The Fed-induced stock market rally might be fizzling, but gold is holding onto its recent gains: It rose another $26.60 (U.S.) an ounce on Thursday, to a 2012 high of $1,726.70. That marks an 11.4 per cent gain from its level at the end of December, when it sat at a five-month low.

The most recent uptick came in response to the Federal Reserve’s monetary policy statement on Wednesday, when it extended its timeline for keeping interest rates at exceptionally low levels likely until late 2014. That, of course, gets some people thinking about inflation – and gold is apparently a great hedge against that threat.

But with the Fed expecting that inflation will possibly slide below its newly stated target of 2 per cent, there is probably something else going on here. Ed Sollbach at Desjardins Securities has an interesting theory: With short-term U.S. government bonds yielding less than the rate of inflation and Fed apparently on hold for the next three years, the opportunity cost of holding gold just went down.

“With 3 per cent inflation and accelerating U.S. economic growth, and the Fed at zero for three years, investors in short-term U.S. bonds will lose 9 per cent to inflation over the next three years with zero rates, suggesting a lower U.S. dollar,” he explained in a note.

“Real rates at minus 3 per cent make zero-yielding gold more attractive, which is why gold spiked C$80 and the U.S. dollar fell yesterday. We now believe we may have been too conservative with our C$1,880 gold target for 2012. On the margin, a weaker U.S. dollar and stronger growth is positive for the whole commodity complex, including oil, but negative for defensives, especially low-yielding staples.”

The other theory behind gold’s gains? Some observers believe that the prospect of another round of quantitative easing is back on the table. That’s good for gold because QE involves printing money to buy government bonds – and nothing gets gold investors more excited than a money printing press in operation.

From Calculated Risk: “The current [Federal Reserve] projections are for unemployment to be significantly too high for years and inflation to be at or below the Fed’s target. That is a strong argument for additional monetary accommodation.”

From Tim Duy: “We need to be patient for the minutes where we can expect to learn more about QE options, and I agree with Calculated Risk that the Chairman paved the way for additional QE, assuming of course that the economy does not show immediate signs of improvement.”

Intellpuke: This marketblog was written by Globe and Mail journalist David Berman; you can read it in context here: www.theglobeandmail.com/globe-investor/markets/markets-blog/gold-gets-giddy/article2316273/