The big gains in gold of the past decade and more were driven by several forces. In 1999, leading central banks around the world struck a deal to limit the amount of gold they sold. Around the same time, gold producers began to cut back on their hedging activities in the expectation of rising prices, as investors began to seek greater exposure to the metal. Some 45 new gold-tracking funds have also sprung up, which together own around 80m ounces worth £85bn.
Sentiment has been another powerful influence in gold's advance. Fears over the stability of the global financial system since 2008 have prompted investors to buy gold, which is seen as a safe-haven in times of stress. The central banks' monetary onslaught since then - in which trillions of new dollars in new money has been created out of nowhere - has also boosted gold's appeal. Unlike paper money, the stock of gold is scarce and limited.
Lately, however, investors' priorities have shifted. Signs of economic recovery - especially in the US - have led to increased appetite for shares at the expense of safe-haven assets such as gold. Both America's S&P 500 index and the UK's FTSE 100 are currently not far off their all-time record highs. Certain top hedge-fund managers have dumped some of their gold holdings, while the holdings of exchange traded products have also fallen.
That said, there are still some brighter spots on the horizon for gold. China's retail gold market has tripled in size since the opening of the Shanghai Gold Exchange 10 years ago. The Middle Kingdom has since become both the largest consumer and largest producer of the yellow metal. Growing Chinese incomes and a still-broadening retail market could continue to swell demand over the coming years.
The short-term price trend in gold is rather worrisome, though. As long as it stays trapped below $1,600 an ounce, the danger is of further weakness to and even through the major floor at $1,522. Were that level to give way, a fall to $1,460 or $1,400 might follow. Figures from the US derivatives exchanges show that speculators are reducing the number of futures contracts they hold, but that they still have many more long positions than short positions. The shift from long to short could gather steam in the event of more price drops. Still, we should also bear in mind that some big US banks have started telling clients that they should stock up on gold at its current low levels.
Looking at the price chart, there are stout hurdles at $1,585, $1,600 and $1,620. If gold gets back above the last of these, a jump to the $1,657 level should follow. Still, if the US dollar keeps strengthening as it has done of late, gold will likely struggle more.
