The uncertainty in stocks leads investors to divert their assets elsewhere
The alarming collapse of the Lehman Brothers has led investors to turn to gold as an investment safe-haven pushing up the price of bullion by more than 2%.
Silver also gained ground in overnight trading as anxiety over the stability of US financial markets spurred a rush toward defensive investments.
Spot gold in Australian markets rose 2.5% or $18.70 to $782.15, rebounding from 11-month low, while silver gained 2.3% an ounce or 25 cents to $11.08.
Fears of further ripple effects from the turmoil on Wall Street also triggered a flight from the dollar, which dropped 1% against the euro, adding to Friday's slide, when the US currency suffered its biggest one-day decline against the single currency in six months.
Oil also continued its journey southwards with a 2% slump taking it below $100 at $99.04, following renewed forecasts of recession on both sides of the Atlantic. The oil price is now down by more than a third from its peak of almost $150 earlier this year.
Peter McGuire, managing director of Commodity Warrants Australia, told Reuters: "Gold is on fire right now. There is a huge amount of nervousness about Merrill and Lehman. The financials are being hit really hard and things could get very interesting once US markets open."
"These are not normal events and people are running to safety, running to quality," he said, adding that gold could rally to $820 to $830 in the next couple of days.
Last week the US economy appeared to be on the road to recovery following the bailout of mortgage lenders Fannie Mae and Freddie Mac. The £3 trillion rescue package eased fears of a widespread financial collapse in the US.
However, the prospect of Lehman's failing to find a saviour and serious funding shortfalls at rival investment banks and mortgage lenders such as Washington Mutual spooked the markets and prompted further falls.
Gerard Burg, an analyst at National Australia Bank, said: "Gold's price response today looks like safe-haven behaviour. The Lehman story is dominating markets, while bullion is probably getting a bit of a lift from the dollar.
"But the longer-term is still bearish. In relative terms gold has been pretty soft as the dollar strengthened. Also Indian demand looks comparatively weak and the gold market can't live without India."