Recently, we had felt that gold would trade sideways for a time, within a band. It appeared to do so for some time.

Then, a power cut to some of the larger South African gold mines apparently caused the metal to spike rapidly in price.

Admittedly there had been talk of increased inflation concerns, but it was the immediate threat to supply that appeared as the major price booster.

It may seem amazing that the world price of a key commodity could experience such a price hike on what appeared to be a very short-term, local interruption in production.

But it is not just a phenomenon of our modern world.

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When I was in the military, I served in the Grenadiers of the Royal Guard. While in London, one of our duties was to provide a night Piquet, or guard, at the Bank of England.

After entertaining my dinner guest I normally requested a tour of the Bank for him. It was fascinating to see the treasures in the Bank, from its beautiful Roman based foundations to the gold Bullion, piled in heavy and alluring bricks in the spacious vaults.

But perhaps the most intriguing aspect was to see the magnificent Court Room, in which the Court of the Bank decided upon the price it would pay for gold.

In a place normally occupied by a clock, set into the wall above the impressive main fireplace, was not a clock but a wind compass, which indicated the direction of the wind moment to moment.

"Why a wind compass?" my guests would invariably ask.

The answer has a lot to do with the price of gold and South African mining, as it happens. And, interestingly, oil, food, nearly every commodity you can imagine. Eventually, corporate profits, naturally.

The wind compass tracked the wind direction in the English Channel. For many years, wind had an important impact upon the time it would take sailing ships containing gold to reach London.

This time difference, of a day or so, was felt to be significant in setting the price of the Bank's gold market bid — important enough to demand an impressive wind compass — now of course just an interesting and rare antique!

My point is that the price importance of "delivery time" has not changed, despite our modern age.

That's because computers have enabled corporations, both wholesalers and retailers, to reduce their inventory costs to the barest minimum by engaging in what is termed "just-in-time" inventory practices.

Today, the inventories carried for most products stand at a minimum. The relationship between sales and inventory size is so sensitive that even a short-term interruption of supply can have an instant impact on sales availability and, therefore, potentially on price.

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In other words inventories are now so slim they offer little "cushion effect" to an interruption in supply.

Added to this is the increasing demand of vast new populations, especially in Asia, who have entered the world of free enterprise and are now accumulating considerable aggregate wealth.

People who once traveled by bicycle now use a motor scooter. Those who ate chicken now order beef. Those who ate rice now want bread and other wheat products. Those who survived on water of questionable purity now drink milk.

Major demand patterns of the world have changed dramatically in just a few years.

The speed of this change in gross world demand has taken many producers by surprise and has caused supply shortages.

It takes time to clear more land, grow and harvest more grain or livestock. To construct a new refinery, food processing plant or mine, takes many months or even years.

Therefore, in the short-term, demand for many products is outstripping supply, driving rapid price increases.

This has also helped to make inventory increases more difficult. Today inventory levels tend, in places, to be so low that they can provide almost no "cushion" to even the briefest interruption in supply.

So, back to gold.

There are basically three main sources of demand for gold: industrial (the largest, including jewelry); investment (store of value) and panic (insurance against political/financial catastrophe).

One of the major historical industrial demands for gold has been for jewelry, particularly from India and other "gold respecting" parts of the world.

As the wealth of literally tens of millions of Indians (who account for some 30 percent of world gold jewelry demand) and others in the new, free enterprise Orient has increased, so has their demand for gold jewelry.

In aggregate this represents not just a large demand for gold, but a rapidly growing new demand.

I have little doubt that it has played a key role in driving the gold price upwards.

As the industrial demand for gold has risen, too, so has its sensitivity to supply interruptions has also risen, almost unseen.

It is tempting to see the recent gold price hike of the past few days as evidence of rising inflation. However, although I see stealth inflation, I feel that the recent price hike in gold is primarily due to industrial supply sensitivity.

I still feel, however, that short of a major item of inflation or catastrophic news, the price of gold, in the short-term, may well ease back to trade sideways for a while.

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