GOLD touched $1541 an ounce today, and having fallen 18% from its high, is nearing the conventional definition of a bear market (a 20% decline). All this is occurring as the Bank of Japan cranks up the monetary presses, there is no sign of a change in expansionary monetary policy at the Fed, and an expectation that the Bank of England will ease policy once Mark Carney takes over.

Indeed, gold's fall contrasts with a sudden boom in the price of another alternative currency, Bitcoin (although the price has been hit today by attacks on the website). As Felix Salmon notes in an excellent post on the virtual money, enthusiasts for Bitcoin and gold come from separate social niches so this trend divergence is explicable, even though one might think their fundamental similarities (a restricted supply) might prompt them to be correlated in normal circumstances. Another explanation for the gap is that the Bitcoin bubble, like any other, is a case of investors piling into an illiquid asset that has suddenly made the news (the story was on the front of the FT today).

In a sense, Bitcoin, a currency with no backing at all except faith (see FT Alphaville), is reminiscent of the "undertaking of great advantage but no one to know what it is" that (perhaps apocryphally) marked the peak of the South Sea Bubble. Of course, many might remark that developed world currencies have no metallic backing and so exist on faith as well; however they do have legal tender status and have the (admittedly impaired) implied backing of the tax-raising powers of their governments. Western governments may yet undermine their currencies but they haven't so far; dollars and euros are pretty universally accepted.

But back to gold. As this blog has mentioned before, the metal is very hard to value; that was an advantage on the way up, but is a disadvantage on the way down. There is no yield and no-one really has to own it; indeed many people only own it because it has been rising for much of this century. Now the bears are starting to emerge; Patrick Legland at SG had just produced a note looking for an end-year price of $1375 an ounce (and an average 2013 price of $1500). He argues that we have not seen the inflation to justify the phenomenal rise in the gold price in recent years (it doubled after 2007); that economic growth may be returning to normal; and that the dollar has rebounded. On that last point, of the G10 major currencies, only the New Zealand dollar has outperfomed the US dollar so far this year, and that only marginally; the yen and sterling have fallen 6-7% against the greenback. Low real interest rates have helped gold (reducing the opportunity cost of holding it) but recent falls in inflation have caused real rates to rise, although they are still negative in many places.

As Mr Legland points out, the fall in gold may simply be a return to normal conditions; since the end of 1971, gold investors have suffered negative returns in 38% of all rolling one-year periods. There are other signs that commodities in general may be losing their hold on investors; copper has experienced its worst start to the year in a decade. Indeed, its fall is perhaps even more interesting than that of gold; is it a sign that the world economy is weakening (the Dr Copper theory that it's the best indicator of global activity) or a sign that, on contrast, risk appetite has shifted in favour of equities, and away from raw materials?

For what it's worth, my view is that the fall in the gold price is a much-needed shakeout, that the world economy is not as strong as the equity markets indicate, and that eventually some central banks will generate high inflation as a way of reducing the debt burden. The alternative - default - is even more painful as Greece and Cyprus have shown. But, alas, I'm not smart enough to know when that inflation will occur - not imminently.