Gold edged lower on Friday ahead of talks to prevent the United States from plunging off a "fiscal cliff" of tax increases and spending cuts, but prices remained on track for their first weekly gain in a month.
Failure to clinch a deal in the US could trigger safe-haven buying of bullion, but if the White House and Congress finally reach an agreement, gold may track stock markets higher.
Gold fell $4.38 or 0.26 percent to $1,658.91 an ounce by 3.07pm UAE time after rising to a session high of $1,657.99.
It has come off a 4-month low of $1,635.09 struck on Dec. 20, but remains well below a record high of around $1,920 hit in September 2011.
For the year, gold is up around 6 percent, but well below a record of around $1,920 touched in September 2011, when a worsening debt crisis in Europe sparked a buying rush.
US gold for February eased $4.00 an ounce to $1,659.70.
"Now it is looking like the US economy might head to a fiscal cliff. However, if the politicians do find a timely compromise, stocks will perform well, crude oil is more likely to stabilise instead of fall, and gold will go up with other risk assets," said Peter Fertig, analyst with Quantitative Commodity Research.
"If there is no agreement, and people don't know what is happening with the economy, the safe haven status of gold could re-emerge."
President Barack Obama and lawmakers are launching a last-chance round of budget talks days before a New Year's deadline to reach a deal or watch the economy go off a "fiscal cliff."
The United States faces $109 billion in across-the-board spending cuts starting in January unless a deal is reached to either replace or delay them.
Gold is traditionally a safe-haven and inflation hedge that investors rush to in times of trouble, but it has lately behaved like any risk asset. The precious metal sometimes rises and falls with the stock market.
Gold is heading for a 12th straight year of gains on rock-bottom interest rates, concerns over the financial stability of the euro zone, and diversification into bullion by central banks.
In other markets, the yen fell to its lowest level in more than two years on Friday, lifting Japanese stocks to 21-month highs on expectations of drastic monetary easing, while shares in the rest of Asia rose as Washington races to avoid a fiscal crisis.
The euro fell to a session low against the dollar on Friday on year-end dollar buying from investors adjusting their portfolios and as traders took profit on the common currency's recent gains.
Global gold demand in 2013 should be led by further strength in Chinese demand and a recovery in India, helping the precious metal continue its bull run into its 13th year, the industry-backed World Gold Council has said.
Gold demand in India, the world's biggest buyer of the metal, was moderate on Friday as jewellers replenished inventory for festivals and the wedding season, but retail and investment demand remained sluggish.
In other news, a South African lawyer moved to file a class action suit against over 30 gold firms on behalf of 17,000 former miners who say they contracted silicosis, a debilitating lung disease, due to negligence in health and safety.
Silver was down 0.36 percent to $30.05 an ounce, platinum eased 0.28 percent to $1,526.24 and palladium dipped 0.56 percent to $702.26 an ounce.