Gold fell one per cent on Friday after China raised bank reserve requirements and U.S. data showed improvement in the world's top economy, which boosted the dollar and dulled the allure of precious metals.
Spot gold was at $1,375.29 an ounce at 1527 GMT, from $1,387.39 late in New York on Thursday. It earlier hit a session low at $1,371.90, down from a record high at $1,430.95 touched on Tuesday. U.S. gold futures were lower at $1,377.80.
"The gold market is probably correcting on the back of the stronger dollar," said BNP Paribas analyst Anne-Laure Tremblay, adding year-end book squaring was also aiding downside pressure.
"Investors who have performed well this year may be looking to protect their gains rather at this stage."
U.S. consumer sentiment rose more than expected in early December while an index of current conditions jumped to its highest level since January 2008, a survey released on Friday showed.
Earlier, data showed the U.S. trade deficit narrowed much more than expected in October, a Commerce Department report showed on Friday, which lifted the dollar.
"It's a mixture of the (U.S.) data but more importantly the Chinese news that came out," said Afshin Nabavi, head of trading at MKS Finance in Geneva. "But at the end of the day we are still holding up to the same range seen earlier this week.
"We are getting close to the year end and there will also be some liquidation. It looks like some of the longs are taking advantage of the rallies."
Earlier however, China's central bank said it was raising lenders' required reserves by 50 basis points, effective Dec. 20, its sixth official increase this year.
"Tighter global monetary policy is bad for gold, and this is tighter monetary policy. But only slightly, and in one part of the world, so the impact is not huge," said analyst Matthew Turner at Mitsubishi Corp.
Rising interest rates raise the allure of bank deposits for investors over gold, while also boosting storage costs for the metal.
However, concerns over European sovereign debt polished the metal's appeal as it is seen as a safer investment.
"Prolonged uncertainty over indebted Eurozone countries will only be gold supportive," said VTB Capital in a research note.
After gold's pull back this week, physical demand has come in to underpin prices as investors scout for bargains, which suggests the metal may be finding its feet.
"Tuesday-Thursday was our strongest three-day run of physical sales to India since late October, when gold was trading around $1,320," said UBS analyst Edel Tully.
"Physical buying from India and other centres this week was likely one of the reasons more investor longs didn't liquidate, as strong physical demand is often a sign that a downtrend is about to bottom."
Investors are also eyeing a Federal Reserve meeting next Tuesday, the first after fierce debate on whether the central bank's further quantitative easing would help the world's largest economy.
Tremblay of BNP Paribas said that a number of issues related to U.S. monetary policy are supportive of gold, including questions about the value of the dollar and its role in the international monetary system.
Spot silver sank into negative territory at $28.23 an ounce, against a $28.70 close. In other metals, platinum was at $1,667.49 against $1,675.99 while palladium was at $730.22 as against $735.97.