In just three months, gold (Exchange: XAU=) has gone from the trade that works in every kind of market to the trade that doesn't work in any market.
Bullion is off more than 17 percent from an all-time high reached in September as strapped hedge funds and sovereign funds sell the metal to raise funds and the strong U.S. dollar (Intercontinental Exchange US: .DXY) strips it of its safe haven status.
For a time, gold rose with stocks and other assets as central banks added liquidity to stem off a global financial crisis. It also climbed in down equity markets as investors crowded into the trade for its traditional status as a store of value in tough times.
"Gold was a safe haven, a hedge and a speculative trade all at the same time," said Michael Murphy, CEO of Rosecliff Capital, a hedge fund. "Long gold has been a winning trade for years. We expect the selloff in gold to gain momentum into 2012. Traders are finding better hedges, better safe havens, and better speculative commodity plays than long gold."
Gold was up more than 25 percent in 2011 through early September. The market value of leading gold exchange-traded fund , the SPDR Gold Trust (NYSEArca: GLD - News), ballooned to $73 billion in November as investors poured more money into gold funds than any other asset class. In just four days, the gold sell-off has turned violent, plummeting more than $100 to breach the $1,600 level. On Wednesday gold fell with stocks. The next day, the metal fell even as the equity market rose.
"When an asset is thought to work in any market, that is the surest sign of a bubble," said Stephen Weiss of Short Hills Capital. "I believe we will hear about massive central bank selling to put currency in markets."
Gold gained some notable backers along its bull run, which only added to the speculative fervor. Most notably, hedge fund manager John Paulson has made the SPDR Gold Trust ETF his firm's single largest holding.
The flagship fund run by Paulson, who's received more accolades than anyone for profiting from the housing bust, is down more than 40 percent for 2011 at last count. With the recent drop in gold, it's likely down even more, if he isn't selling.
To be sure, gold has always been a volatile trade that can turn on a dime. Unlike a stock, there are no earnings behind the metal. It's only worth as much as what the next guy will pay for it. That dynamic has been skewed by the ETF and other retail money flowing into the trade this year, say long-term gold bulls.
"Bull markets climb a wall of worry," said Peter Schiff, CEO of Euro Pacific Capital "These sharp drops shake out the speculators and keep other would-be buyers on the sidelines. Once the weak longs are cleared out, the trip to $2,000 and beyond will resume unencumbered by excess baggage."
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