Bullion's losses snowballed after it broke below its 200-day moving average -- a key technical support it had held for nearly three years. Gold option volatility also exploded as investors sought to hedge against downside risk in underlying futures.
The magnitude of gold's decline dwarfed equities' losses. Bullion was already under selling pressure from the previous session due to a lack of new economic stimulus by the US Federal Reserve and persistent European debt fears.
Rampant market talk that possible liquidation by a big hedge fund to meet redemption demand ahead of the year end also weighed heavily on bullion market sentiment.
"It appears that there is significant amount of forced selling. The way gold is falling it looks like a big fund is blowing up, prompting forced-redemption selling," said James Dailey, portfolio manager of the TEAM Financial Asset Management with $200 million in fund assets.
Spot gold fell 2.8 percent to $1,585.75 an ounce by 12:32 p.m. EST (1732 GMT), having earlier hit $1,564.29, its lowest since late September.
The metal is on track for its worst three-day slide since late September, also its second-largest sell-off since October of 2008.
Silver tumbled 5.1 percent to $29.19 an ounce.
US gold futures for February delivery were down $74.10 at $1,588.90 an ounce. Trading volume already surpassed its 30-day moving average, on track to be one of the busiest sessions in the last three months.
Spot gold broke below its 200-day moving average for the first time since January 2009, as some analysts said that a break below that defining parameter could spell the end of gold's three-year bull trend.
"There is massive liquidation and deleveraging across the board in commodities as oil and copper prices are getting hit. It's almost like panic atmosphere that we were dealing with," said Bill O'Neill, partner of commodities investment firm LOGIC Advisor.
S&P 500 fell around 1 percent. However, US crude oil futures sank 4 percent and copper dived 5 percent in a commodity market maelstrom.
HSBC said the lack of a commitment to inject more stimulus into the economy by the Fed after its Tuesday policy meeting was a negative factor for gold, along with a push among investors to get more cash onto their balance sheet.
"Some macro hedge funds are liquidating gold holdings and taking profits in a difficult year. As trading volume typically drops toward year-end, we expect increasingly volatile price swings," James Steel, chief technical analyst at HSBC, said in a note.
In other precious metals traded, platinum was last down 3.3 percent at $1,422 an ounce. Palladium dropped 4.7 percent to $611.25 an ounce.