Gold struck a new all-time peak above US$866 on Thursday and is set to continue its meteoric rise. What are the main reasons for this increase?

Supply and demand.

Gold, like other commodities, is driven by supply and demand. However, as almost all the gold ever produced still exists, hoarding plays a far greater role in the price determination than is the case with other commodities. Central banks hold a fifth of all this gold in reserve and any change in their inventories would have a big effect on the price.

The central banks of Russia, South Africa, Argentina and China have expressed their desire to increase their gold holdings, driving up the price. Except for maybe Russia these banks are minnows compared to the juggernaut that is China.

Because it holds an unusually large proportion of its reserves in US Dollars and has been battered by the relentless slide in that currency?s value, the Chinese central bank is looking for ways to diversify its reserves. Gold seems an obvious answer.

China holds only about one percent of its assets in gold. Compare that to the United States that holds 16 percent of its reserves in gold and you begin to understand why the prospect of a Chinese switch to gold has the gold bulls foaming at the mouth.

According to the World Gold Council gold demand in the third quarter of 2007 was a record US$20.7-billion, up 30% on a year earlier. Demand from the electronics industry is rising by 13 percent a year, gold for ?other industrial uses? is up 17 percent and jewellery by 27 percent.

India is the largest gold-consuming nation in the world and China is not far behind. Both these countries have economies growing at breakneck speed, increasing the spending power of their gold adoring consumers. Both India and China are liberalizing laws relating to the import of gold in ways that will facilitate gold purchases on an unprecedented scale. These countries will drive demand well into the century.

In stark contrast to booming demand, production seems to be in the doldrums. According to Neal R. Ryan, Vice President and Director of Economic Research for the largest retail dealer in precious metals in the US, Blanchard and Company, production in Australia, South Africa, Canada and Peru is expected to continue sliding in the next few years. ?They will never reach their peak levels from years past,? he said. Ryan reckons that global production for gold peaked in 2001 at 2604 tonnes or 83.7 million ounces.

Inflation.

U$100 oil. Nuff said? Not quite. Years of easy credit, major tax cuts, the long term decline in the value of the Dollar, a colossal trade deficit and the US?s massive foreign debt have led to ever increasing inflationary pressures in the world?s biggest economy. The result? Investors are scrambling for ways to protect their savings.

Gold is not money, but it sure acts like it. And herein lies its worth in inflationary times. Gold is a liquid and tangible asset that is far more difficult to produce than issuing new currency. Furthermore, its value does not rely on any particular government?s health. Gold?s status as an excellent hedge against inflation is justified by the fact that it has kept its value, in terms of real goods and services that it can buy, for millennia. The purchasing power of currencies, in contrast, is in perennial decline due to the impact of rising prices for goods and services.

Wars and rumours of wars.

Unrest in Nigeria threatening our sticky, black life?s blood. Iranian nukes and US sabre rattling. Pakistan teetering on the edge. For the gold investor these are the stuff dreams are made of.

In times of crisis and political uncertainty people see gold as a ?flight to safety? and the gold price goes up. Gold, unlike most other financial assets, is immune to an issuer?s reduced capacity to pay, offering indemnity against default.

Dollar weakness.

The weakening Dollar tends to be accompanied by an increase in the gold price. Because gold is a Dollar denominated commodity a weaker US currency makes it cheaper for investors holding other currencies. This tends to increase gold demand, causing the price to increase.

Currency speculators believe that Dollar weakness is here to stay.

As a result there is rising interest from these speculators in buying gold.

Greed.

Notice how every single newspaper is running daily stories about the record gold price? Everyone wants to get in on the act, the old herd mentality, causing gold?s performance to be self perpetuating.

$100 oil.

When oil goes up, so does gold. Because mining gold is energy intensive, the cost of mining gold will increase as the price of oil goes up. Both oil and gold are commodities and are largely affected by the same stimuli.

As energy prices rise inflation goes up and, because of gold?s status as inflation hedge, so does demand for gold.