(Updates with comment, refreshes prices)
* Gold set for largest three-day fall in 28 years
* Flight to cash prompts widespread selling
By Amanda Cooper
LONDON, Sept 26 Gold fell on Monday, buckling
under the weight of the strength of the dollar as investors
scrambled for cash in the face of mounting fear over the impact
of a potential Greek debt default on the euro zone economy.
Euro zone officials played down reports on Monday of
emerging plans to halve Greece's debts and recapitalise European
banks to cope with the fallout, stressing that no such scheme is
yet on the table.
European equities rose on the back of hopes of a prompt
solution to the debt crisis, while industrial commodities such
as silver and base metals bore the brunt of
investor desire for liquidity in the face of mounting
uncertainty and a stronger dollar.
In the last three days alone, gold has fallen by over 10
percent in its largest three-day slide in 28-1/2 years, having
lost more than 20 percent since hitting record highs just shy of
$2,000 an ounce earlier this month.
Spot gold was last down 4.0 percent on the day at
$1,589.84 an ounce by 1415 GMT, having fallen earlier by as
much as 7.4 percent, putting the difference between the intraday
high and low at $128.40, the largest daily price swing on
"It's got things going for it now clearly sovereign risk
hasn't gone away. So for gold, as outright insurance, that
demand is still there. Where we are struggling at the moment is
gold is still sensitive to the dollar," said Citigroup analyst
"Backing off away from $2,000 under the weight of those
issues have not really at the moment led to an immediate long
term sell-off," Bergteil said, adding: "What we will require for
that is for people to stop worrying about sovereign risk, that
they come to the conclusion that the world is going to grow very
nicely and we will not face these pot holes."
After a weekend of being told by the United States, China
and other countries that they must get more aggressive in their
crisis response, European officials focused on ways to beef up
their existing 440 billion-euro rescue fund.
Deep differences remained over whether the European Central
Bank should commit more of its massive resources to shoring up
Europe's banks and help struggling euro zone member countries.
The lack of consensus on a lasting solution to the euro zone
debt crisis has been a major driver in this year's rise in the
gold price to record highs above $1,900 an ounce.
"The rise in volatility taking place in the gold price was
clearly an indication that gold was no longer a low-risk asset.
So there are a few signs there that would have given you pause
for thought, but inevitably when the move happens, everyone is
taken a little bit by surprise," said Natixis commodities
strategist Nic Brown.
"I would suggest that part of what is happening is a
collective move away from commodities by investors. The fact
that there is carnage going on across the commodities spectrum
indicates there are a fair few investors who are getting cold
feet at this stage and that has hit some precious metals
disproportionately," he said.
Last week's data on investment in U.S. gold futures shows
speculators cut their holdings to their lowest level in over two
years, as reflected by the fall in net non-commercial open
interest on COMEX. <0#CFTC>
Short-term interest rates on dollars and other major
currencies, have shot up this month, as banks have become
increasingly unwilling to extend funding to each other because
of fears over their individual exposure to the debt of the
peripheral euro zone nations.
Gold is often sold off as a means of raising dollars when
funding conditions deteriorate, much as they did in late 2008
with the onset of the credit crunch that ensued from banks
withholding lending because of their concern over counterparty
exposure to toxic U.S. mortgage-backed assets.
"Gold is one of the few assets that remains in positive
territory this year, in a sense it is one of the last assets
standing, and because of this as investors head for cash they
sell the assets that have performed. Essentially gold is a
victim of its own success as liquidity trumps," wrote UBS
analyst Edel Tully in a note.
Silver also came under fire, falling by as much as 16
percent at one point in the day and set for its worst three-day
fall on record, having lost more than 25 percent in this period.
The spot price was last down 9.1 percent at $28.22 an
ounce, its lowest since last November.
Platinum fell by 4.2 percent to $1,538.49 an ounce,
its lowest since May last year, while palladium recovered
from an earlier 5.0-percent fall to trade down 1.1 percent on
the day at $624.50 an ounce, around its lowest since last
(Editing by James Jukwey)