By Barani Krishnan

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

In what’s shaping to be most challenging period of U.S. economics since The Great Inflation of 1965 to 1982, the Federal Reserve is planning three to four (or maybe more, you pick the number you like) rate hikes this year with 25 basis points per round (or if we are to believe Atlanta Fed’s , it could even be 50 bp).

With today’s relatively hawkish Fed – to be sure the central bank is nowhere near the Paul Volcker period of the ‘80s when rates were numbingly-high at 20% – it’s understandable if speculators want to sell down gold, which theoretically would suffer under rising rates.

But let’s not also forget the principal reason for shifting from the ‘The Great Easy’ era of the Fed (virtually zero rates with endless money supply) is inflation  running at 40-years highs (note that we are picking up from that same period of stifling price pressures that Volcker ended).

Indeed if it’s inflation that we’re fighting, shouldn’t gold be at the forefront of that fight, at least from a commodities perspective, given the yellow metal’s standing as an inflation-hedge?

“No!” scream the bears who seem intent on driving gold to the lower $1,700s, and $1,600s if possible, citing and the that could remain red-hot in the interim as the Fed tries to tame that inflation monster. 

While some of that argument may hold, gold’s endurance as a store of value over time cannot be understated. 

Anyone who has tried buying real bullion bars can attest to the sheer premium attached to them and how far they are from the futures trading on New York’s Comex. If that isn’t respect for the precious metal’s value, I wonder what is.

Many counter theories are offered by gold bulls as to the reason they, rather than The Fed, might win this game. Some of these came from replies to my last article.

• Although the Fed may only increase rates two times before observing their impact, the Fed could pause to observe the effect of each one. Neal Kashkari, chief of Minneapolis Fed suggested that there be a spring break in the rate hike cycle to evaluate the Fed’s progress. As the Fed tried not to lose sight of its mandate, the Fed will see gold rise once again before May. It won’t be a smooth pivot and gold bulls will be seeking to gain from the Fed’s missteps and any economic fallout.

• The Fed will push the U.S. into a recession by being too aggressive with  tightening, just like how it was too accommodative with the so-called QE, or quantitative easing. The dollar’s tumble in a recession will inflate gold instead.

• Wall Street uses Treasury yields to manipulate the gold futures price. They don’t correlate with futures on Comex because one cannot buy actual gold products without paying a substantial premium. (My own point earlier). While the media keeps harping on gold being a “non-yield bearing asset”, the true investor in gold doesn’t care about yields being at even 2%m when inflation is growing at a scorching 5-7%.

Of course the gold/inflation story differs from the oil-inflation tale. 

Oil is up 15% and gold is down by 2%. Gold has dropped 2% over the past year. This year’s relentless climb in oil is not actually driven by inflation. It’s due to the Russian/Ukraine political theater and OPEC+’s faux labeling of an undersupplied market as “balanced” and ensuring it never reaches balance, because true balance might mean $60 oil, not $90. 

However, inflation-hedging can be used as an insurance policy for oil investors because virtually all commodities that are inversely related to the dollar are inflation hedges. However, oil may be the worst hedge against inflation, if one exists. Buying gold itself doesn’t contribute to inflation. But it’s a different story with oil.

Being the commodity that literally powers and moves the planet, oil is indispensable to the earth’s mobility. Oil is an underlying commodity of almost all commercial activities. Oil prices rise, which leads to higher oil prices for food, fuel, clothes, and almost every other essential. 

It’s disingenuous to say you’re hedging against inflation by buying oil when your purchase is actually helping drive up the price of that oil. It’s a money-making opportunity during a bull market. That’s fine. Don’t use the excuse that it’s an inflation hedge.

Gold Price & Technical Outlook

Gold futures’ most active contract on New York’s Comex, , settled down $8.40, or 0.5%, at $1,778.80 an ounce. 

The benchmark gold futures contract lost almost $60 over the previous two sessions. The contract suffered a loss of over 2% per week, effectively wiping out its gains from the past two sessions.

Earlier in the week, Comex’s front-month topped $1,854 – its highest since November and in a convincing break from the $1,830-$1,835 resistance.

It has fallen below this level due to the tumble, which makes it harder for gold climbers.

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

“There may be a short term reversal leading to a retest of the $1,797 (50% Fibonacci level), $1,811(50 Day Exponential Moving Average) and $1,818 Daily middle Bollinger Band,” said Dixit. 

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

He said gold’s initial bullish run above $1,850 looked like a decisive victory, but that later “turned out to be a prank scripted by the bears.”  

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

Oil Market & Price Activity

It is hard to find better oil trading times than this one.

Brent reached a $90-per-barrel record, marking the sixth weekly win for crude prices. This latest rally was fueled by the Russian-Ukraine conflict and the upcoming meeting OPEC+ of oil producers, which always provides its own drama to maintain crude prices at the boiling point.

“Bottom line is that everything that I look at tells me oil can go a lot higher,” said Scott Shelton, crude futures broker at ICAP (LON:) in Durham, North Carolina. “Refiners  can reach for barrels here at this price … margins will justify it.” He added though that he thought “a smaller flat price is better suited for this story”, suggesting an overrun in prices. 

After hitting a record $89.25 per barrel, it dropped to 69 cents or 0.7% at $90.03. For the week, it rose 2.4%, while the cumulative gain  for the six weeks was 22%. Brent was around 14% higher for the whole year.

WTI, which is the U.S. benchmark crude oil, was up 0.2% at $86.82. WTI saw a 2% increase in WTI for this week. However, the overall rise over six weeks was 23%. It has increased by around 15% since 2020.

Russia-Ukraine tensions reached a new high after Moscow’s military buildup near Ukraine has expanded to include supplies of blood along with other medical materials that would allow it to treat casualties. It was  another indicator yet of the Kremlin’s military readiness in the conflict, three U.S. officials told Reuters.

OPEC+ was meanwhile preparing for its February 2nd monthly meeting. The global oil alliance’s sessions have been an occasion for officials to discuss raising oil prices. Energy media have been saturated lately with stories that some oil exporters within the alliance are unable to increase their production as a result of the capacity constraints imposed by under-invested oil areas.

Technical outlook for Crude 

Dixit, of Skcharting, noted that crude oil prices rose steadily over six weeks, placing them in the zone of a possible bearish reversal.

“Going into the week ahead, a sustained move under $87.30 on WTI will start a sideways move with bearish bias that targets $85.20. It this fails, oil could slide to $82.90 first, then $81.90 and finally $81.30,” he said.

“But a strong move above $87.30 may extend the bullish move to retest $88.80, and reach $89.90 and $92 over an extended period of time.”

Disclaimer:Barani Krishnan doesn’t hold any positions in securities and commodities that he discusses.