Gold is back in vogue with the spot price making a new all-time high this week after touching $2,147 an ounce, surpassing the prior peak seen in May 2023.

Meanwhile, oil is close to entering a new bear market with Brent crude prices dropping nearly 20% in the last month despite war in the Middle East and efforts by OPEC+ to restrict production and prop up the market.

There are many reasons which could explain the diverging price trends, but the overriding factor is the change in investor sentiment seen over the last month.

There has been a growing realisation among investors that the major central banks have finished raising interest rates due to signs inflation is now heading back towards target.

Since the softer-than-expected US inflation print on 14 November, stock and bond markets have turned in their biggest price gains of the year.

Over the same period the US dollar has dropped around 4% against sterling and the euro as markets begin to price in earlier interest rate cuts than expected just a few weeks ago.

Historically, gold tends to get a boost from a weaker dollar, which is playing a role in positive recent momentum, but there is another factor to consider.

If the US Federal Reserve decides to allow more time for inflation to come back to its 2% target it implies inflation could remain elevated for longer. This might be useful for another reason.

Given the high level of government debt built up during the pandemic, cynics might argue it is more palatable to pay off that debt with deflated dollars.

The Fed is trying to walk a tightrope to weaken the economy enough to bring down inflation without causing a recession – a ‘Goldilocks’ scenario – and markets now seem convinced the central bank is on track to achieve that goal.

However, that scenario may yet prove illusory as the impact from tighter monetary policy has arguably only just begun.

That’s because excess consumer savings from the pandemic and fixed-rate mortgages have so far shielded many consumers from high interest rates.

By some estimates, only a third to a half of the effects from high interest rates have fed through to the economy so far which means times could get tougher over coming months.

This could also explain the weakness in the oil price, as investors start factoring in a fall in energy demand as the world economy slows down.

Data coming out of China has been weaker than expected in recent weeks, while the Eurozone remains close to recession after contracting 0.1% in the third quarter.

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