Have you seen how Indian rupee has fared against dollar? $ has lost nearly 20% against the indian currency within around a year. Gold has increased close to 15% during the same period. So demand for gold from the jewellery industry (majority of it coming from the sub-continent) from a price point of view has actually increased from mid 2006.
Much of the Rupee appreciation against $ happened during mid-late 2006. Although $ depreciated against other currencies in 2005-2006. That is the reason why gold did’nt breach the 2005 high of 720 in 2006. We have to look at the loss in monetory value of fiat currency along with the demand to understand its price moves. Currently investment demand (due to people buying gold to hedge against $) is low compared to jewelry demand (around 70% last time I checked). But this might change very soon as Rich noted. This will need central banks, individuals start putting portions of their assets in gold. Last I checked the european banks are still selling their gold reserves. But if $ keeps depreciating against rupee I think the jewellery industry can easily prop up the prices until people realise and push up the investment demand