This is an interesting question, and one I spent quite a bit of time
going through the research on. So let's see what we got.
You mentioned that India's consumption was down. As I was reading on
Gold Price Fixing, and the market, it crossed my mind that
"consumption" is a rather broad term. While craftsmen such as yourself
do consume gold, creating jewelry, and electronics consume gold in
circuits, and India consumes gold for a variety of reasons, investors
consume gold simply by investing. Arm chair investors have blossomed
as a population. In the last 3 years, the technology and public
perception of safety in online investing has made investing in gold, a
matter of a few clicks of the mouse. (Also, India's consumption may
have gone down, but China's has gone way up, and will continue to do
--"China is currently the second-largest holder of U.S. Treasuries
behind Japan, creating a need for China to create a stronger hedge
against a weakening dollar.
This follows a previous statement by Teng Tai, China's chief
securities dealer, when he advised the country to increase its current
gold reserve of roughly 600 tons to 2,500 tons in the near term and
maintain around 3,000 tons over the long term. Gold speculators have
anticipated such a move for some time, as China's current gold
position is only 1.4% of its total foreign exchange reserve, according
to figures from the International Monetary Fund. This percentage ranks
it the lowest among the top 15 central banks with bullion reserves,
according to a recent report from Credit Suisse First Boston. A move
to 2,500 tons would make it the fifth-largest bullion holder, behind
countries like the United States and Germany.
Gold speculators are partying over the possibilities. Since 2001, the
price of gold has doubled to its current level of around $535 per
ounce. It provided investors with an 18% return in 2005, outpacing the
S&P 500's 3% over the same period."
China is definitely a factor, and again this move has been anticipated
for a very long time. Back again to the armchair investors:
--"The formation of superfunds streetTRACKS Gold (NYSE: GLD) and
iShares COMEX Gold (AMEX: IAU) make it possible by a click of the
mouse to designate a portion of your portfolio to the sole purpose of
tracking gold prices. For example, since gold prices increased 18% in
2005, investors were awarded with an equal return by holding
But these funds have another effect in that every investment dollar
put into them is matched by its equivalent in gold. So, as more and
more investors flock to streetTRACKS Gold, the fund, in turn, buys
more gold, essentially increasing the metal's demand on the market.
And just how high has the demand for this fund risen? Consider that
over the past year its total net asset value has increased an
astounding 27.8% to $4.9 billion." ---
Again from the Fool.com commentary written in January of 2006.
Another main reason is fear. As this article points out, fear is
really the only reason to begin to invest in Silver, or Gold, since
precious metals do not pay interest ...
--"Unstable political conditions around the world are also playing a
role. "When people are worried about political turmoil, they like to
hold their wealth in a mobile form that they can take with them," he
Walt Nelson, who teaches banking and corporate finance at MSU, thinks
a big factor is fear ? whether it is an American who fears inflation
or someone in an unstable country fearing the collapse of the current
So we have a great deal of fear (war, terror, nuclear threat, oil
shortages), a much greater access to gold investing, and a large
country moving into Gold and away from a weakening dollar, all at the
All of these factors build on each other. It is not a single target
reason, it is the build of each of these factors which continue to
drive the price up. The fact is however, that the build is a bubble.
" Over 2005 the World Gold Council estimated total global gold supply
to be 3,859 tonnes and demand to be 3,754 tonnes, giving a surplus of
Gold doesn't pay interest, and isn't a good long term investment. At
some point these basic facts are going to hit home to the investors
and the bubble will pop.
Perception is the driving force at the moment. It really doesn't
matter what the "real" consumption or value of the gold is, the price
is driven by the demand for purchase, and right now the demand is
I hope that answers the question for you, if not then please use the
Clarification button and I'll get back to you as soon as I can.