Gold might still reach the $2000 mark despite suffering its largest three-day price drop in 28 years this week.
After an incredible run since January, which culminated in a record level of $1900 an ounce at the start of September, the gold price momentarily dropped to below $1600 this week, raising fears that the gold bubble has burst.
But the gold price is not likely to collapse in the short term and could still reach $2000 in the coming year, analysts said this week.
According to Josina Oliphant, commodities analyst at Rand Merchant Bank, the fundamentals that drove the gold price up, including high global liquidity levels and low interest rates in leading economies, are still in place.
"As long as the problems in the eurozone persist, the demand for gold as a safe-haven asset will continue," she said.
"The demand for gold as an inflation hedge has come down somewhat as US long-term inflation expectations came down, but the longer-term fundamentals are still in place, so we still think the gold price can end the year at $1900 an ounce."
Oliphant said because the gold price was still far from its real high of about $2500 reached in the 1980s - taking inflation into account - there was scope for it to move higher and reach $2000 in the next year.
US Federal Reserve chairman Ben Bernanke said in August that US interest rates would not be raised until at least the middle of 2013, a surprisingly long-term commitment for a central banker.
Oliphant said as long as US interest rates stayed lower for longer, it would benefit the gold market.
Walter de Wet, head of commodity research at Standard Bank in London, said there was a good chance of gold reaching $2000 before the end of 2011 or in the first quarter of next year, because governments and central banks had ample incentive to continue creating liquidity.
"If central banks keep on printing money and more money goes into circulation, the value of gold as a currency increases in relation to other currencies," he said.
De Wet said one of the reasons for the recent slump in the gold price was a breakdown in the money market.
"The money market is not functioning as it should and in Europe and other developing markets there is a need for cash. Such a situation is bad for any commodity, including gold, as investors liquidate their positions to generate cash."
Leveraged gold investments and margin calls, especially in China, also contributed to the fall, he said.
"If the price of gold falls by large amounts in one day, say the 6% or 7% we have seen in recent days, these investors have to pay extra money into the investment accounts to keep their positions open.
"Many could not do that and had to liquidate their long positions on gold, which led to the further fall in price."
Although Standard Bank did not expect the gold price to rally fast as long as the problems at European banks impaired the functioning of the money market, De Wet said it expected the metal to average $1885 an ounce in the last quarter of the year and $1900 in the first quarter of next year.
In its latest macroeconomic forecast released this week, Absa Capital said it expected the gold price to average $2052 an ounce in the last quarter of the year and $2028 for the whole of next year.
"As soon as money markets starts functioning - and central banks will make sure it happens - the gold price will again move higher," De Wet said.
The demand for physical gold, which had increased after the recent fall in the gold price, would also continue, he added.
On the more cautious side Henk Potts, an equity strategist at Barclays Wealth in London, said because much of the recent rally in the gold price was due to sentiment, the fall could show that there were some market participants who believed gold was too expensive.
Potts said a collapse in the gold price seemed unlikely in the short term because there still was enough uncertainty to encourage investors to hold gold.
"But we are likely to see a lower gold price in two years than today. A movement to $1400 over that period seems reasonable, based on the fundamentals we have today."
He said for investors to buy gold as a safe haven they would have to believe that the world would look worse in six to 12 months than it did today.
"We do not believe that is the case."
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