Gold fell on Thursday, extending its drop from a recent record high as a proposal to give Europe's financial rescue fund new powers to fight debt contagion drew investors to riskier assets at the expense of safe havens.
Silver tumbled 3 percent as eurozone leaders at Thursday's emergency summit were set to give their financial rescue fund sweeping new powers to tackle the region's debt crisis. They also signalled they were willing to let Greece default temporarily.
Bullion's flight-to-safety appeal was also under pressure after the New York Times reported that President Barack Obama and House Speaker John Boehner were starting to close in on a major budget deal to avert a US default. The White House later said both parties were not close to a deal.
"Any kind of normalisation, either economic or financial policy, is going to have an adverse effect on the gold price," said Mark Luschini, chief investment strategist of Janney Montgomery Scott which oversees $54 billion in assets.
"However, there are still those elements of uncertainty that leave a wrinkle out there for those who are already long gold to not abandon it," he said.
Spot gold was down 0.8 percent at $1,585.80 an ounce by 1:20 pm EDT (1720 GMT). Bullion was $20 below its record $1,609.51 set on Tuesday.
US gold futures for August delivery were down $9.70 an ounce at $1,587.30. Trading volume topped 200,000 lots in what could end up as one of the market's busiest days since late May.
Spot silver dropped 2.9 percent to $38.82 an ounce.
Precious metals fell as riskier assets rallied after the draft conclusions from the European emergency summit. The S&P 500 rose 1.5 percent and US crude oil futures briefly rose above $100 a barrel.
The draft summit statement suggested the eurozone bailout fund, the European Financial Stability Facility, would be allowed for the first time to help states earlier with precautionary loans. Minds have been concentrated by the danger that Europe's debt crisis could engulf the much bigger economies of Spain and Italy. Greece, Portugal and Ireland have already succumbed.
"There are a lot of unsolved issues for the time being, and gold reacted really marginally after the draft EU summit conclusions. There was no real profit taking," said Bayram Dincer, an analyst at LGT Capital Management.