Gold futures posted another mixed trade early on Friday, but continued to hold near a two-month high on worries about soaring inflation. Nonetheless, gains were capped by expectations of higher interest rates.

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

Gold futures were buoyed early in the week by a weaker US dollar and a pullback in US Treasury yields, but received most of their support on Thursday and Friday, following the release of stronger-than-expected US inflation report. The news boosted the metal’s appeal as an inflation hedge.

Although the inflation news was supportive, action by fed funds traders and comments from a senior Fed official may have helped stave off an upward push or at least limit some of the speculative purchases.

U.S. consumer prices post biggest annual rise in 40 years as inflation becomes more widespread

US consumer prices rose sharply in January, leading to the biggest annual rise in inflation in 40 years, fueling speculation in financial markets for a sharp 50 basis point hike in Reserve interest rates next month, Reuters reported.

The sharp price increase reported by the Labor Department on Thursday was driven by soaring costs for rent, electricity and food, and could put more political pressure on President Joe Biden, whose popularity has waned. in a context of concern about the rising cost of living.

The consumer price index (CPI) gained 0.6% last month after a similar rise in December. Food prices rose 0.9%, with the cost of food eaten at home rising 1.0%. Prices for cereals and bakery products, dairy products, fruits and vegetables rose sharply. Meat prices rose moderately. Electricity prices jumped 4.2%, offsetting cheaper gasoline and natural gas.

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

This followed a 7.0% advance in December and marked the fourth consecutive month of annual increases above 6%. Economists polled by Reuters had forecast the CPI to rise 0.5% on the month and accelerate 7.3% on an annual basis.

Short-term outlook

Excluding the external events unfolding in Ukraine, a battle between gold buyers and sellers is taking place over whether the Fed is behind the curve of the surge in inflation. This week’s price action suggests that gold could win 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 nefarious presence known. Gold buyers should take note that financial markets priced in a 50 basis point rate hike in March, according to the CME’s FedWatch tool. This is not bullish news, which leads me to believe that without the Ukrainian-Russian crisis, gold prices would be much lower.