With Paulson's exit, is the worst over for gold?

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News of high-profile investors like billionaire John Paulson dramatically exiting positions in gold is positive for bullion as it implies that the worst of institutional selling could be over, analysts tell CNBC.

"The reason for the big drop in gold (in recent months) primarily was large scale selling out of exchange traded funds by big investors. I think those big ETF outflows have finished for the moment. They got it right, they acted early," Ric Spooner, chief market analyst for CMC Markets, told CNBC.

"Without that (ETF selling), we could see a rally until we get a high enough price for them to come back in as sellers," he said.

(Read more: Bullion's speculative trade near its end: World Gold Council)

Spooner sees further upside for gold, which hit a two-month high of $1,372 an ounce on Thursday. He is calling for the precious metal to trade in a range of $1420-1490 an ounce in the coming weeks.

"People who needed to get out of gold to balance positions, have likely done so. From here on, you tend to have more opportunistic sellers who want to lighten their portfolios or lock in profits from recent gains," he said.

The World Gold Council's quarterly report on demand trends published on Thursday showed that ETF selling accelerated to 402.2 metric tons in the quarter from 176.5 metric tons in January-March quarter.

A filing with the Securities and Exchange Commission (SEC) this week revealed that prominent U.S. hedge fund Paulson & Co, led by John Paulson, more than halved its stake in SPDR Gold Trust, the world's biggest gold-backed ETF, in the second quarter to 10.2 million shares.

Other sellers included Northern Trust, which sold 5 million shares, and Bank of America and UBS which sold over 2 million shares each, according to ANZ. Against the trend, Goldman Sachs, increased its holdings to 4.4 million shares - more than six times its holdings at the end of March, the bank said.

(Read more: Demand for physical gold jumps 53% in second quarter)

"Since the end of June, gold holdings by the ETF had fallen further, to a low of 909 (metric) tons, though they have increased over the past week by 4 (metric) tons to 913 (metric) tons. This could be a sign that one of the factors that have driven the gold price lower is subsiding," the bank said in a note Thursday.

Sentiment seems to have turned more positive over the past two weeks, ANZ said. However, the bank added that the precious metal looks prone to a correction before making a sustained move higher. It said a break above $1,370, could see gold heading towards $1,390.

(Read more: Is sentiment toward gold shifting again?)

Jonathan Barratt, founder of Barratt's Bulletin, a commodity newsletter, who agrees the bulk of institutional selling is likely behind us, noted that the move in gold overnight was particularly encouraging.

"Yesterday, equity markets came under pressure and people went back to gold. That's a sign people are getting a renewed feeling that gold is a store of value," he said, referring to the selloff in U.S. stocks and over 2 percent bounce in gold prices on Thursday.

—By CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H