Gold is traditionally a safe haven for investors when markets are uncertain – which would suggest that the price should be robust in the current climate.

But, this week, the gold price was just $815 – lower than it was before the market fallout of September and October. At the end of August it stood at $835.

This seems at odds with reports that investors are still flocking to buy the physical metal.

Last week, the World Gold Council said that demand for gold bullion was at a record high. Consumers bought 121 per cent more gold coins and bars in the third quarter of this year than they did during the same period in 2007.

So fund managers and commodities traders all say they are surprised there has not been more of a spike in the gold price as a result.

The reason, they agree, is most likely to be the effect of deleveraging, particularly among hedge funds.

“You would have anticipated the price would have risen more rapidly than it has, based on the demand for physical metals, but the activity in the futures market has to some extent offset this,” says Nicholas Brooks, head of research at ETF Securities.

Deleveraging can be blamed for both the price spikes and the price slumps in the past few months as hedge funds have been closing both long and short positions, argues Mark O’Byrne, executive director of Gold and Silver Investments, which sells gold bullion to investors.

He points to the Commodities Futures Trading Commission, the commodity market regulator in the US, which shows how far different groups of investors are short in a particular commodity. Known as open interest levels, these have fallen to a new low in gold.

“Gold has rallied by $135 per ounce in recent days, and yet the open interest has gone down showing that much of the move was created by shorts closing their positions,” he says.

O’Byrne believes that this low in open interest levels means that deleveraging is finally starting to tail off.

This could now lead to a spike in the gold price. “If one assumes this deleveraging stops or slows down, the price of physical gold could rise quite sharply,” says Brooks.

But experts remain wary of predicting how much higher the gold price might go. In August, Gold and Silver Investments was confident it would go back to $1,000 by the end of the year – now, it says that is unlikely.

However, the dwindling prospect of a big price spike makes it more likely that investors will buy physical gold – not on a short term or speculative basis, but as a medium to long term hedge as part of their overall investment portfolio.

“Gold continues to attract strong investor interest given its safe haven, US dollar hedge and portfolio diversification qualities,” says Brooks.

And a deflationary environment would only increase investor demand for gold. “If we went into deflation I think there would be incentives to hold gold as you’ll see further financial dislocation and the safe haven nature of gold would come to the fore,” he argues.

O’Byrne points out that while gold has fallen in dollar terms in the year to date, in both sterling and gold terms it has actually risen.

Gold has lost 2 per cent this year in dollar terms, but it is up 10 per cent in euro terms and 26 per cent in pound terms.

Aidan Kearney, co-manager of Credit Suisse’s multi-manager range, says: “There are a number of reasons why we feel it is appropriate to hold gold right now.”

He cites continuing concern over the financial system, as well as the recent drop in the gold price which has enabled UK investors to buy it as a hedge against weakness in the dollar.

Jane Sydenham, investment director at Rathbones, says that most investors should have some exposure to gold in a well diversified portfolio, suggesting a rule of thumb is around 5 per cent.

She says: “In most of our portfolios, we have some sort of exposure to gold, partly because it is very unclear at the moment whether or not we will go into deflation or whether inflation will pick up again in a couple of years’ time. That’s such a big call that it makes sense to have some assets in one area that will do well against others that won’t.”