Gold fell more than 1 percent on Thursday after the Federal Reserve disappointed gold bulls by failing to announce more aggressive monetary stimulus, lifting the dollar and bringing forward expectations for a rise in U.S. interest rates.
Gold prices have been estimated to rise to $2,000 per ounce by the end of this year, if one or more countries depart from the beleaguered euro zone.
After a policy meeting ending Wednesday, the Fed said it would extend an existing bond program aimed at bringing down long-term borrowing costs and stimulating growth, dubbed Operation Twist, but held fire on a new round of quantitative easing that some investors had hoped for.
Traders said the decision not to embark on a new program of outright bond purchases means the Fed is likely to start raising rates earlier than its own guidance suggests.
Gold had risen as high as $1,640.50 an ounce earlier this month on hopes that the Fed would unveil fresh quantitative easing measures to stimulate growth after a spate of disappointing economic data.
Further monetary easing would have maintained pressure on long-term interest rates, keeping the opportunity cost of holding gold at rock bottom, and may have pressured the dollar.
Prices fell ahead of the Fed statement as speculation grew that full QE was off the table, but more selling was seen on Wednesday, which accelerated as the dollar climbed.
Spot gold was down 1.1 percent at $1,587.00 an ounce at 0905 EDT, while U.S. gold futures for August delivery were down $27.70 an ounce at $1,588.10.
"Currently we're seeing a bit of follow-through from disappointed investors, but believe we should be finding support pretty soon," Saxo Bank vice president Ole Hansen said.
"Bernanke left the door open and extended the expected period of low interest, which is good news for gold. Overall I think the market is not ready to let go of gold, as it still looks like one of the better bets should the economic outlook continue to deteriorate."
On the wider markets, European shares were flat, while the dollar rose versus the euro. A retreat in Spanish government bond yields after a debt auction and in safe-haven German Bunds pointed to softer risk aversion.
Crude prices fell more than $1 a barrel, meanwhile, as concerns over the outlook for the U.S. economy, the biggest oil consumer, grew.
However, concerns over the economic outlook at a global level remained elevated.
"We are wary of the potential impact of the looming 'fiscal cliff' in December, when the latest roll-over Bush-era tax credits are due to end could see consumer purchasing power fall substantially," investment bank Fairfax said in a note. "We expect the Fed to take further action before this event to avert yet another potential crisis."
"We see gold as attractively priced at these levels, and we see the potential for further QE in the United States, China and Europe as leading gold higher this year."
From a technical perspective, analysts who study past price moves for clues on the future direction of trade see solid support for prices around $1,580/1,560. Further consolidation around current levels is expected after the metal avoided too sharp a drop on Wednesday.
Physical gold traders in India, the world's biggest consumer of the metal, kept to the sidelines despite its price fall, seeking a bigger retreat in spot prices. The rupee's fall to a record low against the dollar kept local prices high.
Silver was down 1.7 percent at $27.60 an ounce.
The gold/silver ratio, which measures the number of silver ounces needed to buy an ounce of gold, rose above 57 on Thursday, moving back towards the year's high, as the grey metal underperformed.
Spot platinum was up 0.1 percent at $1,451.35 an ounce and spot palladium was down 0.5 percent at $611.53 an ounce.
Monthly Swiss imports of raw and powdered platinum from South Africa, source of nearly four out of five ounces of world supply of the white metal, fell to their lowest in more than two years in May, Swiss customs data showed on Thursday.
"We saw in today's South Africa trade balance that platinum exports from SA were low in Q1," Standard Bank analyst Walter de Wet said. "This should have spilled over into April and May."
"Given the low price in especially May, it may be possible that many of the producers preferred to hang on to as much 'discretionary' metal as possible until the price improves somewhat," he said.