After a month of unprecedented volatility that has rattled some investors' confidence in gold's decade-long winning streak, the question is obvious: Is this what the popping of a gold bubble looks like?
The answer, of course, isn't obvious. The bursting of asset bubbles is best seen in retrospect, and gold's 10 percent decline from a record high just three weeks ago is far from its worst tumble; it last suffered such a setback in late 2009, and multiple times in 2008. It is only halfway to the 20 percent mark that separates a correction from a bear market.
While a survey of the best minds of the bullion market predicted this week that gold would continue to power higher over the next year, topping $2,000 an ounce, there are undeniable warning signs flashing along the way, threatening to undermine one of this year's top-performing assets.
Returns this year: r.reuters.com/suz52s
Spot gold prices tumbled more than 3 percent to a one-month low of $1,721 an ounce on Thursday, falling further out of favor as a global round of risk aversion triggered by weak Chinese manufacturing data and grim comments from the Federal Reserve hit commodity markets especially hard.
The U.S. dollar index .DXY rose 1.25 percent and U.S. stock indices fell nearly 4 percent. Brent crude dived by $5 a barrel, copper logged its biggest loss since October 2008 while sugar and grains slumped 5 percent.
Without calling a top in a market that has consistently proven all but the most intrepid gold bugs wrong, below are several factors to consider when weighing whether this is the end of the road or just a big bump in it.
RISK CORRELATIONS IN TATTERS, DOLLAR DRIVER RETURNS
The most alarming shift in the gold market in recent weeks has been the abrupt collapse in what had become a predictable risk-off trade. The 25-day correlation between gold and U.S. 10-year Treasuries had strengthened to the highest since at least 2005 at 0.7 by a week ago, but has since collapsed. The inverse link with the S&P hit its lowest in early September since the financial crisis, but has now bounced.
The dislocation has been increasingly evident this week, with gold falling in tandem with oil, stocks and copper, while the safe money rushed instead for Treasuries and the dollar.
The apparent cause? Possibly the rise of another popular correlation, one that had been largely set aside -- the dollar. On Thursday, the correlation returned negative for the first time in two weeks. It has averaged -0.4 for five years.
If that correlation holds strong, gold may be hostage to the greenback for some time. While the euro's woes and ultra-risk-averse investors may continue to help pull the dollar index .DXY up from near its 2008 record lows, few expect a sustained recovery that could drag down gold.
Along with the loss of its safe-haven status, for the moment at least, gold's long-standing favor as a hedge against inflation hasn't been evident for months, with Western economies closer than ever to another recession.
Even so, with the Fed pledging to keep interest rates at near zero for the next two years, gold's lack of yield is less of a penalty than in normal times.
On top of the disrupted correlations, gold has extended a period of unprecedented volatility, with day-to-day price movements in excess of 2 percent during 15 of the last 37 trading sessions -- a run unrivaled except for in 2008. On an absolute basis, intraday swings of more than $50 an ounce have not been regularly witnessed since 1980.
Volatility graphic: r.reuters.com/bet83s
"When something can move 3, or 5 or 6 percent in the course of two days, that's not a safe haven. Safe havens should be quiet and stable ... not violent," said Dennis Gartman, a longtime professional commodities investor who has regularly traded in and out of the bullion market.
OPTIONS FLASH AMBER
The extraordinary whipsaw trade has bled into the options market, where implied volatility -- a measure of the cost of buying options either to bet on prices rising or to protect against prices falling -- has surged lately.
The CBOE's gold volatility index .OVX based on COMEX futures prices spiked in August to its highest in two years, and surged anew on Thursday as prices crashed.
More tellingly, traders say there is growing demand for buying put options, which protect an investor if prices fall. In the past, they say, far more investors wanted call options to benefit from gold's seemingly unyielding rise.
TEMPORARY LIQUIDITY RUSH?
Over the past few years, gold has occasionally tumbled in tandem with stocks and other "riskier" assets simply because investors in those other markets were desperate to raise cash in order to cover margin calls or offset losses. This had little to do with any safe-haven issues or correlations and everything to do with the need for immediate liquidity.
That occurred most recently in June, with several days of in-sync losses. But the impact tends to ebb quickly, and few analysts see that as a compelling factor at the moment, suggesting the bounce-back may not be as swift.