After surging to a nine-month high of around $1,795 at the beginning of October, the precious metal has fallen to around $1700 an ounce on Thursday.

A few months ago, traders were betting on a move up to $2000 on expectations that massive quantitative easing by major central banks would encourage spending and lift asset prices and gold, used as a hedge against inflation.

But this has not materialized and gold prices have weakened as a result, said UBS commodities analyst Tom Price.

"Instead of spending you have deleveraging going on, people are taking cash and paying down debt, that's a bearish sign," Price said.

Recent strength in the U.S. dollar – which has risen 0.5 percent against a basket of currencies in the last month, has also contributed to the sell down in gold, said Ric Spooner, Chief Market Analyst at CMC Markets Asia Pacific.

A strong dollar generally means lower gold prices. When the dollar strengthens, gold futures, which are traded in dollars, become more expensive for investors who use other currencies.

And, there is limited upside for the precious metal in the coming months, say analysts, given the bleak inflation outlook and growing risk aversion in global equity markets.

As investors look to move to the sidelines, they are likely to sell gold exchange traded funds (ETFs) and this will further weigh on gold prices, said Jonathan Barratt, CEO and founder of Barratt's Bulletin, a commodity newsletter in Sydney.

For instance the SPDR Gold Trust, one of the biggest ETFs, has fallen 3.6 percent over the past month.

"The SPDR gold fund has more gold holdings than the French central bank, if investors decide to get out, you have physical sales which will impact the price of gold," he said.

Barratt, who started scaling back his long position in gold two weeks ago, forecasts the precious metal will likely end the year below $1700, with $1635 the lower end of his target range.

Festive Season

While the festive season in the world's top consumer of bullion, India, will provide some support to gold prices, it is unlikely to have a lasting impact, according to analysts.

The precious metal, which is widely regarded as a store of wealth by Indians, is traditionally gifted during weddings and religious occasions, particularly during the months of October and November.

"The Indian festival season is an important fundamental driver for gold, we will see a few weeks of gold buying, but weakness in the rupee which translates into higher gold prices, could limit buying this year," said Price.

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Barratt, who agrees that Indian buying will not be enough to counter selling by investors, says the next major risk event for gold will be the November 6 U.S. presidential election.

"The election is a game changer, if we get an Obama win, gold prices will stay steady, but if (Republican challenger Mitt) Romney comes in, gold will edge lower," Barratt said.

"If Romney wins, he will stop spending and we will get a new Fed chairman who won't be aggressive in printing money," he said, adding that this will lower inflation expectations further and cause a correction in gold prices.