Spot gold dropped to $1,260.74 an ounce, its weakest since early February, before steadying at $1,264.70 by 0635 GMT. The metal slid 2.3 percent in the previous session - its biggest one-day decline since December.
Gold had been largely steady in the last few weeks, with technical analysts citing its recent pennant chart formation, also known as a flag because of its triangular shape, which represents a brief consolidation with narrowing price ranges before the previous market move is resumed.
"The technical profile has broken down even further and we are likely to test even lower prices. I don't see anything supportive at the moment," said Victor Thianpiriya, an analyst at ANZ.
Thianpiriya said the weakness in Chinese demand was also worrying.
Trade data on Tuesday showed that China's imports of gold from main conduit Hong Kong fell to a 14-month low in April as importing banks were adequately stocked amid softer demand and a weaker yuan.
Chinese demand failed to pick up on Wednesday despite the sharp overnight drop in prices.
"We have had a $30 price drop and still no jump in Chinese premiums. That is not supportive," said ANZ's Thianpiriya.
Prices for 99.99 percent purity gold on the Shanghai Gold Exchange were about $2-$3 an ounce above global prices, little changed from Tuesday's premiums.
The price differential between Chinese prices and global prices is considered a good measure of demand.
China has been a big support factor for prices recently, amid stimulus withdrawal in the United States and weak demand from No. 2 buyer India.
Meanwhile, economic data showed that orders for long-lasting U.S. manufactured goods unexpectedly rose in April and consumer confidence perked up in May, supporting expectations of a rebound in economic growth.
The data sent the S&P 500 to a new record, hurting gold.
Holdings in SPDR Gold Trust, the world's largest gold-backed exchange-traded fund, rose 8.39 tonnes to 785.28 tonnes on Tuesday - the biggest daily inflow in at least 14 months.
Traders said the inflow likely reflected the funds' holdings before the sharp price drop on Tuesday, and the trend still remained bearish.
Among other precious metals, platinum also largely held on to losses from the previous session after the new South African mining minister pledged to mediate in a crippling miners strike now in its fifth month.