When Jean-Claude Trichet announced a quarter-point jump in interest rates this week, gold and silver prices dipped as the European Central Bank chief emphasised his inflation-fighting focus.

GoldBut the two well-known inflation hedges were only temporarily dented by the tough talk; on Friday silver pushed above $40 a troy ounce for the first time since 1980 and gold pushed to a new all-time high in nominal terms at $1,474.19.

The metals’ rallies have clear links to rising fears about inflation. But recent predictions for silver to hit $50 and gold to breach $1,500 are based on more than just these fears.

“Both markets actually have surplus supply. Demand for both is good – particularly industrial demand for silver – but this isn’t enough to absorb all the supply,” says Suki Cooper, precious metals analyst at Barclays Capital. “That leaves the rest down to investor demand.”

Investors have indeed been piling in. Holdings of gold to back exchange-traded funds – the popular way for retail investors to gain exposure – jumped 19.9 tonnes on Thursday alone in the biggest single inflow since late January, according to Barclays. On the same day, holdings of silver jumped 42 tonnes to another record at 15,554 tonnes.

Interest itself has been triggered by a range of factors, not least geopolitical tensions. After a weak January, prices of the metals spiked higher in February when the unrest that toppled governments in Tunisia and then Egypt sent investors scrambling for havens.

During the financial crisis, investor fear manifested itself in strong demand for physical holdings. In spite of recent turmoil, there has not been the same scramble to buy physical supplies this time round.

“The fear factor is not as key right now,” says Osvaldo Canavosio, a hedge fund analyst at Man Investments in New York. “At the height of the financial crisis, in precious metals there was a bit of a panic to hold physical.”

Yet the haven buyers were out in force again on Friday, watchers said, as investors braced for a potential shutdown of the US government if last-ditch talks between Republicans and Democrats fail to reach agreement.

Retail investors are showing particular interest in silver coins in many countries, including the US. Last month the Utah state legislature passed a bill accepting US gold and silver coins as legal tender and other states are considering similar legislation in a direct rebuke to the Federal Reserve and its ultra-loose monetary policy.

“Utah has crossed the Rubicon, others are likely to follow suit,” says Daniel Brebner at Deutsche Bank.

Analysts and investors now see $1,500 gold and $50 silver as likely to be breached in the coming months, as the potential for looser monetary policy for longer in the US weighs on the dollar.

Commodities, including gold and silver, are typically priced in dollars so a weaker dollar boosts raw materials prices. The euro hit a 14-month high of $1.4443 against the dollar on Friday. Some gold bugs are even betting on a third round of quantitative easing, dubbed QE3, by the Federal Reserve, after its current scheme ends in June.

“Expectations that QE2 could be followed by QE3 are higher in the gold market than in other markets,” says Edel Tully, precious metals strategist at UBS.

This could leave gold investors setting themselves up for disappointment. “I would expect gold to march to $1,500 sooner rather than later,” says Ms Tully. “Towards the end of this quarter gold could hit a stumbling block if QE2 ends.”

An end to QE would tighten US monetary policy but it would be a small step compared with the inflationary impact of soaring oil and food prices, which have pushed real US interest rates – nominal rates minus inflation – to negative levels, analysts say.

“Gold is ultimately dependent upon real rates, which are a function of both inflation expectations and monetary policy,” says Jeffrey Currie, head of commodities research at Goldman Sachs, which forecasts gold will hit $1,625 by the end of the year. “A top in gold prices will only become apparent when the risks of sovereign default are behind us with a clear and successful exit of the stimulus we’ve seen over the last few years.”

Negative real rates are not just a US issue; the same is true in China – where demand for bullion is skyrocketing, bankers say.

“The cost of carry [the difference between interest on deposits and non-interest bearing gold] is zero,” says Walter de Wet, head of commodities research at Standard Bank. “It incentivises money to be invested in assets.”

Analysts are, however, less confident on silver, whose move higher has been so dramatic that many believe a sharp correction could soon be on the cards.

“I’m less convinced we’re going to remain so high,  if only because we’re expecting a generous increase in mine supply,” says James Steel, commodities analyst at HSBC. “Short-term, we could go higher, but it’s increasingly vulnerable to a correction.”

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By Jennifer Hughes, Jack Farchy and Gregory Meyer