By Barani Krishnan

Investing.com. It may have been a huge year for inflation. But it was definitely a weak one for gold. Gold is one of the best hedges against price pressures that investors know.

With readings for the U.S. and the Federal Reserve’s preferred inflation gauge — the core — both at 40-year highs, gold prices showed a 5% loss on the year.

U.S. gold futures’ most active contract, , settled up $14.50, or 0.8%, at $1,828.60 an ounce on New York‘s Comex.

Comex gold dropped 3.6% during the 2015 year. It was its third annual decline in the past three years, and it suffered the most severe slump since 2015.

This slide comes also after an exceptional year in 2020 for gold, which saw bullion prices rise to records above $2,100 per ounce. That resulted in a 22% annual increase. Inflation concerns drove the rally as U.S. budget deficits started hitting record highs from unprecedented Covid-19 relief spending.

Gold has traditionally been touted as a hedge against inflation, although that argument was weakened earlier this 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. Gold fell often at the expense U.S. Treasuries and the dollar, who rallied in anticipation of Fed rate increases to lower inflation.

“The gold-inflation divorce of 2021 will certainly be hurting to bulls in the space who’d have expected last year’s love theme between the two to continue,” said Phillip Streible, precious metals strategist at Chicago’s Blueline Futures. “Honestly though, the writing for that break-up was already on the wall with the sell-offs in gold that we had seen since Q3 last year, and deepened through 2021.”

“That said, it doesn’t mean that the gold-inflation play will not reassert itself in the coming year,” Streible added. “The Fed is unlikely to have as many rate hikes as it thinks in the coming year and if employment slows again for any reason, hedging in gold could again become a theme. And that’s one reason why gold has come back to finish 2021 above $1,800 from this year’s low beneath $1,700.”

Fed announces a rapid timeframe for ending pandemic-era stimulative and plans to increase interest rates as soon as March. This is the first time since March 2020’s Covid-19 epidemic.

The Fed has said it could have as many as three rate hikes in 2022 but that will depend on keeping inflation at 2% a year and unemployment ideally at around the 4% level that it defines as “maximum employment”.

After the Covid-19 epidemic, it rose to 14.8%. However, last month’s reading was 4.2%. The Consumer Price Index rose 6.8% from November to November 2018, its highest level since 1982.

News about rate rises almost always have a negative impact on gold. If the inflation theme is strong, gold may still hit new heights. That’s what bulls in the space are counting on.