FORTUNE — Up until last year, gold prices rose for at least 11 years in a row. The precious metal spawned a frenzy among everyone from gold bugs to politicos who think America should return to the gold standard. But today they’re likely feeling nervous. Gold prices have entered bear market territory, having fallen by 22% this year.
And it’s going to get worse as investors zero in on whether the U.S. Federal Reserve will scale down its stimulus program, called quantitative easing. Goldman Sachs (GS) analysts say gold will continue dropping into 2014, possibly falling below $1,000 an ounce, a level not seen since early 2009. This is a reverse from gold’s steady rise from $800 an ounce in early 2009 to more than $1,900 in the fall of 2011; on Tuesday morning, it was trading at $1,314.50 in New York.
Regardless whether the Fed tapers its bond-buying program this week or later, a few other factors will likely drive prices lower.
Inflation. What inflation?
Gold is typically a hedge against rapidly rising prices. Since the financial crisis, many economies from U.S. to Europe have launched several rounds of quantitative easing. The supply of money tripled in most advanced economies, and many worried it would effectively stoke inflation.
Unless all you consume is bacon, inflation hasn’t been a problem as the U.S. and the rest of the world retreats from financial abyss. In fact, global inflation is actually low and falling further. In a June article in Project Syndicate, New York University economist Nouriel Roubini forecast that gold could fall to $1,000 by 2015.
Roubini, nicknamed Dr. Doom for his forecasts of the financial crisis, noted that even though the supply of money has expanded it hasn’t changed very many hands, largely because banks have been hoarding cash in the form of excess reserves.
If banks start lending more, however, the risks of inflation could rise. Even then, gold faces other headwinds.
It may be safe, but where are the returns?
Unlike other assets, gold provides no income. That was an overlooked issue during the worst years following the financial crisis, but now that the economy is improving, gold must compete with returns on other investments, such as stocks, bonds, and real estate.
Since Bernanke hinted it could scale back the Fed’s bond-buying program soon, interest rates have surged, and they’re poised to rise further. This effectively puts gold in a tough spot, as investors sell off the precious metal seeking higher returns in stocks, bonds, and other investments.
“The time to buy gold is when the real returns on cash and bonds are negative and falling,” Roubini writes. “But the more positive outlook about the U.S. and the global economy implies that over time the Federal Reserve and other central banks will exit from quantitative easing and zero policy rates, which means that real rates will rise, rather than fall.”
Crisis in Syria has subsided (at least for now)
Gold is widely viewed as a safe-haven investment. When crisis arises, investors flock to the precious metal as a safe store of value.
Markets have been zeroing in on conflicts in Syria, which could potentially push gold higher. At least for now, however, a military strike looks less likely as the country has accepted Russia’s proposal for its chemical weapons to be given up for U.N. control. It remains to be seen if Syria is serious about its offer, but it does make U.S. military strikes less likely, at least in the near-term, according to JPMorgan analysts.
And even if the offer isn’t serious, it’s uncertain if Congress would vote for military action.
Another debt ceiling debate could be a snooze
There’s another crisis to consider that could sway the direction of gold: The debt ceiling.
As Americans will recall, there has been not one drama-filled deadline — but two — since 2011. The first almost pushed the economy into catastrophe, with a major ratings agency taking the nation’s stellar triple A rating away. The issue was resolved through $1 trillion in discretionary spending cuts combined with sequestration. The second one followed shortly after Obama’s re-election, and like the first one, Republicans and Democrats came to an agreement; the debt ceiling was raised.
Come September 30, the nation will approach another deadline. It’s likely that the market might snooze through the third debt ceiling debate, as the previous ones were ultimately resolved. That would keep downward pressure on gold, but there is of course a possibility that the latest debt ceiling drama may turn out differently: Republicans say they will raise the debt ceiling only in return for budget concessions, while the Obama administration says it won’t offer any.
Eventually, either side will likely budge, but as the Washington Post’s Ezra Klein points out, what alarms him now is that “no one can tell me how one or both of those positions will change before we breach the ceiling.”
That uncertainty may send gold higher, but it hasn’t, at least not so far.