Gold drifted lower all through the Asian session today, before sinking fast as Tokyo closed and Europe opened for business.

Versus the US Dollar, gold dropped $4.50 inside two hours to open London below $649 per ounce.

The drop was less severe against other currencies, most especially the Euro – which fell hard versus the US Dollar this morning after Germany reported weak export numbers for Dec.

Even so, the Sterling price of gold dropped fast towards £330. For Euro investors the €500 level looked vulnerable as the selling continued.

What caused the drop? "Sales of gold scrap from Indonesia and Thailand dominated the physical sector in Southeast Asia," reports Reuters, "though dealers also noted some buying interest from India, the world's largest consumer."

Falling prices could deter further physical sales, however. One dealer in Hong Kong also reports that jewelers in mainland China are keen to buy ahead of next week's Lunar New Year festivities – but they're waiting for a pullback in prices.

"We mainly deal with scrap this week but sales from Thailand have slowed down a bit. I would say physical demand is mainly from India," adds a dealer in Singapore.

Shorter-term however, the drop through $650 won't look good to professional investors studying gold-price charts.

Gold stalled at this resistance-level both in August and Dec. This month's break above $650 had been seen as a significant move.

"It's a key sentiment level," noted Chiaki Kanako, chief dealer at Tanaka Kikinzoku, Japan's biggest gold wholesaler, to Reuters earlier. "So we might see gold struggle a bit at this level."

Further selling pressure could also come from private investors in Japan. Tokyo's benchmark gold futures contract – due for delivery in Dec. '07 – trod water today, before dipping to the equivalent of $677 per ounce.

"There has been an increasing interest to hold bullion from the general public in Japan,'' Kanako-san explained. "Such long positions held by the general public reached perhaps the highest in 20 years."

Whatever the longer-term merits of the case for gold, record positions in any financial asset tend to suggest a reversal of sentiment. Last week saw a record "short" position in the Japanese Yen, for instance.

The Yen's refused to drop further from its four-year lows, however. And it could cause a lot of trouble in financial markets everywhere if it suddenly turns tail and begins to rise.

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