In fact, in the second half of 2009 a new development hit the gold market: central banks are no longer a net supplier but have now become a source of demand. This change in attitude is mainly linked to the intrinsic characteristics of gold, i.e. its rarity and indestructibility, which build its reputation as a "safe haven". Its ability to preserve value in real terms makes it an excellent hedge against inflation, and against economic and political uncertainty. For the same reasons, it offers protection against the weakening of the dollar.

It is therefore not surprising to see growing interest in gold as aggressive and unconventional monetary policies are stoking inflationary fears. The central banks of the main emerging countries share these fears and are diversifying their reserves to guard against a possible depreciation of the US dollar or other currencies (the Central Bank of India purchased 200 metric tons of gold from the IMF in November 2009).

However, monetary policy is not the sole price-driver for gold; there are also fundamental elements pulling in the same direction. For some years, gold production has been decreasing due to the exhaustion of mines - the discovery of new sources is becoming rarer and exploration costs are rising. That means there is only limited scope for increasing production.

Over the past ten years 60 to 80 per cent of the demand for gold has come from the jewellery sector, with the rest being accounted for by investment and various industrial applications. The demand for jewellery is mainly from such markets as India or China, which have good structural economic prospects. For these reasons, in addition to its versatility, demand from investors has been growing strongly for some years, as can be seen by the growth of exchange traded funds.

Therefore, the combination of pre-existing microeconomic factors, notably restricted supply, and macroeconomic factors spawned by the crisis and expansive monetary policies - risk of the US dollar and other currencies weakening, very low real interest rates, inflationary fears, reaction of investors and central banks to these fears - is creating an environment which favours the yellow metal.

Investors who want to increase their gold stocks may do so either directly or indirectly by investing in the gold sector. Direct investment offers high asset diversification of assets with an exposure of one-for-one to gold price fluctuations. On the other hand, investing in gold-producing companies yields two sources of revenue: underlying gold-price fluctuations and each company’s ability to create margins.

The performance of these companies dampens the effect of changes in the price of gold via the operating leverage effect: an increase in the price of gold is closely linked to profits made by these companies, even if they depend on production costs. It is nevertheless worth noting that gold-producing companies are still affected by equity market fluctuations. That is why, although they provide diversification to a portfolio, their effect is less than that of physical gold. On the other hand, while the price of gold is rising, anticipated returns may be higher.

In the current environment exposure to gold, whether direct or indirect, thus seems a good idea due to the fragile equilibrium of a market where supply is inelastic and demand potentially growing due to various concerns (notably inflationary). The case for gold is further underpinned by its safe haven status, which is coming to the fore in investors' thinking now that sovereign risk is becoming more of an issue.