Precious metals, a safe haven until last week for investors fleeing crumbling valuations of risky assets such as equities and commodities, saw their biggest price declines since the global financial crisis in 2008. Gold mining stocks also plummeted.
A rising US dollar, higher margin deposit requirements and investment funds' needing to raise cash to meet investors' redemption needs after sharp falls in equity values in the past two months, all contributed to gold and silver's fourth day of losses.
Gold, which touched a record high of US$1,923.70 on September 6 as developed nations piled up more and more government debt, yesterday tumbled to as low as 20 per cent below the record high.
Since the United States and European sovereign debt crisis showed signs of worsening last month, gold has gained value as it is seen as a refuge amid the uncertain economic outlook, with the world teetering on the verge of a second major global economic downturn in three years. But with no credible and easy fix to the debt crisis in sight, nervous investors raced to sell assets to raise cash, and gold was not spared.
'Liquidity is evidently market players' trump card at present, with no exception being made for gold, especially as the price of gold is still around 12 per cent higher than it was at the start of the year,' said a research report by Commerzbank.
Immediate-delivery gold fell as much as US$124 an ounce or 7.5 per cent to US$1,532.72 in early London trade, before recovering to US$1,628.29 in mid-morning trading. Silver fell as much as 16 per cent to a 10-month low of US$26.07 an ounce before rebounding to US$29.60.
Mainland gold mining stocks also fell. Shandong Zhaojin Mining Industry dived as much as 29 per cent before recovering, but still ended the day 18.2 per cent lower at HK$11.52. Zijin Mining Group fell 10.8 per cent to HK$2.22 and China Gold International Resources Corp dropped 11.8 per cent to HK$21.95.
Despite the challenge to gold's status as a market refuge, analysts believe it is only a matter of time before it regains strength since the fundamental factors supporting its value - massive government debts in rich nations - will take years to correct.
'Gold's sharp decline and extreme volatility in recent weeks have raised questions about it retaining its traditional role as a safe-haven asset and the sustainability of its multiyear rally,' wrote senior metals analyst Robin Bhar in a research report.
'The fall in gold though, still looks to be largely corrective in nature with physical buying and investor interest expected to be seen on the dips.'