GOLD is rapidly losing its allure. Traditionally thought of as the best investment in a crisis, its price has plummeted in recent months.

The Argentine central bank's announcement that it had sold all its gold sent the price plunging to a 12 1/2-year low of $289 an ounce on Thursday, and there could be worse to come. Many believe it will drop beneath the previous low of $284 in 1984.

Some say that the crisis in the Asian tiger economies will produce more sales. European central banks are also preparing to sell, fearing that there can be no recovery in the short term.

Argentina sold 124.4 tonnes, at an average of $370 an ounce, raising nearly ?900m at the start of this year. The money was invested in US Treasury bonds.

The move echoed action by other central banks that believe gold is an unproductive asset. The Argentine bank said the bonds would yield 5% and bring in $81m a year. But the returns on gold depend on its price alone. Consequently, with its status as the investment of last resort on the wane, speculators are seizing on the opportunity to make a killing.

The hedge funds, which risk wealthy people's money on various investments including gold, have been deflating the market further in the past few days by selling gold they do not own at about $285 an ounce in the expectation that they will be able to buy it at a lower price before they have to deliver. The official market price is $287. This is in sharp contrast to hedge-fund activity in 1993 when George Soros and the late Sir James Goldsmith became gold bulls and made big profits as the price soared.

But Rhona O'Connell, from T Hoare & Co, would not be surprised if the price fell to the levels of 1984.

"$284 is the price that I, and many others, see as a realistic possibility. It could go even lower. But, hopefully, with the Indian wedding season and Chinese new year coming up, we should see these traditional gold markets prevent the price falling too far."

Last year India and China accounted for 12% of purchases. Traditionally they have been big buyers as their cultures have always seen gold as the ultimate gift and decoration. But restrictions on imports into India, imposed earlier this year, have confused traders and may result in less demand.

Added to this is the rush of Far Eastern investors selling gold following the currency crisis in the region. Rather than buying it as a safety measure they are cashing in holdings in a similar manner to insurance policies.

Market observers believe that central banks are acting independently, rather than co-ordinating sales, and this will result in much more lending and selling. A harder-nosed view is that the central banks were looking for goldmines to close, which would allow them to fill the resulting deficit with metal from their vaults.

Michael Wagner, a gold analyst with Brondeis Hauck, says: "In order to stabilise the price and allow it to recover we would need to see permanent pit closures resulting in about 300 tonnes less gold being produced each year. We may indeed see some closures following the move by Argentina, and the expectation is for further sales round the world. The likelihood is that some older mines with higher production costs will have to go first."

But another analyst says that despite the selling there have actually been few closures. He says: "They want gold to perform. The main thing is the longer-term outlook should be one of diminishing supply. In fact, a very small amount of mine capacity has closed.

"It will take something extraordinary to turn this market round and we look set for at least another year of bear markets."

Gold's reputation as a saviour in times of economic trouble appears to be over. Since 1980 when the second oil crisis pushed the price to $835, the metal has been in a long-term bear market, interrupted by occassional rallies. In 1984, driven by a strong dollar, it fell to $284. It then rose a little and for the following decade traded between $350 and $500. Yet this year the market has suffered a new wave of negative sentiment, which has hit confidence.

In the past decade many of Europe's central banks have realised that gold neither serves the function nor has the cachet it has historically enjoyed and many have been quietly reducing reserves. Europe's new generation of central bankers is versed in the use of derivatives and other financial instruments to hedge risk. While their forebears believed in gold's value, many of today's central bankers think gold locked in a vault is a wasted asset yielding no return.

This was the main reason the Australian Reserve Bank ditched its gold earlier this year. It said it could achieve higher returns by investing the proceeds elsewhere. If all Europe's central banks followed Australia's lead and liquidated their gold, the sum raised could reach ?100 billion. This is the main reason why observers think any big recovery in the price is unlikely in the short term.

The prediction of another year of bad news is also based on the expectation that countries such as Switzerland, a nation almost synonymous with gold, will sell half its 2,800 tonnes of reserves.

The Bank of Switzerland has to seek permission from voters before a sale and a referendum is expected early next year. But the first steps to what would be a huge sale have been taken with the decision to lend gold in October. Belgium and the Netherlands have also been big sellers with the latter off-loading 300 tonnes last winter.

Germany, which has also begun to lend some of its reserves, is predicted to sell in the coming months. Denials by the Bundesbank of any sale policy have been ignored by observers who do not believe them.

Wagner believes it is inevitable his country will sell a large chunk of its gold, which would depress the price even further.

"If, or more likely when, Germany sells, it could knock another $25 off the gold price," says Wagner. "We could see the price falling to as low a $250 an ounce before the end of this year. Just two months ago I thought it could only fall as low as $280. I have had to reconsider in light of current events."