IF a preoccupation with the weather is a curiously English phenomenon, then nothing could be as compelling a story as a “perfect storm” – a rare occurrence in which several weather conditions come together to destructive effect.

Gold, an important bellwether of the economic world, finds itself the beneficiary of such an occurrence, buoyed to within a whisker of the all-time high of $850 an ounce.

It was so different a decade ago. Up until 1999, the market for gold had been in decline and was characterised by flagging prices and volatility. The darkest hour for gold enthusiasts was on May 7, 1999 when the Treasury announced it was going to sell Britain’s gold reserves.

So what has changed? Part of the answer is that there have been deep structural changes in the commodity markets. The prices of most commodities have risen between threefold and tenfold in the past five years.

Yet despite high prices, global gold production is falling. South Africa, the world’s largest producer, is turning out barely 25% of what it did in 1970. Production elsewhere has also peaked – in America in 1998, in Australia in 1997, in Canada in 1991 and in Brazil in 1982.

So the supply of gold has fallen. But at the same time demand has risen. There are two reasons. First, more people are able to buy it and, second, new players have entered the market. Before 2000 gold traded on markets that were somewhat opaque. Gold was not too popular with investors. For every £1,000 they put into the financial markets, only £3 went to commodities – and gold was a subset of that. Gold funds launched in 2004 made life easier for investors. They could trade in them through the stock markets.

The liberalisation of the gold market in China in 2002 was another milestone that changed sentiment.

Before 2000, demand for jewellery influenced the gold price. A rise in the price was often met by a corresponding fall in jewellery sales, which dragged the gold price back down again. However, with new optimism for the future of gold, speculators are piling in. Just lately the gold price chart has gone from linear growth to exponential. The contributing factors are well known – a falling American dollar, geopolitical tensions, the banking credit crisis and inflationary fears.

So what is the forecast for gold? Three factors will dominate up to Christmas. First, the speculators, many of whom leapt on the bandwagon in the past few months, are keen to see gold break through $850 an ounce. Second, banks and traders who are shorting the dollar and going long on gold are keen to take profit ahead of the year-end. Third, pension funds are putting more money into commodities.

Our advice? Buy an umbrella.

Ross Norman is a director of Thebulliondesk.com, the leading online source of bullion market news, prices and research

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