By Apeksha Nair
(Reuters) - Gold prices dropped to their lowest level in four months on Thursday as the dollar rose underpinned by optimism surrounding tax reform in the United States.
Spot gold fell 0.5 percent to $1,257.70 an ounce by 0707 GMT, after marking its lowest since Aug. 8 at $1,255.80.
U.S. gold futures were also down 0.5 percent at $1,259.90.
The dollar on Thursday inched up against its peers, as optimism over U.S. lawmakers making progress on tax legislation continued to grow.
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Hopes that U.S. tax reforms would boost economic growth have dented demand for safe-haven assets such as gold.
"Gold is testing critical long-term support at $1,260 in Asian trading," said Jeffrey Halley, senior market analyst at OANDA.
"A break of this level opens up a potential 50-dollar move to $1,200 as gold suffers from investor flight to crypto currencies and the prospect of an FOMC rate hike next week with more to come in 2018."
Crypto-currency Bitcoin surged past $14,000 on Thursday to post yet another record high.
INTL FCStone analyst Edward Meir said gold could move slightly lower heading into next week's Federal Reserve meeting as investors would be jittery about the Fed's policy wording going forward.
Markets are widely anticipating an interest rate hike by the U.S. central bank next week and are waiting on the outlook for further rate hikes in 2018.
Gold is highly-sensitive to rising interest rates, as these tend to boost the dollar, in which the metal is priced.
"Gold will continue to be under pressure in view of rate hikes, dollar gains and strong U.S. data," said Argonaut Securities analyst Helen Lau.
Spot gold is poised to break support at $1,262 per ounce, and fall to the next support level at $1,250, according to Reuters technicals analyst Wang Tao.
"Gold traders will face a nervous end to the week as gold fails to rally even as the U.S. yield curve continues to flatten and ahead of crucial payroll data tomorrow evening," Halley said.
Meanwhile, global holdings in gold-backed exchange-traded funds (ETF) rose by 9.1 tonnes to 2,357 tonnes in November, with the net inflows coming entirely from Europe as the U.S. dollar fell, the World Gold Council said on Wednesday.
In other precious metals, silver fell 0.5 percent to $15.88 an ounce after earlier slipping to its lowest since mid-July at $15.82.
Platinum was 0.7 percent lower at $895.74 an ounce, after earlier having hit its lowest since July 11.
Palladium was up 0.1 percent to $994.50 an ounce.
(Reporting by Apeksha Nair in Bengaluru; Editing by Joseph Radford and Vyas Mohan)
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