Gold broke below the key psychological level of $1,300 an ounce on Thursday as safe-haven demand for the metal eased due to rising Asian equities and strong Chinese manufacturing data.
Physical demand in the region, however, increased slightly on the lower prices, with premiums in the biggest bullion consumer China edging up on buying interest.
Spot gold fell 0.6 percent to $1,296.50 an ounce by 0319 GMT, after dipping 0.2 percent in the previous session. U.S. gold slid about $7 to $1,297.80.
Asian stock markets edged broadly higher on Thursday as China's factory activity expanded at its fastest pace in 18 months in July, bolstering hopes for recovery in the world's second-biggest economy.
"The safe-haven demand for gold is muted now as equities are gaining strength and there has been no significant worsening of tensions in the Middle East or Ukraine," said one trader in Hong Kong.
Another trader said there were also stop-loss orders below $1,300 which prompted some selling.
Gold had recently seen support build around the $1,300 level on deepening violence in the Middle East and Ukraine that burnished its safe-haven appeal. The metal is seen as an alternative investment to riskier assets such as equities during times of uncertainties.
Bullion could still see some safe-haven bids as Gaza fighting raged on Wednesday, displacing thousands more Palestinians in the battered territory as U.S. Secretary of State John Kerry said efforts to secure a truce between Israel and Hamas had made some progress.
Meanwhile, Kiev said two of its fighter jets were shot down over the rebel-held territory in eastern Ukraine on Wednesday, and the missiles that brought them down might have been fired from Russia.
SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, said its holdings rose 0.6 tonnes to 805.44 tonnes on Wednesday - increasing for a second straight day.
With prices dropping below $1,300, physical buyers - who had been waiting on the sidelines in recent weeks - came back to the market, albeit in a small way.
Prices on the Shanghai Gold Exchange edged up to a premium of $3-$4 an ounce to the global benchmark from about $1-$2 on Wednesday.
However, despite the increase in buying on Thursday, demand remains weak compared to earlier this year, dealers said.
Sluggish physical demand in Asia could weaken support for any price rally and fail to provide a floor if prices were to decline.
China's gold demand slumped by a fifth in the first six months of 2014, the China Gold Association said in a statement on Thursday, hurt by a weaker yuan and strong purchases last year.