LONDON— Even the most fierce gold bulls must be feeling sheepish after bullion tumbled helter-skelter to two-year lows in a couple of days, putting a question mark over how much space the metal should take in portfolios.
After 12 years of unbroken yearly gains, a Reuters poll of 37 analysts in January found that while they expected the bull run to top out, gold could see record average highs this year and next.
And even if banks had started back-pedaling on predictions that it would beat 2011's record high of $1,920.30 per ounce, most still favored the fundamental case for holding gold as an alternative currency and hedge against inflation.
And then came Cyprus. An assessment of Cypriot financing needs prepared by the European Commission showed on April 10 that the troubled island would need to sell excess gold reserves to raise around 400 million euros to help finance part of its bailout.
On the same day, minutes from the March 19-20 U.S. Federal Reserve meeting showed officials appeared on course to end their extraordinary bond-buying stimulus by year-end, which in turn would relax inflationary pressure.
Gold fell 1.6 percent, but appeared to stabilize the following day before plummeting about 5.2 percent and 8.4 percent on Friday and Monday, respectively, as selling caused more selling - the most astonishing two-day move in 30 years.
Prices were about $1,380 per ounce at 1650 GMT on Tuesday, having started Friday above $1,560 per ounce.
"[It] looks like a capitulation, but in an asset that doesn't produce cash flow it is particularly hard to decide where to buy some more and if the move is finished," said Pedro de Noronha, managing partner at London-based Noster Capital.
We were lucky to get out of all our outright long positions in the $1,560's. We are keeping an eye on it, but doing nothing for the time being," he said.
The Chicago Board Options Exchange [CBOE] Gold ETF Volatility Index, often referred to as the "Gold VIX" and viewed as a proxy for investor expectations of volatility, surged on Monday, gaining more than 60 percent as prices slumped to two-year lows.
Investors in gold-backed exchange-traded funds have headed for the door in hordes.
"I don't think anyone thought we'd see the enormous move and volume of selling that we did see. It's done a great deal of damage to investors' confidence," said Sean Corrigan, chief investment strategist at Diapason Commodities Management in Switzerland.
Corrigan added that gold's perceived efficiency as a safe haven had been declining for some time, as the factors that would normally send the market higher had failed to do that - the crisis in Cyprus being a case in point.
Downgrades and drama
There has been a recent spate of gold downgrades by investment banks; Goldman Sachs, also on April 10, cut its gold price forecasts for a second time in six weeks, citing expectations for an acceleration in U.S. economic growth and recent lower prices.
In the wake of the sell-off, prices have lost about 20 percent so far this year and about 28 percent since the record high in 2011.
And demonstrating the drama, trading volume in U.S. Comex gold futures turnover was at 689,000 lots, preliminary Reuters data showed on Monday, surpassing the previous record of 486,315 lots on Nov. 28, 2012.
Bank of America Merrill Lynch acknowledged the key triggers were fears of further central bank gold sales in the euro zone following the Cyprus proposal, with fund selling exacerbating the spectacular dive.
The bank added, however: "The gold price collapse is hard to explain when looking at traditional variables such as the trade-weighted dollar or interest rates, raising concerns that the reputation of gold as an alternative to fiat currency may have been damaged."
The jury is out on how long it will take for confidence to return, given that funds are likely to continue beating a retreat and the expectations of global economic recovery, which hurts gold market fundamentals.
Those who remain upbeat on the metal's future say the official sector - central banks - are still keen buyers of gold, and its usefulness as a liquid store of value in difficult times is indeed demonstrated by the Cyprus proposal.
"The body language of central banks doesn't seem on the whole to be sellers," said Deutsche Bank analyst Daniel Brebner.
"I'm doubtful that gold's role would be seriously strained by these three days of extreme volatility. I think there will be certainly a number of institutions that will rethink the wisdom of using gold as an investment, but time will tell if gold is truly a barbarous relic," said Brebner.