Gold tumbled 2 per cent in volatile trading Monday, hit by another round of momentum selling and heavy liquidation by commodity hedge funds the day that a 21 per cent margin hike took effect.
The metal has fallen 11 per cent during its four-session selloff, its sharpest four-day drop since February, 1983. Market watchers said big hedge funds were selling gold to cover losses in other markets, and others cited end-of-month "window dressing" by institutional investors.
Signs of deflation, as reflected by one-year lows in the yields of the Treasury Inflation-Protected Securities (TIPS), also weighed on gold, viewed as a safe haven during times of inflation.
"The gold selloff in the last week represents a significant change in pattern of the risk-on/risk-off trade," said Alex Griffiths, a senior director of credit-rating agency Fitch. "Investors' attitude to gold now appears to be shifting."
Spot gold was down 1.8 per cent at $1,627.29 (U.S.) an ounce by 3:45 p.m. ET. During the session, it fell more than 7 per cent to a 2-1/2-month low of $1,534.49.
The $128 difference between the session high and low marked the largest daily price swing on record.
U.S. gold futures for December delivery settled down $45 at $1,594.80 an ounce in heavy trade, with volume almost 50 per cent higher than its 30-day average.
Silver was down 1.2 per cent to $30.68 an ounce.
Silver fell as much as 16 per cent and was set for its sharpest three-day fall on record of more than 25 per cent.
On Friday, CME Group raised its margins, or deposits, on trades of gold by 21 per cent, effective Monday. This put a tighter squeeze on most optimistic gold investors, who were trying to hold onto long positions, according to analysts.
"The liquidation, whether forced or self-determined, has yet to run its final course," said independent investor Dennis Gartman.
On the charts, bullion's relative strength index has fallen below 30, an area usually considered as oversold by analysts. It traded as high as 85 a month ago, well above the overbought level of 70.
Despite Friday's $100 selloff, the latest CME data showed that open interest in gold was down less than 2 per cent, a sign that participants might have initiated new short positions while others liquidated their long or bullish bets.
The lack of consensus on a lasting solution to the euro zone debt crisis has been a major driver in this year's rise in the gold price to record highs above $1,900 an ounce.
Reports of emerging plans to halve Greece's debts and recapitalize European banks to cope with the fallout lifted U.S. equity markets and dampened gold's safe-haven appeal, even as ECB officials said no radical new steps were on the table.
Platinum fell 3.3 per cent to $1,552.74 an ounce, its lowest since May last year. Palladium recovered from an earlier 5 per cent fall to trade down 0.5 per cent at $628.49 an ounce, around its lowest since last October.