The price of gold fell to its lowest level in more than 18 months amid fears that sales of the precious metal forced on Cyprus by its desperate financial plight would lead to wholesale dumping by hard-pressed countries in the coming months.
At the end of a week dominated by the plight of the troubled island nation, gold slid below US$1,500 an ounce for the first time since July 2011 in anticipation that Cyprus would raise £400 million (HK$4.8 billion) by offloading some of its reserves.
Share prices also fell on the major European bourses after the gathering of EU finance ministers in Dublin made it clear that there would be no increase to the £10 billion earmarked for Cyprus, even though the expected cost of the bailout has been raised by £6 billion to £23 billion.
While the gold sale by Cyprus is itself small, heavily indebted euro-zone nations such as Italy and Portugal could also find themselves under increasing pressure to put their bullion reserves to work.
"If Cyprus can break the gold market, then [there are] many reasons to be worried, with Slovenia, Hungary, Portugal, Spain and Italy in line," Milko Markov, an investment analyst at SK Hart Management, said. "It is a make-or-break moment for gold ... if the market can't handle the reallocation and Cyprus, then there is really a need for a bear market."
A Cypriot government spokesman said the increase in the size of the bailout would not lead to more money being taken from those who have deposited their savings in the nation's banks.
Although both Portugal and Ireland were granted an additional seven years to pay back their loans as a reward for sticking to their austerity programmes, help for Cyprus will be limited to extra investment from Europe's structural fund.
A spokesman for the German government said its contribution to the bailout for Cyprus would not change despite the deteriorating financial health of the country but that Angela Merkel's government supported easier terms for Portugal - which tabled fresh measures to save more than £1 billion from its budget - and Ireland.
Most major European stock markets saw falls of more than 1 per cent, with weak economic news from the US adding to the downward pressure on gold.
The fall in gold prices was estimated to have cost billionaire John Paulson more than US$300 million of his personal wealth. He has roughly US$9.5 billion invested across his hedge funds, of which about 85 per cent is invested in gold share classes.
Bullion has soared for more than a decade due to its status as a safe-haven investment in troubled times and in response to inflation fears as the US Federal Reserve embarked on an aggressive stimulus programme of quantitative easing.
The Guardian, Reuters, Bloomberg