There are many factors involved in setting prices, some in opposition, and some more popular at times than others. But at the end of the day, prices rise because demand is rising and supply is not.

In their Weekly Comment (Nov 13) on Gold, Credit Suisse states:

"Our studies indicate that gold supply in the long term is inexorably falling behind demand as the diminishing number of new reserves fails to compensate for dying mines. This has been happening for some time but, until recently, the effect has been masked by Central Bank sales and producer hedging. However, Central Bank sales will likely whither, and Banks could become net buyers of gold. This transition, together with expected increased investment demand, jewellery consumption and diminishing mine supply, will be when the supply-demand imbalance heats up the gold price. We believe this has already begun.

Some of the major drivers, which collectively support and provide upward pressure to the price of gold, are:

• US economic fundamentals " the US$ underpins the gold price. There continues to be a raft of reasons and arguments from economists against the long-term health of the US$. These include: the massive and rising debt and current account deficit; looming crisis in Social Security; the rising budget deficit; and excessive household debt.

• High energy and commodity costs " these cause inflationary pressures that result in upward pressure on the gold price (because of gold's inflationary hedge characteristics). The significant increase in commodity costs means high capital sums are required to exploit mineral reserves, which is likely to deter investors as project margins are squeezed.

• Global supply and demand factors " mine supply will likely continue to decline significantly over the next 10 years. Global gold producers are depleting reserves faster than they can discover them.

• Official Sector supply (Central Banks) will likely decline significantly, particularly after 2009, and many countries could increase their gold reserves in the future (China, Russia Japan).

• De-hedging is likely to continue to draw on supply.

• Fabrication " the demand for jewellery and other areas of fabrication fairly remains strong. China's consumption is likely to increase significantly over the next 10 years.

• Investment demand is likely to continue to increase significantly through bullion-backed securities (Exchange Traded Funds ETF's) and through Comex and Tocom. ETF's are now acting as a "Peoples Central Bank", buying gold, thereby taking gold out of the system and countering Official Sector sales. The total investment in ETF's, bench-marked against Central Bank holdings, now ranks No 11 " at 585 tonnes.

• Geopolitical turmoil " global hot spots: terrorism and political tensions cause short-term volatility, putting upward pressure on the gold price. (Middle East Iran, Iraq and North Korea).

We believe the US$ will continue to underpin the gold price. However, supply and demand factors will begin to make their presence felt to such an extent that they alone (or in combination) could trigger a quantum upward change in the gold price, enough to sustain a new gold price US$ equilibrium.

For the record, Credit Suisse has dropped their gold price forecast (made in May) for 4Q06 from $690 to $630 (which is obvious since half the quarter is now gone), and from $700 to $665 for 2007, from $725 to $700 for 2008. and from $767 to $751 for 2009. But for 2010, they kept the forecast at $800.

From where I sit, traders now ought to be looking at buying into those asset rich junior and intermediate producers and the companies holding huge as yet undeveloped resources. In a Gold Bull market, the seniors that have falling production and depleting resources will be the ones on the acquisition trail. In every case, we have seen huge premiums paid by the senior companies, and their share prices have taken major hits as and when take-over bids are made.

Of course, take-over premiums are already built into the market, but on the pull-backs, that's where the values will lie.

Also, the producers that have declining production, rising costs, and relatively high cash costs at present, are the ones traders ought to avoid.

There are also several major producers that are rapidly trying to de-hedge, which means that as and when the gold price pulls back, they are going into the market and buying back some forward production they previously sold. That will drain future cash flow and profitability, so traders have to watch this situation as well. I'll write something on it later.

Unfortunately the latest gold reports I have from BMO, UBS, and Credit Suisse are too large for my web publishing system to handle, and I don't have the time at this point to use the eSnips service.