Conventional wisdom says the main reason why gold prices are rising is the loose monetary policy out of the developed world and a loss of faith in fiat currencies like the U.S. dollar.

While loose monetary policy does contribute to higher gold prices, a bigger factor is at work, according to Amit Bhartia and Matt Seto of GMO LLC.

Seto and Bhartia think that since around 1999, the huge gold rally has largely been on the back of surging demand from emerging market consumers.

Consider the chart below, which shows that gold has not strongly tracked changes in U.S. inflation and inflation expectations since around 1999.

Gold prices are, however, nicely correlated with the Emerging Asia's share of global gold demand.

From 2000 to 2010, retail purchases from emerging market consumers accounted for 79 percent of total global gold demand. Developed markets consumer demand, meanwhile, only accounted for 25 percent of total global demand.

In recent years, some have also pointed to the financialization of gold (i.e. the creation of gold ETFs) and buying from central banks to explain the rise of gold prices. However, gold ETFs only accounted for 7.5 percent of total demand while central banks were net sellers during this period.

Several factors explain this surge of gold purchases from emerging market consumers.

From 2000 to 2010, as emerging market economies boomed, so have the savings of their peoples; in China and India alone, combined gross savings rose from $557 billion to $3.4 trillion, according to Seto and Bhartia.

Emerging market consumers, however, have limited options to invest their new-found wealth. If they put it in the bank, their money could lose value because the deposit rate is often lower than inflation.

The domestic capital markets in their countries are often limited, immature and therefore risky. While Western financial markets are more mature, emerging market consumers often face restrictions in investing in them.

Because of all these factors - collectively known as financial repression - gold has emerged as one of the best options to store value and even generate returns on investments for emerging market consumers.

So what does this mean for gold prices going forward?

On the one hand, gold prices could fall if economic growth in emerging market countries slow or if emerging market countries relax their financial repression, said Seto and Bhartia.

On the other hand, demand from central banks and developed countries may be far from saturated, which potentially gives gold another leg up.

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