Gold Prices sank to a one-month low in London on Wednesday, falling further as New York opened to stand 3.1% lower from Tuesday's start at $896 per ounce.

Crude oil failed to hold above $122 per barrel, and base metal prices also fell, dragging the major commodity indexes sharply lower.

World stock markets rose meantime – alongside the US Dollar – pushing the Nikkei 1.6% higher in Tokyo and adding 1.8% to the FTSE100 here in London.

The Euro touched a fresh five-week low of $1.5525 after the European Commission's latest survey reported sharper-than-expected falls in consumer, industrial and economic confidence.

In the United States, private-sector payrolls added 9,000 jobs last month, said the ADP report. Analysts had expected a 60,000 drop. 

"The Gold Market is struggling for direction," said Gerard Burg, an energy & minerals analyst at National Australia Bank in Melbourne, to Bloomberg News by phone this morning.

Lower crude oil prices have dampened the "inflation prospect," he believes, "and this is negative for Gold."

The latest reading of US Consumer Prices puts inflation above 5% per year. Short-term interest rates, in contrast, pay only 2% per year.

"With US investment-grade credit default swap spreads narrowing yesterday, equity markets should keep investors' attention today," says Manqoba Madinane at Standard Bank in Johannesburg.

"However, some investors could adopt a wait-and-see approach as the Gold Market searches for further clues on the greenback. [But] more strength in the greenback today could intensify the bearish tone in precious metal markets."

Despite the turnaround in local stock markets, European bond prices continued to rise on Wednesday, pushing the yield offered by two-year German bunds down another three points to 4.31%.

Ten-year UK gilt yields fell to 4.85% – an 11-week low sparked by Tuesday's poor housing and retail sales data.

New mortgage approvals in June fell by two-thirds from the same month in 2007. The CBI's latest survey of Distributive Trends gave the worst reading in 25 years.

A new report from Roger Bootle, the widely-respected "deflationist" head of Capital Economics, further undermined support for the Euro on the currency markets today by warning that "an ugly combination of weak GDP growth, poor international competitiveness, and rising government borrowing costs could lead to renewed calls for Italy to leave the currency zone."

"As things stand, not only will Italy lose ground to the rest of the Eurozone, it could soon start to do so at an even more rapid rate."

Data from the Eurostat agency says Italy's labor costs have become 40% less competitive against Euro-giant Germany since 1995.

Looking at the short-term picture, "there's weakness in Gold and precious metals due to a stronger Dollar and weaker crude oil," reckons Matthew Zeman at LaSalle Futures in Chicago.

"Gold has been following the inflation outlook."

Blaming forecasts of a global slowdown – which call Recession a Dead-Cert Inflation Killer – the Financial Times notes that the number of outstanding contracts in US commodity markets has shrunk by 5.5% since March.

In oil, open interest has fallen to an 18-month low. Forced de-leveraging of financial players as the credit crunch bites has also been compounded by the threat of anti-speculative legislation from US politicians.

If the level of open contracts in commodity futures continues to fall, warns John Reade – chief commodity strategist at UBS in London – "this would make trading more difficult and more expensive" as liquidity evaporates and volatility increases.

Volatility in spot Gold Prices has fallen since the metal retreated from the all-time peak of $1,032 per ounce hit in mid-March.

But holding north of 20% on a daily basis for the last 17 weeks, volatility in Gold remains well above its long-term average of 16.4%.

"We have one more month to go before Gold's Regular Season – following the usual summer doldrums – begins again," writes Julian Phillips of GoldForecaster. "So sellers are moving to the cautious side now.

"[But] we are seeing an expression of investment demand almost in the absence of physical demand. This is telling us that, when they weigh up the future of the banking system and paper currencies against Gold and silver, investors hold a solid belief that precious metals have a place in prudent portfolios."