The last time the Federal Reserve hinted that it could start to tightening monetary policy, investors followed by dumping physically backed gold at a record pace.
As investors prepare for what is likely to be the first Fed rate rise since June 2006 on Wednesday, the risk posed to gold exchange-traded funds (ETFs) is in the spotlight once again as the metal has failed to act as a traditional safe haven so far this year.
Since 2013, around 38 million ounces (moz) of gold ETF holdings have been liquidated globally, bringing total holdings to around 50moz from the all-time high, according to UBS data.
"It's difficult to answer the question of whether or not the bulk of ETF selling is behind us. We can't know the motivation of each gold ETF holder – particularly on the retail side – and we don't have visibility on timelines and pain thresholds," said commodities analyst at UBS, Joni Teeves.
"The value is probably more in having some idea where the next pressure point could be, and by simply looking at the buying buckets, this seems to be within the next $250 south of where market is trading right now. ETFs could become an issue should $1,000 be tested," she added.
Spot gold prices are down over 17 percent from their peak of around $1,293 per troy ounce at the end of January this year, largely on expectations that U.S. rates will rise, which has pushed the dollar higher, putting pressure on gold prices.
Ahead of the Fed's decision due to be released at 2 p.m. ET, gold around 1 percent to trade around $1,070 as investors started to focus on the pace of hikes and how dovish the Fed will be following the first rate rise.
Gold sank to multi-year lows in 2013, breaching the $1,200 mark for the first time since 2010 just a few weeks after the Fed said its bond purchases could start to "taper off" if the economy continued to recover.
The Gold ETF market has seen steady growth for a decade – reaching an all-time high of 88moz in 2012. The first annual net outflow only occurred in 2013 and selling has continued since, albeit at a much slower pace.
The bulk of the buying seemed to have occurred in two waves according to UBS. The first wave was when gold was trading between $800 and $1,000 – about 43moz of gross buying occurred around these levels. The second wave came when gold was trading above $1,200 – where additional 59moz of gross gold ETF purchases were made.
"ETF holders who belong to the second buying bucket are likely feeling jittery right now. With gold hovering only $70 away from the psychological $1,000 level, these ETF holders are likely feeling the pressure ahead of the Fed," Teeves said.
Looking at average returns across asset classes in a U.K. sterling portfolio, 2015 has been a tough year for private investors, according to data from gold broker BullionVault.
"A portfolio split equally between U.K. shares, bonds, cash and property investments has returned just 2.6 percent, the smallest gain since the 7.5 percent loss of 2008,"said head of research at BullionVault, Adrian Ash.
Looking at how central bank policy into 2016, Ash said monetary policy will continue to be front of mind for gold and silver investors.
"Gold tends to do well when other assets repeatedly fail to perform, but does best when markets lose confidence in central banks. 2016 risks crystallizing that threat, boosting private investor gold demand again, as the phoney war of hinting at interest-rate rises leaves the Bank of England, like the US Fed, in a position where they need to put up or shut up," Ash added.