Gold lost its appeal as a safe haven Monday, falling over 2 per cent as fears of a Greek debt default and larger euro zone problems drove investors into bonds and the dollar.
Oil, meanwhile, tumbled in a second day of heavy losses, with Brent crude reaching its lowest price in almost a month.
A meeting of European officials to tackle the region's debt crisis ended without a solution, stoking fears of a possible Greek default. Investors got out of risky trades and took refuge in U.S. Treasuries and the dollar.
The cancellation of a visit by Greek Prime Minister George Papandreou to the United States to chair an emergency cabinet meeting at home, and a regional election defeat for German Chancellor Angela Merkel, added to perceptions of a worsening crisis.
Gold , which hit record highs above $1,920 (U.S.) an ounce just two weeks ago, fell below the psychological level of $1,800. Some fund managers and analysts were thinking prices may need to dip to below $1,700 for the market to rally again.
Longer-dated U.S. Treasuries jumped more than benchmark 10-year bonds, taking yields on the 30-year paper to their lowest level since January 2009. The dollar rose 1 per cent against a basket of currencies – its most in a week.
While the stronger dollar itself appeared to be pressuring gold, some analysts said the safe-haven wind that had fanned the precious metal to record highs has diminished and potential buyers were looking at lower levels to re-enter the market.
"What's different about the euro zone crisis this time is people are moving straight to cash instead of looking at alternative safe assets like gold," said David Meger, metals trading director at Chicago's Vision Financial Markets.
"Also, there's a contingent out there that feels that gold has gone up too fast, too soon, and that it needs to correct more to bring back that real strong support or value buying or bargain hunting."
Uncertainties over what a two-day policy meeting of the Federal Reserve from Tuesday would yield has also put gold in a wait-and-see mode, said James Dailey, a portfolio manager who helps manage $220-million for TEAM Financial Asset Management in Harrisburg, Pennsylvania.
"Depending on what the Fed says or does, things could change pretty quickly for gold," Dailey said.
There is broad consensus that the U.S. central bank will further ease monetary policy at the two-day meeting, although analysis said that may not necessarily weaken the dollar.
"I would say $1,700 would probably be the level which I'd expect value buyers to come in. The next leg lower would be $1,660, which should put a bottom to the market's correction," said Dailey at TEAM Financial.
OIL TAKES A FALL
Oil tumbled in a second day of heavy losses on Monday, with Brent crude reaching its lowest price in almost a month as escalating fears over the euro zone debt crisis triggered across-the-board selling of riskier assets.
Brent crude was set for its biggest two-day drop since a steep slide in early August as investors increasingly began factoring in a greater possibility of a Greek debt default after European leaders failed to find new ways to end the crisis.
Oil has weathered much of the turmoil in financial markets over the past month thanks to supportive fundamentals, such as diminished North Sea production and healthy Chinese demand. After falling below $100 in August, Brent has traded in a band of around $105 to $115 a barrel for the past month.
On Monday, it appeared to be succumbing to broader macro-economic fears, causing a renewed spike in options. Technical selling as Brent crude crashed below the 200-day moving average likely spurred selling too.
"Markets are under pressure as the European finance ministers failed to come up with anything solid this weekend. There are some strong worries that Greece is not doing what's needed to get another round of aid," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.
Trading volume was anemic at about a third below the one-month average as investors kept their powder dry ahead of a host of major events this week, including the U.S. Federal Reserve's likely measure later this week to temper long-term interest rates, the International Monetary Fund's gathering of major financial ministers and a slew of U.S. housing data.
ICE Brent November crude fell $3.08 to $109.14 a barrel by 2:24 p.m. (ET), having fallen as low as $108.87, its lowest since Aug. 24. It has closed below the 200-day moving average, effective at $110.41 on Monday, only about four times in the past year, all of them in August.
U.S. October crude , approaching expiration on Tuesday, fell $2.23 to $85.73 a barrel, after slumping as low as $84.93. The front-month Brent/WTI spread narrowed by 70 cents to $23.34 a barrel.