Equities rallied after major central banks said they would cooperate to offer three-month US dollar loans to commercial banks to prevent money markets from freezing up. A bearish double-top chart pattern in gold accelerated technical selling as prices slid below $1,800 an ounce.
Gold has lost 7 percent since hitting a record $1,920.30 last Tuesday.
"Any attempt to ease the fear or moving forward with the euro zone debt crisis is going to be viewed as positive by the markets, and nonetheless takes away the need for the safe haven assets such as bonds and gold," said David Meger, director of metals trading at futures broker Vision Financial Markets.
Spot gold was down 1.8 percent at $1,788.09 an ounce by 3:57 PM (1957 EDT), having dipped as low as $1,772.04. The precious metal is set for its second straight weekly loss, which would be its first two-week drop since early July.
US gold futures for December settled down $45.10 at $1,781.40 an ounce. Trading volume was about 10 percent above this week's average turnover, preliminary Reuters data showed.
Silver fell 2.2 percent at $39.77 an ounce.
Most analysts said gold's long-term bull run remains intact, but some investors questioned the metal's ability to rise above $2,000 after its most volatile trade in two years, with bullion rising or falling more than 2 percent 12 times in the past 30 days.
"It seems like sentiment has swung back and forth significantly on a daily basis in the past several weeks. At the moment, gold is the readily traded asset being watched very closely by speculators and investors alike, creating volatility to the market of late," Meger said.
On charts, gold should find support at $1,702, a recent low reached in late August, representing the "neckline" of a bearish double-top pattern after bullion failed to extend gains above $1,900 an ounce twice in the past four weeks, said Adam Sarhan, CEO of New York-based Sarhan Capital.
"If we are not able to get above the all-time high, by definition the double top remains in place. In the short term, it's definitely going to be technical pressure," Sarhan said.
Equities and the euro rose after coordinated actions by central banks eased any funding crunch created by Europe's sovereign debt crisis. European bank shares rallied.
Gold dropped as German government bond futures staged their largest one-day fall in six months on signs of more willingness from policymakers to solve Greece's debt crisis, prompting some to sell positions in safe-haven bonds.
US data showed an above-forecast rise in weekly US jobless claims, August inflation cooling and a surprisingly large contraction in a reading of regional manufacturing.
HSBC, GFMS FORECAST $2,000 GOLD
UBS analyst Edel Tully said in a note that the US Federal Reserve policy meeting next week could boost the gold market.
HSBC and metals consultancy GFMS said on Thursday they see gold rising above $2,000 an ounce, citing high government debt levels and instability in the currency markets.
GFMS, a unit of Thomson Reuters, said it expected gold to break through $2,000 an ounce by year-end, as recovering investment added to already strong bar, jewellery and official sector buying.
Spot platinum was down 1.4 percent at $1,783.58 an ounce, and spot palladium was up 0.9 percent at $721.88 an ounce.
Copyright Reuters, 2011