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Inflation is still too hot; what does this mean for gold?

Kitco News

(Kitco News) - Last week we warned investors that they should expect to see lower gold prices in the short term. We have been proven right so far as the precious metal tests support just above $1,800 an ounce.

The two key factors weighing on gold are inflation and rising bond yields, on the expectations that the Federal Reserve will have to continue to aggressively raise interest rates.

Friday, the U.S. Department of Commerce said its core Personal Consumption Expenditures price index rose 4.7% in the last 12 months, up from December's reading of 4.6% and hotter than the consensus estimate of 4.3%.

Michael Wilkerson, Founder of Stormwall Advisors and Author of Why America Matters: The Case for a New Exceptionalism, told Kitco News's editor-in-chief Michelle Makori that inflation could rise as high as 12% this year.

Inflation remains a significant threat to the U.S. economy, and the Federal Reserve will have to deal with it. Persistently higher inflation has pushed the yield on U.S. two-year bonds to 4.8%, their highest level since 2007; at the same time, U.S. 10-year bond years are looking to breach 4%.

Bond yields are rising as long-shot expectations start to build that the U.S. central bank could push the Fed Fund's rate above 6% in this aggressive tightening cycle. This represents a dramatic shift in interest rate expectations.

The CME FedWatch Tool shows that markets see a 27% chance of the Federal Reserve raising interest rates by 50 basis points next month. While the odds are still low, they have risen dramatically; a week ago, markets saw an 18% chance and last month, there was less than a 3% chance.

Along with rising bond yields, the shift in interest rate expectations is providing the U.S. dollar with new momentum as it trades at a one-month high against a basket of global currencies.

We can't stress enough that this is a harsh environment for gold in the near term. However, many analysts remain optimistic about gold as prices continue to hold solid support above their 200-day moving average of around $1,785 an ounce.

Gold price remains under pressure, but largely ignores hotter inflation data as core PCE rises 0.6% in January, annual inflation rises 4.7%

While gold's near-term prospects look pretty dismal, it is also important to remember that the precious metal is more than just a play on interest rates. It remains an important portfolio diversifier as it continues to outperform equity markets.

The shift in interest rate expectations has caused a sharp selloff in the S&P 500. The broad equity index is on pace to end the week with a 2.5% loss, but gold prices are down only 1.6% from last Friday.

Analysts have also noted that gold remains an attractive safe-haven asset in a world filled with geopolitical uncertainty.

On Monday, the Financial Stability Board (FSB), a BIS-affiliated advisory body that coordinates financial rules for G20 economies, issued a warning that the global economy could face more commodity price shocks as the world continues to deal with COVID-19 supply chain-related issues all while Russia's war with Ukraine reaches the one-year mark.

Analysts at BCA believe that gold still has a chance to drive back to $2,000 this year as the growing global wartime economy pushes inflation and geopolitical risks higher.

Gold still has a lot of potential, but for now, we watch and wait.

Have a great weekend.

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.