On Tuesday, U.S. gold futures’ most active contract, February, fixed up $14.50, or 0.8%. It clawed back half of the year’s beginning loss of $28.50, or 1.6%, caught in Monday’s trade.
The previous day’s slump indicated what gold bears could do this year as the Fed readies to increase rates as many as three times before the end of 2022.
Tuesday’s rebound, nevertheless, revealed that longs in the game were not ready to throw in the towel yet, or roll over and play dead.
The U.S. economy risks an environment of sustained high price forces in a post-coronavirus world or retrieval to the low-growth, low-inflation regime experienced in the two decades before the epidemic, senior Federal Reserve banker Neel Kashkari spoke on Tuesday.
Gold was always a hedge against inflation. Nevertheless, that argument was cut last year as the yellow metal’s prices steadily declined in the face of ramping price tensions in a U.S. economy rebounding aggressively from the COVID-19 epidemic. Often, gold dropped at the expense of the dollar and U.S. Treasuries, which rallied on expectations of rate hikes by the Federal Reserve to tamp down inflation.
Fed Decision Awaited
The Fed should terminate on Wednesday minutes of its December meeting. It spread out an expedited timetable for completing its epidemic-era stimulus. The central bank’s intent to hike rates as many as three times in 2022 will still rely on keeping inflation at 2% a year and unemployment ideally at about the 4% level that it describes as “maximum employment.”
News of rate hikes is nearly always bad for gold. It was partly reflected this last year as it approached 2021 down 3.6% for its first annual drop in three years and the sharpest slump after 2015.
But suppose the inflation theme stays strong through 2022. In that case, gold could recover. It could even retrace 2020’s record highs exceeding $2,100, which, incidentally, came on the back of inflation worries. That’s what bulls in the precious metals space depend on.