Gold is probably the most irrational of all financial assets. It serves essentially no useful purpose beyond its ability to demand higher prices from someone else. It generates no cash flow. It pays no dividends. Its main commercial purpose is to serve as decoration.

I covered these topics in a MSN Money column back in March. The takeaway was that it was the swing factor of investment demand — mainly through new gold ETFs like the Gold Trust SPDR (NYSE: GLD) — which had boosted gold prices.

However, another important source of price support has been the de-hedging of order books by gold producers as they try to quickly get exposure to rising gold prices by buying gold to reverse their short dollar trades.

This process accounted for upwards of 13% of total annual gold demand back in 2006 and 2007 and has been dropping ever since. Now, Barclays Capital analyst Suki Cooper believes it will account for just over 3% of total demand this year. This eliminates an important source of demand that “in some instances provided the impetus to push gold out of range bound trading and compounded positive sentiment.”

Let’s look at a few numbers to give you an idea of how significant a shift this is.

Back in 2007, most of the world’s largest gold producers held huge hedge books to protect against declines in gold prices. AngloGold Ashanti (NYSE: AU) held a 400-ton hedge book. Barrick Gold (NYSE: ABX) held a 370-ton book. Newcrest Mining (NCMGY

) held a 150-ton book. Newmont Mining (NYSE: NEM) and Compania de Minas Buenaventura (NYSE: BVN) each held a 66-ton book.

Now, all of these companies have reversed their positions. Cooper estimates that the global hedge book now stands closer to just over 100 tons.

For now, this withdrawal of buying demand hasn’t been a problem. Investors, encouraged by the promise of another flood of cheap money from the Federal Reserve, have been snapping up precious metals to protect against the threats of both inflation and deflation. But if the economy continues to chug along, avoiding both of these troublesome economic scenarios, gold prices could drop like bullion bricks now that the producers are no longer supporting the market.

Disclosure: The author does not own or control a position in any company mentioned.

Be sure to check out Anthony Mirhaydari’s new investment advisory service, the Edge. A free trial has been extended to Investorplace.com readers. Log in with “freeuser” as the user name and “edge” as the password.