The economist John Maynard Keynes dismissed gold as a "barbarous relic". And after the recent dramatic collapse in the gold price, many chastened gold bulls nursing large financial losses may ruefully agree. Two years ago the price of gold had soared sevenfold in value in a decade, peaking then at $1,920 (€1,466) an ounce. The slow but steady decline in the price of the precious metal that has followed rapidly accelerated in the past week, catching financial markets off guard. Investors panicked and dumped their gold holdings, as the gold price dropped by more than a quarter from its 2011 peak. Traditionally, investors have viewed gold as a safe-haven asset in turbulent financial times. But its sudden, sharp fall in value has called that conventional wisdom into question.

Gold is viewed as a hedge against inflation and insurance against currency devaluation. Since 2008 and the financial crisis, all the world’s major central banks have engaged in aggressive monetary easing – money printing – in an effort to stimulate economic recovery. Many investors saw inflation as the inevitable and ultimate consequence of that exercise. But, much to the market’s surprise, inflation has been contained so far, while in recent months gold has begun to act out of character.

Gold also failed to respond positively – by rising in value – to negative developments that in the past would have seen the precious metal soar. Instead, rising tension in North Korea, concerns about the health of the US economy, and fears about the future safety of bank deposits in the euro area, given the terms of the Cyprus bailout, served only to drive down the gold price. And when Cyprus also indicated it would sell some of its gold reserves as part of its bailout programme, worried gold investors found a further reason to sell.

For investors who want to hedge their risk, gold has offered one form of diversification that has worked in the past. But whether it can continue to work, only the financial markets can decide.