The price of gold has been on a steady upward trend for months. True, recently it has fluctuated, giving up some of the gains it has made. But the trend line has not been broken. It is telling a message which should not be ignored. The message is contained in the various possible replies to a basic question – why has the upward trend developed?

The question also arises from the essential qualities of the metal, and the extent to which they may be surmised to have influenced its price performance. The days when gold was a unit of account have long passed – even when it was so by proxy after the demise of the gold standard.

Similarly its role as a medium of exchange ended a very long time ago. It may be exceptionally so in particular circumstances.

For instance, the suggestion that the greedy wife of deposed Tunisian despot Zine al-Abidine Ben Ali went to the country’s central bank to demand a heavy load of the bullion from its vaults as she prepared to flee the anger of the uprising has never been verified.

It did indicate, however, that the lady felt she could exchange rescue from the citizens’ anger with piles of gold deployed in some foreign country. Nor has it been verified that Libya’s autocrat Muammar Gaddafi has resorted to paying his mercenaries with pieces of gold. It is an established fact that the Central Bank of Libya is sitting on a huge pile of gold bullion.

There have also been persistent reports that currency in circulation is drying up, both in the east, where the freedom fighters have their headquarters, and in the west, where Gaddafi continues to cling on to power.

But whether that has led to gold actually being cut up into small ingots to be used as a medium of exchange to pay for the mercenaries’ ugly services is another rumour that has not been verified.

There is no doubt, however, that gold does have its uses. Most definitely it remains a favoured store of value, both for central banks as well as for wealthy individuals. Demand for it for that purpose is heavily influenced by the rate of inflation and real return on top quality bonds.

Stored gold does not yield a liquid return. Or, if it does – since there are banks which pay a margin of interest on gold stored with them – it is very low. As such it has an opportunity cost measured by the going best rate of interest on triple-rated bonds. A more sophisticated measure is the real rate of interest on bonds.

The lower the rate of interest, or the real yield from bonds, the higher the inclination to turn to gold as a store of value, since the opportunity cost for doing so – the interest foregone – is minimal.

The latest upward trend in the gold price has ridden on the back of a very low interest rate regime as money authorities tried to nudge their economies out of recession into recovery and into a reasonable rate of growth. Meanwhile, inflation, though low, has tended to turn the real rate on prime capital paper into a near-zero or even negative rate.

Those who went for gold, therefore, suffered no or little opportunity cost relative to bond yields. On the other hand, with the recession mostly over and recoveries apparent in the main economies, albeit haltingly so in some of them, risk appetite has recovered and equity prices have gone up. The opportunity cost of holding gold when measured against equity yield has been substantial.

Why, then, has the gold trend line remained upwards? Gold buyers, some of them hoarders, some nimbly active operators, have continued to show a marked preference for the metal possibly because their reading of the situation differs from that of many analysts and of politicians. For one thing they recognise that the problem of sovereign risk has not receded, notwithstanding the vigorous measures taken by the European Central Bank and the International Monetary Fund. That being so the fearsome risk of contagion remains.

Another factor lies in the strength of the global recovery from the recession. Germany has recovered, definitely so as its rising exports show. But how many other major countries can be as confident? A third factor relates to the threat of inflation. Prices have been rising at a subdued rate, at one time giving rise to fear of deflation. That risk has not materialised.

Instead the pace of inflation has been picking up. The threat was fed by rising commodity prices, in particular under the buying pressure of China. When that appeared to ease in recent weeks commodities tumbled. Yet China’s exports continue to surge and its appetite for raw materials remains voracious. The gold price always reacts to actual or forecast inflation.

In addition to hedging and other investment considerations there remains a steady industrial demand for gold. All in all, while recently tested heights might drop somewhat, the overall demand for gold does not appear set for a collapse. Rather, gold continues to make a good case for itself.