Gold is on the cusp of new record highs or a bear market - Felder Report
(Kitco News) - The gold market appears to be at a critical juncture that could determine whether prices are headed back to all-time highs or falling into a new long-term bear market, according to one market analyst.
In his latest gold commentary, Jesse Felder, creator of the Felder Report, noted that gold has created a fairly consistent stair-step pattern going all the way back to the late 1990s.
"Prices move higher until they reach a ceiling, denoted by a descending trend line, at which point they consolidate for a time. During bull phases, like that seen from 2002 to 2011, these consolidation periods don't sustainably violate the prior trend line; during bear phases, they do," he said in the note.
Although gold prices have recently dropped from January's nine-month high, they are still at the upper end of the broader consolidation channel. Felder's analysis noted that January's rally would be the third test of broader resistance around the $2,000 level.
"If the bull phase that began in 2016 is to continue, gold prices will break out and push to new, record highs."
On the downside, the support level to watch comes in just above $1,600 an ounce.
"Conversely, a sustainable breakdown below the recent lows would signify a new bear phase has begun," Felder said.
Looking at the risk-reward scenario, Felder said he sees more upside potential for the precious metal.
"Because the longer inflation remains elevated and the Fed remains behind the curve, the greater the chance of a breakout versus a breakdown.
Felder has been a long-term bull in gold and precious metals miners for several years. He has noted that major gold producers he has classified as BANG stocks (Barrick, Agnico Eagle and Newmont) remain a lot more attractive than the tech-sector FANG (Facebook, Amazon, Netflix and Google) stocks.
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Felder noted that free-cash flow in the tech sector has fallen 80% from its peak in mid-2021. However, since the start of the year, FANG stocks have seen solid investor demand.
"Clearly, investors piling into these stocks today are betting the companies can make the transition from hyper-growth to hyper-efficiency and rapidly reverse this plunge in profitability," he said.
At the same time, Felder noted that the profitable mining sector continues to be ignored.
"Free cash flow has soared more than four-fold since I first wrote about them. The rise in aggregate market cap has been far less," he said. "The result of all of this is that the BANG stocks have outperformed the FANG stocks even while they have gotten significantly cheaper and the latter have gotten significantly more expensive relative to their respective trends in free cash flow."
Felder added that he expects the mining sector to generate additional value as inflation remains persistently high.
"If the return of inflation proves to be secular rather than cyclical, BANG stocks' recent outperformance is likely only the beginning of a much bigger trend," he said.