"The last few weeks ought to have been stellar in the gold market. And, sure, as of yesterday, gold was decisively up from the mid-$700s a troy ounce, where it had been trading when the black days began. But that increase hides some weird goings-on.

Back on Black Monday, when Lehman filed for bankruptcy and shares of AIG (nyse: AIG - news - people ) dropped like a stone, gold hardly budged. On Black Tuesday, when the Reserve Primary Fund broke the buck, gold only managed a medium-tepid rally. Finally, on Really Black Wednesday, as the SEC shot the messenger by cracking down on the shorts, gold zipped up 10%.

But then on Utterly Black Monday, Sept. 29, when market skidded 7%, gold closed barely above $900. On Oct. 6, with a huge global washout in stocks, gold traded in the $870s. And now, three weeks after the crisis started, gold is still weakly flirting with the low $900s.

Need I say it? Shouldn't gold--during the greatest financial crisis since the Great Depression--be performing better? Jeesh, it hasn't even gotten close to this year's high of $1,000. Gold has a history of being safe-haven investment, but rather than a safe haven, it's looking suspiciously like an afterthought.

OK, maybe this isn't totally persuasive. But how about gold's other chief function in life--as an inflation hedge. Strange doings here, too.

When core Consumer Price Index increases were rather tame all last year, gold zoomed. It topped $1,000 a troy ounce in early March. But then, even as price indexes started warning about steeper increases in inflation, gold prices started drifting down--with a sharp fall starting in July.

My own moment of confusion came in August. The Producer Price Index for July showed a 1.2% monthly increase--that's tacked on to a 1.8% increase in June--bringing the annual rate of inflation to 9.8%. Ummm, that's getting uncomfortably close to double-digits. But gold barely moved up.

True, the relationship between gold and inflation seems to have come unhinged over the past few decades. From the late 1990s to 2005, for example, the nominal price of gold was below the inflation-hedge price.

This decoupling has generated lots of explanations--some worthy, some not. One of the most interesting is a paper published in 2006 by the World Gold Council. Two economists, Eric J. Levin and Robert E. Wright, looked at gold prices and inflation using data from 1976 to 2005. They scrutinized factors that might cause deviations: changes in the U.S. inflation rates, inflation volatility, gold's beta, credit risk, exchange rates, the gold lease rate and political uncertainty.

The answer? A one-to-one relationship between inflation and the price of gold in the long term--a 1% increase in inflation accompanied by a 1% increase in the price of gold. But the economists also found "considerable" fluctuation in short-term prices, and these fluctuations endure for quite a while. On average, it took five years for two-thirds of these deviations to disappear. Read the paper at gold.org.

Of course, as Keynes famously observed, in the long run, we're all dead. So allow me to suggest another view--one that makes sense if you look at supply and demand in the gold market in a slightly different way.
Please check out the pie chart below. Demand for gold for use in jewelry makes up well over half of total demand--65% to be exact. That towers over the second-largest demand slice of 15% for coin and bar. The third largest slice is 14% for industrial and dental uses.

Demand for gold jewelry from Asia and the Middle East has been gangbusting for the past several years. Put strong demand against the slide in supply (production has been declining) and prices are bound to go up. But jewelry demand is also very price-sensitive. Jewelry, after all, is a discretionary purchase. No surprise then that when gold prices started zooming early this year, demand went limp, falling as much as 25%.

In August, however, demand for gold started perking up. Most analysts attribute the bump-up to buying from India, the world's largest demander of gold for jewelry. September, October and November are big holiday months in India (and in China, the third-largest market). Gold bangles are exceedingly popular; they're usually worn in pairs on both arms.

All of this suggests it is retail demand that controls the price of gold, not investment demand. Unless, of course, there are tons of people who want to wear their safe-haven inflation hedges on their wrists."

Gold must make a swift gain to at least $975 per ounce and remain above that level on a consistent basis in order to reflect current financial market conditions. Until and unless bullion comes to be regarded as the only viable currency by all individuals, everywhere, the values being talked about in the perma-bulls camp are not in the cards. Whether or not the metal comes into play as an asset that central banks might seek to hoard or mobilize in their attempt to right the world economic ship, remains to be seen. At the moment, the metal remains vulnerable to margin call sales and to people seeking plain old, ugly, cash. To put into that shiny new Home Depot-bought safe.

Individuals are selling assets without being very discriminating these days. Bullion is in demand by buyers who have neglected to line their nest eggs with it previously - that, there is little doubt about. However, when we have the largest consuming country virtually absent from the demand table, and the we add the investors who are now resorting to mobilizing their previously acquired metal in order to offset losses in their equity portfolios, perhaps the current prices are not as unwarranted as they might seem. The clash continues. The crash...that's another story. One that the weekend talk shows will surely cover in great detail.

Hey, it could be worse. You could be a G-7 member sitting down to discuss what to do about the lives and livelihood of the billions of your compatriots. In the meantime, do not open the brokerage statement that came in today's mail. Not without a chair nearby.

Please note that Kitco Inc. will be closed on Monday, October 13, 2008 in observance of Canadian Thanksgiving Day and US Columbus Day. Also, please note that both US and Canadian banks and Postal Services will be closed for these holidays. This writer will likely remain horizontal for the day.

Happy Thanksgiving to our Canadian readers ! Let's give thanks for being alive, healthy, and for being together with our families.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.