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Now is not the time for gold investors to throw in the towel - Felder Report
(Kitco News) - The gold market has struggled to find any bullish traction since hitting its all-time highs in August. The price is finding strong resistance, around $1,750 an ounce. Still, one market analyst said that he expects the bearish sentiment in the precious metals market to shift again.
Jesse Felder, founder of The Felder Report investment newsletter, said that now is not the time for investors to throw in the towel when it comes to investing in gold, even as prices have dropped nearly 17% from their August highs. June gold futures last traded at $1,724.40 an ounce.
Felder described the price action in the last seven months as a healthy correction.
The biggest threat to the gold market remains rising bond yields, which continue to hold near their highest level in more than a year. The yield on 10-year notes last traded at 1.6%.
However, Felder said although nominal yields are rising, gold investors need to pay attention to real yields, which includes rising inflation. Felder added that he expects that the bond market selloff and the rise in yields are close to peaking.
"The rise in rates has already been dramatic and there is reason to believe it may be nearer to its end than its beginning. At the same time, inflation appears to be on the verge of picking up once again. If so, real rates will fall and gold will likely resume its uptrend," the former Bear Sterns analyst said in a report Wednesday.
The question of how high 10-year yields will rise has been top of mind for many investors. Some research firms have said that interest rates could push to 2.5% as expectations continue to grow for the U.S. economy to see a robust recovery from the COVID-19 pandemic.
A second significant bullish factor for gold is the rising government debt, Felder said.
"Currently, the CBO estimates that the 2021 deficit will be $2.3 trillion, slightly less than last year's total. However, this does not include the $1.9 trillion stimulus package recently passed by congress. Nor does it include the possibility of a new $3 trillion infrastructure package which is currently being planned by the administration," he noted.
Felder said that deficits are nowhere near close to peaking. There appears to be a paradigm shift in attitudes toward deficit spending. He added that the gold market has not priced in all the new spending.
"Neither gold's utility as an inflation hedge nor as fiat currency insurance has actually been tarnished at all," he said.
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