In August 2011, a Gallup poll asked Americans what they thought would be the best long-term investment: 34% said gold, 17% said stocks.

It's too early to declare a winner, but the early results are in. The SPDR Gold ETF is down 17% since the survey was taken. The S&P 500 (SNPINDEX:^GSPC) is up 38%.

Gold has lost nearly one-fifth of its value this year alone, and more than 10% since Friday -- the worst decline since the early 1980s, when the yellow metal began a two-decade slump. Whether the current slide is the end of gold's bull run, or just a short-term drop, no one knows. What is clear is that gold isn't the wealth-preserver many thought it was. Some gold stocks, like NovaGold and Kinross Gold (NYSE:KGC), have lost more than half their value in the last year.

It wasn't supposed to work this way. The bullish argument behind gold made so much sense. As the Federal Reserve ballooned its balance sheet, inflation was sure to take off. And as the government ran trillion-dollar deficits, confidence in the dollar was sure to go up in smoke.

But neither happened.

The Consumer Price Index has increased at an average annual rate of 1.87% since 2008. That's almost half the average level after World War II. Privately measured inflation gauges show roughly the same change. The vast majority of the new cash the Fed printed never really left the Fed at all, as banks kept it parked in excess reserves. And the federal budget deficit has been nearly cut in half as a percent of GDP. "It shocks people when I tell them the deficit as a percent of GDP is already close to being cut in half (this doesn't seem to ever make headlines)," wrote economic blogger Bill McBride last week. It may be shocking the gold market, too. People still talk about "trillion-dollar deficits as far as the eye can see" without realizing that no such forecast exists. Government debt as a percent of GDP is on track to fall over the next decade

Then there are rumors that the Fed will cut its quantitative easing within a few months. "I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer," said San Francisco Fed president John Williams last week. "If that happens, we could start tapering our purchases then. If all goes as hoped, we could end the purchase program sometime late this year." This would have been unthinkable just a month ago.

To boot, gold purchases by central banks have long been cited as a bullish catalyst. But now fears are swirling that the central bank of Cyprus will be forced to dump its gold to finance an international bailout. If Cyprus, who else? Portugal? Spain? Italy?

The irony is that the goldbugs may get the story right but the investment wrong. Like any asset, gold is forward-looking and prone to wild overreactions. So prices doesn't always mesh with what's going on in the economy. Inflation in the 1980s averaged nearly 6% -- triple current levels -- and gold lost more than half its nominal value. It is entirely possible that the coming years will bring high inflation, but tumbling gold prices. Just as the Internet blossomed while the Nasdaq plunged from its high in 2000, asset prices can gallop far away from the stories people buy into them for. Indeed, they usually do.

Historically, gold has surprisingly little correlation with inflation. As one Citigroup research report put it: "There is no obvious relationship between the gold price and inflation." Instead, gold correlates fairly well with two events: negative real interest rates and financial panic. But if the economy is healing, as many think it is, real interest rates are likely to rise. And as the Cyprus bailout showed last month, markets appear to be well past the panic stages of the financial crisis. One interpretation is gold's fall is the shift in how investors perceive risk -- away from a world obsessed with panic and collapse toward one focused on long-term growth.

For those in gold for the long haul, that should be unsettling. Over time, gold's real return averages close to zero:


Average Annual Real Returns, 1838-2012



Treasury bonds




Source: Deutsche Bank Long-Term Asset Return Study

The stock market falling 20% or more is typically nothing for long-term investors to fret about -- historically, it's a once-every-five-years occurrence, with large gains over time. Gold is different. Over the long haul, the best it will do is preserve wealth. In between, it goes through periods, sometimes decades-long, of boom and bust.

No one knows if the gold story has peaked. What we know is that it's riskier than many believed. As Bill Bonner says, "People do not get what they want or what they expect from the markets; they get what they deserve."

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

Motley Fool contributor Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.