Gold through its unique qualities such as its historic relevance and being an important monetary asset has helped investors in conserving their wealth in troubled times.

What is driving gold ?

After the recent crisis in 2008 the central banks world over are having easy monetary policies and trillions of dollars have been injected as economic stimulus to support growth and fight the recession. The easy monetary policies have resulted into excess cash and created inflationary pressures in major parts of the world. The Inflationary pressures lower the confidence of the investors in paper money leading many investors to buy gold.

Demand for gold has increased as the safe heaven after the equity markets and commodities markets turned volatile since 2008 and investors are now seeking capital preservation.

During the second qtr of 2011 the demand for Gold was 919.8 tonnes – worth US $ 44.5 Bn. This is the second highest quarterly growth on records. Central Banks purchased a net of 69.4 tonnes to diversity their foreign currency reserves to gold. China and India accounted 52% of global bar and coin investment and 55% of global jewellery demand. Y-o-y volumes growth in total consumer demand was 38% in India, 25% in China compared with a global growth rate of 7%.

China the largest exporter in the world has huge trade surplus which generates vast quantities of foreign exchange reserves. China buys huge amount of US treasuries to deploy its reserves but the recent downgrade by S&P of the US Treasuries and renewed concerns of high debt of US, China may diversify its foreign exchange reserves to Gold.

The Dow/Gold Ratio

Presently Gold is trading at 1870$/tounce and the Dow closed at 10818. The Dow/Gold ratio works out at 5.78 which Is much below its long term average of 10. The ratio dropped to 6 in the early 1989 and was as low as below 2.0 during the 1930s great depression.

The current situation in the US as well globally does not indicate a depression or a grim situation to warrant more downfalls in the global equity markets.