(Kitco News) – As gold falls below its $1,675 support, David Erfle, founder of JuniorMinerJunky,com, said a strong dollar is weighing on the precious metal. Gold and the US dollar often move in opposite directions.
“The dollar has been the biggest drag on the price of gold,” he explained. “And of course the Federal Reserve continues to raise interest rates.”
During the year, the US dollar index (DXY) gained 14.3% as the Fed raised its key rate by 225 basis points. The DXY is now close to 110.
Erfle pointed to $1,675 as a key support level for gold, which has been “tested five times before.”
“The previous five times it was for testing, we saw big buys coming in right away,” he said. “This is not the case today.”
Erfle spoke with Kitco News anchor and producer David Lin at the Precious Metals Summit in Beaver Creek, Colorado.
The Fed and precious metals
Gold is not a hedge against inflation, but rather “a hedge against stagflation” and “a hedge against the loss of investor confidence in government and currencies,” Erfle said.
“Investors still believe the Federal Reserve is in control,” he said. “I expect a 75 basis point hike [at the Fed’s next meeting]. If it’s a 75 basis point rise, it could be a new buy situation when it comes to the price of gold.”
He explained that after the next Fed meeting, gold could see more buying as investors “pick up cheap gold.” Erfle said gold’s “fundamentals” are improving, pointing to rising political tensions domestically.
“[The domestic political situation] is ripe to trigger a surge in the price of gold because the bear side of the market is so overcrowded,” he said.
Erfle pointed to rising costs, combined with a “drift gold price,” as a problem for gold miners’ profit margins.
“We really haven’t had inflation like this in forty years,” he said. “The price of gold has to go up… In terms of exploration, [miners are] reduce exploration programs.”
However, he mentioned that miners have “lots of money” they can deploy.
“Even though the situation is very similar to the end of 2015, the fact that many of these companies have a lot of cash is different,” he said. “I wouldn’t want to be a company looking for money right now.”
To see Erfle’s stock picks, watch the video above.
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