Investors aren't as keen to get their hands on gold any more. Photo: Peter MorrisIs nowhere safe?
The thumping meted out to gold bulls overnight has certainly wiped some of the sheen from the precious metal's allure.
In the past four years, gold has been on a seemingly relentless march north, from levels close to $US600 until a few months ago when it appeared destined to smash through $US2000.
But gold traders have had second thoughts since September which has given the market a severe dose of the wobbles.
Overnight, gold dropped around $US92 an ounce, easily breaching the $US1600 barrier. And while it still is up 11 per cent for the year, the thinking among many traders is that it could go lower, possibly down to $US1400.
Exactly why this has happened is not easily explained. As fear grips money markets, and Europe continues to teeter on the brink of political self-destruction, gold ordinarily would be the natural haven of choice for investors too nervous for stocks and bonds.
But that enormous run up in recent years has lured investors into taking profits, for there are precious few assets in recent years that have been in the black. Many are looking to offset losses in other areas. There are plenty to choose from in that department. Bond markets and stocks have been hugely volatile for the best part of a year.
The other concern weighing on sentiment is the outlook for inflation. When the US Federal Reserve began printing money to kickstart the economy - and attempt to minimise debt by creating inflation - traders en masse jumped on board the gold bandwagon.
Recession fear trumps inflation
In more recent months, however, the concerns in Europe have overshadowed the fear of inflation. Now, the worry is that a recession in Europe will dampen global growth, taking the heat out of inflation.
While the European Central Bank has shunned the Fed strategy of printing cash to fund bond purchases of distressed nations like Italy, it is under plenty of pressure to do so as a way of extricating Europe from its immediate problems.
For as long as it retains its resolve to avoid the inflation cure, the euro will continue to struggle, the US dollar will shift higher and gold will weaken. But if it does succumb to the pressure and embark on that questionable strategy, the focus again will switch to gold.
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