Gold prices fell sharply early on Friday as upbeat US retail sales data boosted the American dollar and stoked expectations that the Federal Reserve could reduce its bond-buying stimulus soon.
Bullion posted its biggest two-day drop since October 1. Silver underperformed gold to drop nearly 4 per cent, while platinum group metals also fell sharply.
US retail sales rose solidly in November, adding to signs of a strengthening economy that could draw the Fed closer to reducing the pace of monetary stimulus, particularly after last week's better-than-expected US non-farm payrolls and gross domestic product data.
The news of a US bipartisan budget agreement reached this week was also seen to have removed the last obstacle preventing the US central bank from setting a timeline to trim its $US85 billion ($95 billion) monthly bond purchases at its December 17-18 meeting.
Spot gold fell 2 per cent to $US1226.86 an ounce, after hitting a low of $US1223. Comex gold futures for February delivery settled down $US32.30 at $US1224.90, with trading volume about 15 per cent above its 30-day average.
As US House of Representatives lawmakers prepared to vote on a rare bipartisan two-year budget deal on Thursday, House Speaker John Boehner erupted in anger at conservative groups who oppose the measure.
"The weakness [in the gold price] due to the US budget deal talk, has been [exacerbated] by US data showing more strength in the economy and supporting the dollar," said Georgette Boele, commodity analyst at ABN Amro.
Expectations that the Fed will taper its stimulus program have helped knock gold 25 per cent lower this year. Ultra-loose monetary policy is seen as bullion-friendly, as it keeps interest rates at rock bottom while stoking inflation fears.
In the physical markets, buying in major consumer India remained soft on Thursday.
Among other precious metals, silver dropped 3.9 per cent to $US19.48 an ounce, platinum was down 1.4 per cent to $US1360.74 and palladium down 2.7 per cent to $US715.25.