By Barani Krishnan
Investing.com - Gold longs’ bet to win the race against inflation seems to be on.
Gold futures’ most active contract on New York’s Comex, February, settled up $19.70, or 1.1% at $1,818.50 per ounce on Tuesday to advance across the key $1,800 support level ahead of the release of the latest reading on U.S. inflation. It was the third consecutive rise for Comex gold, which has gained 1.6% over the stretch.
Expectations are high that the Consumer Price Index for December will show another spike after the 6.8% jump in the year to November, which already represented the fastest price growth in 40 years.
Gold is touted as an inflation hedge and it is reinforcing that label by holding to a decent support level since the start of 2022. It failed that hedge mission several times last year as its rivals — the dollar and U.S. Treasury yields rallied instead of expectations of U.S. rate hikes.
“The reason why gold will outperform is not a clear one, but it seems unlikely that the back-end of the Treasury curve will see yields go significantly higher once we get past the first couple of Fed rate hikes,” said Ed Moya, analyst at online trading platform OANDA. “The longer gold stays above $1800 the more annoyed the shorts will become.”
The United States will likely have more interest rates over time if inflation continues to exceed forecasts, Federal Reserve Chairman Jerome Powell said Tuesday as the central bank prepared for its first rate hike since the COVID-19 pandemic that upended the economy two years ago.
“The economy no longer requires extremely accommodative policy,” Powell told a Senate hearing held to confirm the extension of his term till 2024 by President Joe Biden. The Fed chair said the members of the central bank’s policy-making Federal Open Market Committee were unanimous in wanting a rate hike this year though the timing and frequency was undecided. “Broadly, speaking, all members of the committee see interest rate increases coming this year. The median was three,” Powell said.
Fitch Ratings, in a forecast released Tuesday, predicted that the Fed will raise rates twice this year and another four times next year.
Powell declined to commit to any hard number beyond the Fed’s projections “The committee hasn't made any decision on timing of rate hike. We must be humble and nimble,” he said, referring to unsteady labor market gains despite reaching the Fed’s target for “maximum employment”, with a jobless rate of 3.9% in December. “If inflation continues to be higher than forecast, we will have to raise interest rates more over time.”
But while inflationary pressures are expected to persist until the middle of this year, “we are most likely to remain in an era of very low interest rates”, Powell added.
The economy shrank by 3.5% in 2020 due to shutdowns and other disruptions caused by the pandemic. The Fed has projected a 5.5% growth for 2021 and 4% for 2022.
The Fed’s problem though is inflation, which is running at four-decade highs as prices of almost everything have soared from the lows of the pandemic due to higher wage demands and supply chain disruptions. Economists expect the first pandemic-era rate hike to fall between March and June as the central bank moves to dampen price pressures.
News of rate hikes are almost always bad for gold, which somewhat reflected this last year as it closed 2021 down 3.6% for its first annual dip in three years and the sharpest slump since 2015.
But some analysts think that if the U.S. inflation theme remains strong through 2022, then gold could rebound, and even retrace 2020’s record highs above $2,100 — which, incidentally, came on the back of concerns about soaring price pressures.
That said, gold’s technicals have so far shown a major wall of resistance for the yellow metal at $1,830. Like its hedging mission, gold has failed that $1,830 test several times over the past few months.