U.S. gold futures posted their steepest losses in a month on Thursday, dragged down by a global flight from risk that raises new questions about bullion's value as a safe haven and the sustainability of its long rally.
Silver crashed nearly 10 percent lower, its biggest sell-off since it collapsed from a record in early May, while copper sank 8 percent and oil 5 percent as commodity markets bore the brunt of the global rout, triggered by mounting economic anxiety after a fresh round of weak data.
The spot price of gold, which tracks bullion, fell by a more modest 2.5 percent. Even so, it rattled investors who fear weeks of extraordinary volatility and the apparent loss of a safety premium may be undermining one of bullion's biggest selling points.
Gold is never a safe haven, said Dennis Gartman, an independent investor and regular commentator on gold, based in Virginia. When something can move 3, or 5 or 6 percent in the course of two days, that's not a safe haven. Safe havens should be quiet and stable ... not violent.
The benchmark December gold futures contract on New York's COMEX settled down $66.40, or 3.7 percent, at $1,741.70 an ounce, after setting a session low at $1,723.20. It was the contract's sharpest one-day loss since August 24.
In bullion, the spot price hovered at $1,738 an ounce by 4:20 p.m. EDT, down 2.4 percent from Wednesday's last trade of $1,781.29. Earlier in the session, it hit a one-month low of $1,721.34 earlier.
Spot silver dived to $34.89, from $39.60 a day ago.
As the dollar's inverse correlation with stock markets waned, its link with the dollar strengthened as investors seeking safety rushed straight to the greenback, which hasn't attracted the kind of speculative flows that gold has.
The dollar hit eight-month highs against the euro and U.S. Treasuries rallied.
The fear factor this time was a third straight month of manufacturing declines in China, as the world's second-largest economy began to exhibit signs of fading demand from the United States and Europe.
Weak German data and renewed pessimism about the U.S. economy from the Federal Reserve heightened worries about a global recession.
In gold, the sell-off stemmed largely from the dollar after the Fed said on Wednesday it was shifting its portfolio toward longer-term debt to bolster the U.S. economy. Investors unwound leveraged positions funded in dollars in response.
Short-term interest rates also rose, helping the dollar further, as the Fed's proposed $400 billion portfolio reshaping did not involve an expansion in money supply.
To further his argument on how much more volatile things could get, Gartman said gold seemed poised for both a rebound and deeper losses.
I get the sense that gold may bounce from here. But if you get a bounce up to $1,760 or $1,780 or so in the next two days, there'll be plenty of people selling it up there.
I'm not sure there is a price that will get the market into absolute buying again. I think it'll have more to do with the passage of time. We'll have to see if this morning's lows hold for honestly a month or more, before anybody steps back to say 'I'm going to buy it now', Gartman said.
Technical analysts said gold futures were within $20 of a new support area, which if broken could further unravel this year's gains of more than 20 percent.
Gold is forming a large, ominous double-top pattern. There is a neckline at $1,705.40 ... that's an important area to watch, said Adam Sarhan, chief executive of Sarhan Capital in New York.
We're either going to have a light-volume pull back toward that support and bounce or it's going to slice through this neckline like a hot knife through butter.
Hans Kashyap, president of Analytics Research Corp in California, said there was still a good chance that gold would digest the current pull back and hold in a larger trading range, roughly between $1,700 and $1,900.
The world's largest exchange-traded fund in gold, the SPDR Gold Trust, has seen its holdings in bullion fall by nearly 1.0 million ounces this year. So far in September, holdings of gold have risen by just under half a percent after nearly two straight weeks of outflows in the early part of the month.
Some suspect that gold is not as fundamentally or technically weak as suggested, but suffering because of a relatively high value that made it easy to sell for covering losses in stocks and other bad trades.
Gold has finished up in five of the last eight months and its race to record highs above $1,920 an ounce in September had put a number of investors in the money, some analysts said.
Commodities may be the biggest risk assets but they are also the easiest to liquidate, and this is probably more true with gold than anything else, said Sean McGillivray, vice president and head of asset allocation for Great Pacific Wealth Management at Grants Pass in Oregon.