(Fortune) -- When gold prices turn skyward, like they did for the past two weeks before some recent flattening, some mix of greed, fear and uncertainty are likely ruling the market. What better time to remember what really drives prices over the long-term: market fundamentals. Through that lens, gold might not be such a hot investment.
The gold market works much like any other, with supply and demand eventually equalizing, and runaway prices returning to long-term averages. Since 1980, the price of gold has averaged about $440 an ounce in U.S. dollars. But much like U.S. home prices over this decade, it can take some time for prices to return to normal.
Barclays Wealth in London predicts gold will fall to a fair value of $800 an ounce by 2012, as investors eventually dump it for riskier trades; Societe Generale, the French bank, in April 2009 predicted $800 gold by the end of 2010, though it has reversed its stance since then. Analyst John Nadler of gold deal Kitco predicts gold will fall to $900 in 2011. (See editor's note below.)
Their reasoning is simple: investors are keeping prices high even as demand from non-investors is cratering.
Take gold jewelry, which accounts for more than half of the world's gold market. Demand there fell 8% in the fourth quarter of 2009 and is likely to continue to fall amid high prices that turn off shoppers. For example, in India, the largest gold buying country, high gold prices this week kept Indians from purchasing metal for the gold-buying festival of Akshaya Tritiya, which in turn drove down prices.
Then there's price pressure from the supply side. Higher gold prices mean miners work overtime. The supply of mine gold around the world jumped 7% last year to 2,572 tons-the second largest increase in history.
Gold bullion dealer Kitco says places like China and Russia will help boost the amount of gold from mining by 4% to 6% a year through 2014. Because it costs miners about $480 on average to extract an ounce of gold, they plow ahead when prices are high, eventually leading to an oversupply situation.
Gold as $1,200 also brings out the sellers and resellers. In 2009, scrap supply-all those gold pendants, necklaces and coins people have lying around-hit an all-time high of 1,700 tons. All those "we buy gold" signs, Internet advertisements and late night television commercials? Well, they're starting to work.
That scrap supply high is actually a 27% rise from 2008, according to Kitco. "So long as prices remain above $1,000-$1,100 we will continue to see a river of secondary gold actually starting to compete with mine production," says Jon Nadler, a Kitco analyst.
The real reason for the drop: stabilization in other markets
That's not to predict an immediate gold crash. The "fear premium" it commands as a store of value during uncertain financial times could support higher prices indefinitely.
As traders sort out the effects of Europe's $1 trillion bailout and whether inflation or deflation creep up in the U.S., investors will probably continue parking in gold as long as they can. Gold has slumped just a bit as a sense of some stability has returned to the markets in Europe.
But some of the smart money is betting that gold keeps rising. Hedge funds and other big speculative traders boosted their gold bets by 2% last week, according to data from the U.S. Commodity Futures Trading Commission.
The thing is, no one knows how long their bets are for. Fast money from hedge funds and speculators can get out while prices are high. In fact, one of the prevailing themes among speculators seems to be: ride the momentum while it lasts. Often times their ownership of gold lies in futures, never even taking physical delivery of the yellow stuff.
Essentially, it's the Rabbit Angstroms (and now Glenn Beck watchers) of the world that have to fear the gold Krugerrands in their safe deposit boxes could slowly shed all the value they have picked up over the last year.
Dennis Gartman, a hedge fund manager and newsletter editor who is betting on gold, wrote last week that "the public is selling gold not buying it, as evidenced by the fact that there are as many advertisements on television touting the opportunities one might have in selling one's gold ... as there are touting gold as an investment.
"Until ... the latter advertisements dwarf those of the former, the Bubble has not yet been blown."
In other words, bubbles and semi-bubbles rarely last-the market fundamentals are just too powerful to ignore.