The precious metals that were supposed to provide a haven in times of economic turmoil are rapidly losing their lustre as the year draws to a close.
Gold and silver prices tumbled Wednesday after a report from the European Central Bank rekindled concern that the region's debt crisis is deepening.
Investors fled to U.S. dollars, reducing the relative appeal of gold, silver and other commodities priced in greenbacks. Particularly hard hit were the shares of miners that produce precious metals. The S&P/TSX composite index, which is heavily weighted with mining stocks, felt the full force of the downdraft, losing 1.66 per cent.
The ECB report showed European banks are hanging onto the hundreds of billions of euros they have borrowed from the central bank rather than lending it out, an indication of the stress being felt by the euro zone's financial institutions.
"This is concerning as it may indicate they are preparing for a potential credit freeze where banks are afraid to lend to one another," said Alfred Lee, an investment strategist at BMO Asset Management Inc. in Toronto.
Precious metals have long been billed as insurance against the prospect that paper money may lose its value, but gold and silver prices have suffered this year as the European debt crisis has heated up and investors have flocked instead to the perceived safety of the U.S. dollar. "Gold and commodities in general continue to run into headwinds due to the recent strength in the U.S. dollar," Mr. Lee said.
Gold tumbled $31.40 Wednesday to settle at $1,564.10 (U.S.) an ounce in New York, its lowest price since July. It was the commodity's fifth consecutive day of declines.
Silver fell 5.2 per cent to $27.234 (U.S.) an ounce, its lowest level since January.
The fall in precious metal prices sparked a rout in mining shares. Shares of Barrick Gold Corp. sank 3.6 per cent in Toronto, while Goldcorp Inc. retreated 4.7 per cent and Silver Wheaton Corp. lost 6.1 per cent.
The shares of gold miners have sustained heavy losses as investors have demonstrated a growing preference for investing in the metal through exchange-traded funds that hold bullion directly. Despite a 9.5-per-cent rise in the price of gold this year, a basket of 39 Toronto-listed gold stocks has fallen 20 per cent.
Observers say that investors are "deleveraging" by selling gold, stocks and other risky assets and seeking safety in the most liquid investments, notably U.S. cash and Treasuries. The euro dropped to an 11-month low against the U.S. dollar after the release of the ECB report.
Gold's decline reflects "U.S. dollar strength as a result of deleveraging across global markets," said Paul de Sousa, vice-president of business development for Bullion Management Group Inc. near Toronto. He says the fundamental case for buying gold as a store of value remains unchanged.
Gold prices have received a boost in recent years from heavy buying in emerging Asian markets. There was growing concern on Wednesday that demand for gold may weaken in China and India, the world's top two consumers of the precious metal.
Gold imports by India may drop as much as 50 per cent this month after the rupee plunged, according to the Bombay Bullion Association. China restricted gold trading in spot and futures contracts to the Shanghai Gold Exchange and the Shanghai Futures Exchange on Tuesday to crack down on illegal buying and selling of commodities.
With files from Bloomberg News