CPI Data Boosts Gold’s Appeal as Hedge Against Inflation

Gold futures posted another mixed trade early Friday, but continued to hold near a two-month peak on concerns over surging inflation. Nonetheless, gains were capped by expectations of rising interest rates.

The precious metal is considered a hedge against soaring inflation and is often used as a safe store of value during times of political and financial uncertainty. However, higher interest rates tend to increase the opportunity cost of holding gold, diminishing its appeal as an investment.

Gold futures were underpinned early in the week by a weaker U.S. Dollar and a retreat in U.S. Treasury yields, but received most of its support on Thursday and Friday, following the release of a stronger-than-expected U.S. inflation report. The news boosted the metal’s appeal as a hedge against inflation.

While the inflation news was supportive, the action by Fed funds traders and comments from a high ranking Fed official may have helped prevent a breakout to the upside or at least limit some of the speculative buying.

US Consumer Prices Post Largest Annual Gain in 40 Years as Inflation Becomes Widespread

U.S. consumer prices rose solidly in January, leading to the biggest annual increase in inflation in 40 years, fueling financial markets speculation for a hefty 50 basis points interest rate hike from the Federal Reserve next month, Reuters reported.

The broad increase in prices reported by the Labor Department on Thursday was led by soaring costs for rents, electricity and food, and could heap more political pressure on President Joe Biden, whose popularity has been declining amid anxiety over the rising cost of living.

The Consumer Price Index (CPI) gained 0.6% last month after a similar increase in December. Food prices rose 0.9%, with the cost of food consumed at home increasing 1.0%. There were strong increases in the prices of cereals and bakery products, dairy, fruits and vegetables. Meat prices rose moderately. Electricity prices jumped 4.2%, offsetting cheaper gasoline and natural gas.

In the 12 months through January, the CPI jumped 7.5%, the biggest year-on-year increase since February 1982.

That followed a 7.0% advance in December and marked the fourth straight month of annual increases in excess of 6%. Economists polled by Reuters had forecast the CPI rising 0.5% on month and accelerating 7.3% on a year-on-year basis.

Short-Term Outlook

Stripping out the external events taking place in the Ukraine, a battle between gold buyers and sellers is taking place over whether the Fed is behind the curve on the surge in inflation. This week’s price action suggests gold may be winning the short-term battle.

As for the Fed, the CPI report should serve as a wake-up call that inflation is here and making its damaging presence known. Gold buyers should take notice that the financial markets have priced in a 50 basis point rate increase in March, according to the CME’s FedWatch tool. This is not bullish news, which leads me to believe that if it weren’t for the Ukraine-Russia crisis, gold prices would be a lot lower.