Gold prices fell from record highs toward $1,400 (U.S.) an ounce on Tuesday as investors took profits in thin trade, but the prospect of worsening U.S. deficits after a tax-cut extension, more monetary easing and a European debt crisis still underpinned safe-haven demand.
Silver prices also retreated, after breaking above $30 an ounce in the previous session for the first time since 1980.
"The market had really run out of momentum, and, although we made new highs, it was more on sentiment than on fresh business," said Simon Weeks, head of precious metals at the Bank of Nova Scotia.
U.S. President Barack Obama unveiled a compromise deal to extend all Bush-era tax cuts for two years. Analysts said gold was bid as an inflation hedge on uncertainty whether such a move could worsen the fiscal deficits of the world's biggest economy.
Moody's Investors Service is worried the extension of U.S. tax cuts agreed by Obama and Republican leaders could become permanent, hurting U.S. finances and the country's credit ratings in the long run.
Gold's retreat was in line with a pullback in other commodities, with copper also easing back from record highs and oil slipping from an earlier two-year high.
Spot gold dropped 1 per cent to $1,409.35 an ounce at 1:05 p.m. EST (1805 GMT), sharply below a record $1,430.95 set earlier in the session. U.S. gold futures for February delivery fell $6.10 to $1,410.
Gold priced in euros also hit a record high at 1,072.03 euros an ounce before retreating.
Spot silver slipped 1.1 per cent to $29.82 an ounce, having earlier hit fresh 30-year highs at $30.68 an ounce.
Gold volume on the COMEX division of the New York Mercantile Exchange was at 170,000 contracts, 30 per cent below its 30-day average, as some trading desks and funds already have closed their books ahead of the year end. Silver futures volume at 95,000 lots was in line with its average.
Some analysts said that dwindling volume for precious metals futures could signal price declines in the near term, or at least the metals might already have reached short-term tops as trading interest faded.
Nonetheless, the precious metal is likely to remain supported by concerns over the financial health of the euro zone.
Germany and other euro zone states resisted calls on Monday from the International Monetary Fund to do more to quell the bloc's debt crisis, although the euro firmed on optimism that Ireland would pass an austerity budget.
"Even though the euro is regaining a little bit of strength against the dollar after the losses yesterday, it is still on the weak side, and fears of contagion are lingering," said Peter Fertig, a consultant at Quantitative Commodity Research. He was referring to worry that debt problems would spread in the euro zone.
Federal Reserve Chairman Ben Bernanke signaled on Sunday the U.S. central bank could expand its existing quantitative easing program by buying more government bonds.
With the U.S. dollar set to come under more pressure from the prospect of rising money supply, gold should reap the benefits of investors seeking an alternative to volatile currencies, analysts said.
However, the end of the year traditionally brings with it less liquidity and greater potential for rapid shifts in price direction, meaning that gold could endure more setbacks before resuming its uptrend.
"Tactical investors have turned positive on gold and silver and increased their long exposure. In our view, positioning does not look excessive, suggesting that the sector could attract further near-term flows," Credit Suisse analysts said in a note. "However, with markets closing in on critical price levels, risks of investors' taking profits have increased as well."
The number of ounces of silver needed to buy one ounce of gold hit its lowest level since February 2007 at just 46.99, having declined from a seven-month high this February at 70.91.
Platinum slipped 1.4 per cent to $1,696 an ounce, while palladium lost 2.2 per cent to $738.97. Prices at 1:09 p.m. EST (1809 GMT)