While gold demand set a record in dollar terms for demand in 2007, the end of the year was marked by sharp curbs in demand caused by the volatility of the gold price.

According to the report:

A steady annual increase in overall identifiable gold tonnage demand, coupled with a gold price racing towards the long held $850 oz record, combined to make dollar demand for gold hit a record US $79bn in 2007. Identifiable gold demand in tonnage terms was 4% higher in 2007 than in 2006 at 3,547 tonnes.

China has now overtaken the US as the second largest volume retail market for gold jewellery after India, with demand for jewellery reaching 302 tonnes. In Turkey and the UAE 2007 brought record overall demand for gold in tonnage terms while strong growth continued in Russia with jewellery demand rising 11% to set a further annual record.

However, high and volatile gold prices had a major impact on the fourth quarter with identifiable demand falling by 17% in tonnage terms from year-earlier levels. This trend was most keenly felt in India, the world's largest and also most price sensitive gold market, where Q4 demand fell 64% on year earlier levels following 40% growth in the first three quarters. The US was also negatively impacted with a combination of a weak economy, poor retail environment and record prices denting jewellery demand which for 2007 as a whole stood 14% down on 2006 figures.

It would appear the record high prices have stymied India's demand, but I think this is a case where the market has become paralyzed by prices never before seen - a situation that will correct itself once the realization sets in that the gold prices of the 90's are a thing of the past.

Price shock is one of the risks inherent in a rapidly appreciating commodity, and is often the signal of a top, or at least a pause, in the commodity in question's growth, as traditional buyers and end-users of the product take a moment to adjust to their new reality.

Investment demand set a new record at $8.1 billion, the largest quarterly net inflow of investment in gold since the onset of the current bull market.

The report continues:

For 2007 in total, net retail investment (defined to exclude investment via Exchange Traded Funds which is discussed separately) amounted to 405.3 tonnes, 2% higher than in 2006 (and 14% higher in dollar terms).

Four countries account for the bulk of this category and these, together with China where the process of de-regulation is finally lifting the barriers to such investment.

Overall net retail investment has been on an upward trend in recent years driven by the growth in India, Turkey and Vietnam. Expansion in these three countries has been more than sufficient to counter the impact of net Japanese retail investment swinging from positive to negative from 2006 as investors started to take profits.

In 2007 growth was fastest in medals and imitation coins (up 22% due to rapid growth in India which accounts for the bulk of this category). Bar hoarding rose by 5%, with official coins falling by 3% as demand in the USA fell back from 2006 levels which had been boosted by the introduction of the Buffalo coin.

Growth in 2007 was concentrated into the first half of the year. In Q4 net retail investment, at 67.0 tonnes, was 39% lower than in Q4 2006 as holders took profits. The fall was concentrated in medals and imitation coins and in bar hoarding and reflected lower net investment in India and Vietnam along with an intensification of selling back in Japan. Investment in official coins was unchanged from a year earlier.

My question is, if demand fell so sharply during Q4 of 2007 in both retail and investment consumers, what is driving the price so consistently upward?