O mere sona, meri tamanna

Traditional safe asset, gold, has regained much favour during the year amid mounting political and trade risks, falling interest rates, and sustained demand as a reserve asset by central banks. The dollar, weakened by a wider US fiscal deficit and concerns over an assault on the Fed's independence, is adding to gold's allure by making it less expensive overseas. The rally in bullion prices - silver has surged impressively - is squeezing household purchases in traditional markets like China and India, as buying interest emerges elsewhere due to the softening dollar. Buying on dips by the Chinese and Indian central banks is acting as a counterweight to slackening demand by households.

The de-dollarisation drive is feeding the gold rally in the absence of a viable contender for a reserve currency. Emerging economies, which need an alternative to the dollar as trade among members begins to rival trade with mature economies, are unlikely to be able to provide one without some form of monetary integration. On its part, the US will not allow a viable threat to the dollar, and it will prevail. Gold steps into this standoff as a strategic reserve. This role becomes amplified with the persistence of geopolitical tensions. The US is now, ironically, resurrecting the world's confidence in gold after the final burial of the gold standard in 1971.

The global economy has gone through convulsions since it went off gold, yet the standard is unlikely to return. Inflation has been tamed in advanced economies, and monetary policy has reached a happy consensus. Governments have become extravagant and will find it tough to change their spending habits. Managed exchange rates have served the cause of globalisation. Trade and investment flows are now of an order that need to be sustained by floating currencies. The economic system since the gold standard is much more flexible and relatively painless to set right after shocks. Gold's comeback as an asset will necessarily have to be limited.