Gold turned sharply lower on Wednesday, as investors weighed U.S. Federal Reserve Chairman Ben Bernanke's congressional testimony warning of risks to holding interest rates too low for too long and opened the possibility of reducing bond purchases.
In prepared remarks, as expected, the Fed chief said monetary stimulus was helping the U.S. economy recover, but it was too soon to remove existing measures.
Then, during the question and answer period, investors began to sell gold as Bernanke raised the possibility of gradually reducing the Fed's bond purchases if the labor market improved in a sustainable way.
"The big debate with the Fed has been, are they or aren't they going to begin reducing their liquidity subsidies this year or is it going to continue to go on?," said Michael Cuggino and president and portfolio manager at Permanent Portfolio Funds in San Francisco.
"Regardless of what your position is, you heard something today that you could rely on to support your own view. I think they are saying things could go either way," he added.
The dollar rallied after Bernanke's remarks, pressuring gold into negative territory. The euro slipped, retreating from a one-week high set before Bernanke's speech.
Spot gold had briefly broken above $1,400 to a one-week high of $1,414.25 an ounce after Bernanke said the Fed needed to see further signs the economy was gaining traction before removing current measures.
But the precious metal erased all those gains and slid once he opened the possibility that the Fed could reduce bond purchases as early as later this year.
Spot gold was down 1.12 percent at $1,360.08 per ounce by 3:05 EDT (1905 GMT) and had fallen as low as $1,354.61.
U.S. gold futures for June delivery finished at $1,367.4, off the previous close at $1,378.20 an ounce. In after hours trade, it fell further to $1,358.70, down 1.37 percent.
In a sign of divisions on the policy-setting Federal Open Market Committee, minutes of the latest meeting released Wednesday highlighted the debate over how soon the Fed should start to scale back its bond-buying stimulus.
"On one hand, Bernanke's leading you to believe that they might taper off bond buying in the next few meetings. On the other hand, other Fed members have commented on the dual mandate that would lead you to believe stimulus is going to be around for quite awhile," said Cuggino, referring to the Fed's balancing act of managing both inflation and economic growth.
Bernanke's testimony also emphasized that inflation continued to run below the bank's target.
Gold is usually seen as a hedge against inflationary pressures, which remain low in major markets at the moment, despite accommodative measures.
"The Fed has been buying bonds since the beginning of the year and gold hasn't done much, and if you look across the world, we are indeed seeing monetary easing, but inflation expectations are dropping," Credit Suisse commodity analyst Karim Cherif said.
Physical demand remained strong in China, but buying in India, the world's top gold consumer, has been slowing as its central bank tries to rein in a trade deficit by cutting gold and silver imports.
As a gauge of investor interest, holdings of New York's SPDR Gold Trust, the largest gold-backed exchange-traded-fund, fell 0.8 percent on Tuesday to 1,023.08 tonnes, the lowest in more than four years.
Spot silver eased 0.63 percent to $22.24 an ounce, after falling to a 2-1/2-year low earlier in the week at $20.84.
Platinum trimmed gains to 0.12 percent at $1,458.74 an ounce as supply concerns in South Africa continued. Palladium was up 0.10 percent to $744.22 an ounce.