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Gold bars are displayed at bullion house in Mumbai.ARKO DATTA/Reuters

Investors and portfolio managers who piled into gold during its decade-long rise are suddenly on the run.

For many, the shocking reversal is a harsh wake-up call. Gold is usually touted as a safe harbour in times of economic trouble and uncertainty, but lately, the precious metal has proved just as prone to speculation as stocks and other securities.

Monday's stunning decline – the biggest one-day drop since 1980 – extended a rout that began last week. Gold bullion prices, at $1,361.10(U.S.) an ounce, have fallen about 14 per cent since Thursday and are down nearly 25 per cent since last October. It hit an all-time high of $1,900 an ounce in 2011.

The stocks of gold producers have long been troubled because many large mining firms, such as Barrick Gold Corp. and Kinross Gold Corp., have been plagued by multibillion-dollar writedowns and cost overruns at their mine sites. But gold's believers still made the case for investing directly in the metal, believing that efforts by central banks in the United States and Europe to create more money will eventually cause inflation.

Over the past few months, though, one development after another has weakened the bullish argument for gold. Global inflation is tepid, at best, and lately the Federal Reserve has shown that it is considering curtailing its quantitative easing program, by which the government prints money to stimulate the economy. Investors have also seen equity markets soar, pushing the S&P 500 and Dow Jones industrial average to record highs, giving them more confidence to move out of gold and into stocks. Last week, new data from the U.S. Commodity Futures Trading Commission showed that hedge funds slashed their long positions on commodity futures and options by 31 per cent, the biggest cut since October, 2008.

Martin Pelletier, portfolio manager at Trivest Wealth Counsel in Calgary, attributed Monday's market moves to "irrational behaviour" that created panic selling. "I don't think people are trading on fundamentals," he said.

Jeffrey Nichols, managing director of consulting firm American Precious Metals Advisors, echoed the confusion. "It's a very emotional market, acting almost insanely, without any rational explanation that is based on fundamentals and supply and demand trends," he said.

The drop surprised even those who predicted that gold prices would fall. Michael Haigh, global head of commodities research at Société Générale, co-wrote a pessimistic report on gold that was issued on April 2, when the metal was trading at around $1,600 an ounce. While the report forecast that gold could fall to $1,375 an ounce by the end of 2013, the drop over the past couple of weeks has been sharper than anyone predicted.

"This isn't choppiness. This is like coming off a cliff," Mr. Haigh said in an interview.

Some of the recent turmoil appears to stem from fears that Cyprus's central bank would start selling its gold reserves, which investors worried would prompt the Italian and Spanish banks to do the same. Similar fears emerged in the late 1990s as European countries adopted the euro. Gold prices plummeted and the International Monetary Fund had to arrange the Washington Agreement on Gold, under which 14 European central banks promised to limit their sales to no more than 400 tonnes (12.9 million ounces) annually over a five-year period.

This time, though, there's no such need for an intervention. After the European Commission's April 9 assessment that Cyprus would need to sell gold, the Central Bank of Cyprus has come out and said it isn't considering doing so.

But that's done little to calm investors, and now speculation is running rampant.

To find solace in these markets, precious metals portfolio manager Robert Cohen at Dynamic Funds likes to look at a basket of commodities. Alhough bullion is falling fast, crude and silver are too. Historically, it has cost 16.5 barrels of West Texas intermediate crude to buy an ounce of gold, and today it's just a bit cheaper, at 15.4 barrels.

"What keeps me calm about things is just looking at commodities with relation to one another," he said.

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