Gold has traditionally been a currency for adverse times, acting as a refuge for investors and savers. It is seen as a safe store of value that paper currencies can never be. The secular uptrend in the value of the precious commodity over the last decade has only added to its lustre as a hedge against inflation. So, what does one do when gold prices head south, with dire predictions of a further downside? That is the predicament of fund managers, investors and savers now with gold prices falling to their lowest level since 2010 in what many see as the effective end of a 12-year bull run in the commodity that saw its price peak at $1,923 an ounce in 2011.

The latest market price of the precious metal at around $1,148 an ounce is about 40 per cent off that historic high. The rally in gold prices really began during the global financial crisis of 2008 as investors sold stocks and rushed to hedge their bets against major currencies such as the dollar and euro which reflected the trouble in their home economies. Investors queued up to buy gold and other precious metals-backed exchange traded funds which poured their money into the commodity, driving its value upward. This, in turn, drove more people to the commodity as other asset classes turned weak, delivering negative returns. In short, gold entered a virtuous cycle — which seems to be ending now.

Holdings in global gold exchange-traded funds are at a five-year low, showing the extent of capital flight out of the commodity. The immediate cause for the loss of attraction was the decision of the U.S. Federal Reserve to wind up its quantitative easing programme that pumped in an estimated $4 trillion into the economy; much of the money had found its way into commodity and stock markets globally. With the American economy set on a revival path amid low-inflationary expectations, the dollar has been strengthening in recent times, leading to an outflow of funds from commodities such as gold and oil.

Inflationary expectations have reduced thanks to the fall in oil prices which, in turn, has prompted funds to move out of gold. There could be a further period of weakness ahead for gold with the Federal Reserve indicating an increase in interest rates by mid-2015. Weak growth in China and the Eurozone’s troubles are seen as the only factors that can reverse the trend.

The fall is good news for India, which has seen a rebound in gold imports after the Reserve Bank of India partly loosened some of the controls it imposed last year. The government now has the leeway for a further loosening of controls or even a lowering of import duty, which is a demand from the jewellery industry. However, whether this option is exercised or not will depend on the rupee’s movement vis-à-vis the dollar.