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Shares of gold miners have stayed flat even as the price of the metal has soared.Associated Press/The Associated Press

Falling gold prices are testing investors' enthusiasm for an asset that was supposed to protect them during times of market turmoil.

With global stocks getting hammered by fears of anemic economic growth and Europe's worsening debt crisis, many investors are counting on gold to insulate their portfolios and deliver steady gains. Indeed, the precious metal is heading for its 11th successive annual gain and is up in value by more than 20 per cent this year. But during the latest bout of market gyrations, gold has suddenly reversed course.

The price fell $64 (U.S.) an ounce, or nearly 4 per cent, on Thursday to $1,744.10, and is now down 9 per cent from its all-time high of $1,917.90, reached on Sept. 5.

"Investors are going to start to question the safety [of gold]and some of the pronouncements of why they should be holding it," said John Kurgan, senior market strategist at commodity trading house MF Global Canada.

"Gold is suppose to be the go-to investment in times of fear, but that really hasn't been happening in the last few days. Today it just caved in," he said at the end of Thursday's trading session.

The catalyst for the selloff in bullion appears to be the same one affecting stocks. On Wednesday, the U.S. Federal Reserve warned that the fragile U.S. economic recovery faces "significant" threats. The central bank and its chairman Ben Bernanke also detailed the Fed's next stimulus plan, which involves switching $400-billion worth of government debt to long-term bonds from short-term bonds. Unlike the previous two rounds of stimulus, this version does not involve printing more money, something that drives up gold prices.

Gold investors were disappointed by the Fed's move because it does not boost overall liquidity, which might prove inflationary, said Patricia Mohr, commodity market specialist at Bank of Nova Scotia.

Adding to the selling wave, a lot of hedge funds and leveraged investors started dumping stocks and precious metals to meet margin calls, Mr. Kurgan added.

MF Global's technical analysis suggests that gold will find support at $1,705 an ounce, with the next threshold being $1,620, he said.

Even though declines to those marks would only move bullion prices back to where they were this summer, the dollar figures are huge and undoubtedly would have a psychological impact on investors who bought for safety. No one knows, of course, how big that sentiment shift would be.

Mr. Kurgan doesn't think gold will return to its high this year, but says it likely will next year as investors rethink their move into U.S. currency, he said.

Gold is facing a correction right now, with the big question being how far will it go. "Right now, no one wants to step up and be a hero and buy anything," he said.

John Ing, president and gold analyst at investment dealer Maison Placements Canada Inc., says investors have overreacted. He considers the recent dips in bullion prices as buying opportunities and says he is confident that the U.S. dollar will retreat and gold will rise over time.

"Not to take it lightly, but when the proverbial police raid the brothel they even take the piano player," he says. "In this dash for cash, where investors are disappointed in Bernanke's solutions, they have just said, 'Let me out of here,' and that includes gold."

Mr. Ing points out that in 2008 investors made a similar sprint for the exits. But once they were able to sort through the emotions, they moved into the only "default haven," which is gold. Thursday's selloff was another short-term, knee-jerk reaction, he said.

"Ironically, some are fleeing into the U.S. dollar, but that's like attaching your lifeboat to an anchor. The U.S. is the biggest debtor in the world and its outlook is not good," Mr. Ing said.

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