These are questions that haunt market analysts for the past one year. Still there seems no end to the crave for gold among buyers. Indians, who normally stay away from gold when the prices are above  Rs 15,000 per 10 gm, bought 56 tonnes of gold during the Diwali week, throwing recession blues to the wind.

Then investors thought after Diwali, the main occasion for Indians to buy gold, the gold prices will come down and the demand for the yellow metal will ease. No way! Things are back to square one with more and more people rushing to buy the yellow metals whereas the supply is not matching the demand.

Net long non-commercial and non-reportable positions on COMEX, a proxy for investor flows, rose to an all-time high of 27.58 million ounces at the end of September, according to the World Gold Council.

And it is no longer only the exchange-traded funds (ETFs), which pushed prices up in 2008, piling in. Quantity of gold that ETFs have added in the past few months has stayed fairly constant. While gold ETFs added 440 tonnes in the first quarter of 2009, the amount added since then has dropped to 29 tonnes.

The high price of gold is being supported by the weak dollar and aided by speculation about its future as the first-choice reserve currency for trading commodities such as oil. Fears about inflation next year are helping, too, although neither of these is enough to explain fully its popularity. The gold spot price rose much more quickly than US inflation expectations for the next five years in September.

Analysts believe that the price will stay around the $1,000 mark on average for the next few years.

However, supply should not be constrained in the near future. Although output in South Africa, the world’s biggest gold producer for most of the past century, has slowed, China has come forward to take its place. The burgeoning scrap market should also ensure that there are few supply problems in the short term.

At the same time, physical demand for gold is low. The appetite for gold jewellery has slowed around the world, with America particularly badly hit, and it is unlikely to pick up until prices fall substantially.

Sentiment is playing a key role in boosting the price of gold, which might be useful for a short-term trade but not for a long-term play at the moment..