Ever since its discovery, gold has always fascinated mankind. Used as an ornament and as a currency, it continues to baffle economists, policymakers and laymen alike. This article takes a closer look at the way the gold market functions and at the inherent dynamics of this fascinating metal.

In recent years, one witnessed more and more investors looking towards gold as an investment avenue for parking their savings. It is not a new phenomenon. Traditionally, people have invested their savings in gold, though it was by and large an idle asset. But now the shift is on looking towards gold not only as a safe asset but also as vehicle for earning income. This is similar to investments in stock markets. Analysts attribute few reasons for this. While gold has reached an all-time high, the stock markets have fallen sharply. By the end of 2004, the price of gold touched $435 an ounce, the highest in more than 15 years2. Dollar, on the other hand, had fallen by 25% against other currencies since 2002. Though the gold standard was abandoned even by the US in 1973, gold still played a major role as a reserve currency. The freshly mined gold actually constituted a tiny percentage of total gold reserves that existed above ground. Almost all the gold that had been mined till date existed in some form or the other. In 2001, the above ground stocks were estimated to be 145,200 tons as against the fresh supply of 2,600 tons3. A bullish trend was visible in the consumer jewelry segment both in India and China. Besides, research was leading to discovery of new uses for gold in the industrial segment. Gold prices, though dominated by central banks and private investors, were often driven more by emotion than by economics. Historical Perspective Gold is being mined for hundreds of years. It had been first found on the river beds and creeks and came to be known as alluvial gold. Later the mined gold came from beneath the rocks sometimes thousands of feet below the ground.

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