Gold and Silver Prices continued to fall in Asian and London trade on Friday, dropping to fresh two-month lows even as the US Dollar fell on the currency markets.

By lunchtime in London – and compared with New Year 2011's record highs – the Gold Price in Dollars stood 6% lower, in Euros 7.5% down, and in British Pounds nearly 9% lower.

European stock markets meantime ignored a sharp fall in Asian share prices, while Western government bonds ticked lower.

Agricultural and energy commodities bounced from this week's falls.

"The threat of further monetary tightening in China continues to overwhelm precious metals," says Standard Bank's daily note, "with gold and silver the hardest hit.

"Given their high correlation with global liquidity this is to be expected."

"Everybody's getting out," reckons Leonard Kaplan, president of Illinois's Prospector Asset Management, speaking to Bloomberg.

"Look for acceleration on the downside. Historically, when Gold Prices go down from the highs, they fall precipitously."

"All in all, [2011] will be a bumpy ride for the yellow metal," says the latest Precious Metals Monthly from the VM Group consultancy in London – heart of the world's professional Gold Bullion market.

"Continued investment demand will be critical...but as the global economy returns to growth, the perceived necessity to Buy Gold as an anti-risk device will diminish, unless inflation gets out of hand."

Surging inflation is "always a possibility" however, warns VM in its report for ABN Amro, because governments worldwide "are nervous about raising interest rates in case they snuff out the fledgling recovery."

New data released Friday showed Australian import prices, Japanese industrial activity, and both UK mortgage approvals and retail sales all falling in Dec., defying analyst forecasts for a rise.

Today's near-zero interest rates on cash deposits "will persist" in both the US and Europe, says VM – encouraging savers to Buy Gold, as well as equities – while "The rise in the Chinese and Indian middle class will [also] continue to support demand."

The Chinese New Year typically marks the strongest period for household gold demand, says BullionVault analysis cited today by MarketWatch.

Since 2005, the Jan-to-March period has seen China's private household gold demand average a rise of 22% from the previous nine months.

Looking at China's latest import data, 2010 saw Silver Bullion imports (net of exports) rise four-fold from 2009 note analysts at Mitsui in London – a total of 3,500 tonnes.

A heavy seller of Silver Bullion after lifting the state's 50-year monopoly in 2000, China was a net export of 3,000 tonnes as recently as 2005.

Domestic silver production meantime rose 8.3% to 11,617 tonnes last year, Beijing's official statistics bureau said Thursday.

Gold production – which also includes an "unknowable" volume of scrap-metal recycling, as well as new mining output – grew by 6% from 2009 to 615 tonnes.

"There's an increasing amount of existing jewelry and other gold products that can be recycled, though the actual amount is difficult to estimate," Bloomberg quotes an analyst from Beijing Antaike Information Development.

Back in Friday's action, "Market sentiment has changed," says a Hong Kong dealer in a note. "Physical demand [will now] only show up when price dips."

Silver was "abandoned" by Asian traders overnight, he adds, but here in London the metal  continued to trade in backwardation on Friday morning, with prices for one- through 12-month delivery lower than for immediate settlement.

"That suggests to the lay observer that demand for the physical stuff is at unprecedented levels," says the FT's Alphaville blog.

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