By Barani Krishnan

Investing.com – Gold longs’ bet to win the race against inflation seems to be on.

Gold futures’ most active contract on New York’s Comex, , settled up $19.70, or 1.1% at $1,818.50 per ounce on Tuesday to advance across the key $1,800 support level ahead of the release of the latest reading on U.S. inflation. This was Comex gold’s third consecutive increase, with a 1.6% gain over that stretch.

There are strong expectations that the Consumer Price Index December will record another jump after the 6.8% increase in the year-to-November, which has already been the most rapid price growth for 40 years.

The gold is positioned as an inflation hedge. It is maintaining a good support level since 2022, which is confirming that claim. It failed that hedge mission several times last year as its rivals — the dollar and U.S. Treasury yields rallied instead of expectations of U.S. rate hikes.

“The reason why gold will outperform is not a clear one, but it seems unlikely that the back-end of the Treasury curve will see yields go significantly higher once we get past the first couple of Fed rate hikes,” said Ed Moya, analyst at online trading platform OANDA. “The longer gold stays above $1800 the more annoyed the shorts will become.”

Jerome Powell, Federal Reserve Chairman and the US’s first interest rate increase since the COVID-19 outbreak two years ago that ravaged the economy said Tuesday that there will be more inflation in the United States.

“The economy no longer requires extremely accommodative policy,” Powell told a Senate hearing held to confirm the extension of his term till 2024 by President Joe Biden. The Fed chair said the members of the central bank’s policy-making Federal Open Market Committee were unanimous in wanting a rate hike this year though the timing and frequency was undecided. “Broadly, speaking, all members of the committee see interest rate increases coming this year. The median was three,” Powell said.

Fitch Ratings published a Tuesday forecast that predicted the Fed raising rates twice this year as well as four additional times next year.

Powell declined to commit to any hard number beyond the Fed’s projections “The committee hasn’t made any decision on timing of rate hike. We must be humble and nimble,” he said, referring to unsteady labor market gains despite reaching the Fed’s target for “maximum employment”, with a jobless rate of 3.9% in December. “If inflation continues to be higher than forecast, we will have to raise interest rates more over time.”

But while inflationary pressures are expected to persist until the middle of this year, “we are most likely to remain in an era of very low interest rates”, Powell added.

Due to the shutdowns and other interruptions caused by pandemic, the economy contracted 3.5% in 2020. For 2021, the Fed projects a 5.5% increase and for 2022, a 4% growth.

The Fed’s problem though is inflation, which is running at four-decade highs as prices of almost everything have soared from the lows of the pandemic due to higher wage demands and supply chain disruptions. As the central bank attempts to reduce price pressures, economists predict that the Fed will raise its first rate in the pandemic era between March and June.

Gold is almost always affected by news of rate increases. This was evident last year when it fell 3.6% to close 2021, its first annual decline in three years. Its sharpest slump since 2015!

But some analysts think that if the U.S. 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 concerns about soaring price pressures.

That said, gold’s technicals have so far shown a major wall of resistance for the yellow metal at $1,830. Over the last few months, gold failed to pass its $1,830 testing several times, just like in its hedging mission.