Gold prices can run $700 higher as the U.S. faces a debt spiral - Jess Felder
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(Kitco News) - The U.S. economy is on the brink of a significant debt spiral, which will drive gold prices significantly higher in the next few quarters, according to one market strategist.
In a recent interview with Kitco News, Jess Felder, creator of the Felder Report, said the Federal Reserve is desperate to make sure financial markets remain confident in its abilities to navigate uncertain economic conditions. However, he added that in its desperation, it is on the cusp of making significant policy mistakes by maintaining higher interest rates in a world flooded with sovereign debt.
“The Federal Reserve keeps saying that interest rates will have to be higher for longer, but as a result, we are starting to see problems in the Treasury market,” Felder said. “We are going to see more signs of financial instability with more volatility in Treasuries.”
Because of its rising debt and elevated interest rates, the U.S. government paid $879.3 billion in interest during the fiscal year that ended September 30. Service costs are expected to increase to $1 trillion in the new fiscal year. The U.S. debt costs have surpassed the nation’s annual defense budget.
Growing U.S. debt concerns are already impacting U.S. Treasury markets. Last week, the U.S. government sold $24 billion in 30-year notes, in what was a disappointing auction. Analysts noted that during the auction, primary dealers, who buy up supply not taken by investors, had to accept 24.7% of the debt on offer, more than double the 12% average for the past year.
Felder added that in this environment, there is a very real risk that the bond market can become unanchored to economic conditions. He said this could also push equity markets back into bear market territory and risk pushing the economy into a recession, forcing the Federal Reserve to jump in and cap bond yields.
“As Treasury market volatility grows, the Federal Reserve will have to step in. They will say that they are not going to end the balance sheet runoff, but they will introduce a new program to help stabilize markets,” he said. “Markets will see through this and see it as a new round of QE and that is when the gold price explodes.”
Felder added that conditions will be ripe for gold when the U.S. unemployment rate starts to increase and as recession fears begin to build, bond yields move higher instead of lower.
He pointed out that it is inevitable that yields will continue to rise because the U.S. government is in no condition to provide any fiscal support when the economy eventually falls into a recession.
“The size of the U.S. debt and rising deficit will make this recession different from the others. Anything the government will do will only widen the liquidity hole in Treasury markets. This is how a debt spiral begins,” he said. “Over the next few quarters, investors are going to realize that this fiscal problem isn’t going away and will eventually turn to gold.”
As to how high gold will go in a new rally spurred by a debt spiral. Felder said he is looking for a run to $2,700 per ounce.
“The three-year sideways correction in the gold price is a very classic bullish flag pattern. When looking at the flagpole that preceded it, which was the rise in ’18, ’19, a simple projection from classical technical analysis highlights a target about $700 above the current price,” he said.
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