By David Lew
The rally in gold has spurred a commodities boom. Some big commodities investors like Jim Rogers are laughing all the way to banks, for they must have minted millions out of the investments they made in commodities years back. Gold, indeed, is the main driver of the commodities boom these days that investors like Rogers are enjoying.

But how long will this boom continue? Where is gold price headed? The upward rally in gold has prompted most bullion analysts to predict that the yellow metal prices will cross past the magical $1150 per ounce mark. Some say it will surge to $2000 by 2010. They include Jim Rogers who is insisting that gold is set to touch $2000 soon, though the erudite investor Rogers is not willing to put in money in gold at this high price.

So what is behind this big rally in gold prices? Around this time last year, gold prices were hovering at $ 800-plus per ounce. Those who had invested in gold at that time have made a clean profit of $ 350 per ounce of the precious metal. Lots of money, indeed, if you had bought few ounces of gold.

But how far is this gold boom going to last. To be frank, I feel the gold boom is artificially made, to a large extent, by clever bullion traders and speculators at several commodity exchanges across world led by the US Comex, who are selling gold contracts these days frantically to make lots of money.

One argument for the surge in gold prices is that the US dollar value has been plunging thanks to the collapse of several banks in America and the great ‘economic depression’ that have hit the world’s wealthiest and powerful nation. But US being the largest gold holder, the value of the yellow metal going up has increased the valuation of US reserves.

Another argument for the big rise in gold price is the fact that central banks across the world are frantically buying gold reserves in an attempt to get rid of US assets held in dollars. Is it a correct strategy for the central banks? India’s Reserve Bank of India (RBI) surprised the bullion world early this month by buying 200 tonnes of gold from the International Monetary Fund (IMF).

Here is a note on central banks buying gold that was published in Commodity Online last week:

While it may be true that some central banks may show interest in adding gold as a part of their reserves, it is important to look at the whole picture, said Matthias Detremmerie, director and precious metals analyst at Goldessential.com. The central banks that are touted as buying candidates are mostly limited to emerging countries such as China, Brazil
and Sri Lanka. Even India falls under this denominator.Detremmerie added that there were two important consequences. One is that these emerging nations are not likely to cause a paradigm shift in the global gold-as-reserve picture over the longer term. Whereas 200 tonnes may sound as quite a lot, it is actually limited in terms of global official gold holdings, which are estimated to be around 30,000 tonnes. A shift in the whole picture is also unlikely due to the second reason, being that mature central banks - and thereby currently the largest official holders of gold - are likely not to significantly increase their reserve exposure to gold, he said.

Currently, most of the world's official gold holdings are situated in the U.S. (approx 8,133 tonnes), the Euro-zone (10,800 tonnes) and the IMF (roughly 3,000 tonnes, after subtracting the recent 200 tonnes sale to India's Reserve Bank.). Certainly, the U.S. and Europe have been hit the hardest by the financial crisis. Both are left with budget imbalances for many years to come following the financial aid to the ailing economy, Detremmerie added.

Therefore, it seems viable that some of Europe's central banks - which can act separately on gold sales under the limitations of the Central Bank Gold Agreement -, are going to look for opportunities to fill the gaps. There's good evidence that central banks are well aware that gold could be nearing a cyclical high, and that it could be profitable to unload some of it, as it is what any sensible investor wants to do; buy at the bottom, sell at the top. Even for central banks, gold implies a wanted profit-post on balance sheets.

Now that everyone is talking about gold at $200 per ounce, the people who are struggling with the yellow metal are those who want to buy gold jewellery ornaments. For instance, in countries like India where buying gold ornaments is a must social custom, the high gold price has turned out to be a big blow to parents.

In fact, the high gold price has led to a plunge in gold jewellery sales and gold demand in countries like India and China, two of the largest consumers of the yellow metal in the world.

Check out the report on gold from the World Gold Council here:

According to World Gold Council (WGC), total identifiable gold demand for the third quarter 2009 reached 800.3 tonnes, or US$24.7 billion in dollar terms, up 15% from the second quarter, as gold's long-term store of value and wealth preservation qualities continued to attract investors and consumers. Jewellery and investment demand in non-western markets rebound from the very low levels seen in the first quarter, while industrial demand started to recover in response to an improvement in economic conditions.

However, the Q3'09 Gold Demand Trends Report, released today by the WGC, shows a 34% drop on year earlier levels due to an exceptionally strong Q3'08, which saw soaring demand in response to the deepening global financial crisis and as many non-western markets responded to a dip in the gold price in that quarter. To address this, WGC compared Q3'09 against the five year Q3 demand average to 2007, which showed tonnage down just 4% on this basis.

Everyone knows that high gold price will further dent the jewellery market across the world, as it will be tough for people to buy gold ornaments.

2008 was the year of credit bubbles, in the United States and rest of the world. Will 2010 be an year of bullion bubble? Will gold price, instead of going up to $2000 per ounce as predicted by Jim Rogers, plunge to $800? Some bullion analysts believe and insist that gold prices will fall, that too drastically.

It is not a doom scenario for gold because gold at $800 per ounce is also good money, says one such bullion analyst Marc Robinson. “Gold prices cannot go up like this without any reasonable bullion fundamentals. Gold price is on a bubble. It can burst any day, any time. In fact, the most realistic gold price is $800 per ounce,” says Robinson.

So should we wait for $2000 gold or $800 gold? Will gold crash to $800 or surge to $2000? Remember the crash of 1978-79 when gold, crude oil and diamond prices went up and suddenly crashed down.