Gold's reputation as a safe investment took another beating on Friday, after an upbeat U.S. jobs report sent bullion tumbling toward three-year lows and raised speculation that the downturn isn't over.
Gold fell to $1,220.10 (U.S.) an ounce, down $31.80, bringing this year's decline to 27 per cent.
What was once seen as ideal protection against economic crises, runaway inflation and a deteriorating U.S. dollar has instead begun to look like a dangerous asset.
"Gold went up like an escalator, but it's going down like an elevator," said Avery Shenfeld, chief economist at CIBC World Markets.
The latest bout of weakness follows a strong U.S. monthly payrolls report from the Labor Department, which showed 195,000 job gains last month along with upward revisions to April and May.
The report bolstered expectations that the Federal Reserve will start to wind down its bond-buying program, known as quantitative easing or QE, as early as September.
This expectation, spelled out by the Fed at its last monetary policy meeting, has rattled markets: Stocks have wobbled, bond yields have spiked and the U.S. dollar has shot-up to three-year highs.
The yield on the 10-year U.S. Treasury bond rose to above 2.7 per cent, up more than a full percentage point since May. Since gold pays no dividend, rising bond yields make it less attractive relative to fixed income investments.
At the same time, U.S. inflation is well below the Fed's target of 2 per cent, suggesting that several years of extraordinary central bank stimulus have not led to the cataclysmic results that gold enthusiasts had long expected.
Stéfane Marion, chief economist and strategist at National Bank Financial, believes that any bullish view on gold – based on currency volatility and rising public debt – must be pushed well into the future.
"Under current circumstances, the forces at play right now are still suggesting more downside potential," he said.
CIBC's Mr. Shenfeld thinks gold could fall to $1,000 an ounce by the end of 2014, implying a further 18 per cent retreat.
Gold stocks are also reflecting a dour outlook for the commodity, along with problems associated with rising production costs. Barrick Gold Corp. fell 4.8 per cent on Friday, to its lowest level in more than 20 years. Goldcorp Inc. fell 1.4 per cent.
Markets have a habit of getting ahead of themselves, though, with investors banking on scenarios that fail to arrive – and some gold experts believe that bets on an upcoming Fed policy shift is hopelessly offside.
I do not believe in the tough talk by the Fed," said Ronald-Peter Stöferle, managing partner at Incrementum AG, an asset manager based in Liechtenstein. "This institution did not see the troubles gathering in 2007 and 2008 and why should anyone believe in their forecasts now."
Rather than winding down quantitative easing, he believes deflationary pressures will force the Fed into increasing its bond-buying activities. That, combined with the fact that central bank polices have been highly experimental in recent years, with no road map for markets to follow, makes gold attractive as a type of insurance.
But just as upward pressure drove gold to a record high of $1,900 a ounce in 2011, as investors helped to fuel the rise, today's downward pressure could continue if more investors lose faith in its ability to hold value.
"Momentum works against gold because as an asset with no yield the only thing you have going for you is the price," Mr. Shenfeld said.
With gold down $680 an ounce from its record-high, price has become a dead weight.