U.S. Treasury yields rose across maturities to weekly highs as global trade war fears abated a day after the United States and Mexico reached agreement on an overhaul of the North American Free Trade Agreement (NAFTA).
"On the margin its not much, but real rates rose and that took some of the wind out of gold sails," said Ryan McKay, commodities strategist at TD Securities.
The easing of trade tensions prompted investors to reduce safe-haven positions in U.S. government debt. Sales of long-term Treasuries in particular pressured prices and drove yields up more at the long end of the curve, indicating bullishness about the economic outlook.
Spot gold lost 0.8 percent to $1,201.06 per ounce, earlier touching $1,214.28, its highest level since Aug. 10. U.S. gold futures for December delivery settled down $1.60, or 0.1 percent, at $1,214.40 per ounce.
Often purchased as a hedge against geopolitical risk, gold is highly sensitive to rising yields, because it pays no yield, yet costs to insure and store.
In recent months, investors have sought safety from the trade disputes in U.S. Treasurys, which entails buying dollars. But a weaker U.S. dollar kept gold supported on Tuesday, as it generally boosts demand for dollar-denominated commodities.
The U.S.-Mexico deal pushed the dollar lower against a basket of major currencies as investors sought alternative assets and the greenback's safe-haven appeal declined.
"The main trade dispute, meaning U.S.-China conflict, is still going on so this NAFTA deal is just a small aspect," said Commerzbank analyst Daniel Briesemann.
Net short positions in COMEX gold contracts increased for a sixth straight week to a new record.
"What will be important is whether we will we see a short squeeze, which could push gold higher," said Commerzbank's Briesemann.
Short-covering could kick in if gold breaks above $1,220, Kitco Metals analyst Peter Hug said.
Spot silver declined 1.1 percent to $14.70 an ounce, after hitting $14.99, a nearly two-week high, while platinum lost 1.1 percent to $790.60, after touching a two-week high of $810.
Palladium declined 1.2 percent to $937.70 per ounce, having touched $956, its highest price since July 10.
The NAFTA deal, which includes new rules for the car industry, kept platinum and palladium supported because of their use in auto catalysts. But analysts say the fundamental impact of the deal should be limited.