By Barani Krishnan

Investing.com – Do not write off gold yet — that’s what longs in the game would say despite the odds stacked against the yellow metal as the Federal Reserve prepares to raise interest rates for the first time this year since the Covid-19 outbreak of 2020.

U.S. gold futures’ most active contract, , settled up $14.50, or 0.8%, on Tuesday, virtually clawing back half of the year’s opening loss of $28.50, or 1.6%, seen in Monday’s trade.

The previous day’s slump was a sign of what gold bears could do this year as the Fed prepares to raise rates as many as three times before the end of 2022.

Tuesday’s rebound, however, showed that longs in the game were not prepared to throw in the towel yet — or simply roll over and play dead.

“The bullishness is interesting given we’re in a monetary tightening environment, (and) the dollar remains king and economic optimism remains strong,” said Craig Erlam, analyst at online trading platform OANDA.

According to Neel Kashkari, senior Federal Reserve banker, the U.S. may face high inflation and price pressures after COVID or return to the low-growth regime of the 20 years before the pandemic.

Gold has traditionally been touted as a hedge against inflation, although that argument was weakened last year as the yellow metal’s prices steadily fell in the face of ramping price pressures in an U.S. economy rebounding aggressively from the coronavirus pandemic. The dollar and U.S. Treasuries fell frequently at the expense gold, but they rallied due to expectations that the Federal Reserve would raise rates in an effort to reduce inflation.

The Fed will publish Wednesday the minutes of its December meeting, where it set out a quick timetable to stop its current pandemic-era stimulative. The central bank’s plan to hike rates as many as three times in 2022 will still depend on keeping inflation at 2% a year and unemployment ideally at around the 4% level that it defines as “maximum employment.”

Rate hikes almost always mean bad news for gold. Gold closed down last year at 3.6%, the first time it had fallen in three consecutive years.

But if the inflation theme remains strong through 2022, then gold could rebound, and even retrace 2020’s record highs above $2,100 — which, incidentally, came on the back of inflation concerns. That’s what bulls in the precious metals space are counting on.