The bubbling yellow metal

Commodities, especially 'gold' look like a good store of value in the current economic regime, where the interest rates and the yields on government bonds are low. Banks are more willing to support investors and speculators than to lend businesses and consumers.

When money is easy and demand moves faster than supply, prices can explode. In 18 months from July 1978, gold went from $ 185 per ounce to $ 850. That's $ 2400 in today's (Nov 17,2009) dollars. And interest rates were much higher than now. A similar price rise from here would bring gold to more than $ 5000 per ounce.

The price of yellow metal depends on same three factors like Oil or wheat - demand, supply and financial conditions. Since august, it surged 20%, which might be a modest beginning.

Gold production from mines totaled 2,414 tonnes in 2008, worth $ 88 billion at Nov 16 price. There will be more this year, however it is expected to be less from 2010 onwards.

India recently purchased 200 tonnes of gold from IMF, thereby rising gold composition in for-ex reserves to 6% (earlier 4%). If China decides to substitute 10% of its existing for-ex reserves ($ 2.3 trillion dollars) with gold, it might require to buy almost three years' worth of production, at current price.