Gold broke above $650 in European trade today, just minutes after the highest London Fix since Aug. 9th at $648.75 per ounce.

It also broke above £330 per ounce for the first time since late Nov. for Sterling buyers, and gold continued to trade above €500 for European investors. The Canadian Dollar has now sunk to an 8-month low versus gold, just like the Japanese Yen.

What's driving this sudden surge in gold demand?

The Russian central bank today reported that its gold and foreign currency reserves increased $1 billion to more than $302 billion in the week up to Jan. 19th.

But even if the Kremlin is growing the portion of its reserves held in gold, that in itself wouldn't explain this week's surge.

Mining companies are meanwhile buying back gold production they've already sold forward – before it was mined – adding to demand in the physical gold market.

"I'm hearing there are some buy programs," one Swiss fund manager told Reuters earlier. "That's why gold is quite well supported."

But good support doesn't explain today's leap above $650 per ounce. Take Gold Fields, for example, the world's fourth-largest gold producer. It's spending $528 million to claw back gold sold before it was mined from the Western Areas, a mine it just bought.

These forward sales of gold from the Western Areas were terminated at an average spot gold price of $622 per ounce. Gold has since risen to $654 per ounce today. That gap between the two prices represents a loss to the miners – and extra demand amid today's rising gold market.

But the new surge in gold demand can't solely be down to Gold Fields! Against the Australian Dollar, gold is now trading at its highest price since Sept. Versus the Swiss Franc, gold has now hit its highest levels since June.

How come?

Well, "overall we still have got a macro-economic picture that is relatively supportive for gold investors," as Michael Widmer, metals analyst at Calyon Corporate and Investment Bank, said earlier to Reuters. But his reasoning misses the point.

"You generally expect the US economy to slow down, a relatively healthy growth in the euro zone and a downward pressure on the Dollar...

"In such an environment, people might start to adjust their portfolio to put a little bit more gold in it and reduce the risk of being too exposed to a downcycle."

Oh really? Regular users of BullionVault's charts will know that gold has been rising versus all currencies over the last week, and not just the US Dollar. As noted above, it's reaching and breaching critical levels against the Pound, Euro, Yen, Swiss France, Canadian and Aussie Dollars.

So could gold's spike of May '06 – which took it above $720 per ounce – be set for a repeat or more? The risk of a US downturn is only one factor driving investors to buy the metal today.

For a full analysis of the gold market in January 2007, plus detailed news on likely demand and supply drivers right now, click here and read on...