Gold fell further on Thursday in London, dropping to a two-week low vs. the Dollar as Asian stock markets closed sharply lower and an early rally in Eurozone shares flipped into a 2% plunge.

The Dollar rose once again with the Japanese Yen, as crude oil lost 2% to $68 per barrel and broad commodity markets lost 1%.

New data showed the Japanese economy expanding less quickly than analysts forecast, with domestic price deflation hitting 3.0% annually – the worst rate of falling prices on record, 20 years after Tokyo's stock-market and real-estate bubbles burst.

"Hearing rumors of funds liquidating gold positions," said one London journalist in an email today, admitting they "might be unfounded".

"We believe that one of the key drivers for [commodity market] liquidation could be FX moves," says Walter de Wet at Standard Bank – "most importantly, the Euro/Dollar exchange rate."

Noting the "clear correlation" between the falling Dollar and swelling speculation in raw materials since 2007, "A disorderly adjustment lower in the Euro could see much more liquidation across commodity markets," says de Wet.

"The FX options market puts the probability for the Euro reaching $1.15 within 3 months at 36% this morning. Two weeks ago, this probability was 13%."

"[Gold] investment demand will remain the major driver for some time," counters the MKS refinery in Geneva, Switzerland, "[but] participants should expect more volatility as the Eurozone faces its toughest test yet."

Leading online German dealer ProAurum.de today says 140 of the 163 gold products it lists for sale are "not available".

German citizens, anxious to Buy Gold today, are driving across the border to Switzerland to find gold, says Zurich's Blick newspaper.

"It is worse than in the days after the Lehman Crash," says metals analyst Thorsten Proettel at Landesbank Baden Württemberg, pointing to the period in late-2008 when retail gold investors couldn't find coins and small bars to buy, despite lower prices in the wholesale Spot Gold market for large, 400-oz bars.

On the professional wholesale market today – where liquidity remains unimpaired – Gold priced in Euros today fell to a 7-session low of €30,700 per kilo, down almost 6% from Monday's record high.

In Dollar Gold Prices, "$1169 proved a huge resistance level" on the way up, reckons the latest note from bullion bank Scotia Mocatta. "So we expect it to be a support on the retracement."

US, UK and German government bonds meantime rose sharply as world stock markets fell, pushing the yield offered by 10-year US Treasuries down to a new 2010 low of 3.30%.

Noting "stress" in Europe's interbank lending market – the first market hit by the turmoil of August 2007 – "Some officials suspect that this is because the European Central Bank has been supplying the wrong type of Dollars" to commercial banks in 'liquidity' loans, writes Gillian Tett, capital-markets editor at the Financial Times.

"Though it offered short-term funds last week [using new 'swapped' Dollar loaned by the US Federal Reserve], what European banks really need is medium and long-term Dollar funds."

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