Gold dropped on Wednesday, falling in tandem with declines in the equity markets and the euro, as weak Chinese factory data and a contracting euro zone economy prompted selling.
Gold, which has recently followed riskier assets, was pressured as the euro slumped after the euro zone economy showed signs of contraction in November and China's factory sector shrank by the most in more than 2-1/2 years.
"It's a typical risk-off trade. We still have macroeconomic concerns and losses across markets are correlated. A lot of people don't want to own anything but only in cash and dollars," said Michael Matousek, senior trader at U.S. Global Investors Inc (GROW.O), which has $2.5 billion in assets.
Bullion has appeared to lose its investment appeal as a safe haven amid economic uncertainty. The 25-day correlation-log between gold and the S&P 500 rose to a positive 0.5, its tightest link in six months.
Spot gold was down 0.6 percent to $1,689.29 an ounce by 2:25 p.m. EST, sharply off an earlier low of having fallen to a low of $1,677.08.
U.S. gold futures for December delivery settled down $6.50 at $1,695.90 an ounce. Volume was more than two-thirds above its 30-day norm, preliminary Reuters data showed, reversing a recent trend of weaker turnover.
Silver fell 3 percent to $31.71 an ounce, alongside the entire commodities complex on dollar's gains and economic worries.
Gold's technical outlook remained vulnerable as it was trading below its 100-day moving average, a key support which it held for a month until a breach following Monday's 2.5 percent losses.
The next major support on gold charts will be its 200-day moving average at around $1,600 an ounce.
"If gold falls to the $1,600 level, I would not be surprised to see a good rebound there because investors with deep pockets will be stepping in," Matousek said.
Gold was underpinned by signs that the euro-zone debt crisis was starting to threaten Germany and France, the region's biggest economies. S&P fell around 2 percent.
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