Investors were caught unawares this week when the price of an ounce of gold saw a sharp fall of 9.2% to $1,395 an ounce, the biggest one-day fall since the 1980s.

The dramatic drop coincided with poor economic data out of China which hit the wider mining and commodities sector.

The recent bout of selling is particularly surprising if recent political problems around the world are taken into consideration. Gold is traditionally considered as ‘Armageddon Insurance’ – a safety net for investors when all other asset classes are volatile.

Mike Turner, head of global strategy & asset allocation, says: “Gold’s fall from grace is arguably puzzling. Developed market countries remain mired by huge levels of debt and anaemic growth.

“Even in the relatively buoyant emerging markets the rate of economic expansion has slowed. In such uncertain times, one would think gold would be regarded as a safe haven. Yet its double-digit decline in recent days would suggest otherwise.”

The price of gold rose eight-fold to its ultimate high in January 1980, but this rally was followed by a crash – gold lost 65% of its value in over two years and it took nearly 30 years for investors to make their money back.

But is this week’s price drop a long overdue market correction from decades of increasing gold prices or is the price set to fall further?

Alan Miller, CIO of investment firm SCM Private, says: “In January we said that gold is probably the most dangerous asset of all assets to hold at present and any more signs of economic stabilisation/growth could precedent a 30%+ fall.

“We still believe that the price has further to fall – the fundamental value of gold is still a fraction of the current price.

“In October 2008 the price of gold was $827 so even at the current price of $1408 – it has still risen by 70% over the last few years.

“Our January 2013 prediction of a 30% fall would produce a gold price of $1177, a further 16% fall.

“But one thing I have learnt about markets is that they rarely trade at fair value and they tend to over-shoot (in both directions) so I really do not think you can estimate the amount of money “safely parked” in gold which can quickly head for the exit when people realise they have bought into the latest bubble.

“When seemingly every taxi driver holds something, and today that thing seems to be a gold fund, it normally marks the top.”

Still a safe haven?

Gold does not produce any income, interest or dividends – essentially, it just sits there until an investor chooses to cash it in, so investors need to question whether they are willing to risk any possible future price shocks like the one felt this week.

Miller says: “Call me old fashioned but I would rather invest in something that pays me money every year and in the case of equities tend to grow over time.

“Sure, the [gold] price might have a small bounce back and there will be plenty of people telling you this is a “buying opportunity”, but one needs to have a sense of perspective.

“Few investments defy Newton’s Law of Gravity for very long when their price spike up, as gold has over the last few years, especially when their inherent fundamental value is questionable.”

However, Turner says investors should not ignore the attractions of gold.

“No one really knows the long-term consequences of the huge monetary stimulus packages implemented to rescue the global economy from the clutches of deflation/depression. Inflation remains a risk, however distant, and gold remains one of the best insurance policies against this threat,” Turner says.

“Equally, if deflation prevails this brings into question the soundness of fiat money, in particular currencies such as the euro which seems much less stable at the moment and gold represents the best store of value against that prospect.

“Central banks, particularly in emerging markets, are only just beginning to increase their exposure to gold as they look to diversify away from US treasuries and the US dollar.”

No doubt the massive shock will have shaken nerves of even the most stalwart gold bug, and it may take a while yet to see the yellow metal back in favour.

With mixed messages coming from the experts on where to sit on ‘gold is a safe haven’ debate, investors need to re-evaluate how much exposure and risk they are willing to take on.