Gold prices plunged yesterday in a frenzied day of trading as investors dumped their holdings amid the easing of Europe's currency crisis and rumors of sales by China's central bank.
The sharp drop in prices came amid what traders described as a marketwide panic. A broad swath of international investors, mutual funds and speculators unloaded gold on fears that demand was softening even as the price was reaching a speculative peak.
"The market just crashed," said Patrick MaGilligan, a precious metals trader with Merrill Lynch & Co. "At some points during the day, there were absolutely no bids."
Yesterday's sharp plunge in prices was all the more painful for market participants because of the wide number of professionals and individual investors who had begun speculating in the market in recent months in hopes of participating in gold's long-running price rise. The trading served as a grim reminder of the volatility and riskiness of the commodities markets.
On the Commodity Exchange in New York, gold for August delivery, which hit a high yesterday of $400.70 an ounce, fell at rapid speed to a late price of $377.20, some $22 below the previous day's close. During the day, the price had sunk even more, to a low of $372 an ounce.
The most actively traded gold contract, for December delivery, ended trading at $380.70 an ounce, down $22.60. The collapse brought spot gold and all of the major gold contracts below the psychologically important level of $400 an ounce, which could make it difficult for the precious metal to regain any upward momentum in the next few weeks, traders said.
Other precious metals also fell. Silver for September delivery plummeted 48.2 cents, to end at $4.783 an ounce, on the Comex, and platinum for October delivery sank $25, to close at $394.60 an ounce, on the New York Mercantile Exchange.
Gold's drop left prices about where they were four weeks ago, and only somewhat below the $390-an-ounce level reached at the end of trading two weeks ago.
Many of the biggest speculators in gold are still ahead of the game, since many bought in months ago, while prices were far lower. Sir James Goldsmith, a British-French financier, and George Soros, a renowned fund manager and speculator based in New York, made heavy bets on gold back in April. Of course, traders like Mr. Soros and Mr. Goldsmith rarely buy and hold commodities for long periods.
The sharp losses yesterday stemmed partly from the crisis last week in the European currency exchange system. Last Friday, when that crisis reached its peak, gold hit its 34-month high on speculative buying as large institutional funds bet that a breakdown of the ex change system could set off a -- for the gold markets.
Over the weekend, order was restored to the currency markets when European central bankers modified the exchange system, leaving many gold investors holding hordes of the metal and contracts on it, all of which had been purchased on an in vestment theory that proved false.
That left many investors anxious, knowing that the recent arrivals to the gold party could decide to -- out the door with the push of a button on a trading computer. And, as any trader knows, anxiety begets a collapse in any market.
Gold prices dropped in each trading session, and the number of open gold futures contracts, a statistic that traders say is an important sign of potential growth in market demand, stopped rising.
By yesterday morning, the market was poised for a fall. Rumors began in London that the central bank of China, where gold demand has been especially high in recent months, was selling 6 to 10 tons. "That spooked a lot of funds," Mr. MaGilligan of Merrill said.
On top of that came additional rumors that the Chinese government was planning to further restrict purchases of gold by individuals, a move that could well give central bankers better control over their currency, but would choke off a significant source of demand.
And figures released by the World Gold Council showed that imports to Taiwan, Hong Kong and Singapore were slowing, falling to 161 metric tons in the second quarter, from 306 tons in the first quarter.
With the market already jittery, the sell-off simply fed on itself. "It was like a chain reaction," said Ian MacDonald, manager of precious metals marketing with Credit Suisse. "Once it started, it just kept going."
One reason for the sustained plunge was that the funds that had pushed prices so high had also put in place orders to sell gold if it fell below a certain level. And those orders, known as stops, got hit repeatedly during the trading yesterday, pushing prices down more each time.
"At all levels, we hit all these stops from funds with major positions," said Daniel Weisman, head precious metals trader at the MTB Bank in New York. "As those stops got hit, there was no quality buying to absorb that kind of selling."
Even with the collapse in prices, traders said that they expected gold to resume its upward moves within a few weeks, as long as there were no significant shocks to either the supply or the demand.
But other analysts said that gold producers, most of whom have not been selling on anticipation of higher prices, might begin to sell holdings out of fear that the market has hit its highs and may be headed lower.