By Barani Krishnan

Investing.com — As the first trading month of the year draws to a close, it’s interesting to see just how different gold’s reaction to inflation has been than oil’s.

In what’s shaping up to be one of the toughest times for the US economy since the Great Inflation of 1965-1982, the Federal Reserve is forecasting three to four (or maybe more, you pick the number you like ) rate hikes this year with 25 basis points per round (or if the Atlanta Fed is to be believed, it could even be 50 bps).

With today’s relatively hawkish Fed – to be sure the central bank is a far cry from the Paul Volcker era of the 80s when rates were staggeringly high at 20% – it’s understandable that speculators want to sell gold , which would theoretically suffer from the rise in rates .

But let’s not forget either: the main reason for the passage of the Fed’s “The Great Easy” era (virtually zero rates with an endless money supply) is inflation which is reaching 40-year highs (note that we resume from this same period of the suffocating pressures on prices which Volcker put an end to).

Indeed, if inflation is what we are fighting, shouldn’t gold be at the forefront of that fight, at least from a commodity perspective, given that the yellow metal is a hedge against inflation?

“No!” shout the bears who seem determined to drive gold to the lower $1,700s and $1,600s if possible, quoting and who may remain red hot in the meantime as the Fed attempts to tame this inflation behemoth.

While some of these arguments may hold, gold’s endurance as a store of value over time cannot be underestimated.

Anyone who has tried to buy real bullion can attest to the premium attached to them and how far away they are from New York Comex futures. If that’s not respecting the value of the precious metal, I wonder what is.

Various counter-theories abound from gold bulls as to why they – rather than the Fed – might win in this game (some of them were from responses to my last post):

• The Fed may only raise rates twice before pausing to see their effect (interestingly, Minneapolis Fed Chief Neal Kashkari has suggested a spring break in the hike cycle to determine how much progress is being made by the central bank). Gold will likely rise again by May as the Fed tries to stick to its other mandate of growing the economy through jobs, even as it hikes rates and tries to shrink its huge balance sheet. This will not be a smooth pivot and gold bulls will look to take advantage of Fed missteps and any economic fallout.
• The Fed will push the United States into a recession by being too aggressive with tightening, just as it has been too accommodating with so-called QE, or quantitative easing. The fall of the dollar in a recession will instead inflate gold.
• The relationship between Treasury yields and gold is formed by Wall Street to control gold futures prices. These do not correlate well with futures contracts on Comex as one cannot buy real gold commodities without a high premium (my view, earlier). While the media continues to proclaim that gold is a “no-return asset”, the true gold investor doesn’t care that returns are even at 2%, while inflation is rising at a torrid rate of 5 to 7%.

Of course, the story of gold and inflation is a world apart from the story of oil inflation.

Gold is down 2% on the year while oil is up 15%. Oil’s relentless rise this year is not really driven by inflation. This is due to Russian-Ukrainian political theater and OPEC+’s false labeling of an undersupplied market as “balanced” and ensuring that it never reaches equilibrium, because true equilibrium could mean $60 oil, not $90.

But the inflation hedge works as support for the Oil bulls because virtually all commodities, being inversely correlated to the dollar, are inflation hedges. The truth is that oil is perhaps the worst hedge against inflation, if there ever was one. Buying gold by itself does not contribute to inflation. But it’s a different story with oil.

Being the commodity that literally powers and moves the planet, oil is essential to the mobility of the earth. It is the underlying commodity in almost all trading activities. Rising oil prices lead to higher prices for food, gasoline, clothing and almost all essentials.

It is dishonest to say that you are protecting yourself against inflation by buying oil when your purchase is actually helping to drive up the price of that oil. Just call it an opportunity to make money in a bull market. It is very good. Do not use the bull it is an inflation hedge.

Gold Price and Technical Outlook

The most active gold futures contract on the New York Comex settled down $8.40, or 0.5%, at $1,778.80 an ounce.

In the previous two sessions leading into Friday, the benchmark gold futures contract fell almost $60 in total. This gave the contract a weekly loss of more than 2%, virtually wiping out the back-to-back gains of the past two weeks.

Earlier in the week, the first month of the Comex rose above $1,854 – its highest since November and in a convincing break of the $1,830-$1,835 resistance.

The fall took it back below that level, which now makes it a tougher wall for gold to climb.

Sunil Kumar Dixit, chief technical strategist at skcharting.com, said price action over the week showed that gold’s next move will largely depend on the market’s reaction to the 1,780 level. $, whether it’s a hold point or a break point.

“There may be a near-term reversal leading to a retest of the $1,797 (50% Fibonacci level), $1,811 (50-day exponential moving average) and $1,818 daily average Bollinger Band “Dixit said.

“But breaking and holding below $1,780 will extend the bearish momentum by exposing $1,768 (61.8% Fibonacci level) and $1,735.”

He said gold’s first bull run above $1,850 looked like a decisive win, but later “turned out to be a scripted farce by the bears.”

“Fueled by the Fed’s hawkish announcement of a rate hike in March, gold’s flash crash has since taken it through several support levels. The end may not be over.

Oil market and price activity

There are fewer better times in oil trading than one could have chosen to be a bull than now.

Crude prices posted a sixth straight weekly win, with global benchmark Brent posting a new high of $90 a barrel. The latest race was fueled again by the political theater of the Russian-Ukrainian conflict and the upcoming meeting of the OPEC+ oil producer alliance, which never fails to provide its own drama to keep crude prices boiling.

“At the end of the day, everything I look at tells me that oil can go much higher,” said Scott Shelton, crude futures broker at ICAP (LON:) in Durham, North Carolina. “Refiners can hit barrels here at this price…the margins will justify it.” He added, however, that he thinks “a smaller all-inclusive price is better suited to this story”, suggesting a price overrun.

hit an eight-year high of $90.25 a barrel before rising 69 cents, or 0.7%, to $90.03. For the week, it was up 2.4%, while the cumulative gain for the six weeks was 22%. For the year itself, Brent was up around 14%.

, the benchmark for U.S. crude, gained 21 cents, or 0.2%, to $86.82. For the week, WTI gained 2%, while the total rise for the six weeks was 23%. Since the beginning of 2020, it has increased by around 15%.

Tensions between Russia and Ukraine reached a new height after Moscow’s military buildup near Ukraine expanded to include blood supplies and other medical supplies that would allow it to treat the wounded . It was another indicator of the Kremlin’s military readiness for the conflict, three US officials told Reuters.

OPEC+, meanwhile, has been preparing for its monthly meeting on February 2. Every session of the global oil alliance these days has been an opportunity for its officials to drive up oil prices. In recent weeks, the energy media has been saturated with reports that alliance oil exporters were unable to ramp up production due to capacity constraints at underinvested oil fields.

Crude Technical Outlook

Skcharting’s Dixit noted that crude prices have risen steadily for six straight weeks, putting them in the period of a potentially bearish reversal, triggering a near-term correction.

“In the coming week, a sustained move below $87.30 in WTI will initiate a sideways move with a bearish bias that targets $85.20. If that fails, Oil could first slide to $82.90, then $81.90 and finally $81.30,” he said.

“But a strong move above $87.30 may extend the upside move to retest $88.80 and reach $89.90 and $92 for an extended period.”

Warning: Barani Krishnan does not hold a position in the commodities and securities he writes about.