The run-up in gold prices in recent years – from $800 per ounce in early2009 to above $1,900 in the fall of 2011 – had all the features of a bubble.And now, like all asset-price surges that are divorced from the fundamentals ofsupply and demand, the gold bubble is deflating.

At the peak, gold bugs – a combination of paranoid investors and otherswith a fear-based political agenda – were happily predicting gold prices goingto $2,000, $3,000, and even to $5,000 in a matter of years. But prices havemoved mostly downward since then. In April, gold was selling for close to$1,300 per ounce – and the price is still hovering below $1400, an almost 30%drop from the 2011 high.

There are many reasons why the bubble has burst, and why gold prices arelikely to move much lower, toward $1,000 by 2015.

First, gold prices tend to spikewhen there are serious economic, financial, and geopolitical risks in theglobal economy. During the global financialcrisis, even the safety of bank deposits and government bonds was in doubt forsome investors. If you worry about financial Armageddon, it is indeedmetaphorically the time to stock your bunker with guns, ammunition, canned food, andgold bars.

But, even in that dire scenario, gold might be a poor investment. Indeed,at the peak of the global financial crisis in 2008 and 2009, gold prices fellsharply a few times. In an extreme credit crunch, leveraged purchases of goldcause forced sales, because any price correction triggers margin calls. As aresult, gold can be very volatile – upward and downward – at the peak of acrisis.

Second, gold performs best whenthere is a risk of high inflation, as its popularity as a store of valueincreases. But, despite very aggressivemonetary policy by many central banks – successive rounds of “quantitativeeasing” have doubled, or even tripled, the money supply in most advancedeconomies – global inflation is actually low and falling further.

The reason is simple: whilebase money is soaring, the velocity of money has collapsed, with banks hoarding theliquidity in the form of excess reserves. Ongoing private and publicdebt deleveraging has kept global demand growth below that of supply.

Thus, firms have little pricing power, owing to excess capacity, whileworkers’ bargaining power is low, owing to high unemployment. Moreover, tradeunions continue to weaken, while globalization has led to cheap production oflabor-intensive goods in China and other emerging markets, depressing the wagesand job prospects of unskilled workers in advanced economies.

With little wage inflation, high goods inflation is unlikely. If anything,inflation is now falling further globally as commodity prices adjust downwardin response to weak global growth. And gold is following the fall in actual andexpected inflation.

Third, unlike otherassets, gold does not provide any income. Whereas equities have dividends, bondshave coupons, and homes provide rents, gold is solely a play on capitalappreciation. Now that the global economy is recovering, other assets –equities or even revived real estate – thus provide higher returns. Indeed, USand global equities have vastly outperformed gold since the sharp rise in goldprices in early 2009.

Fourth, gold prices rose sharplywhen real (inflation-adjusted) interest rates became increasingly negativeafter successive rounds of quantitative easing. The time to buy gold is when the real returns on cash and bonds arenegative and falling. But the more positive outlook about the US and the globaleconomy implies that over time the Federal Reserve and other central banks willexit from quantitative easing and zero policy rates, which means that realrates will rise, rather than fall.

Fifth, some argued that highly indebted sovereigns would push investorsinto gold as government bonds became more risky. But the opposite is happeningnow. Many of these highly indebted governments have large stocks of gold, whichthey may decide to dump to reduce their debts. Indeed, a report that Cyprusmight sell a small fraction – some