Gold fell to a three-week low on Wednesday after comments from a Federal Reserve official raised the prospect that the U.S. central bank could start to rein-in its stimulus programme as soon as next month.
Bullion has lost around 25 percent of its value this year, after 12 annual gains, on fears the Fed will curb its $85 billion monthly bond purchases on signs of economic recovery.
The U.S. central bank's tapering would support a higher interest rate environment that diminishes gold's attractiveness.
Spot gold was down 0.2 percent to $1,278.64 an ounce at 1020 GMT, after hitting its lowest level since July 17 at $1,272.64 earlier in the session.
U.S. gold futures for December fell $4.10 to $1,278.30 an ounce.
"It does very much look as though the Fed is keen to go ahead with its tapering, perhaps starting as soon as September and that has added a little negative sentiment to the gold market and for that we think there is more downside risk in the near term," Natixis analyst Nic Brown said.
The dollar stood around a one-week low hit earlier, while European shares fell.
Benchmark U.S. Treasury yields steadied around 2.66 percent. Returns from U.S. bonds are closely watched by the gold market, given that the metal pays no interest, as these are viewed as a key indicator of what the Fed action will be in September, analysts said.
Chicago Fed President Charles Evans said on Tuesday the U.S. central bank will probably trim its quantitative easing (QE) programme later this year and could do so as early as September, depending on economic data.
Evans was the third Fed official in two days to suggest a September pullback was still on the table.
Fed policymakers, who last week voted to continue its bonds-buying, next meet on September 17 and 18 to discuss policy.
PHYSICAL DEMAND SLOWS
With physical demand at subdued levels during the seasonally soft summer period, investors are closely monitoring economic data from the United States and the wider economic events.
The U.S. economy likely grew faster than initially reported in the second quarter, thanks to a sharp narrowing in the trade deficit to its lowest in more than 3-1/2 years in June as exports touched a record high and imports fell.
Shanghai gold futures closed down 1.5 percent on lower demand, dealers said.
China's net gold imports from key supplier Hong Kong slipped about 4 percent in June from the previous month, although purchases held above 100 tonnes.
Gold premiums in India eased on Tuesday due to a lack of buying support in the physical market, as traders survived on old stocks amid an absence of fresh imports.
Silver was down 0.9 percent to $19.31 an ounce. Platinum fell 0.4 percent to $1,418.24 an ounce and palladium lost 1 percent to $713.50 an ounce. (Additional reporting by A. Ananthalakshmi in Singapore; editing by James Jukwey)