A strengthening U.S. dollar, continuing turmoil in Europe and investment funds selling their positions after the earlier run-up have all contributed to the decline, experts say.
Dennis Gartman, publisher of a widely followed investment letter, believes the run-up in the price of gold is over.
"Too many people were just categorically too long on gold and are being liquidated out," he said in an interview.
"You have a large number of hedge funds who are caught completely offside and the margin clerks have very sharp pencils right now."
The February gold contract on the New York Mercantile Exchange closed down $23.20 at US$1,540.90 Thursday, although it remains well up from where it began the year at just under US$1,400 an ounce.
Gartman said investors are realizing the austerity measures to deal with the government debt crisis in Europe will be deflationary — not inflationary — and are selling gold, a traditional hedge against inflation.
Hedge funds that were betting the price of gold would head even higher are also selling their positions, pushing the price down even further, he said.
"If you're a large hedge fund and known to be long on gold you really don't have much choice but to sell some so that you can say 'oh no, look I was actually getting out,'" Gartman said.
Bart Melek, head of commodity strategy at TD Securities, was quick to point out that investors who bought gold at the beginning of the year and held on to their investment are up about nine per cent.
He noted that the U.S. dollar and the value of gold tend to have an inverse relationship. If one goes up, the other goes down.
"What we've seen recently is the U.S. currency move up quite a bit and that's happening for several reasons, not the least of which is the fact that Europe is in recession," he said.
The price of gold, which is traded in U.S. dollars, also headed lower as the U.S. dollar has gained strength in recent days against the euro. A stronger U.S. dollar makes gold more expensive for buyers with euros.
Melek said his bank's call for the price of gold in the first quarter of 2012 is for about where it its now, but he expects it to rally next year as the European Central Bank finally steps in and helps resolve the ongoing financial crisis.
A recent survey by consulting and auditing firm PwC found 80 per cent of gold miners expected the price of gold to go higher in 2012, with a majority expecting a peak at US$2,000 an ounce.
The same survey a year ago found 73 per cent of the miners predicted an increase in the price of gold with 24 per cent believing it would remain about the same. Forty per cent in 2010 believed gold would peak at around $1,500.
However, Gartman suggested that it will be months before the public ventures back into the gold market, noting that stocks have outperformed gold.
"I think a lot of damage has been done. A lot of psychological damage has been done," he said.
"The public has been burned very badly by gold in the last three months."