Cyprus expected to sell off gold reserves as price falls further on news of poorer Chinese growth and US manufacturing data
Concerns that strong recoveries in the US and China have come to a dramatic halt sent gold to a two-year low in one of its sharpest falls in recent years.
Gold fell 8.5% and silver was down 14.5% as investors digested news from Beijing of a slowdown in growth and a downbeat report from US manufacturers.
Brent crude oil prices fell to their lowest since last summer, ending the day only a few cents above $100 a barrel, down 2.3% on the day.
Gold had already fallen to its lowest level in 18 months on Friday amid fears that cash-strapped countries would need to sell off their reserves, as Cyprus is expected to do so, to raise €400m (£340m) – although the amount it raises will drop if the price keeps falling. The economics consultancy Capital Economics, though, said it was sceptical that the situation in the Mediterranean island could be the cause for the sell off in gold
The slump continued which meant that the gold had now fallen nearly $200 in the last two days to below $1,400 an ounce for the first time since February 2011. The plunge came as finance ministers and central bank officials travelled to the International Monetary Fund's annual meeting in Washington.
Concern may turn to China after a rebound in its economic fortunes late last year appeared to reverse when GDP figures for the first quarter of the year revealed a drop in annualised growth to 7.7% from 7.9% in the previous quarter.
Some analysts blamed much of the weakening picture across the globe on the continuing recession in the eurozone, which triggered a 7% decline in imports last month. Most eurozone countries are in recession and growth is not expected to pick up until the end of the year or possibly 2014.
In response to the ongoing depression and the possibility that Spain will apply for a bailout, calls for a break-up or fundamental review of the single currency are gathering pace.
In Germany, the newly formed political party Alternative für Deutschland put pressure on the chancellor, Angela Merkel, to restrict eurozone bailout terms unless wealthy property owners in southern Europe make a larger contribution.
Peter Bofinger, an economic adviser to Merkel, criticised the bailout terms set for Cyprus, which involved a raid on individual and business savings. "The resourceful rich just move their money to banks in northern Europe and avoid paying," Prof Bofinger told Der Spiegel, a German magazine.
He said property owners in Spain, Greece, Portugal and Cyprus should pay a wealth tax to partly fund their government rescue packages.
Remarks by Mario Draghi, the head of the European Central Bank, that struggling banks should be allowed to fail added to the sense of unease.
He said: "The banking sector and the financial market of the euro area has become fragmented. This is harmful as the euro area is a bank-based economy.
"Around three quarters of firms' financing comes from banks. So if banks in some countries will not lend at reasonable interest rates, the consequences for the euro area economy are severe."
"In providing liquidity to our banking counterparties, we cannot and do not want to subsidise banks that are failing. Our liquidity support is not and should not be equity support. Likewise, in pricing out break-up risk in sovereign debt securities, we cannot and do not want to subsidise governments," he said.
Capital Economics said gold has traditionally grown in value during periods of uncertainty. "None of the fundamental explanations being discussed for the slump in gold prices really holds up. It is still not even certain that Cyprus, whose holdings are tiny, will be selling any gold. If anything, the incoming US data has made it less likely that the Fed will withdraw its monetary stimulus any time soon," Capital Economics said. "Any emphasis placed on the risks to gold posed by a stronger US recovery and rising interest rates certainly looks increasingly misplaced, or at least premature," it said.
Stockbroker Brewin Dolphin said the more widely held view is that increases in supply of all metals and weakening demand in China and the eurozone especially, accounted for at least some of the decline in gold prices.
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