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Gold Outlook: One Factor You Must Watch

Gold is up again todayon several factors: 1) end of month buying, 2) speculation that the European Central Bank is unlikely to raise rates, meaning rates will stay low in the U.S. and Europe for some time, and 3) Chicago Fed's Evans endorsing low rates for some time to come.

Gold and Other Money Metals - A CNBC Special Report
Gold and Other Money Metals - A CNBC Special Report

Where will gold go from here? No one can give you a sureproof answer to this question, but here's two different ways to think about it.

1) Watch the women of India. They are the largest purchasers of gold in the world, and they are no fools. The issue is not whether gold will go up or down, but whether it is currently cheap or expensive compared to other investments.

The price of onions. I spent some time a short while ago with AngloGold Ashanti CEO Mark Cutifani at his office in Johannesburg, South Africa, who has spent a lot of time talking to Indian gold consumers.

He notes that they view gold strictly as an investment, and compare it to the cost of other commodities and investments. Like onions. Like fuel. And like real estate.

(How do commodity futures work? )

"So they're triangulating a basket of commodities against the price of gold so with inflation going up, for thousands of years, they've worked out what gold is in relation to the things that matter in their life and they see gold as volume against the price. And that's how they get to the price of gold. At the moment, they're saying, gold looks pretty good. On a relative basis, it's holding its value."

Notice how carefully Cutifani chooses his words: at the moment, gold looks pretty good. On a relative basis. That means that if inflation stops, and gold keeps going up...it will be less attractive as an investment to Indian investors. Or if real estate suddenly drops in price, while gold keeps going up, real estate might be a better investment.

So look for signs of "buyer fatigue" in places like Asia and the Middle East.

And remember, gold has competition from its eternal nemesis, silver. This is happening in the United States, where demand for gold jewelery again declined in 2010 as consumers shifted to more affordable silver jewelery.

2) Look at gold as a play on paper currency. Aside from demand issues, John LaForge and Chay Norbom at the respected Ned Davis Research firm have made what I think is a correct observation: the peak price of gold will reveal itself in the currency markets.

"Gold's bull run reflects a lack of trust and credibility in governments and central banks worlwide to stop printing paper money at will. We believe this because gold continues to rise versus every currency we track--developed country and commodity country currencies alike. Until governments start enacting more sound money policies, gold should continue to rise. Gold's ultimate demise will come when confidence in paper currencies returns, which forecast is not today."

Want more on the history of gold and how the gold business operates? Go to my special report for CNBC.comThe Golden Age, on the home page of CNBC.com.

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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