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Can you be a gold bear with inflation at 5%?

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(Kitco News) - Once again, the gold market is in a street brawl as it fights rising interest rates and expectations that the Federal Reserve will tighten its monetary policy sooner than later.

After two strong months of rising prices, we are starting to see sentiment shift in the precious metal market. So far this month, gold has been unable to hold gains above $1,900 an ounce even as real yields dropped to a one-month low to negative 94 basis points.

Inflation continues to be the dominant factor for the gold market. For some, gold's weakness heading into the weekend is a bit of a surprise after the U.S. Labor Department reported a 5% annual rise in its Consumer Price Index, the biggest increase since August 2008. Stripping out volatile food and energy prices, consumer inflation pressures rose 3.8% for the year, the strongest rise since 1992.

Briton Hill, president and partner at Weber Global Management, put the growing inflation threat into perspective in an interview with Anna Golubova. "Let's say if the S&P 500 goes up 5% or 6%, but the inflation rate is up 8%. On paper, everybody made money, but in real terms, they actually lost money because the inflation rate is so high," he said.

"If you aren't paying attention, you can miss something like that. And by the time it's over, it's too late. You already lost a lot of the wealth," added.

However, gold is suffering because although inflation pressures are on the rise, there are still some expectations that these pressures will ease as the U.S. economic recovery continues. There is also the growing expectation that because of the looming inflation threat, the Federal Reserve will have to tighten its monetary policy and reduce its bond-purchase program sooner than expected.

We are already starting to see banks lose some of their conviction that gold prices will make new highs by the end of the year. This week analysts at Société Générale warned that gold's path to $2,000 is becoming a little more complicated.

"We expect flows to be positive in 2021 on the reflation trade, but rising rates mean that there are conflicting forces affecting the gold price. It will be important to evaluate whether the market remains focused on real rates, which should stay slightly negative due to inflation, or nominal rates, which should rise and appears to increase the opportunity cost of holding gold," the analysts said.

However, not everyone is experiencing a crisis of faith. This week, billionaire "Bond King" Jeff Gundlach reiterated his bearish call for the U.S. dollar and for gold prices to go much higher.

Kristina Hooper, chief investment strategist at Invesco, also has an interesting take on the current environment. She added that while she expects inflation pressures to prove to be transient, there is a tactical case to hold gold for the next six to 12 months. She noted that inflation will probably get a lot worse before it gets better.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.