All that is glittering is really gold. International gold prices have moved above $1,000 an ounce a few days ago. After living through an environment of credit-fuelled over spending, the rational response is to consume less and save more. However, there are fears of inflation looming large with further increases in credit, and easing up of monetary policies. Most people now want to avoid pain at any cost. Gold seems like a good option to park funds in these trying times. It helps people fight the fear factor and provides a comfort zone.

Now that gold is being traded on the Net, and exchange traded funds are gaining ground in the country, investors are hedging their bets by putting more money in gold.

According to reports, gold may hit a new high of Rs 17,000 per ten grams in weeks to come. This inspite of the rally in the stock market. A weakening dollar also fuels investment in gold. Gold prices did not crash even during the peak of the crisis when the stock market tanked and the real estate business went belly up. Gold is not a bubble, says an investor.

In spite of the arrival of gold funds and trading on gold online, people in India buy gold as a safety Net. Facts and figures vary. But it is said that gold holdings in India are almost one third of its GDP. According to the World Gold Council?s estimates, Indian households own about 15,000 tonnes of gold, accounting for about 10% of the world wide stock. India?s share of global gold demand is higher than that of the US. Indians hoard gold.

So do the Chinese. Growth in the value of private gold purchases has consistently outstripped China?s GDP growth every year since 2001, when retail-price controls were abolished. In the first-half of 2009, private gold buying in China actually overtook India to become the world?s number one market. The Chinese also share the Indian obsession of buying jewellery.

Apparently jewellery buying has more than doubled in China in the last five years.

There is a fear that the zooming gold prices may affect the jewellery business in the country. Analysts feel that the current high prices may have prevented consumers from going for gold especially after all the fear mongering about drought. So are people buying less jewellery in the country now? The jewellery trade with a few exceptions is still quite unorganised and no jeweller will reveal his figures or margins.

The industry is characterised by labour intensive operations, working capital and raw material intensiveness and of course the price volatility of gold. It is also getting increasingly export oriented. Demand for gold and diamond jewellery is driven by festivals and weddings, increasing affluent and middle class population, increase in per capita spend on luxury items and so on.

Did the economic meltdown make a deep dent in the jewellery business in the last few months? Not quite, say people in the trade. The downturn affected people who were dependent on the American economy. There is a whole chunk of Indian economy which is not. Think of rice traders, people in cement, infrastructure. They did not stop buying gems and jewellery. About 80% of the jewellery business consists of gold. There has been a lot of volatility and so business did go down a bit starting last September. But it was manageable, particularly for the larger retailers. Tamil Nadu, Kerala and Andhra are?as is well known?major buyers of gold jewellery. One could not see thinning crowds in any of the retail outlets in these states. When the price goes up, customers wait for a couple of days. Once they are convinced that there will be price stability for some time, they come back to the shop.

Most big time jewellers say they do not speculate on gold. If they buy gold when the price is high and are faced with a situation when it suddenly drops, they will sell low and buy back gold immediately.

So they compensate for the highs and lows.

There is also the school of thought that gold is not a great investment. In the last 20 years, gold price has gone up from $400 to $1000 per ounce. which means a compounded growth rate of less than 4% per year.

Indian prices have gone up higher due to the dollar rupee exchange rate variation. In 1991, the dollar equalled Rs 18. Today it is at Rs 49. So if one thinks that the same trend will continue over the next 20 years, it is better to buy dollars and speculate!

However gold often moves in the opposite direction to the dollar, as it is seen as an alternative to holding the US currency. Some market players are not very sure about gold prices sustaining at $1,000. They think that the rally had been driven by speculators and gold at this price is an expensive buy in historical terms. Gold futures have topped $1,000 nine times?three times this year and six times last year, including a record $1,033.90.

Gold does not really earn anything. It does not have an economic value. It does not have economic utility like copper or coal. But gold is an emotional buy. You may never sell your family gold. But you feel good that you have it and that you can turn to it when you have a problem!