Gold fell 2 percent to a three-month low on Wednesday, hit by a dollar rally against the euro, a technical sell-off and losses in U.S. equity and commodity markets.
Bullion is now on track to end the year with its smallest gain in three years.
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Gold's losses deepened as U.S. equities erased gains for the year as investors shifted focus to economic worries in 2012, and the euro hit an 11-month low against the dollar with thin trading exacerbating volatility.
Silver tumbled nearly 5 percent, leading the pack in industrial commodities' decline. The metal is now on track to end the year down 11 percent, after a $3 drop in the last five sessions, reversing hefty gains of the last two years.
Analysts said that a bearish double-top technical pattern and the fact that gold is on track to close at its lowest level since July could send more bullion investors heading for the exit.
"When you get so many people who bought gold thinking it was a safe haven and now under water, that's the reason why it can come off more, perhaps on dollar strength," said Rick Bensignor, chief market strategist of Merlin Securities.
"The dollar becomes the safe place, not the gold market," said Bensignor.
Spot gold was down 1.9 percent at $1,562.24 an ounce by 1:02 p.m. EST (1801 GMT). U.S. February gold futures were off $31.10 at $1,564.40.
Spot silver fell 4.5 percent to $27.37 an ounce.
A 1 percent jump in the dollar index broadly pressured commodities as investors flocked to the safety of the U.S. currency and Treasury bonds, traders said.
"This is a risk-aversion issue for sure. There are some geopolitical concerns out there that have become heightened this week," said Jason Schenker, president of Prestige Economics LLC.
Although gold traditionally has a safe-haven appeal, the euro zone debt crisis is threatening the global economy, causing a liquidity shortage in markets and forcing investors to abandon their gold positions to cover losses elsewhere.
Gold initially traded just slightly lower after news Italy's short-term debt costs halved at an auction as a new package of budget austerity and an injection of cheap long-term money from the European Central Bank won Rome some respite.