What lies beneath the gold price slump?

Instead, it appeared to show the importance of momentum within gold markets.

The gold price has two main influences: physical buyers, buying gold bars or jewellery for a longer-term investment and investment buyers, who buy through exchange traded funds (ETFs) or futures and tend to be more short-term in nature.

The most recent sell-off has been almost exclusively driven by ETF sales and activity in the futures market, hence its size and speed.

On the ETF side, Lipper fund-flow data showed global gold ETF ownership fell by $2.7bn (£1.7bn) for the week ended April 17, when gold experienced its most dramatic decline. Some of the world’s largest gold ETFs had significant outflows since the start of the year.

The SPDR Gold Shares ETF, for example, had outflows of nearly $13bn this year. Data from Bloomberg suggests that overall holdings in gold ETFs have fallen by 13 per cent this year. With the gold price falls, this has shaved $36bn from the aggregate value of gold ETFs.

However, Stephen Cohen, head of iShares EMEA investment strategy and insight, says there has also been activity in the futures market on the days when the gold price has fallen heavily, suggesting this has been an important influence.

Viktor Nossek, head of research at Boost ETP, says: “These big falls always tend to occur when gold reaches extreme valuations compared to other asset classes. Institutions with gold holdings instigate selling pressure, needing to sell to fund budget shortfalls. They sell by moving out of gold ETFs. This means that selling pressure tends to go on for a few days.” He says, for the time being, he is seeing continued selling in gold ETFs.

But recently the price has risen, albeit moderately. It is roughly 3.5 per cent higher for the week ended April 26.

In a recent note, Joni Teves, precious metals analyst at UBS, suggested Asia buyers had responded to the lower gold price with a wave of buying. The Financial Times reported that Hong Kong’s banks, jewellers and even its gold exchange had been left without enough gold supply to meet demand that was the highest in 30 years.

Mr Nossek says: “People have kept buying on the physical side, particularly now that it looks so cheap. In India, for example, people buy gold for weddings at this time of year. These buyers are not as price sensitive and will tend to hold gold for the long term.”

However, he says that these buyers do not create as much movement in the gold price as ETF buyers and sellers, which is why the gains have been relatively muted.

Mr Nossek believes that, for any sustained rise in the gold price, professional investors holding ETFs would have to step back into the market. However, they are more price sensitive and will be comparing gold to other ‘safe haven’ assets such as US Tips (Treasury Inflation-Protected Securities).

He adds: “The US is recovering, Europe and China are restructuring. The recent setback in the gold price is nothing to do with a slump in global activity. There does not appear to be an inflation risk, which was the big reason to hold gold, but, globally, inflation seems to be holding at 2 per cent. People are becoming more confident.”

Mr Cohen says that the impact of central bank policy has been an important factor in the overall performance of the gold price since the credit crisis and recent selling has been due, in part, to the perception that US quantitative easing may be drawing to a close. He says: “Gold returns over time have been shown to correlate to negative interest rates.”

He suggests that the psychology around gold has weakened. A confluence of factors, not least the dramatic falls in price, have dented its status.

Where has the money gone? Mr Cohen says some money moved into silver ETPs in the first quarter of the year, but there have been some outflows in April.

He adds: “We have seen inflows into developed market equities. We haven’t experienced any ‘great rotation’ out of bonds but cash sitting on the sidelines has gone into developed market equities. There are some signs the money moving out of gold has been reinvested there.”

Mr Nossek says it is reasonable to ask whether the gold correction has only just started, given that it remains at an extreme valuation relative to history. The past decade has seen huge enthusiasm from ETF and physical buyers and, with one half of that gone, the gold price looks more vulnerable. However, for the time being at least, the price has found a floor at around $1,400 and while Asian buyers sustain their enthusiasm, there is some support at these levels.

Cherry Reynard is a freelance journalist