What gold is telling us about the direction of interest rates

The price of gold is on the rise, gaining around 10% in the past two months, and almost 30% since early 2016. At around $1,330 an ounce, it is not far off hitting a four-year high against the dollar. Being priced in a weak dollar helps, but the key driver for the increase is the inflation scare, which has reminded investors that an ounce of gold has maintained its purchasing power for thousands of years.

Gold's "great virtue is its ability to hold its value", says John Authers in the Financial Times, but its renewed lustre isn't merely about inflation jitters. It also reflects "a lack of fear of the Fed [Federal Reserve]". Gold has no yield, so if interest rates rise rapidly it becomes less appealing than bonds or cash, while inflation would be squeezed out of the system. Gold's latest upswing, then, suggests that people don't think the US's central bank will move quickly enough to nip inflation in the bud.

Given central banks' lousy record recent history shows they are always caught on the hop this seems to be a very reasonable bet. There are also plenty of potential geopolitical flashpoints that could boost demand for the traditional safe haven, while rising wealth in emerging markets should prop up the long-term jewellery demand. Gold has further to go.