NEW YORK/LONDON (Reuters) - The price of gold bullion tumbled 9 percent in heavy trade on Monday, and shed more than $125 (81.7 pounds) per ounce in its biggest-ever daily loss, as investors ditched the precious metal en masse in search of better returns.
Commodities fell across the board, but few as hard as gold, which hit a two-year low, and silver which plunged 11 percent. Both platinum and palladium also fell sharply.
Bullion's collapse caught many veteran investors, who see gold as portfolio protection against inflation and other market risks, by surprise. Monday's drop eclipsed the rout on January 22, 1980, a day after gold hit its then-record $850 on global panic over oil-led inflation due to Soviet intervention in Afghanistan and the Iranian revolution.
In percentage terms, it is set for its biggest one-day fall since 1983.
There have been no sudden changes in the macro economic argument for gold in the last week, although numerous factors have kept gold from rising while investments like U.S. stocks took off.
While last week's news that the Central bank of Cyprus might sell gold reserves to finance its European Union bank bailout did trigger a rush for the exits when bullion slid below the pivotal $1,500 an ounce threshold, few saw it likely to usher in a round of other official disposals.
"The pressure from proposed sale of Cyprus gold is one of the factors, and once one of them start they all run from the hen house," said Robert Richardson, senior account executive and trading officer at Canadian broker-dealer W.D. Latimer Co. Ltd.
The big question is whether the gold bull market is over after 12 years of consecutive yearly gains. Gold hit the lowest price since February 2011 and has now almost halved its rally since the 2008 economic crisis, leaving the metal around $550 below its record high of $1,920.30 set in September 2011.
Recent signs that Fed officials appeared to be nearing a decision to start winding down their bond purchases to end stimulus contributed to the negative tone for gold, even though inflation has failed to materialize as feared during its rounds of post-financial crisis quantitative easing.
Spot gold dropped as low as $1,336.04 an ounce before recovering slightly to $1,347.29 by 4:31 p.m. EST (7:31 p.m. British time), down 8.9 percent, its biggest single percentage fall since 1983.
U.S. futures for June delivery settled down $140.30 at $1,361.10. Trading volume hit a record high exceeding 700,000 lots, almost quadruple the 30-day average, preliminary Reuters data showed.
Gold recouped losses a bit when news of two explosions hit the Boston Marathon late Monday afternoon, killing at least two people and injuring 23. The metal, however, fell further in late trade.
The exodus from bullion hit broader commodity and financial markets. U.S. stocks posted their worst day since November due in part to losses in commodity-related stocks. But Monday's selloff in the Dow Jones industrial stock average came days after stock indexes hit record highs.
Disappointing Chinese economic data earlier on Monday simply gave investors another excuse to slash holdings as U.S. equities and other key industrial commodities including oil and copper fell.
Liquidation came from all quarters, including exchange-traded funds, speculators and even physical bullion owners in China and India, the world's largest bullion markets, said David Govett, head of precious metals at Marex Spectron in London.
"This is a market that has only got one thing on its mind ... get me out," he said.
Plummeting prices took their toll on shares of gold mining companies, as Canada's Barrick Gold Corp, the world's biggest gold producer, slid 10 percent.
On Monday, hedge fund manager John Burbank, a long-time investor in gold, said the recent sharp selloff in bullion came as a surprise to many investors as some economic improvement and declining commodity prices took their toll.
Investors cut exposure to gold, with total holdings at the world's major bullion gold-backed exchange-traded-funds falling to their lowest since early 2012.
Traders also cited liquidation by prominent hedge funds in gold exchange traded funds, especially the SPDR Gold Trust, which was one of the most-active trading U.S. stocks. The gold ETF posted a record monthly outflow in February.
Paulson & Co, run by billionaire financier John Paulson and by far the biggest shareholder in SPDR Gold, told clients earlier this month its gold fund suffered double-digit losses during the first quarter.
The reversal of yen carry trades, in which investors borrowed cheaply in the Japanese currency to reinvest the money in higher yield assets, also led to some gold selling as the yen rebounded from a four-year low against the dollar.
Jewellers in New York slashed prices and shoppers sought out potential bargains.
Retail investors scooped up gold coins at lower prices, Ray Nessim, CEO of major U.S. coin dealer Manfra, Tordella & Brookes told Reuters.
Among other precious metals, silver was down 11.8 percent to $22.81 an ounce. Palladium dropped 7.8 percent to $652.72, while platinum was down 6 percent at $1,396.24, on the verge of entering a bear market, or 20 percent off from its recent high set earlier this year.
Additional report by Lewa Pardomuan and Manolo Serapio Jn in Singapore; editing by Alden Bentley