Bullion lost nearly 2 percent following a brief rally to an all-time high $1,447.40 on Thursday, but the metal is set to post a small gain for the week as Portugal's credit downgrade and escalating political unrest in the Arab world underpinned safe-haven demand.
"Gold really took off last fall when the Fed launched QE2. So, negative comments (by Fed officials) has dampened investor sentiment in gold to some extent," said Peter Buchanan, senior economist of CIBC World Markets.
Spot gold dropped 0.1 percent to $1,427.91 an ounce by 3:23 p.m. EDT (1923 GMT). US gold futures for April delivery settled down 0.6 percent at $1,426.20.
COMEX gold was one of the few actively trading commodity markets with volume already topping 250,000 contracts, one of the heaviest trading days year to date.
NO QE2 EXTENSION?
Members of the more hawkish wing of the Fed, led by Philadelphia Fed Bank President Charles Plosser, said the central bank will have to reverse its easy money policy in the "not-too-distant future" to avoid sowing the seeds of inflation as the US economy is now on firmer footing.
Last November, the Fed initiated a $600 billion bond buying program -- dubbed QE2 because it is the second round of quantitative easing -- which is scheduled to end in June.
Analysts said gold was a major beneficiary since the Fed has kept short-term rates near zero since December 2008 and has bought more than $2 trillion in long-term securities to push borrowing costs down further and boost recovery from the 2007-2009 recession.
RESISTANCE AFTER TOP REVERSAL
The metal remains pressured by strong technical resistance seen after Thursday's top reversal day pattern, where a new high set in an uptrend is followed by a close below that of the previous day.
"After the key technical reversal yesterday, when we could not turn around and blow through the record high, everybody started heading for the door at the same time," said Frank McGhee, head precious metals trader of Integrated Brokerage Services.
A key reversal day could mark an important turning point on technical charts, and analysts said near-term price actions are likely to set its course.
Rick Bensignor, chief market strategist of Dahlman Rose said that a close above key resistance at $1,445.40 could send bullion to another leg higher.
GOLD SET FOR BIGGEST QUATERLY OUTFLOW
Despite gold's recent strong performance, inflows into exchange-traded funds backed by the precious metal remained lackluster, with holdings of the largest, New York's SPDR Gold Trust, down by another 0.9 tonnes on Thursday.
They are so far on track to fall more than 65 tonnes this quarter alone, which would be the fund's largest quarterly outflow since it was launched in 2004. However, interest in bullion from other sources is outweighing these outflows.
Gold investors now look forward to next week's heavyweight economic indicators, including Friday's nonfarm payrolls report, Wednesday's ADP private-sector job data and Thursday's factory orders.
Silver gained 0.2 percent to $37.21 an ounce, having retreated from the previous session's 31-year high at $38.13 an ounce. Holdings of the largest silver ETF, the iShares Silver Trust, leapt to a record 11,140 tonnes on Thursday.
Platinum dropped 0.2 percent to $1,744.49 an ounce, while palladium fell 0.2 percent to $747.22.