Imagine slamming a moving car into reverse gear. You can expect lots of grinding noises, and probably some damage to the machinery. That is what has happened to the gold market.

Gold has been meandering downwards in value since 1980, when it was worth $850 an ounce. That trend had accelerated in the past five months - until a sudden recovery in the space of two and a half days last week. Having fallen to $250 an ounce a few weeks ago, gold is now above $300 (€280), a level it has not held since last year.

The immediate cause of these gyrations is market anxiety about possible future sales by the world's central banks. Even though gold long ago lost its role as the anchor of the world financial system, many central banks still hold large reserves. But some countries have been selling up; and others, such as Britain and Switzerland, are following suit.

The sharp fall in the price of gold since May was accelerated by Britain's decision that it will sell 415 tonnes, more than half its reserves. Its recovery followed the announcement that total European bank sales will be limited to 2,000 tonnes over five years and 400 tonnes in any single year. The restrictions allow Britain and Switzerland (which intends to sell 1,300 tonnes) to go ahead with their plans.

There is a further factor. Over the past 10 years, a large and complex market in gold derivatives - over the counter loans, forwards, futures and options - has developed. It was based on the ready supply of gold available for loan from central banks at rates of interest below those for money. This year, when gold looked like a one-way market, heading down, mining companies and investment funds both sold heavily. When the price turned up, they needed to buy to cover earlier positions. However, the European banks also said they would not increase the amount of gold on loan: as a result, loan rates soared to 10 per cent, and the gold price spiked up to $317.

For participants, the most pressing question is how a market built on ample and cheap liquidity will adapt now that liquidity is drying up. For bystanders, the more interesting question is what happens to the gold price.

Mr Robert Guy of NM Rothschild, doyen of the London market, warned this week: "The market has turned, but don't think the debate about whether you should hold gold has gone away."

Early this century, the price of gold was fixed by the world's central banks and there were restrictions on private ownership. But in the 1960s and 1970s gold's monetary role diminished, private investors were allowed to buy it, and market forces started to determine its price.

Pent-up private demand was one reason the price soared before 1980, despite substantial sales by both the International Monetary Fund and the US government. In many developing economies, notably India, the Gulf and Asia, gold has long been the investment of choice, and is often bought in the form of jewellery. Political and currency crises, soaring oil prices and high inflation also reinforced its investment attractions in the west.

Those are yesterday's worries. Although gold has still many supporters, its falling price over nearly two decades has made it a remarkably poor long-term investment. The best estimate is that there are nearly 140,000 tonnes of it: enough to meet nearly 40 years' demand. Nearly half is in jewellery, around a quarter is in central bank vaults, the rest in gold objects or private hoards.