(FORTUNE Magazine) – The ideology of fanatic gold investors--and that means most gold investors--has always been a blend of libertarian and reactionary elements. They talk about Fed conspiracies. They loathe government and its "paper money." They scorn fools who believe in stocks and the dollar. Their feeling of superiority was reinforced in the '70s, as the price of gold zoomed up 1,462% while the equity and bond markets crumbled (along with, as they saw it, things like law and order).

But since 1980 gold-stock owners have lost more than 90% of the value of their holdings, measured against the S&P 500. The price of gold is down to a 20-year low of around $250 an ounce.

Most economists blame the drop primarily on low inflation and the proliferation of other inflation hedges, especially derivatives. But to goldbugs there has to be a conspiracy. And they think they've found it: speculators--along with mining companies and other members of the gold industry--borrowing masses of gold, selling it on the spot market, investing the proceeds in higher-earning securities, then paying back their loans with cheaper gold. If this goes on, they warn, we're in for a financial crash because banks and dealers will have to pay an exorbitant price to cover their short positions.

The goldbugs have a point in that there is short-selling going on and it has helped depress the price of gold in the short term. But most of the short-sellers have offsetting long positions in real supplies for future delivery. Speculative selling is limited, partly because the market is so illiquid. The real problem is the huge pile of gold sitting in government and private vaults. And though there may be a temporary rally soon, the downward spiral in price is likely to continue.

Sniffs Randall Oliphant, president and CEO of giant Barrick Gold of Toronto: "I don't see how promoting a conspiracy theory encourages people to invest in gold."

Most of the selling is being done by mining companies such as Barrick, hoping to lock in a margin between production costs and prices--a prudent, even routine practice in most industries. They borrow gold from so-called bullion bankers (big-name banks and financial firms, which in turn borrow the metal from central banks). Then they sell the gold and use the proceeds to pay their production costs, eventually repaying the loan with their own product.

Why does that strategy infuriate gold fanatics? First, in the short run the hedging depresses the spot gold price as the borrowed metal is sold into the cash market. And as John Brimelow, a gold-stock analyst, points out, the mining companies are essentially forgoing "upside potential in the event of a big price rise--since some future production will have already been sold at a lower price--in return for a more predictable but limited earnings stream. This hurts the gold shareholders, who lose the potential from a higher gold price, though management pay is safer." Says one goldbug: "Barrick Gold is evil. They have debauched this market."

Bad as the mining companies are--in the goldbugs' eyes--even worse are the hedge funds, dealers, and other speculators who have supposedly sold billions of dollars worth of gold into the spot market and invested the proceeds in equities, junk bonds, and other paper. That only works, the goldbugs claim, if interest rates on the borrowed gold (now around 2% for six months) and gold prices both stay low. So the speculators supposedly collude to keep things that way.

We're not just talking about a few malcontents wearing T-shirts imprinted with a Glock 9mm pistol and the legend, I DON'T CALL 911. Listen to John Willson, president and CEO of Placer Dome, the second-largest North American gold producer: "I believe there are forces, such as the central banks, that can get together to modify or manipulate the gold market. They keep the price down." (Of course, that sentiment hasn't stopped his company from selling short five million ounces, or about 1 1/2 years' production.)

Fueling the goldbugs' bitterness, former stalwarts such as the Bank of England and the Swiss National Bank have announced that they will sell a large part of their reserves over the next couple of years. (The former auctioned 25 metric tons--or 61,600 pounds--July 6.)

In January gold enthusiasts formed a lobbying group called Gold Anti Trust Action Inc. and hired veteran Philadelphia tort specialists Berger & Montague to look into a case against "colluders" among the dealers and banks. The World Gold Council, an industry trade group headed by Willson, has its own investigation. Says Bill Murphy, GATA's chairman: "It is clear that the shorts will blow up in the not too distant future."

How much gold is at issue here? The most extreme goldbugs say speculators alone are borrowing up to 8,000 metric tons, or about $68 billion worth. The more moderate, such as Willson, think the world's total short position is maybe 7,000 to 9,000 tons, divided roughly equally between speculators and industrial users such as mining companies and jewelry makers. Phillip Klapwijk, managing director of Gold Fields Mineral Services Ltd., an industry economic research firm, puts the total short position at about 4,300 tons at the end of 1998, most sold by miners and industrial users. (Since then, perhaps 500 to 1,000 tons more have been sold short.)

Let's put this in context before we talk about a teetering inverted pyramid of speculation. There are about 137,400 tons--about $1.1 trillion worth--of gold aboveground, some 31,400 of which is held in central banks, according to Gold Fields. All the "global macro" hedge funds combined have maybe $30 billion available for trades such as selling gold short, and most of that is committed to other positions. The mines, for their part, are likely to slow their hedging in a couple of years because they and their banks will reach the limits of prudence. That probably means no more than 3,000 tons of producer hedging over the next two to three years--a little over one year's production.

The capital and credit for a short-selling conspiracy simply aren't there.

"Gold is best looked on as a slowly depreciating currency. It is in the early stages of being turned into just another commodity," says Kevin Crisp, chief gold researcher for J.P. Morgan. Once it's demoted to the status of pig iron and oats, you can expect to see the price falling to or below the cost of production. That could be a good $50 or more under even today's depressed level.

Hard to see a comeback from here. And also hard to see a conspiracy.

--John Dizard