Gold prices slid on Thursday, with a short-covering rally fizzling out as expectations grew that the Federal Reserve would reduce its huge stimulus programme after a provisional budget deal in Washington.
The bipartisan budget agreement is seen as increasing the chances of an earlier taper, as investors wait to see whether the Fed will start trimming its $85 billion monthly bond purchases at its Dec. 17-18 meeting, or in January or March next year.
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Spot gold was down 0.6 percent at $1,243.50 an ounce by 1102 GMT, pulling back from a three-week high of $1,267.26 hit on Tuesday. U.S. Gold futures for February delivery were also down $13.60 at $1,243.60.
"The U.S. budget agreement takes away another part of uncertainty for the Fed because they don't have to worry about another government shutdown," said Standard Bank analyst Walter de Wet.
"That on balance goes in favour of the argument that the Fed is going to start tapering sooner rather than later."
Expectations that the Fed will taper its stimulus programme have helped knock gold 25 percent lower this year. Ultra-loose monetary policy is seen as bullion-friendly, as it keeps interest rates at rock bottom while stoking inflation fears.
Prices are expected to remain in a relatively narrow range until next week's Fed meeting, analysts said.
Readings on the U.S. economy are being closely watched, however, for their impact on monetary policy. Thursday's data focus will be on U.S. weekly jobless claims numbers for the week ended Dec. 7 and U.S. retail sales data for November which could set the tone for gold prices later in the day.
INDIAN DEMAND SOFT
On the physical markets, buying in major consumer India remained soft on Thursday as dealers struggled to source metal.
"Supplies are short in the market," Harshad Ajmera, proprietor of JJ Gold House, said, adding that premiums were steady at $120 an ounce on London prices. Last week they hit a record $160 an ounce.
Imports into India have fallen sharply this year after the Indian government lifted import duty to 10 percent earlier this year and tied imports volumes to exports, in a bid to curb a rising trade gap.
Demand from China, which is set to take over from India as the world's number one gold consumer this year, has also been relatively quiet, traders said.
"There has not been a great deal of action from China over the last few days, with the SGE premium steady between $5-7 over spot," MKS said in a note. "We will need to see some swings in this to have renewed interest from the region."
Investor interest remained lacklustre, with holdings of the world's largest gold-backed exchange-traded fund, New York's SPDR Gold Shares, down 2.1 tonnes on Wednesday.
This year has seen heavy liquidation of ETF holdings, with the SPDR's holdings dropping by more than 500 tonnes to their lowest in nearly five years.
Other precious metals were also feeling the pressure in the markets, with silver down 1.6 percent on the day to $19.97 per ounce, while platinum was down 0.4 percent to $1,374.75 and palladium down 0.6 percent to $730.90. (Additional reporting by Clara Denina in London, A. Ananthalakshmi in Singapore; editing by Keiron Henderson)