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Inflation threat is far from over, got gold?

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(Kitco News) - After a relatively quiet week, the gold market saw some fireworks on Friday as investors reacted to rising inflation pressures.

Economists expected to see a further decline in consumer prices in May; however, the U.S. Labor Department said its Consumer Price Index rose 8.6% for the year in May, hitting a new 40-year high.

Gold price action Friday was impressive, to say the least. In a nearly $50 price swing, gold went from the bottom of its range just above $1,825 to test significant resistance at $1,875 an ounce.

According to many market analysts, the Federal Reserve's credibility is now on the line as investors start to question if the central bank can actually bring down inflation. Although the Federal Reserve is expected to raise interest rates by 50 basis points next week and in July, they remain woefully behind the inflation curve and some significant investors are paying attention.

Thursday, David Einhorn, founder of Greenlight Capital and a long-time gold bull, said that gold will be an essential asset as the Fed is bluffing when it comes to taming inflation.

"The Fed doesn't really have the tools to stop the inflation. When the Fed has to choose between fighting inflation and supporting the Treasury, I think it has to pick the Treasury. At that point, it's best to have some gold," he said in a presentation during the annual Sohn Investment Conference.

But it's not just investors who see gold as an essential asset in a portfolio. Wednesday, the World Gold Council released its annual central bank gold survey. Fifty-seven banks participated in this year's survey, and 25% said they wanted to increase their gold reserves in the next 12 months.

It's best to have gold as Fed won't tame inflation - David Einhorn

"The planned purchases are chiefly motivated by increasing concern about a possible global financial crisis, although anticipated changes in the international monetary system and concerns over rising economic risks in reserve currency economies are also major factors," the analysts said in the report.

It's not surprising that gold demand is starting to attract new safe-haven demand. Tuesday, the World Bank waved a major red flag, saying that a 1970s-style recession will be difficult to avoid for some countries

The World Bank slashed its global growth outlook to 2.9% for 2022. Its January forecast for 2022 projected global growth to be at 4.1%.

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