Lead-Lag Live

Axel Merk on Market Crisis Signals, Federal Reserve Dynamics, and Gold's Strategic Role in Diverse Portfolios

• Michael A. Gayed, CFA

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What if today's market turbulence signals the onset of another financial crisis akin to 1987, 1998, or 2008? Join me, Michael Gayed, Publisher of The Lead-Lag Report, as I engage in a profound discussion with Axel Merk, an authority in the gold industry. We dissect current market conditions, compare them with past crises, and uncover the diverse profiles of gold investors—from dollar skeptics to diversification seekers. Axel underscores the necessity of a well-rounded investment toolkit to navigate the unpredictability of financial markets, urging you to expand your comfort zone and prepare for the future.

Unravel the intricate relationship between Federal Reserve policies and market narratives in our compelling conversation. We scrutinize the Fed's prioritization of systemic risk over stock market valuations, the complexities of forecasting economic recessions, and the crucial role of credit spreads. Delving into the significance of timely yet limited jobs reports and the rapid shifts driven by media, Axel and I explore the unique market dynamics during slower summer months and the inherent challenges of economic predictions in a tightening monetary landscape.

Expand your global perspective as we analyze Japan's precarious financial situation and its potential worldwide impact, including rising borrowing costs and fiscal hurdles. We explore China's strategic gold purchases amid sanctions, the ramifications of increasing credit card delinquencies, and the evolving global economic landscape influenced by China's ascent. Reflecting on skepticism in investment trends and the enduring value of gold in diverse portfolios, I invite you to follow my live insights on Twitter for real-time financial market updates.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

My name is Michael Guyatt, publisher of the Lead Lag Report. Joining me for the hour is Mr Axel Merck, who's a real OG in the industry, especially in the gold industry, and you can't spell gold without OG, so it's funny how that kind of works, axel. For those who don't know about you and your background and your phenomenal career, just do a quick CV on what you've accomplished in your life.

Speaker 2:

Great to be with you. Well, I'm a humble market participant, I guess that's one way of saying it. I started an investment business, actually in 94 it was. It became a real business in 2005 when we launched our first public product. These days we manage 1.4 billion in gold and gold mining to public products, and we have been active in the currency spaces and just about any asset class. So I have lots of opinions. I don't claim to be right. I see my role in being thought-provoking and getting you out of your comfort zone so you can cross-check whatever I have to say with your investment process. And just one thing you said I'm very supportive of you. I do also hold you to account. You posted the other day, or amplified, somebody the other day who said you have always been right or right in the racing months, and I said the only thing that proves is that you're not married to that person. So I try to hold you to account as needed.

Speaker 1:

As I go back to what I said, Axel is very good at giving advice life advice as well, on that, All right. So I want to start off with a post that you put out. I think it's appropriate, given what's going on volatility-wise. You put out this. You know you're sharing an article from the Wall Street Journal Is this 1987, all over again, or 1998? You said. For, whatever it's worth, this market feels increasingly familiar or similar perhaps to 2008. Not that I have a better crystal ball, so feel free to ignore this. Look, we always want to find parallels and analogies. Right as far as what's going on today, is it like the past? I just had a conversation with somebody who made an argument that it feels more like LTCM. Is this kind of a unique beast? Are there any parallels to anything in history that you've experienced in your career?

Speaker 2:

Well, the most striking one is an anecdote, I suppose, when literally the same person who recommended in the late 90s and 99 to buy a specific tech company several weeks ago recommended I buy, or that this person buys a specific tech company and they're literally one of the high flying companies of the day and I don't want to give investment advice, but to me that was, oh my God. If that's not a sign of a market top, what is Now? Clearly with a caveat, greenspan warned about a reaction like Zubrin's in late 96. So timing, these tops are difficult, but this is about as classic a top formation as it gets. When you get to a top, you get a shop sell-off, you get the reversal, you get the naysayers this isn't a top. You get the folks this and that. And as a reminder, in 2000, the NASDAQ topped out in March I think. The S&P lasted until September.

Speaker 2:

So when you've had an extended period where buying the dip is the only right strategy, people are not just going to throw in the towel overnight. It's a process. And to your question whether it's going to require some spectacular event, with hindsight maybe we'll attribute it to that. I would think that's just a symptom, just like on Monday. I don't know what happened on Monday, but with the market being down over 10 percent in japan, that presumably was some margin calls that amplified things and then then people got back in. But does that mean all the problems are over? No, I think this was just a a little sign that we're at a stage in the market where people are gradually waking up to to to the real world which we have not been living in since 2008.

Speaker 1:

I love this. I think this is interesting to think through, sort of characteristics of a top right, because I do see a lot of people that speak about gold. Right, it's just a big thing for you. Obviously People will say, well, gold is topped, but the characteristics of a gold top should be similar to the characteristics of an equity top, and gold doesn't seem to have those characteristics right now.

Speaker 2:

Now, well, we talk a lot about gold. Gold is very simple. Right, it's a barbaric relic, it doesn't do anything. It ultimately competes with cash. But I broadly classify the gold buyer into three groups the one, concerned about the purchasing power of the dollar, about the deficits, those sort of things. The second class of buyer is the diversification buyer. And the third buyer is the speculator, and the fellow concerned about the purchasing power has kind of always been there. The diversification buyer phases in and out. I see that on the increase. The speculator really only comes in when there is some action, and in recent weeks and months we've seen a little bit more of that.

Speaker 2:

But let me just expand in the context of what you're asking. On the diversification buyer, correlations aren't stable and you'll probably know that better than anybody with what you do under risk-off, risk-off sort of environment. But similarly, in the space of gold, right, the price of gold has a zero correlation to equities over the long run, but by no means is there always a zero correlation. Sometimes it moves with risk assets, sometimes against risk assets, kind of all.

Speaker 2:

These markets are meant to cause maximum frustration and part of the reason I said at the outset that my role is to get people thinking there is no single answer on how to prepare for what's next. Just as the Fed has a set of tools, you may want to have a set of tools, and of course we all weigh them differently and use them differently. Tools, and of course we all weigh them differently and use them differently. But gold tends to do well when there's a hot landing, in a soft landing, not so much because risk assets discount that. It does particularly well in a hot landing because people are increasingly looking for diversification when the S&P does very poorly right. And so there are a lot of things where history gives you an indication but no one, no assurance of what things might involve yeah that.

Speaker 1:

I mean that that correlation point is worth emphasizing. Right, on average, the correlation is zero, but it's like that old saying uh, you can, you can drown in a pool that's, on average, six feet deep. There's a lot of variability that can happen with that, and I remember in 20, I think it was 2011, gold had a pretty sizable correction, as we're called, back then in September. That was after the debt downgraded, after the concerns around the pigs with Europe and gold sold off aggressively and even though it's supposed to be non-correlated, it was very correlated at that moment in time.

Speaker 2:

That's okay, though, as long as you actually have a timeframe beyond tomorrow. Yeah, no, absolutely, and it is, of course, often and a few years ago I think it was 2022, where most of the diversification stuff didn't work, no matter what you did, so that can happen as well. The good news is currently there's cash that's yielding a good chunk of change. The problem with cash, of course, is that nobody gives you the signal when to go back in, and the one thing I like to remind people of, sometimes off, is Richard Russell, who passed away several years ago. He wrote a newsletter on market timing since the 1950s, I believe, and he published a piece many decades ago Rich man, poor man and talked about how the rich man doesn't need to chase the market because they have an income stream from the real estate, from the job, from wherever it may be, and they can wait for the market to be good value, whereas the poor man feels obliged to chase the trend because they want to get rich, with the irony, of course, being that the poor man could get rich if they were also patient and so just like Warren Buffett, or at least Berkshire, otherwise I would think Warren Buffett is not as involved in decision making no more.

Speaker 2:

They have $250 billion in cash. They seem to be OK missing out a rally here and not giving investment advice to buy that or any other security, but stick to your guns and the worst that can happen is if you don't have a process, it doesn't matter if your process isn't particularly good, but having no process is usually what kills you.

Speaker 1:

I'm pretty sure having $250 billion in cash means you're always going to be good in general, but it is interesting because a lot of people have talked about that as a signal. I had Lynn Alden on Leadlag Live yesterday and she mentioned that as well, which I think is intriguing, which I guess brings with it a question of sort of where are we in the cycle, whether it's a continuation of the prior cycle, whether it's a new cycle. It seems like you and I are on the same page, that this cycle has clearly changed, and I always go back to a cycle change just means new leadership.

Speaker 2:

For full disclosure, I was in the early recession camp, as many, many others have, although even when I thought the recession would come early, I said that when the election comes around, that's probably one of the weaker points in the economy, as kind of trying to assess the lag effects of Fed tightening and whatnot.

Speaker 2:

And the reason why recessions are important is many people believe and I am one of them that during recessions, risk assets perform less well, and even if you're not into market timing, that's the one sort of area where taking some steps might be prudent. Of course, predicting recessions isn't so easy either, and we only know them with hindsight at least in the US, how the comedies decide on these sort of things, at least in the US, how the committees decide on these sort of things. But clearly we have had a Federal Reserve that has gradually tightened monetary policy. We're still in an environment where credit spreads aren't particularly wide. Even when volatility spiked on Monday, credit spreads increased, but not dramatically so, and so the Fed, by the way, is not concerned about valuation in the stock market, but they are concerned about systemic risk.

Speaker 1:

And credit spreads blowing up can create systemic risk. I'm so glad you said that because I was trying to hammer. They don't care about the stock market, they care about the threat.

Speaker 2:

They're confusing it. The other thing is, because we're at 5.5% of the Fed funds rate, they think they have all the room in the world to lower rates and so they're in no rush. We can talk about how much sense some of that makes, but that's their mindset. That is their mindset. They will literally wait until the shit hits the fan. I think that's a CLA level four term here. Um and I I hear you're cursing much less so maybe you don't use that language anymore. But the um on monday, right that as long as there's no dislocation, that's kind of all right. Now, obviously, a major market going 10 down 10 will get people's attention, but when it recovers right away, they say, oh, that's all right.

Speaker 2:

They act with hindsight, right. They don't act preemptively Ever more so, by the way, because they're reading tea leaves like you and I do. They don't have more information than we do. It's a debating club, right, and that's kind of the difference. We are able to push a button to buy or sell, and that's kind of the difference. We are able to push a button to buy or sell.

Speaker 2:

They have a tradition of getting consensus, which means they're always going to be late, and then there's a lag effect on top of that. I don't see how that cannot lead to a recession, because that's what always happens, unless they're sometimes lucky right. But that is the baseline. And, by the way, the market of course prices in further out an economic downturn, because the unknown unknown can hit. But the market focuses on the average and will not predict that tomorrow's jobs report is going to be bad. It's just when that comes out they revise.

Speaker 2:

And, by the way, just on the jobs report, sorry for rambling a little bit Many people have criticized the numbers in the jobs report because a lot of modeling goes into it. They're not that accurate, but it's the most timely report that's available on the jobs market which is relevant for the economy. And so, even though the numbers aren't the best, the birth-death model there is somewhat random or very bad at predicting recessions as well. It is a very timely report and that's why the market pays attention to it. But the academics at the Fed take that as quote unquote, just one data point, and so they are, by design, looking at that not as actively as we do, which also means that the market pushes them and the Fed will always be behind the curve.

Speaker 1:

I will say it's not just the Fed that doesn't know what's going to happen next, it's also those that write headlines. I'll share the post that you showed from Bloomberg today. The savage awful looks overdone unless it's clear a recession is upon us and your comment was Yogi Berra's quotes are better and I'm a huge fan of Yogi Berra predicting the future, predicting hard, especially about the future.

Speaker 2:

In defense of journalists they are often not the ones writing the headlines to their stories. So just in their defense, I have talked to many good journalists and then there's the headline. And well, I didn't make up that headline for that story.

Speaker 1:

I do. I'm just giving your years of experience in the industry. Has there ever been anything like what we're seeing now in terms of the speed with which the narrative changes? Like I post that repeatedly, it's like watch how quickly the narrative changes. This is mind-blowing to me that we go from you know everything's fine, everything's stable, the Fed is going to begin and it's soft landing to. Oh, they need an emergency meeting. It's like in three trading days.

Speaker 2:

I this is one way I disagree with you probably maybe the only thing I disagree with you on this discussion. It's always been like this, Because it's always the trustable the media will look at the action and give it a story. The public would love to have a story. You and I would love to interpret what's happening. And yes, when there's a sell-off, there are always a few voices that call for the market to plunge. Keep in mind and I think that's the most newsworthy thing, this is happening in August.

Speaker 2:

Literally everybody and their dog is on vacation, and so the folks who are left at their desks are the ones who are usually not the chiefs, and that happens both on the trading desk, but it also happens with the journalists. I mean, just when Biden decided he's not going to run for re-election anymore, it took like 20 minutes, half an hour. It was on a Sunday, Everybody out. It took the media like half an hour to get that story right.

Speaker 2:

And similarly, there have been other things of late where you just say have the budgets all been cut, but it's summer and so you will have an amplification of second-tier voices, and so maybe that's quote-unquote different, as you have these second-tier voices that get amplified, which often doesn't make so much sense, which maybe would have been caught by a more experienced editor earlier. Maybe it's social media that makes it different, I don't know. Overall, X, where thisges streaming, I think, is the platform where news is breaking, and to me, of course, there's misinformation. Well, there's noise, right Like anywhere, but you get the raw data and you can assess for what it's worth, what to make with.

Speaker 1:

Another great one, and actually this is funny because you mentioned that you I think it was 2012 when you commissioned this image of a picture of the mountain of debt with the yen at the very top, and your comment was the yen once again wins Olympic gold in can kicking. I remember in 2008, one of the narratives was they kicked the can down the road and now the can is kicking back. I don't know who said it, but I remember very vividly that was a line in the lead up to Lehman. Is there a similar dynamic here? Is there a chance that they can't really kick this down the road, that we're in some really weird phase when it comes to Japan and the interconnectedness of global financial markets?

Speaker 2:

Well, Japan- is in trouble. I mean, you'd say, because if they make the cost of borrowing more expensive, the government is toast, and so that is just very, very interesting how this is going to play out, and something that's not sustainable will not last forever. That said, whether it lasts another six weeks or 60 years, you tell me right. I mean, if you look at the major crises that most in the audience probably remember well the 2008 Eurozone debt crisis policymakers will change the rules to take the can down the road. Now, at some point, the market forces will prevail. Like Greece reformed because the market coerced it to reform it. The US is much more difficult in that sense, because the US can get away with much, much more than other countries can. Greece that can't print its own money easily does not. And so, if you're asking me about Japan, I've heard things from policymakers say that to the current batch at the back of Japan saying, hey, good luck to them. They can tell the politicians you've got to get your house in order, but when they don't do it, they have to deal with the costs that they dealt with.

Speaker 2:

And just maybe one point is right we like to complain about monetary policy and whatnot. A country can get away with mediocre monetary policy when the fiscal side is in order. But when the fiscal side is not in order, it doesn't matter how good your monetary policy is, you're hostage of the fiscal side is not in order. It doesn't matter how good your monetary policy is, you're hostage of the fiscal side of things. That doesn't mean things will blow up immediately, but I think part of your question was can there be something that they can't fix? Well, we have liquidity that's skin deep these days and who knows?

Speaker 2:

I don't know the details of everything that happens in Pan Am Monday, but we're used to these super tight spreads in the market. Well, the reason why I have these tight spreads in the markets is because we got these arbitrage firms and market makers that facilitate that. But those guys, they take managed risk in the sense that, based on a probabilistic basis, they go in a bid, but when something changes that they don't understand, they pull the plug, and so the spreads can widen very, very quickly, and then I mean it can happen in the US. If it happens abroad, the folks in the US are asleep. In March of 2020, literally the wheels fell off the currency markets with spreads that you could have driven trucks through.

Speaker 2:

Margin calls happened in these overnight hours that wrecked businesses and the wheels somehow made their way back on, but the Fed was not there to do the rescue because everybody was asleep, literally, and so there's always something that could happen, that could cause more havoc. I'm not saying that's going to happen tomorrow, but in recent days, people started to think, oh, I need some black swan insurance. Well, the time you need to buy insurance is, of course, when volatility is low and when insurance is cheap.

Speaker 1:

Yeah, and insurance on FOMO is not exactly in hot demand when there's periods of FOMO. I had a guest on, I don't know, maybe two months ago. I think his name was Jan Nieuwenhuis and we were talking about gold and he was mentioning the buying that China had been doing for some time of gold, not to sound conspiratorial, but some countries or policymakers or whatever. Were they getting nervous? I mean, is there a chance that some of this buying up of gold that was apparently pretty substantial when it came to China in advance of this? Was there maybe a sense that something could happen to global financial markets?

Speaker 2:

We always love good conspiracy theories. I come from a different camp. I believe in incentives. I believe everybody, every country, is driven by incentives. Most policymakers in every country actually like to do the right thing. It's just that the road to hell, then, is paved with good intentions.

Speaker 2:

And clearly we have weaponized the financial system, imposing financial sanctions on countries that we believe don't behave, on countries that we believe don't behave, and that may be warranted, but of course, then changes the incentives for the quote-unquote bad guys, because they say wait a second, maybe that attention is going to get to us and maybe we hold lots of treasuries. Then we're going to be next the next time that the US government doesn't like what we do. And, by the way, recently SWIFT, the European payment system no, it wasn't SWIFT Euroclear. Euroclear released money that was interest, that was paid to the Russian Central Bank, and that money is now given to the Ukrainians.

Speaker 2:

And so all of that and I'm not saying that necessarily was the wrong decision politically, but what it means from an incentive point of view that if you are China, you've got to think long and hard where you put your money. Now the good news for the US is there aren't many good alternatives, right, and a country like China can't put all of its reserves into gold. But on the margin, gold is a beneficiary from that change in incentives, right, and so it's in that context that these things are marginal changes. I don't believe that there's an international coordination of anything. The world can't agree on anything, and so I don't think the world is capable of coordinating any such things. It's just incentives drive people in a certain direction.

Speaker 1:

Speaking about incentives, you had shared a chart on July 24 showing credit card delinquency rates, the incentives around being able to spend in an environment. I feel like this hasn't gotten that much attention, but it is true that the legacy rates are rising on the credit card end of things, which again would suggest that the lags are starting to hit as far as the faster rate of payment.

Speaker 2:

Well, just for full disclosure on that one, late last year I believe it was where credit standards were tightened, indeed, credit lines were cut, and so that created a bump, and then we had a little bit of a leveling off, and then things have increased. I think, as we're talking the story out, that Disney has fewer visitors. That means less revenue at theme parks Again, investment recommendation here and obviously they had increased prices quite dramatically. But things are company-specific right until they are not, and so the question is whether the consumer will it eventually be exhausted. Again, it's something we know with hindsight.

Speaker 2:

I do see, I live here in Silicon Valley and I have some friends who had super highly paid jobs and guess what? They have lost their job, and so some of these high-flying tech companies are cutting costs, which is something I mean. I guess in recent years they've done a little bit, but historically it's always been like how do you scale the faster, it doesn't matter what I pay in compensation so that we can make it there, and so when there's a slowdown, then suddenly people are a little bit more cautious about how they do these things, and of course we haven't talked about it, but I'm sure you've talked with others about this two-tiered economy.

Speaker 1:

The question is whether the wealthy at some point will stop spending just as crazy, and a rotten stock market might just do that. It's funny you say that because I've had this sort of in my mind progression of the sources of inflation post-COVID. So initially it was supply chain disruption driven, then it was really stimulus, demand driven, I'd argue. Then it's been more wealth effect driven, which is markets, stocks, indexation, housing. That seems to be the way you close the K right. You converge the high end for a business. Now it's got to be an asset class driven, disinflation, deflation event.

Speaker 2:

Yeah, no, absolutely. And I mean the proof is ultimately in the pudding right environment. They have quote unquote credit risk, right, they don't use debt, but it's the same sort of thing. They need access to funding and there was a change that started last October I put it last October, not December as many people put it where Powell pivoted and said that hey, we're done with raising rates and it doesn't really matter that they start easing. But it got a little bit easier with these sort of companies. But of course and there the counter-cyclicality of the gold space is of course apparent that when the Federal Reserve starts easing, it's the gold miners that get credit the soonest, historically anyway, because that's where the money is to be made the soonest historically anyway, because that's where the money is to be made, whereas to the traditional operating businesses they have a difficult time accessing credit because of the slowing consumer demand that's often associated with it.

Speaker 1:

A question off of YouTube from Chiron I want to show here Good evening. Can Axel share what BIS point reduction, or maybe maybe Beast's point, is already baked into the gold price? I mean to the extent that gold likes negative real rates. Is there a way to handicap how much has been discounted?

Speaker 2:

Well, everything is priced in and we have no idea what's going to happen tomorrow. So that's kind of one theory. Clearly, this is the most forecast recession ever and clearly, as we're talking right now, we have four 25 basis points rate cuts priced in by December and the fifth one at January meeting, and then the price of gold has held up very well. The other thing, of course, that has happened is that, historically, one thing that price of gold is often correlated to is real interest rates, longer term rates, and of course, nobody knows what real rates will be in 10 years from now. But if you look at that, longer rates and the tips yield, for example, gives you that there has been a correlation in price of gold, but that broke down with the price of gold going up. And so if you're asking whether that's all priced in, it depends on the metric you're looking at, right, based on those they just might. Okay, it really depends on, in my view, on the changes in expectations. I happen to think that the Fed will be incentivized to use that term again by the market and the economy to cut more than is currently priced in, which does provide room for the upside. But it is, of course, correct.

Speaker 2:

The price of gold has done quite well. Part of it is, if I may say so, both of the prime candidates that we have here, the contenders for the job of the presidency in the US, don't exactly sound like fiscal conservatives. They talk about it maybe in different ways, but based on the ideas that they have brought out, it doesn't sound like a lot of fiscal discipline, and so that's probably a driver for the price of gold. But the one place, by the way, where it hasn't been fully reflected is the gold miners. They've had a nice ride, but especially the juniors have not had the sort of ride that you would expect, given where the price of gold is, and so it remains to be seen. Gold is the sort of thing that you always like to have had with hindsight, but never quite know why you should have it going forward.

Speaker 1:

How much of gold mining stocks is there moving related to just the broader sentiment around small caps and mid caps versus large caps? I mean, is there can some of the weakness in small caps maybe explain why miners have been held back for a number of years just because of their size in general?

Speaker 2:

Well, the gold mining space has is really has multiple segments, right. The big miners and the talking about structural changes right. The rise of ETFs has had a huge impact. An ETF is not going to be involved in funding small mining companies, and so when there is a move in the price of gold, the money tends to go into the big miners. The big miners had overinvested in the previous cycle and then the market put a lot of pressure on them to get their house in order, which they did. The downside of that is that they have less leverage to price the gold because they have so much cash. They're also reasonably large, which means acquiring the junior miners, which you would think would happen to replenish the reserves that they're going to lose, hasn't happened as much. Instead, they're looking at acquisitions of larger businesses, and those tend to be copper mining projects, because copper projects are very large, whereas a small exploration company isn't really worth their while. And so, in the meantime, the juniors they are in the exploration phase and they literally get funding for about two years plus minus, and then they have to go back to the market, obviously in a tough environment.

Speaker 2:

It was difficult. A lot of people got burned in the previous cycle, and so that takes a while. In the meantime, of course, these businesses want to be around, and so they start merging, then, some of them with companies that are cash flow positive but are smaller ones, and you get the creation of the next generation of larger mining companies. Now it's it's a market that's that's fascinating, but it's a market where you really need to know what you're doing. You need to be a um, a bottom-up investors, and and know which ones the right management teams are and whatnot. Um, but it is a market that's that's very, very volatile and that, at least historically, is able to take off quite astronomically. Now, I'm not saying that everybody should put their money into that. Part of the attraction is that with a smaller location, you can get a lot of diversification, but it is not something where I'd recommend hey, put your money into this or that penny stock, because that might be good for entertainment but might not be very good for your wealth.

Speaker 1:

There is a narrative out there that geopolitical risk is great for gold and gold mining stocks. You know this better than I do, but it seems like gold mining stock momentum is very much dependent on oil, not just gold itself. Given how energy-intensive mining is, it seems like every single stock is oil-related.

Speaker 2:

Yes, historically and I've changed my view a tad on that for what we're currently going through Historically, when there's a terrorist attack, the price of gold jumps higher. I don't like it because it's bound to reverse, because the markets, for better or worse, get used to things, including war, terror or whatever it may be, and the next time there's a bombing somewhere, it says okay, there's another bombing right, and you'll see an headline that doesn't make it to the front page, maybe even anymore. And what is different is that I believe that the peaceful post-war period, world War II post-war period has come to an end, and the various geopolitical issues that are in the headlines are symptoms of a new era that is less stable, and so the US is no longer the policeman of the world. To some extent they are, but it's gotten too expensive, it's overstretched.

Speaker 2:

China is obviously on the rise as well, and so a lot of the world dynamics that none of us are old enough to know about are coming back to the surface, and it will change the dynamics.

Speaker 2:

Turkey's geopolitical position might become more relevant, and whatnot, and in that sort of environment the question is, is that kind of that risk premium the price of gold headings more sustainable? I would argue it is only, if only from the context that these increased dynamics around the world make the cost of doing business higher. Right, the cost of transportation from China is higher If you can't take the shortest route, if you have to worry about pirates attacking the ships and whatnot. The reshoring that happens as a result about being less secure, about being in the rest of the world, will make the cost of doing business more expensive. So all of these things you talked about, different drivers of inflation. This is not the sort of inflation you see show up next month or so in the CPI, but it is something that will increase the cost of doing business, will net be somewhat inflationary and I do think is reflected in the price of gold as well.

Speaker 1:

So do you think that we're still likely entering, or at the start, or in already a stagflationary environment, or are we back to the either inflation or deflation?

Speaker 2:

Well, as you know more than many, we had a stagflation product in the market. We loved it. People didn't buy it enough and it's expensive to run this product, so unfortunately, we had to shut it down again. But the reason we launched the product is not because we thought stagflation would be around for a month, but those are multi-year phenomena, and one of the things about stagflation in periods is that the popular decision is not necessarily the economically sound decision to make, and so stagflation usually comes in an era of political instability, when there are populist politicians on the rise, and I think we see that throughout the world. There are very good reasons and very valid reasons why people are upset, but both on the left and on the right, people are voting for the folks who promise them things. Mexico is probably the best example, but in the US, of course, both are left and right. Promises are being made that are not going to be kept.

Speaker 1:

Do environments like this excite you? I mean, it seems like we're probably very early. It is my own personal view we're very early in any kind of gold and gold mining bull market. The optimism, the sort of gold bug mentality of 12, 13 years ago isn't there right now and there's a lot of skepticism. And I keep going back to this line that trends die on conviction, they persist on skepticism. You talk to a lot of people. Do you get a sense that people are skeptical of gold?

Speaker 2:

Well, let me answer your first question whether I get excited. Part of the reason I launched our first public product in 2005 is because I got upset at policymakers. I got upset at what the Federal Reserve was doing and whatnot I saw at the time. By the way, I had two condos. My wife and I had two condos in Southern California and in 2005, we sold them to invest in our business because we thought the prices were getting ridiculous. Obviously, the prices continue to go higher.

Speaker 2:

I tend to be early with trends and I get motivated and excited when I see people mess things up on the policy side. As you might imagine, that happens quite frequently. So I am quite excited about things in general when it comes to investing and then as a business, we've been kind of pushed over the years to precious metal space and, yes, I'm excited about that space. I wouldn't need to be in that space. Sometimes people say I talk my own book, but I have my book because I do believe that's where I want to be. It was another part to your question. At the end of it I want to say that again.

Speaker 1:

The point about sort of skepticism versus conviction.

Speaker 2:

Yes, I mean. Of course, people are always skeptical about most things. And why would you hold gold? It's not a producing asset. And the question right there earlier is isn't it all priced in? What I can say to that is by all means right.

Speaker 2:

Apple without giving any recommendation fantastic company generating cash and whatnot, but of course there's a valuation to it and you have to decide on whether that's worth it or not. But in your wallet for those who still carry cash, right, you have a few dollar notes in your wallet. That's not interest bearing either. So why do you have a few dollar notes in your wallet? That's not interest-bearing either. So why do you have it? Because there's a purpose for that.

Speaker 2:

And so in a portfolio construction, you have liquid assets, non-liquid assets and income-producing assets and assets that may not be income-producing, and I happen to have a greater allocation to gold and gold miners than many, if not most, people have, but that is also because I can bear the risk of that. I believe asset allocation should be much more a question of risk than one of greed and opportunity. What can you afford to do? Where can you afford to do? And if there are no skeptics, I'd be concerned right. When there are no skeptics, that's when you have to be concerned and get out, and so I'm very happy that there are skeptics, and whenever some talking heads on CNBC mention gold, I get concerned.

Speaker 1:

The ultimate contrarian tell is when CNBC turns most bullish on something. Axel, for those who want to learn more about where they can access some of your products, where would you point them to? And any kind of final thoughts before we wrap up here?

Speaker 2:

Merck Investments is the business. Merckinvestmentscom is the website. I can't discuss the products here, but come to the website. Look them up. We have a newsletter Sign up for a newsletter there. I'm on Twitter for X these Days at Axel Merck, as it says on the bottom here the line. That's where I really give my live musings. I tend to tweet quite actively during central bank press conferences, so bear with that. But but otherwise I share a few thoughts and sometimes I tease Michael as well only sometimes appreciate those that joined the live stream.

Speaker 1:

Again, this will be an edited podcast under lead, like I think, and I appreciate all those that support the effort. Please give Axel a follow on X and hopefully I'll see you on the next episode of live Axel. You're the X and hopefully I'll see you on the next episode of Lead Live Live Axel. You're the man. I appreciate you. My pleasure Cheers everybody. Thank you.

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Michael A. Gayed, CFA

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