What is the reason behind gold's glitter in global market. If you take the basic factors, the reasons are simple. If one ponders a little on the history of 'human economy, one would realise that despite all the human prosperity since civilisation began, it is gold alone that still lingers around. And, despite the conjecture during the 90s that gold is slowly being relegated to disuse, the fetish and economics behind this metal remains firmly in place.

But what is the reason behind it? Because 'money' is only as good as the 'exchange' it can bring for you. Either now or later! And this is largely dependent on the willingness of the second and third party to accept such 'money'. And this is where gold comes in. Gold's 'value' is embedded in human history and collective psychology.

Gold derives its economic value from the basic human urge to possess it. It is this natural ability of drawing human possessiveness that makes gold as the natural currency of the world, and helps gold display characteristics quite similar to that of 'ordinary money'.

The 'economics' of gold as determined by demand and supply factors reveal some interesting facts, indicating the underlying momentum; and the partial rationale for the current rally in it. Gold consumption in jewellery comprises around 64% of the total global gold consumption. While aggregate investments in gold comprise 20% of the total global gold consumption (Q1- 2008). What makes gold an interesting preposition is that fresh gold supply has stood around only 62% of the total global demand since 2005, with remaining demand being met by old scrap and previous holdings!

It was, therefore, no surprise that gold prices remained continually upbeat during the period. International gold prices, as depicted by London bullion market, display a 19% growth in the 2002-2008 period. But there is more to this bull rally than what is depicted by the above demand and supply equation. The rally in gold prices is stemmed deeply in the complex relation it shares with US dollar and crude oil, inverse with former and direct with latter.

Since late 2007, the US fed has acted to bolster its decelerating economy by drastically reducing the interest rates. The collateral effect of this was the weakening of international investor confidence in dollar that consequently scrambled to acquire value in other commodities, especially oil and gold. To put that in perspective, in just last year alone, gold has rallied by nearly 36%, while oil has moved by 86% till date.

Furthermore, it is expected that as US economy declines further, the gold prices may gather further steam. It is due to this very reason of financial crisis and economic concern that gold has seen a 100% rise in demand for gold ETF in Q1-2008 over pervious year. Some may rightly argue that this was largely due to the low base effect.

But, yet it is unavoidable to overlook the fact that ETF has been the only segment of gold consumption that has grown positively and overwhelmingly in the Q1-08. Thus with crude oil predicted to touch $150/barrel in short run, and $ 200-400/barrel in medium to long run, the possibility that gold (which is highly 'oil co-related' asset) would remain dormant is unlikely. Even with a historical low of 6 barrel per ounce, gold is projected to grow to $1,000 if oil goes to $150. Thus in the medium to long run, the possibility of a gold rally remains stronger than ever.

Sandesh Kirkire is CEO, Kotak Mahindra Mutual Fund. The views expressed are his own. •

This article appeared in COMMODITY MARKET, India's No 1 news magazine on commodities.