Customers are reflected in a mirror as they look at gold accessories at a gold store in Xuchang, China.
The price of gold is in a major swoon, falling below the psychologically important $1,600 (U.S.) an ounce level, as investors dumped the precious metal amid hopes that global financial strains are easing.
The drop in gold prices, which has taken place in fits and starts over the past six months, is prompting speculation that the long bull market in the metal, which took prices up nearly six-fold since 2001, is ending.
Given the six-month downdraft, the mood in the gold market is becoming fearful.
"We're probably very close to seeing panic lows in the price of gold," says Ronald Stoeferle, an analyst at Incrementum Advisors AG., a Swiss-based financial services firm.
The problem for gold, according to some analysts, is that the economic outlook, while not exactly rosy, is far less dire than it was during the worst of the European debt crisis last year. An improving global economy reduces the appeal of gold as a haven.
In addition, the U.S. economy is showing signs of life, raising the chances that the Federal Reserve Board may end its exceptionally loose monetary policy sooner than expected. Higher interest rates would increase the opportunity cost of owning gold.
All the trends that are unfriendly to gold are causing investors to chase stocks instead. As bullion fell Tuesday by $5.40 (U.S.) to $1,604 an ounce, the S&P 500 reached a five-year high and stocks in Toronto advanced 124 points or nearly 1 per cent to close at 12,810.
Mr. Stoeferle says markets may be experiencing a "big rotation into equities" as investors shift funds into riskier assets, such as stocks.
In recent days, the gold market has had to absorb several unexpected blows. Some major speculators, including billionaire George Soros, have liquidated part of their gold hoard, surprising market players.
Mr. Soros cut his holding in one of the major gold ETFs by nearly $100-million in the fourth quarter. In addition, major speculators have generally been bailing from bullish bets and adding to short positions in gold on the U.S. futures markets, according to data released by Commodity Futures Trading Commission.
Gold demand has also been weak in two major markets. Buying of the metal in China has been muted because of the Chinese New Year holidays last week, when business in the country grinds to a halt. In India, the government is using high import taxes to throttle gold demand in an effort to improve the country's trade balance.
Given all the potential problems, some analysts are surprised that gold hasn't fallen more, suggesting that there may be underlying strength in the market.
"I think given all the negative commentary on gold … the fact that it's still held up relatively well is actually quite encouraging," says Julian Jessop, head of commodity research for Capital Economics, an independent research firm based in London.
Many analysts contend the metal is only experiencing a pause in a long-term advance.
Mr. Jessop says that when confidence in the global economy fades again, safe haven demand will pick up and "then I think gold is going to resume its climb."
While current prices are a major stumble from the $1,790 reached as recently as October, gold investors have become used to volatility. The metal has fallen to about $1,530 an ounce both last year and the year before, suggesting the metal has strong support around that level.
"I would be somewhat surprised if it goes below that," says Martin Murenbeeld, chief economist at DundeeWealth Inc.
He says gold is still in a long-term bull market driven by such factors as high global debt levels. An additional factor contributing to gold's current weakness is the threat of a so-called currency war, in which countries would try to depreciate the value of their currencies, he says.
Japan has recently engineered a weaker yen. This action increases the value of the U.S. dollar, which puts pressure on gold prices valued in the U.S. currency.
Mr. Stoeferle says he's been besieged by so many reporters, investors and friends asking him if he thinks it's the end of the bull market that he views these questions as a kind of contrary indicator, suggesting to him that gold is close to bottoming out.
He expects that the bull market in gold will be over for good when central banks begin to raise real interest rates and when countries do something to control the increase in their debt burdens. Until then, he thinks gold will generally advance.
"We always say, hope for the best, prepare for the worst. Therefore, gold portfolio investments definitely make sense."