Monday metal meltdown: Gold drops to 10-month low

By lunchtime gold was off its lows for the day, but still trading at levels last seen in early July last year.

Gold for June delivery was off $22.60, or 1.43%, to $1,561.40 an ounce on the Comex division of the New York Mercantile Exchange by 1:20pm EST after briefly dipping to $1,555 in morning trade.

Monday saw a broad sell-off in commodities and mining stocks as worries over US banks and the European sovereign debt crisis intensified. JP Morgan's $2 billion trading loss led to a sell-off in banking stocks in the US while Greece appeared to be sliding into a protracted period of chaos.

An 11th-hour attempt to form a coalition government failed over the weekend which could lead to a new vote, increasing the chances of the country dropping out of the Eurozone altogether.

Gold was also hurt by a sharp drop in bullish calls by investors with net speculative longs falling 33% while those shorting the metal, believing that the price would fall, bought 51 tonnes last week.

Standard Bank summed up the situation this way: "What is more disconcerting is that while investors have over the past few weeks appeared cautious of running too short on gold, this fear looks to have evaporated."

Other precious metals also fell with July silver declining 1.94% to $28.33 an ounce. July contracts for platinum gave up 1.9% or $27.50 to $1,443.90 an ounce. After gaining more than 16% in the first quarter of 2012, platinum has been in steady decline since the start of April and looks set to give up all its gains for the year. June futures in palladium fell $9.05, or 1.5%, to $594.30 an ounce, near lows last seen in November.

Copper for July delivery fell 2.62% or 10 cents to $3.55 a pound, near price levels last seen at the beginning of the year.

Both copper and gold are now down around 20% from its all-time record highs of $4.49 a pound and $1,911.60 an ounce set in July and September last year.

News out last week from the world's two largest gold consumers – a massive boost to Chinese gold imports and India abolishing a tax on gold jewellery — did little to encourage buying of the yellow metal.

Strong central bank purchases this year also did not soothe gold investors' fears about industry fundamentals.

Bullion bulls are now focusing on any news from US monetary authorities about further policy easing, more specifically the Fed's program of quantitative easing.

The first two round of quantitative easing were a massive boon for gold. QE1 kicked off on 16 December 2008 when an ounce of gold was changing hands for $837.

The Fed bought $2.3 trillion of bonds during the first two rounds that ended in June last year. Another policy instrument to keep interest rates low – called 'Operation Twist' – that pumped $400 billion into markets is set to expire next month.

If the Fed again floods the market with cheap money – something that appears more and more likely – gold should recapture its allure as a storer of wealth and an inflation hedge. And it would hurt the dollar, boosting the metal's price.

Read more about gold and quantitative easing >>

Read more about the copper price and talk of market manipulation >>