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Falling sales by Western governments have also trimmed supply and supported further gains in the gold price. This trend should continue in 2007.

European central banks sold only 396 tonnes of gold last year, against an agreed limit of 500 tonnes. Emerging economy governments, meanwhile, are buying gold for their central bank reserves. The details are secret, but analysts guess that Russia bought 8.7 tonnes of gold between August and October, while Middle Eastern governments, flush with petro-dollars, may have bought 100 tonnes in 2006..

Trying to forecast 2007 demand and supply like this, however, misses the crucial point – why would anyone want to buy gold in the first place?

The uses of gold against 'financial innovation'

The metal is famously useless, with few industrial applications. New compounds are replacing it in dentistry, and the yellow stuff will never pay you a dividend. Indeed, gold costs you to own it – in storage and insurance fees. Add a minimum 2% surcharge from the gold dealers, or the stockbroking charges should you trade gold ETFs such as Kotak, StreetTracks or LyxOr, and gold soon looks like a losing trade – unless the price rises in terms of your local currency. And therein lies its potential today.

Gold cannot be made at will, no matter how pricey it gets. This is why people across the world have used it as a store of value for 5,000 years or more. Gold's utility is simply that it is rare – an attribute of money that no longer holds for dollars, pounds, euros or yen. Gold is also the most popular investment in India, remember, the world's second most populous country. Private demand from the sub-continent accounted for one ounce in every five sold anywhere in the world last year. But what do Indian investors think they are getting when they buy gold – and what might you get from the yellow metal if you buy it today?

Well, gold acts as "a global currency," says Anthony S.Fell, chairman of RBC Capital Markets in Toronto – "the only one that is freely tradable and unencumbered by vast quantities of sovereign debt and prior obligations." Royal Bank of Canada now trades gold off its currency desks, rather than viewing it as commodity. If you look at the flood of paper assets now washing across the world's financial markets, you can why.

A barbarous relic of debt-free simplicity

India's money supply, for example, has surged more than 200 times over since 1975, helping to knock the value of the rupee down from 8 per US dollar to 48 per dollar. Here in Britain, the broad money supply is rising at 14% per year, faster than at any time since 1991 and well ahead of every other major world currency. But the supply of stock market securities, bonds and complex derivative products is rising faster still.

"Financial innovation in the last few years has been extremely strong and powerful," says Gilles Gilcenstein, head of asset management at BNP Paribas. "We've seen that in credit derivatives and equity derivatives, trackers, certificates..." Financial innovation is now so rampant, in fact, that derivatives weigh in at $340 trillion altogether, more than eight times the value of all goods and services traded in the real global economy last year.

Today's bubble in novelty and complexity is sure to blow up – if not in 2007, then all in good time. You might like to hold gold as insurance. For the "barbarous relic" – so beloved of apparently naive investors in the booming economies of India, China and the Middle East – is the ultimate antidote to "financial innovation". Nobody's promise, gold is also no one's to create.

And while you're waiting for the mountain of debt and derivatives to explode, you will own a secure physical asset likely to keep rising in value, thanks to the simple rules of supply and demand.