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Conventional wisdom says the price of gold will track inflation because the precious metal represents the ultimate store of value.

Of course, the theory breaks down when looking at the numbers since 1999. The price of bullion has climbed from $300 an ounce to $1,664 (U.S.) an ounce today, while inflation has remained between zero and 5 per cent.

Amit Bhartia and Matt Seto, of the investment management firm GMO LLC, offer an explanation, saying prices have been driven not by monetary officials debasing their currencies or central banks hoarding gold bars, but by consumers in emerging markets.

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Between 1999 and 2010, emerging Asia increased its share of global gold demand to 57 per cent, from 39 per cent, they say, quoting data from the World Gold Council.

During that period, a total of 29,342 tons of gold were purchased globally for both investment and jewellery.

ETFs accounted for only 2,200 tons, or less than 8 per cent, and central banks were net sellers.

But retail purchases from emerging markets amounted to more than 23,200 tons, or 79 per cent of total demand, "far and away the primary demand component over this period." China and India alone accounted for 9,000 tons, which was more than the developed world as a whole purchased, they say.

Mr. Bhartia and Mr. Seto argue that two factors have driven demand from emerging market consumers: greater savings rates and "financial repression" of the population.

They write: "Because of capital controls that severely restrict money outflows, Chinese and Indian residents are essentially forced to either deposit their savings in a bank or invest in local equities. Governments regulate deposit rates, forcing negative real rates. Moreover, local equity markets are often incomplete. The recent dismal performance of these equity markets has not been encouraging either. Gold jewelry and gold bars, along with real estate, are the most prominent among the few alternatives."

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