Panic selling from hedge funds in response to the European debt crisis forced the gold price to a three-week low yesterday, as well as pushing the silver price back below $40. The Comex September gold contract lost $35.70 (2%) to settle at $1,776.40 per troy ounce. Unsurprisingly, gold’s losses were magnified in the silver market, with the front-month Comex silver contract losing 4.1% intraday – settling at $39.11 per troy ounce.

Though they have recovered slightly in early trading today, European stock markets suffered heavy losses yesterday, with fears growing that Greece is heading for a disorderly default. Heavy falls in stocks and commodities forced hedge funds to liquidate their gold positions in order to cover losses on other assets.

The price action in copper – futures for which fell 3.8% yesterday to hit a new low for the year at $3.77 a pound – is indicative of growing pessimism among international investors. As The Wall Street Journal points out, given its widespread industrial uses, “Dr Copper” is viewed as a bellwether of the global economy. The slowdown in Europe is having a big impact on copper – the continent being the second largest consumer of the metal after China. The news this morning that S&P has downgraded Italian sovereign debt from A+ to A underscores the seriousness of the eurozone crisis.

Meanwhile, huge Chinese demand for gold is showing no signs of abating, and is expected to top a record 200 tonnes this year, according to the World Gold Council (WGC). China is the world’s second largest gold bullion buyer after India, and purchases by the two countries accounted for 54% of second-quarter world gold consumption. The WGC expects Chinese gold demand will double in the next 10 years, though Albert Cheng – the organisation’s Far East managing director – thinks that this forecast may be “too conservative”.

Yesterday also bought confirmation of what many have long thought inevitable: that Venezuelan dictator Hugo Chavez will nationalise the Venezuelan gold industry. His government is giving companies 90 days in which to form joint ventures with the state. The government will hold at least 55% of any joint venture, and all gold sales must be to the state. Investors and mining companies will be hoping that Chavez’s actions are not the precursor to similar moves in other countries.