Wholesale market gold prices traded as low as $1,560 an ounce Friday morning, before recovering some ground by lunchtime in London, while European stock markets were also down and commodities were broadly flat.
Silver prices meantime sank to a 2012 low at $26.64 an ounce—a 7.2% drop on last week's close.
"We believe a break of $26.00 has the ability to trigger liquidation of silver with it looking for $18.00," says the latest technical analysis note from bullion bank Scotia Mocatta.
Heading into the weekend, gold prices by Friday lunchtime looked set for their biggest weekly fall since the first week of March, having fallen 3.7% since the start of Monday's trading.
On the currency markets, the Euro ticked lower against the Dollar, hitting its lowest level this week.
"A decline in the Euro may have contributed to a drop in gold prices," says HSBC precious metals analyst James Steel.
"Near- term momentum may take prices lower, but we believe it may create an attractive point of entry for gold."
The Dollar held onto yesterday's gains made following Wednesday's Federal Reserve decision not to launch another round of quantitative easing.
The Fed opted to extend Operation Twist, the maturity extension program whereby it aims to lower longer-term interest rates by selling shorter-dated government bonds and buying longer-dated ones.
The extension to Operation Twist could reduce liquidity in the short-term funding market, traders have told the Financial Times, since the Fed's System Open Market Account will have sold most of its short-dated Treasury debt by the end of this year. The Fed, they argue, will be less able to lend out short-dated securities at times of high demand, which have often coincided with periods of heightened market stress.
"[It is] a little unsettling for the repo market to no longer have SOMA lending as a backstop," says Michael Cloherty, head of US interest rate strategy at RBC Capital Markets.
"We do not believe that [the] extension of Operation Twist is sufficient, and expect further action from the Fed later this year" says a note on asset allocation from analysts at HSBC, who add that they "retain a very conservative strategic portfolio with a focus on US Treasuries and gold."
Here in in Europe meantime, stock markets extended losses into a second day this morning, after ratings agency Moody's last night announced it was downgrading 15 major global investment banks.
Moody's noted in a statement that "government support [for banks] is likely to become less certain and predictable over time".
Spain's banks meantime could face capital shortfalls of up to €62 billion in the event of adverse economic conditions, according to the results of stress tests published Thursday. The figure is based on potential losses of up to €274 billion, offset against expected earnings and provisions already made for losses.
The €62 billion potential shortfall is less than the €100 billion credit line Eurozone leaders have agreed to offer Spain to finance banking sector restricting.
The stress tests however did not consider the impact of losses on Spanish banks' government bond holdings, newswire Bloomberg reports.
Benchmark yields on Spanish government bonds, which set Euro-era highs earlier this week, ticked lower this morning, ahead of a meeting of a meeting between the leaders of the four biggest economies in the Eurozone.
German chancellor Angela Merkel headed to Rome Friday for talks with Italian prime minister Mario Monti, French president Francois Holland, and Spanish prime minister Mariano Rajoy.
Earlier this week, at the G20 summit, Monti suggested Eurozone rescue funds should be used to buy government bonds on the open market—a proposal supported by Hollande but rejected by Merkel.
Rajoy meantime said last week that he is "waging a battle" to persuade the European Central Bank to buy debt from Eurozone countries facing high borrowing costs.
"The viability of the European monetary system is [being] questioned," said International Monetary Fund head Christine Lagarde last night.
"A determined and forceful move towards complete European monetary union should be reaffirmed in order to restore faith."
Lagarde also called for recapitalization of weak banks, "with preferably a direct link between [bailout funds] and the banks, without going through the sovereign, in order to break the negative feedback loop that we have between banks and sovereigns."
"Christine Lagarde is throwing down the gauntlet," says one Eurozone official quoted by the New York Times.
If European leaders fail to agree measures at next week's European Union summit that calm the markets, "there would be progressively greater speculative attacks on individual countries, with harassment of the weaker countries," argues Monti in an interview carried by several European newspapers this morning.
"A large part of Europe would find itself having to continue to put up with very high interest rates. . .this is the direct opposite of what is needed for economic growth."
"Monti knows he has to get his ducks in a row on the European side," says James Walston, professor of politics at the American University in Rome, citing pressure on the prime minister from those parties that have so far backed him.
"Friday's summit is important for Monti in symbolic terms because it shows Italians that he is center-stage."
The Italian government agreed this week to move forward Friday's meeting, to enable Merkel to attend a soccer match at the European Championships in Poland—where Germany play Greece tonight.
Over in India, traditionally the world's biggest gold bullion market, the postal service today offered a 6.5% special discount on gold coins to mark the festival of Pushya Nakshtrey.
Indian Gold Dealers have reported slow demand this week, with currency weakness contributing to record Rupee gold prices in recent days. Traders on Friday said the Reserve Bank of India stepped in to prevent the Rupee falling further, after it sank to a record low against the Dollar.
"For a while already we’ve seen weak Indian buying owing to a weaker Rupee and the usual seasonal decline we observe over this period," says Friday's note from commodities strategists at Standard Bank.
"South East Asian players have been doing well at picking up the slack but of late they have not."
Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.
(c) BullionVault 2011
Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events—and must be verified elsewhere—should you choose to act on it.