Even the most fierce gold bulls must be feeling sheepish after bullion tumbled its most in 30 years, raising questions about gold's value as part of an investor portfolio.
Most experts failed to see the collapse coming.
A Reuters poll in January of 37 banking analysts and consultants forecast another year or two of average record highs for gold, after 12 years of unbroken annual average gains from a spot low of around $250 per ounce.
A long list of banks forecast gold would average more than $1,800 per ounce, up from $1,668 in 2012. They included ANZ, BNP Paribas, Bank of America/Merrill Lynch, Deutsche Bank, Commerzbank, Macquarie, Morgan Stanley, Standard Chartered and Goldman Sachs. Only one, National Australia Bank, predicted below $1,600.
And even though banks had started back-pedaling on those forecasts, 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 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 around 5.2 percent and 8.4 percent on Friday and Monday, respectively, as selling triggered more selling—the biggest two-day move in 30 years.
Having cratered to $1,321 an ounce on Tuesday, bullion was priced near $1,380 Wednesday, having started Friday above $1,560.
Investors in gold-backed exchange-traded funds in particular have exited 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.
"(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.
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.
Downgrades and Drama
There had been a recent spate of gold downgrades by investment banks; Goldman Sachs on April 10 cut its gold price forecast for a second time in six weeks, citing expectations for an acceleration in U.S. economic growth and after a decline in prices over a number of weeks to below $1,600.
Prices are off about 20 percent so far this year and 28 percent below the record high in 2011 of $1,920, which for technical analysts puts gold in bear territory.
Demonstrating the drama, trading volume in U.S. Comex gold futures turnover was at 689,000 lots, exchange data showed on Monday, surpassing the previous record of 486,315 lots on Nov. 28, 2012.
Bank of America/Merrill Lynch acknowledged key triggers were fears of further central bank gold sales in the euro zone following the Cyprus proposal.
But it said the scale of the decline suggested gold's reputation as an alternative store of value had been undermined.
"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 banks said.
The jury is out on how long it will take for confidence to return, given that funds may continue their retreat and the expectations of global economic recovery, which some argue will undermine gold market fundamentals.
Those who remain constructive 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," Deutsche Bank analyst Daniel Brebner said.
"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."