Gold Loses Friends as Funds Sell, Investors Flock to Risk

After years of having a seemingly endless stream of buyers, gold is quickly falling into disfavor with many investors.

The yellow metal has found itself unable to extend its decade-long rally into 2013 — all the more curious given that central bank easing still continues to flow and global risks abound.

(Read More: Whither Gold? Bears Circle as Rally Hits Speed Bump)

Over the last several days, two developments have painted an ominous outlook for gold, eroding its pillars of support. First, the precious metal has been hit by selling from exchange-traded funds and large investors.

Secondly, developments in the global economy have made investors moderately more comfortable, and in less need for safe-haven investments. Although Europe is still suffering the after-effects of its debt crisis, analysts suggest markets have become more comfortable exiting positions that were effectively safeguards against a possible euro break-up.

"Gold is suffering from a substantial unwind of safe-haven flows due to the euro collapse. It's one of the major themes that have brought the euro higher," said Alessio de Longis, portfolio manager at OppenheimerFunds.

Unlike the last two years, when Greece's restructuring was churning markets and Italian and Spanish bond yields were surging to euro-era highs, "markets no longer believe the euro zone is up for an imminent breakup," de Longis added.

That beneficial backdrop, however, could be short lived. On Monday, markets were whipsawed by a general election in Italy that saw disgraced former-Prime Minister Silvio Berlusconi threatening to retake power in the euro zone's third largest economy. Gold rallied by more than a percent on the development, raising the possibility that Europe's travails are far from over.

(Read more: Global Markets Fear Italian Hung Parliament.)

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Yet fund selling, combined with other factors, have made gold's rebounds painfully shallow. Earlier this month, a regulatory filing showed that George Soros sliced his investment in the SPDR Gold Trust in half late last year.

Last week, the flagship gold fund saw its biggest weekly outflow since 2011, which coincided with a sharp reduction in net gold longs to their lowest level since May 2012, according to Commitment of Traders data.

Market indicators suggest that other gold bugs are quickly following suit as bullion's momentum stalls. That means gold's correction could quickly become a full-scale rout if conditions warrant.

Gold is now trading more like a risk asset, rather than as a safe-haven, noted Chuck Butler, President of Everbank World Markets. He calls that "a mistake," given all of the factors that still support a higher gold price.

"I always call gold an uncertainty hedge," Butler said, saying the downward correction would wash out stale positions. "We'll turn up again with people that use gold as an uncertainty hedge for their portfolio."