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Gold is – finally – showing some signs of life. Despite a modest decline on Friday, the metal that feasts on bad news has enjoyed one of its best weeks in months, courtesy of turmoil in Iraq and Ukraine and early signs of a pick-up in inflation in the U.S. and Canada.

It's almost enough to make gold bugs think back to the glory days of 2011, when the yellow metal roared to record highs amid inflation worries and fears of a euro zone break-up.

Look more closely, though, and the recent excitement seems overdone.

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Yes, gold does hold some attraction for investors who are looking for a diversification strategy, especially when stocks are at record highs and the outcome in Iraq and Ukraine is still up in the air. But so does a much more humble, much more liquid alternative – cash.

For the metal to get some real traction, there would have to be signs that the recent run-up in inflation is the beginning of a sustained trend that would eat away at the value of paper currency and send investors scurrying to the haven of gold. For the moment, that seems like a forced interpretation of the numbers.

In Canada, the core index for consumer inflation, published Friday, showed a rise of 1.7 per cent over the past 12 months. In the United States, the most recent reading for the core consumer price index (CPI) hit 2 per cent this week. Both were above expectations but basically right in line with central banks' 2 per cent target.

Inflation watchers will be quick to emphasize the much more dramatic rise in the overall CPI indexes. Unlike the core numbers, these figures include such volatile components as food and energy. But even they are only slightly above the 2 per cent sweet spot.

The latest inflation numbers will no doubt force the Bank of Canada and the Federal Reserve to shift their rhetoric, putting a new emphasis on the risks that inflation will run above their targets. However, this shouldn't be taken as deep concern about the rising risk of inflation, because it's difficult to get an inflationary surge without a rise in real wages. In the U.S., workers' paycheques are struggling to keep up with inflation. In Canada, wage pressures "remain notably MIA", according to a recent note from Bank of Montreal chief economist Douglas Porter.

As for the euro zone, inflation there is still more a hope than a reality. The European Central Bank is wrestling with fears of deflation and the latest numbers this week show consumer prices actually declined in May from the previous month.

So what could spark a rise in inflation – and gold prices? One possibility would be a rise in inflationary expectations, but there is little evidence of that so far. Breakeven rates – the difference between real interest rates on inflation-protected government bonds and the nominal rate of interest on regular government bonds – have chugged higher in recent days but remain well within normal limits. That aligns with the Bank of Canada's most recent Business Outlook Survey, which showed 63 per cent of respondents expect only modest inflation of between 1 per cent and 2 per cent over the next two years.

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Inflation could also jump if national economies are running up against the limits of their productive potential, leading to bidding wars for resources. But the latest Economic Outlook from the Organization for Economic Co-operation and Development indicates there is still a significant output gap between what countries are producing and what they could produce. "This will keep inflation low, especially in the euro area," it says.

All of this suggests a world in which gold, the classic inflation hedge, is unlikely to shine. Investors should play this rally with caution.

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