Is gold destined to hit just US$800 an ounce?

A falling gold price has seen miners such as Newcrest Mining Limited (ASX:NCM), Northern Star Resources Ltd (ASX:NST) and Beadell Resources Ltd (ASX:BDR) absolutely hammered this week.

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Gold has long been seen as a 'safe haven' during times of economic uncertainty, but that theory has been proven wrong recently with the precious metal hovering near a five-year low price.

Given the enormous uncertainty that has faced global markets in recent times, including the potential 'Grexit' and China's sharemarket meltdown, one could easily have expected the price of gold to soar.

Instead, the resource has been absolutely mauled after experiencing one of its sharpest drops in recent memory on Monday due to a heavy selloff in China. It fell marginally further overnight to fetch just US$1,089.65 an ounce, according to the Fairfax press, which compares to the peak at US$1,921 an ounce in 2011.

Just as gold investors have been punished for holding onto the bullion, so too have investors in the gold producers themselves. Australia's largest gold miner, Newcrest Mining Limited (ASX: NCM), has plummeted 10.3% this week alone, while Beadell Resources Ltd (ASX: BDR), Northern Star Resources Ltd (ASX: NST) and EVOLUTION FPO (ASX: EVN) are down 23.5%, 4.4% and 5.3%, respectively.

The S&P/ASX All Ords Gold (Index: ^AXGD) (ASX: GXD), which tracks the nation's gold miners, is also down a whopping 9.8% since Monday.

Unfortunately for those investors, there are signs that the situation could get even worse from here. In fact, according to Fairfax, Morgan Stanley believes that as a worst case scenario gold could plummet to a low of US$800 an ounce – although that would rely on a sharp increase in US interest rates and likely another heavy selloff of Chinese equities.

Other forecasts aren't quite as bleak as the one provided by Morgan Stanley, although many agree that it has further to fall in the near future.

Indeed, the prospect of a hike in interest rates is enough to make gold investors squirm given that such a move would have a positive impact on the US currency, which has traditionally worked against the price of gold (as gold is quoted in US dollars, a stronger US currency makes it more expensive for international buyers which impacts demand).

While some investors will still try their luck on gold, 'Foolish' investors will recognise there is potential for far greater returns on the local sharemarket, especially thanks to the recent volatility that has created plenty of fantastic long-term opportunities.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. You can follow Ryan on Twitter @ASXvalueinvest. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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