Gold plunges: A safe haven no more?

Gold’s safe haven status is quickly waning after the price of the precious metal fell below US$1,400 an ounce on Monday, to its lowest level in more than two years.

The price of gold has now dropped by more than 10 per cent in two trading days, and is down more than 25 per cent since its record close of $1,920 in September 2011.

Some analysts are forecasting gold to fall below $1,300 in the coming months, as investors cross their fingers for a steady U.S. recovery. That will mean less reliance on gold as a safe bet for investors that were worried about inflation and the stability of the U.S. dollar.

Gold’s nosedive began late last week, spurred by news that Cyprus planned to sell gold to meet its financing needs. The Central Bank of Cyprus later denied the reports, telling CNBC there was "no such thing being discussed." However, the rumoured move led to a couple of high-profile sell orders for gold, and the momentum picked up from there.

“Once gold starts selling it becomes a self-fulfilling prophecy,” said Camilla Sutton, chief currency strategist of Bank of Nova Scotia. “It’s quite rare that you see such a dramatic drop.”

On Monday, gold fell more than 6 per cent to as low as $1,385 an ounce, before recovering back above $1,400. The price fell 5 per cent on Friday.

Last week, Goldman Sachs cut its three-month gold target to $1,530 from $1,615 and lowered the 12-month forecast to $1,390 from $1,550. It said higher inflation, which can help to drive up gold prices, could be years away.

Holdings in the SPDR Gold Trust, the biggest gold-backed exchange-traded product, are the lowest they've been in almost three years and hedge funds have cut bets on higher prices by 72 per cent since October, Bloomberg reported.

“Some of the key pillars of the gold bull market look like they’re suffering fatigue,” Peter Richardson, an analyst at Morgan Stanley, said in an interview with Bloomberg.

“The gold market’s probably started to price in the prospect that beleaguered members of the euro zone might be forced to sell gold to raise part of the funding, and there are much bigger holders in that category than Cyprus.”

Other metals also slumped on Monday, including copper and silver, weighed down by news that China’s economy grew at a slower pace than economists’ forecasts.