Spot gold fell 5.2 percent and silver dropped by the most in three years, extending Friday's rout as investors bolted for the ultimate safe havens of cash and the dollar.
A debt crisis in the euro zone that could infect the global economy is causing a widespread flight to safety that has hammered commodity markets across the board.
Spot gold dropped to an 11-week low of $1,534.49 an ounce before edging back to $1,558.39 by 0706 GMT, bringing losses so far this month to nearly 15 percent, the biggest decline since the financial crisis in October 2008.
Spot silver was down 16 percent at one point to a low of $26.04, its weakest since November last year, before bouncing back to $27.97, a fall of just under 10 percent. The metal has lost more than a quarter of its value in just three sessions.
Many have highlighted the risks of gold being in overbought territory, having gone up in a straight line in the past four years, said Song Seng Wun, a regional economist at CIMB Research in Singapore.
With recessionary pressure piling up, flight to safety means flight to really safe investments, and those are the U.S. dollar and U.S. Treasuries.
Spot gold is approaching key support at the 200-day moving average of $1,526.58, while the Relative Strength Index dipped below 30, seen as an indicator that the market is oversold.
U.S. gold futures fell 4.7 percent to $1,563.40 an ounce, and U.S. silver tumbled as much as 13 percent to $26.15.
The dollar, which has rallied nearly 6 percent so far this year against a basket of currencies, touched a seven-month high as investors fled risky assets to seek a safe haven in the greenback.
The dollar still has room to strengthen more in the short term because the fear of crisis is not over, said Dominic Schnider, head of commodity research at UBS Wealth Management in Singapore.
A stronger dollar pressures gold as it becomes more expensive for buyers holding other currencies.
European policymakers began working on new ways to stop fallout from Greece's near-bankruptcy from inflicting more damage on the world economy after stinging criticism for failing to stem the debt crisis.
But gold's longer-term prospects remain bright, analysts and traders said, as the reasons supporting high gold prices, such as low interest rates in most developed economies and high inflation in the world's top two gold consumers, are still in place.
For the longer term, after prices stabilise and life returns to normal, safe-haven flow will slowly come back. In 2012, there is a chance that gold could reach $2,000 an ounce, said Ong Yi Ling, an analyst at Phillip Futures.
MARGIN INCREASE; ETF HOLDINGS STEADY
Adding to the bearish sentiment, the CME Group raised margin requirements on gold, silver and copper futures contracts on Friday after market volatility rose dramatically in the past few weeks, raising the cost of holding positions.
Speculators cut bullish bets in gold futures and options for the sixth time in seven weeks in the week ended Sept. 20, as the price of bullion continued to unravel from its record.
Spot gold fell 8.6 percent last week, its sharpest such drop in more than 28 years.
Retail punters are scared, said a Singapore-based trader.
There is a big dollar buying frenzy now, which is dragging everything down and people have to liquidate just like 2008.
In 2008, spot gold prices initially shot up after Lehman Brothers' bankruptcy, but soon tumbled more than 25 percent within two weeks in October.
Holdings in the world's largest gold-backed exchange-traded fund, SPDR Gold Trust, stood unchanged at a one-month high of 1,252.211 tonnes by Sept. 23.
The world's largest silver-backed exchange-traded fund, iShares Silver Trust, also reported its holdings unchanged, at 9,868.49 tonnes.
If ETF positions unwind, it could put additional pressure on prices, traders and analysts said.
Prices of other precious metals also tumbled. Spot platinum dropped to $1,463.99, its lowest since May 2010.
Spot palladium fell to an 11-month low of $600.49.