Gold edged down further early on Thursday from the previous session's record high as investors hoped for passage of a bill to cut the US deficit, which could ease worries about a US government default or ratings downgrade. Silver dropped 2 percent as Wall Street rebounded ahead of a Thursday evening vote in the House of Representatives for a deficit-cutting plan presented by US Rep. John Boehner, the top Republican in Congress.
Gold remains up about 7 percent in July on concerns over the eurozone debt crisis and uncertainty ahead of the August 2 deadline to raise the $14.3 trillion US debt ceiling. It could tumble if a debt-ceiling deal eases fears in other financial markets and investors perceive the related spending cuts and tax increases as deflationary, analysts said.
"The market as a whole is starting to get more optimistic that there will be some resolution of the US debt ceiling. If we were to see a resolution, there will be a short-term pull back of the precious metals because of the more certainty," said James Rife, an assistant portfolio manager at Haber Trilix Advisors, which manages $2 billion in assets.
Spot gold was down 0.3 percent at $1,608.11 an ounce by 11:42 am EDT (1542 GMT). It hit a record $1,628 an ounce on Wednesday, its second all-time highs this week, before correcting sharply later in the day. US gold futures for August delivery were down $6.90 an ounce at $1,608.20. Silver was down 1.8 percent at $39.48 an ounce.
In early trade, gold briefly rose above $1,620 an ounce. But it quickly retreated as investors grew less risk-averse when US data showed jobless claims hit a three-month low last week while contracts to buy existing homes rose in June. Supply concerns have underpinned gold prices.
A work stoppage by 100,000 workers at the biggest gold mining companies in South Africa could cost the sector about $25 million a day in lost output. Markets will watch the outcome of talks between unions and Anglo American Platinum, the world's No 1 producer. Spot platinum was up 0.2 percent at $1,788.24, while spot palladium was up 0.3 percent at $825.22.