Gold fell more than half a percent on Friday and moved towards its weakest level in four months as the euro slipped against the dollar and talks to avoid a fiscal crisis in the United States seemed to stall again, turning away investors.
Gold initially rose more than $11 before losing strength after House of Representatives Speaker John Boehner failed to unite his Republican lawmakers behind an effort designed to extract concessions from President Barack Obama in year-end "fiscal cliff" talks.
The latest development cast more uncertainty on the talks to avoid across-the-board tax hikes and spending cuts that could push the U.S. economy into recession in 2013, which in theory could lift gold's safe-haven appeal.
Gold had fallen $7.53 to $1,639.61 an ounce by 0316 GMT, heading for its fourth weekly decline. Bullion had dropped to its weakest level since August in the previous session on heavy liquidation by hedge funds and signs of an improving U.S. economy.
"At the moment, the U.S. budget talks are stalling. Many are unsure if they should enter the market. Perhaps when the U.S. has more concrete news on the outcome, investors will then be more comfortable taking positions again," said Brian Lan, managing director of GoldSilver Central Pte Ltd in Singapore.
"The market volume is thin amidst all these uncertainties, and the year is coming to an end. Many of the investors prefer to take profits and just leave the market."
U.S. gold for February slipped $5.20 an ounce to $1,640.70.
Shares dipped in Asia and the euro fell against the dollar as the U.S. fiscal talks stumbled.
But the White House pledged on Thursday to work with Congress, saying that President Barack Obama is hopeful a deal could be reached quickly.
"Gold and silver will tend to dip before they come up again as investors see them as risky assets together with equities," said Lan at GoldSilver Central Pte Ltd.
"Somehow, gold and silver at this point of time haven't been regarded as a safe haven asset. The safe haven status will be reinstated during a financial crisis."
Despite the sell-off, gold is up more than 4 percent for the year and set for a twelfth straight annual growth driven by rock-bottom interest rates, concerns over the financial stability of the euro zone and diversification into bullion by central banks.
Iraq made its first major move in years to bolster its gold reserves in recent months, while Brazil increased its holdings of bullion by almost a third in November, data from the International Monetary Fund showed on Thursday.
Lower gold prices spurred buying in the physical market, keeping premiums steady at $1 to $1.10 an ounce above London prices.
"Definitely, there's physical buying. It's from all over the place. Physical dealers are buying," said a physical trader in Singapore.