At times in the past decade, gold has looked like a one-way bet. The price of the yellow metal has risen every year since 2001, averaging a cool 18 per cent annual gain.
This year, however, the status quo is being challenged. Bank analysts, ordinarily a bullish crowd, are tempering their calls for record prices with a note of caution: 2011, according to an emerging consensus, may be the year when bullion prices peak. That expectation is based on the view that the economic recovery in the US will start to gather steam, forcing the Federal Reserve to tighten policy and making yields on bonds and equities more attractive.
"As the economy improves you're going to see real interest rates move up, and that's going to cap the upside for the gold price," says David Greely, an analyst at Goldman Sachs in New York. "We think it is prudent for gold investors to begin to prepare for gold prices to peak."
Many analysts see the change in market sentiment since the start of January as a glimpse of what the future may hold for the gold market. As investors have become increasingly confident about the economic outlook in the US and less worried about the eurozone's fiscal problems, money has been flowing into equities and bond yields are rising.
Gold, a traditional "safe haven" against economic uncertainty, has suffered. The exuberance that characterised the market throughout the second half of 2010, founded on fears of a double-dip recession, has dissipated. Some investors have started to take profits.
Prices, which rallied 30 per cent last year to hit an all-time nominal peak of $1,430.95 a troy ounce in mid-December, have fallen 7.5 per cent since then to a three-month low of $1,322.70 this week.
Bankers say the drop reflects a move by short-term traders to take profits rather than a retreat en masse by investors. Indeed, almost all traders and analysts believe the yellow metal will hit new records this year, with forecasts for the high ranging from $1,550 to $1,850, according to a survey by the London Bullion Market Association.
Even so, many are starting to warn of an end to ever-higher gold prices. As well as Goldman Sachs, others including UBS, Credit Suisse, Barclays Capital, Macquarie and the precious metals consultancy GFMS expect gold prices to peak late this year or early 2012.
"We're going to get to a situation in the second half of this year where the emphasis on what drives this market will have shifted and the impetus from ultra-low US rates will have fallen away," says Tom Kendall, a precious metals analyst at Credit Suisse.
Investors have begun to heed the warnings. Speculative bets on a lower gold price in the US futures market last week rose to their highest level since mid-2005, according to the Commodity Futures Trading Commission. Overall, investors are still positive – but their positioning is the least bullish since July 2009.
Watch the funds
Gold's appeal has been buoyed in recent years by high-profile bullish bets by some of the world's top hedge fund managers.
John Paulson, of Paulson & Co, and David Einhorn, of Greenlight Capital, have invested heavily and created classes of shares in their funds that are denominated in gold.
Paulson & Co is the largest holder of the SPDR Gold Shares exchange-traded fund, with a position $4bn at the end of September. Any sign the big hedge fund managers are looking to bail out could trigger a sharp price correction.
Those who invested in gold exchange-traded funds, which have attracted huge inflows in the past five years and helped to drive the gold price higher, have also scaled back their exposure. The largest such fund, SPDR Gold Shares, suffered the largest outflow in its six-year history on Tuesday, sending its holdings to the lowest since May.
At the same time, says Mr Greely of Goldman Sachs, investors have started to protect themselves against a fall in gold prices by buying put options that limit their losses if the market suffers a correction. Mr Kendall adds that "one or two" hedge funds have "started to think about long-term exit strategies".
"The first sell-off could be sharp," says Mr Greely, "but we don't think it will be as dramatic as what you saw in the late 1970s and early 1980s."
Few strategists are recommending going short on gold. Demand from Asia has rocketed in the first weeks of the new year amid sharply rising inflation in the region. Also, central banks have stopped selling gold from their reserves and have instead become significant buyers.
Beyond that, some investors believe the US will face high inflation in the longer run, arguing that the Fed will fail to manage successfully the unwinding of its "quantitative easing" programme. With inflation high, real interest rates would be low even if nominal rates were raised. In such a scenario, investors could well keep putting money into gold.
Equally, says Philip Klapwijk of GFMS, the rally could be extended if the eurozone sovereign debt crisis were to spread. Some believe indebted US states could be the trigger for renewed financial turmoil. "The market is starting to believe that the global economy can easily wean itself off of cheap money," says Daniel Brebner of Deutsche Bank. "We are not so confident that this is the case."
Gold's rally has been characterised by the emergence of new and unexpected risks to economic stability. Shock potential remains.
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