Gold is looking cheaper! (Federal Reserve Bank of New York)
Gold is looking cheaper! (Federal Reserve Bank of New York)

It's been a rough couple of month for those who adopt the Ron Paul/Glenn Beck school of portfolio management. Gold, the prized investment of those who wish to guard against a looming hyperinflation or breakdown in society, has been falling sharply, and on Thursday afternoon briefly passed below the $1,200 an ounce level for the first time since 2010. The reasons why are actually somewhat promising for the economic outlook.

From a recent high of $1,790 on Oct. 4, the price of gold has fallen by about 33 percent, and at 3:15 p.m. Thursday the price was $1,203.

Why? You can't really value gold by analyzing its fundamental value, the way one might a share of stock or a bond. Its price at any given time is wherever supply and demand even out; its future price is wherever supply and demand settle out in the future.

For much of the last five years, the pattern has been this: When the world seems more uncertain and the possibility of a descent into economic chaos more real, the price of gold spikes. For example, in July and August of 2011, when the European crisis was in an intense phase and the U.S. government's credit rating was downgraded, the price of gold shot up 27 percent. At the time, the stock market was falling, expected volatility was skyrocketing, and prices of other commodities like oil were dropping. Gold seems to have been a way for investors to hedge against the possibility of economic catastrophe.

But in the last few weeks, the stock market has been basically flat (with some big jumps along the way in both directions). Oil and other commodity prices are falling. Volatility is way up.

That is the kind of jarring market environment in which, in the recent past, gold would be expected to spike. Instead, it has fallen nearly $400 an ounce, or 25 percent, since April 1. So, gold is behaving more like an ordinary commodity like oil or copper instead of like a special insurance policy against the end of the world.

Or, put a different way, this bout of market volatility seems to be driven not by an existential crisis in the world financial system but more by the prospect of the Federal Reserve winding down its stimulus policies. Some people heavily invested in risky bonds and other investments may be losing money, but it's not the end of the world. No wonder end-of-the-world insurance is looking cheaper.