Paul Walker

'Jewelry demand is the bedrock of the gold market and of course helps to determine the direction of the gold price,' said one of the authors of the 40 year old annual GFMS Gold Survey.

'But what we can see is that investment took over as the key driver of the gold price in 2006 with a 15 per cent fall in jewelry demand to 2,280 tons as a reaction to high prices driven upwards by investment funds.

'It is not true to say jewelry is irrelevant as it helps to determine the price at which gold will come back to the market as scrap, and so has a bigger impact on the total market than its absolute size alone.'

Indeed, Mr. Walker highlighted the impact that a high gold price has had in the emerging markets such as India where 15-20 per cent mark ups on jewelry offer a profit margin that is too small to absorb increasing gold prices.

'The effect is that jewelry producers decide not to take the risk and shut down production instead. It is different in western markets with a mark up of three to five times on jewelry. They can absorb the increasing cost of gold.'

This phenomenon leads Mr. Walker to take a more sanguine view of the outlook for the gold price, with demand from India beginning to impact further on the gold price if prices move higher again. However, his concern is the US economy.

'US consumption has been growing at 3.5 per cent per annum and that is unsustainable, and the US has to face its Day of Reckoning before very much longer. That is where there is a risk that the gold price will overshoot.'

But interestingly Mr. Walker is not convinced that there is a strong correlation between the oil price and gold and therefore thinks that geopolitical risk is not a great concern.

'If you look at the past five years then the highest correlation that you get between the oil price and gold is 40 per cent, and in the first quarter of this year there was a zero correlation.

'What explains the gold price is a whole series of variables. For example, if Indian farmers have a good year that would definitely impact the demand for jewelry, and yet that is not a factor that is often talked about.'

How about the potential for another gold price spike? Is that very likely now? 'Well the whole gold market is a small one and so changes at the margin can make a big impact on price, so this is not impossible by any means.'