Gold tumbled nearly 4 percent Monday, hit by momentum selling and heavy liquidation by commodity hedge funds triggered by another sharp margin hike.
The metal has lost 11 percent during its four-session sell-off, its worst four-day drop since February 1983. Widespread talk of possible selling by big hedge funds to cover losses in other markets and end-of-month window dressing by institutional investors also weighed.
Signs of deflation, as reflected by one-year lows in the yields of the Treasury Inflation-Protected Securities (TIPS), also hit gold.
Hedge funds are caught wholly off-sides, said independent investor Dennis Gartman. The liquidation, whether forced or self-determined, has yet to run its final course.
Spot gold was down 3.4 percent at $1,600 an ounce by 1:17 p.m. EDT, having fallen earlier by more than 7 percent to a 2-1/2-month low of $1,534.49. The difference between the session high and low of $128 marked the largest daily price swing on record.
U.S. gold futures for December delivery were down $37.50 at $1,602.10 an ounce in heavy trading.
Silver fell as much as 16 percent and was set for its sharpest three-day fall on record of more than 25 percent.
Silver dropped 3.2 percent to $30.05 an ounce.
On Friday, CME Group raised its margins, or deposits, on trades of gold by 21 percent, effective Monday.
The move further squeezed the most optimistic investors in gold, who were trying to hold onto long positions, according to analysts.
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 sell-off, latest CME data showed that open interest in gold was down less than 2 percent, a sign that participants might have initiated new short positions while others liquidated their long or bullish bets.
EURO ZONE HOPES WEIGH
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 3.8 percent to $1,543.74 an ounce, its lowest since May last year. Palladium recovered from an earlier 5.0-percent fall to trade down 1.6 percent at $621.47 an ounce, around its lowest since last October.