x
The gold market is seeing solid follow-through buying activity following last week’s record closing price. The precious metal has pushed above $2,100 an ounce, and according to one market analyst, it has room to run.
In an interview with Kitco News, Jess Felder, founder of the Felder Report, said he has been looking for gold to break to the upside as the price action has generated some very bullish technical patterns.
“Gold is forming consistent bullish flag patterns. The price spikes higher, consolidates for a period and then we see another price spike higher. Gold has been looking to break higher for a while now. From a purely technical standpoint, it looks to me like there's a projected target of a couple hundred dollars higher for gold in the short term, but longer term, we're looking at $2,700, $2800, perhaps over the next year or two. Technically, gold just looks very, very good.”
Along with gold’s technical outlook, Felder said that the precious metal has a robust fundamental outlook as he does not expect the Federal Reserve will be able to bring inflation down to its 2% target.
He added that persistently higher inflation could cause investors to lose faith in the U.S. central bank, weakening the U.S. dollar and making gold an attractive asset. At the same time, Fleder said that a weakening economy will force the Federal Reserve to at least reintroduce quantitative easing as it maintains its restrictive monetary policy.
“If you had both of those things at the same time, that would be the ultimate bull case for gold,” he said. “If it turns out the Fed hasn't done enough to sustainably bring inflation back down, that's going to worry people that way. The whole soft landing narrative is based on the idea that inflation comes down so the Fed can lower rates without a recession. But if inflation doesn't come down and they can't lower rates, that will impact the economy.”
At the same time, Felder noted that credit conditions within global financial markets continue to deteriorate. He added that sooner or later, the Federal Reserve is going to have to pump more liquidity into the market.
As good as gold looks, miners look even better
It’s not just the precious metal that looks good. Felder said that he is extremely bullish on precious metals miners as this sector hasn’t been this beat up since the bear market lows in 2015
However, Felder pointed out that the negative sentiment is not aligned with the sector’s solid fundamentals
“To me, this is a very powerful sentiment signal; it suggests that this is about as bearish as investors can get,” he said. “It’s the ultimate irony: miners are trading as if gold is in a major bear market, but gold is holding near record highs.”
As to what will entice investors back into the mining space, Felder said that he expects a rally in gold to create a lot of new interest. At the same time, he said that a correction in the broader equity market could push some funds into miners.
“There are interesting dynamics in the markets right now. Investors are avoiding commodities, generally, because they're worried that if a recession hits, demand for commodities is going to tank. However, they're obviously not avoiding equities. Personally, I would be more worried about equities because corporate profits in a recession fall a lot faster than demand for commodities.”
As to where he sees value in the sector, Felder said that with higher gold prices, major producers like Barrick, Newmont, and Agnico Eagle will benefit from increased cash flows. He added that these companies also represent less risks for generalist investors.
Newmont, the world’s largest gold producer, has recently attracted particular attention after its share price dropped to a five-year low. The company’s share price has since bounced off those lows, currently trading at $32.91 per share.
“Senior producers are about as dirt cheap as they can get,” he said.
Kitco Media
Neils Christensen
