Inflation & gold; both sides of the double-edged sword are razor-sharp

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There is extreme duplicity between inflation and gold. Currently, that duplicity is acting as a double-edged sword with both sides honed to razor sharpness. On the one hand, as inflation moves higher, it makes gold a favorable asset to hold in your portfolio. It is considered one of the better inflationary hedges.

However, in the case of inflation and interest rates, higher inflation will pressure gold lower based on the fact that it will force the hand of the Federal Reserve to raise rates more aggressively in both how many rate hikes the Federal Reserve will initiate this year and possibly the size of the individual rate hikes.

Currently, market participants are waiting for the release of the U.S. core CPI (Consumer Price Index) on Wednesday. Economic forecasts are predicting a rise to the highest level seen in nearly 40 years. The U.S. core CPI index came in at an unheard-of rate of 4.9% in November of last year.

Economists are predicting that the core CPI will rise to 5.4%. Because the core CPI index strips out the costs of energy and food, clearly two of the most essential goods and services that all Americans depend on, the core CPI is not as realistic as inflationary indexes that contain the inflationary rise in the cost of food and energy.

Forecasts for the CPI, which include food and energy costs are forecast to reflect the fact that inflationary pressures continue to surge causing millions of Americans more of their income for their necessities. In November of last year, government reports indicated that the inflationary rate had climbed to 6.2% after forecasts came in just under at 5.8% for October. In December, analysts were dead on predicting that the CPI would increase from 6.2% to 6.8%.

The inflationary pressures continue to get direr as economists are forecasting yet a higher inflationary level for December of last year of 7%. The last time inflationary pressures ran this high was in the 1980s when inflationary pressures averaged between 13 ½% in 1980, 10.3% in 1981, and 6.1% in 1982.

While it’s clear that rising inflationary pressures will create bullish and bearish market sentiment for gold, at least for now, there is a slight edge in the bullish camp. As of 5:00 PM EST,  gold futures basis most active February 2022 Comex contract is currently up $3.90, a net gain of 0.22% and fixed just above $1800 at $1801.30. Our technical studies indicate that the first level of resistance if gold continues to move higher occurs at approximately $1805 based on a combination of the 61.8% Fibonacci retracement, which is currently at 1804 $4.60, and the 50-day moving average, which is currently fixed at $1805.40. If gold continues to rise above that resistance level, the next area of resistance occurs at approximately $1815 based on a series of tops recently seen in gold pricing.

 

Wishing you as always good trading and good health,

Gary S. Wagner - Executive Producer