Gold slid 1.5 percent on Monday in its biggest one-day drop in nearly seven weeks on selling from stop-loss orders and as Asian share markets gained strength.
Spot gold fell as much as 1.6 percent to $1,317.00 an ounce, and was at $1,318.11 by 0705 GMT.
U.S. gold futures also fell 1.6 percent, while silver fell nearly 2 percent.
The sharp decline comes after gold posted its sixth straight weekly gain last week and after hitting $1,345 - its highest since March - last Thursday.
Gold climbed sharply on Thursday as worries about the financial stability of Portugal's largest listed bank Banco Espirito Santo hammered equities and stoked fears of an European banking crisis.
But the fears have now faded, with Asian shares gaining on Monday as investors put aside concerns about euro zone banks and looked forward to corporate earnings and a raft of global economic events.
Another trader said troubles at the Portugal bank were unlikely to become a widespread European crisis.
Gold is seen as an alternative investment to riskier assets at times of geopolitical and financial uncertainties. The metal has managed to stay above $1,300 an ounce in recent weeks on safe-haven bids arising from tensions in the Middle East and Ukraine.
Israel appeared to hold off on a threatened escalation of its week-old Gaza Strip barrage on Monday despite balking at Western calls for a ceasefire with an equally defiant Hamas.
On Sunday, the Israeli military had warned residents of the northern border town of Beit Lahiya to leave or risk their lives when, after nightfall, it planned to intensify air strikes against suspected Palestinian rocket sites among civilian homes.
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