IT was tempting to write about the meteoric rise in the price of gold and equally enticing to comment on the outlook for bonds.

A convenient way to comment on both is to consider their relationship with inflation and where the outlook for both will be determined by the next stage in the global economic cycle, the prospects for inflation and the direction of interest rates.

A bond is typically issued by a government or a company wishing to borrow money and we, the investor, are the lender.

In return, we expect to have the capital sum invested repaid in the future, typically on a predetermined date, while we receive an annual coupon, or rate of interest.

Bonds are usually issued at par, £100, and will repay at par, though there are many different and complex variations. Bonds can be bought and held individually, though more typical for private investors via a collective investment or via a pension fund.

Economist John Maynard Keynes was an important contributor to the theory of the inverse relationship between the price of a bond and the level of interest rates. The daily movement in bond prices can be viewed as a constant assessment by investors of the relative attractiveness of a bond.

For example, a bond paying an interest rate of five per cent will be in strong demand if interest rates are down below one per cent, as is the case now.

As interest rates rise, the relative attractiveness of the bond diminishes and its price is likely to fall. Theory also suggests that at extreme points in the interest rate cycle, as is currently the case, the level of speculative money invested will be extremely high, exacerbating any subsequent movement in price as rates recover.

Continued economic strength outside the creditstricken Western economies has led to resurgent commodity prices ranging from oil to wheat to cotton, fuelling higher prices and raising the spectre of persistent and damaging inflation.

The renaissance for gold also has roots in its historical perception as a hedge against inflation, though its effectiveness is a debate for another day.

Global inflationary pressures will be addressed in different ways in different countries, though in the UK, monetary policy can be tightened through raising interest rates.

With the Bank of England targeting an inflation rate of two per cent and inflation closer to four per cent, it must be increasingly difficult for the Monetary Policy Committee to take no action, despite voting eight to one last time against raising rates.

With the UK economy remaining somewhat fragile, it is understandable that the Bank of England is unwilling to raise interest rates in a hurry, though recent comments from David Cameron regarding the threat inflation poses to the British economy may suggest committee members are coming under increasing pressure.

Bond investments in the UK have been in a long-term bull market for more than ten years, assisted by global deflation, easy credit and a benign interest rate environment.

The net result is that bonds are now held by a wide range of investors while prices are at historical highs. Is this all about to change? If an interest rate rise appears sooner than expected, then a negative reaction for both bonds and gold may not be too far behind.

■ John Pearson is a divisional director in the Teesside office of Brewin Dolphin, and can be contacted on 0845-213-1340. All prices quoted in the article are from public sources. The views expressed are not necessarily held throughout the Brewin Dolphin Group. You should bear in mind that no investment is suitable for all circumstances and it is important to seek expert advice if in any doubt. Brewin Dolphin Limited is a member of the London Stock Exchange, authorised and regulated by the Financial Services Authority.