Gold Prices jumped 2.6% at the Asian opening on Monday but drifted back to $770 an ounce as world stock markets sank and money fled into government bonds following the overnight demise of two Wall Street giants.

Lehman Brothers – a major player in the commodity futures market – filed for Chapter 11 bankruptcy just as the London Stock Exchange opened for business today, driving the FTSE100 share index more than 3.4% below Friday's close.

US regulator the Commodity Futures Trading Commission (CFTC) said it was "closely monitoring" derivatives in raw materials as a result. Traders across forex, bond, derivative and stock markets also struggled to identify losses, gains and default positions owed by the failed investment bank.

Crude oil futures dropped almost 5% to trade below $97 per barrel this morning, while soft commodities also sank.

Base metal contracts traded through the London Metals Exchange, in contrast, all rose sharply.

Back on Wall Street, Merrill Lynch also lost its independence this weekend after frantic negotiations, with Bank of America – which joined London's Barclays bank in walking away from rescuing Lehmans on Saturday – agreeing to buy America's largest brokerage for $50 billion in cash and shares.

Today the London Bullion Market Association (LBMA) – the professional gold-dealer's trade body – said that neither Merrills nor Lehmans will impact the depth or liquidity of physical gold trading.

"They're ordinary members, they're not market makers, they're not clearers," said CEO Stewart Murray to Bloomberg this morning. Lehmans and Merrills' position in the gold market was "quite small given the many number of ordinary [LBMA] members."

Hank Paulson, the US Treasury secretary, may now hope that the purchase of Merrill Lynch by Bank of America deal creates a "fire break" on Wall Street. "Merrill was the next target for short-sellers," says one source quoted by the Financial Times today.

But S&P futures pointed more than 3% lower as the Wall Street open drew near, with shares in AIG – the world's largest insurance group – looking set to worsen Friday's 31% collapse after appealing to the Federal Reserve for an emergency $40 billion loan.

"Ratings agencies threatened to downgrade the insurance giant's credit rating," says the New York Times, breaking the story. "One person close to the firm said that if such an event occurred, AIG may survive for only 48 hours to 72 hours."

Money continued to pour into government bonds meantime, knocking three-year US Treasury yields almost 0.4% lower to 2.04%.

Three-year German bund yields sank 22 basis points to 3.72% as prices soared, helping suck some €23 billion out of France's Cac-40 stock index.

Today the European Central Bank (ECB) lent €30 billion to the money markets in a "quick tender" auction after inter-bank lending rates jumped from 4.29% to 4.41%.

The auction received 51 bids looking for a total of €90bn. The final interest-rate paid at the auction averaged 4.39% – almost 0.4% over the ECB's current target rate.

"Systemic risk indicators have adjusted upward," writes Manqoba Madinane for Standard Bank in Johannesburg, "which is supportive of precious metals.

"Firstly, the spread between US two-year generic swap and bond rates has broken above the 100 basis-points level again, warning of yet more credit market risk.

"Secondly, the  five-year investment grade CDX credit default spread has widened a further 3.23 basis-points after having made strong gains last week. This opens the door for investment fund flows into precious metals as investors seek to hedge against financial market risk.

"Following the Lehman Brothers decision, we believe risk will stay high, which could keep the greenback under pressure today."

Early action in the currency markets saw the US Dollar dumped in Asia, pushing the Euro more than three cents higher – a little shy of $1.45 – and taking the British Pound to its best level this month above $1.81.

But just as Friday's late spike in Euros and British Pounds evaporated by the US close as bearish traders closed their positions and took profits, so Monday's jump was quickly reversed.

That held the Gold Price in Sterling above £431 per ounce. For French, German and Italian investors, gold held above €543.

Surveying 28 professional gold traders, investors and analysts at the end of last week, Bloomberg found 11 were bullish, while nine said to sell. The remaining four were "neutral".

The latest US options-and-futures data – released after Friday's close – showed hedge fund traders and other "large speculators" continuing to slash their bullish betting on gold and growing the number of short contracts they hold.

As a proportion of their total position, the number of bullish contracts held by institutional speculators fell below 70% to its lowest level since June 2007.

Private individuals trading gold derivatives also slashed their bullish bets – and also for the eighth week running – while building their largest short position since May 2005.

Back then however, the bullish ratio for "small speculators" stood above 75%. Last Tuesday it stood at a record low of barely 58%.

On the other side of the trade, meantime, professional traders acting for gold miners, refineries and bullion banks – often called the "smart money" for their cautious but prescient trading in gold – grew their long positions to an all-time record, pushing their bullish ratio to its own record above forty-one contracts in every hundred.