Lead-Lag Live

Axel Merk on Strategic Gold Investments, Risk Management Nuances, and AI's Role in Future Forecasting

• Michael A. Gayed, CFA

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Join us for a compelling conversation with Axel Merk from Merk Investments, as we unravel the complexities of risk management and the significant role gold plays in investment strategies. Discover how Axel transitioned from tech investing to managing an impressive $1.6 billion in gold and gold mining investments. This episode promises insights into the critical nuances of hedging, disciplined investment strategies, and the lessons learned from financial upheavals like the 2008 crisis. We'll discuss how maintaining a balanced portfolio and avoiding overexposure can safeguard your investments when markets appear deceptively calm.

Explore the psychological and emotional dimensions of investing, particularly when facing substantial portfolio declines. Axel Merk and I dissect the common gap between expected and actual investor behavior during downturns, emphasizing the importance of understanding one's risk tolerance. Learn about the strategic use of gold as a hedge, its fluctuating correlations, and the potential benefits during economic instability. The discussion extends to the mining sector, with insights into the impacts of deregulation, the volatility of energy costs, and the essential role of management teams in executing successful projects on time and within budget.

We wrap up with a forward-looking perspective on economic forecasting and the intriguing potential of AI in refining investment strategies. The conversation touches on the challenges of navigating deregulation and fiscal policy, underscoring the importance of diversification and realistic market expectations. Axel and I consider why mid-cap and development-stage companies may offer more potential in the gold mining sector, given their venture capital-like dynamics. As we close, I express gratitude to Axel Merk for his invaluable insights and share plans for a networking luncheon in Manhattan with industry leader Hal Lambert. Join us as we connect with the minds shaping the future of investing.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Merk Investments and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. 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

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Speaker 1:

To me, investing is at least as much about risk management than about trying to make a buck on the profit side. But it also means when your portfolio crashed in 2008, that it was that you lost more than you could afford to lose because you were overexposed to those risk hours.

Speaker 2:

You can hedge inflation risk. You can hedge drawdown risk. You can hedge counterparty risk. What are the hedges that gold hedges draw-down risk and hedge?

Speaker 1:

counterparty risk. What are the hedges that gold hedges? Yes. So gold is this odd asset that, when you do historic studies, an amazing, diverse supplier much of the time, most of the time, and you never quite know why you should hold it for the future, because it's this barbaric relic that doesn't really do anything. One of the dirty secrets in our industry is that a retail investor is chronic. The professional investor does risk management. What the hell is the difference? Right, speak big. The difference is maybe that you do it more with a system, right? The one thing an investor, in my view, should have is a system. It doesn't need to be a brilliant system.

Speaker 2:

My name is Michael Guy, a publisher of the Lead Lag Report. This conversation is sponsored by Merck Investments. We're talking about some of the different things that Axel Merck is working on and, of course, the returning champion, mr Axel Merck himself. I actually got into a suit for Axel.

Speaker 1:

And, by the way, those who don't know us, this is not beer that I have early in the morning. This is iced tea.

Speaker 2:

Just trying to pretend that this is iced tea. People just left because you said it's not beer. I mean it's the holidays.

Speaker 1:

You got to. Fun fact, I'm from a beer family. We had family for hundreds of years brewed beer and then sold out over a decade ago to the guys everybody sells out to.

Speaker 2:

So what Axel is saying is that his entire family is very wealthy and they've got alcohol around them. Yeah. So, axel, I know a lot of people are familiar with it, but maybe just a quick kind of recap of your background what do you do? And your love of gold.

Speaker 1:

Yeah, Just on that note, if you read the annual reports on these breweries for 100 years, they complain every year that the margins are compressing, declining. It's a darn tough business to be in because the retail outlets control it. Aries, that's what you tuned in for. We manage a little over 1.6 billion in gold and gold mining. I didn't grow up investing in gold and gold mining. I suppose I actually have a master's in computer science. I used to invest in tech companies in the 90s, but then the bubble came in 2000.

Speaker 1:

We moved more towards cash and international cash management. There was currency management, and that got us to launch our first currency mutual fund in 2005. Got us to launch our first currency mutual fund in 2005. Well, at some point we had four mutual funds and a few other things, and these days investors have pushed us towards gold and precious metals, not just investors. We did it ourselves as well, but after the Eurozone debt crisis, people didn't want to touch currencies anymore, and so we have a competing product, one of the major gold exchange share products, and we have a close in fund in the gold mining side.

Speaker 1:

We can't even though there's a sponsored interview, we can't dive into the product details, but at merkinvestmentscom. You'll find more about it. But we'll talk about the environment and hedging and whatnot. But one of the reasons why we've gone into gold is because in 2007, 2008, we actually went to Citigroup as our custodian in our mutual fund and one of the things we did in 2008 was we kept a slightly negative cash balance with our custodian to manage our counterparty risk. We were one of the go-to places because we actually take that stuff seriously, that the small print that's in the prospectus and these wonderful risks, and it's given us the slow and steady road and we actually believe what we do and we drink our own Kool-Aid. I'm one of the larger investors in each of our things that we do.

Speaker 2:

Let's focus on the entire concept of hedging, because there are a lot of people that would say what's the point of hedging when things are working? Press right, just keep taking on more risk and it'll kind of resolve itself. How do you think about the use of hedging tactically and if it's even worth hedging in a world where it feels like the Fed just wants to keep things going Well?

Speaker 1:

hedging means a gazillion different things to many different people, and so let me I mean, give me a few hours. I'll go through each one of them, but let me maybe illustrate this, since I just mentioned 2008. Before 2008, through kind of middle of 2007, markets were going higher and higher and higher. And what I tell people is right. We can't give. We're regulated right, so we can't give specific investment advice. But I tell them, follow a process. Of course, if your process is that you can mark tops and market timeline, you're brilliant at it. By all means, do what you're good at. But most people aren't that good at it. And so let's say, you have any sort of asset allocation and one segment of your portfolio outperforms. For most people, that kind of means that you reallocate over time and, sure enough, in 2007, most people didn't do that, which means that now you have a misallocation of risk in your portfolio.

Speaker 1:

To me, investing is at least as much about risk management than about trying to make a buck on the profit side. But it also means, when your portfolio crashed in 2008, that it was that you lost more than you could afford to lose because you were overexposed to those risk hours. And then there were a whole bunch of pundits that came out and said, hey, double down. This is an amazing buying opportunity, and while technically they may have been right because in March 2009, we're at the major market bottom I do think it is utterly irresponsible to promote that. And the reason is that you got to be able to sleep at night with your investments. Reason is that you got to be able to sleep at night with your investments, and so the right thing to do is that you rebalance on the way up, and so then you have some firing power, and at that stage, yes, you can then go all in right.

Speaker 1:

But if you don't have that firing power, it is irresponsible that you'rextend it and then double down from the overextended. It's like going to the casino and doubling down every time until you're completely bankrupt, and so because, of course, there's no assurance that that's going to work out, and so one way of hedging is to just follow the investment process. Now, of course, there are a bunch of other things about investing. One of them is, of course, short the markets, and just we can go into that. The short answer is on shorty, it's often a negative carry trade, and so you better got the timing right, and it's one of the reasons why cash or gold or gold mining or those things might help, because there you can have a long strategy. But I am getting ahead of myself.

Speaker 2:

I usually joke about that. Saying buy the dip. It's like buy the dip assumes you have cash to buy the dip with. Pretty honestly and everybody's saying buy the dip, and that means they already bought the dip before. So what's the word Firepower?

Speaker 1:

Yes, and people may always poke fun at Warren Buffett, and just poke fun. I don't think he actually calls for shots anymore. But the Warren Buffett, and just I don't think he actually calls for shots anymore, but the general idea of his philosophy is still there at Berkshire Hathaway that he gets really failed on the last leg of a bull market, that he has so much cash. But, sure enough, at some point he can deploy it. And the dirty secret on Wall Street is, of course, that you don't get compensated for cash. Investors will forgive you if you underperform in a down market, but they'll crucify you if you don't keep up in the bull market. And so if you hold cash in the bull market as a professional investor, I mean, your clients are going to leave you for the other guy that promises you the bull.

Speaker 2:

Yeah, if you can't beat him, join him, Because if you don't join him you're not going to have a career. I think it's sort of the point, which is why excesses typically happen.

Speaker 1:

And, by the way, what happened then? Of course, the many years of the zero interest rates? Right, if you weren't fully invested in the markets again, you lost your clients and we've lost a lot of talent, especially on the active management side. Yeah, the active management by default means you're not just always 100% all in on the index, right, and if the only thing the index does is go up and up and up outperforms everything else just to put a little kitchen here for our work, the gold mining side, and we can talk about that space in more detail later on. But that is uniquely a kind of position for active management. The mine life tends to be more limited and when you have that sort of environment, index-based investing does not necessarily give you kind of the best sort of bang for the buck.

Speaker 2:

So index-based investing assumes market efficiency right and some markets, some others.

Speaker 1:

And, of course, index-based investing is somewhat of a joke anyway, right? What is an index? You've got so many passive indices and, of course, that in itself is active allocation and the one thing that maybe to add here what happened in an environment where quote, unquote everything goes up? Well then you might as well invest based on your political persuasions, because if you invest in green stuff and green stuff always goes up, of course I invest everything in green. I want to make the world a better place, right? And we really need a more severe bear market to kind of get rid of these myths, because it just doesn't work that way. We've seen some of that, of course, but if your darlings always go up, I mean it makes for great party talk, but it's not necessarily good for your long-term wealth.

Speaker 2:

Is it that we need a severe bear market or we just need a bear market with time right? I mean, we've had these very compressed declines, but then the central banks step in, they liquefy and then it comes right back right. It's that V formation which has been emblematic of post-QE era. I mean, it seems like you need to have some time, aspect to pain to get people to be rewired to think about risk?

Speaker 1:

Yes, it doesn't need to be severely down, it needs to be extended. There's a question coming in why do you lose sleep at night if your portfolio drops 30%? In this snippet world? Of course, we're going to ask the command a little bit.

Speaker 1:

Right, again, I can't give specific investment advice, but I would, and people talk about well, what's your risk profile? Right, my view is, one type of risk is whether you can sleep at night, and that's, of course, a bit of a simplification. But what are you comfortable with? When you sit down with an advisor, you can pick a number. What the heck does that mean? And then, when push comes to shove, and say if you get nervous with your investment, are you able to stomach the downturn? That is really the question. Are you able to stomach the downturn? That is really the question.

Speaker 1:

And so I allege that if you have a certain risk tolerance, but then your portfolio gets riskier and you don't do anything about it and let's keep it simple 60-40 allocation, the 60% of your portfolio grows to 80% of the portfolio. Now, suddenly you have an asset mix that is riskier than what you signed up for, and so when that risk portion plunges, I allege that a lot of people have significant discomfort. Now, of course, if you're a robot and saying, hey, yeah, I invested 60-40 with a portfolio that was worth 100 bucks and it zoomed up and now it's back down, I was where I was before and everything is fine, but that's not how human psychology works for most people, right? So, anyway, that's just some good thought on that.

Speaker 2:

Yeah, and that's also consistent with the reality, which is that you look at investor returns versus, you know, index returns. They're very different. Everyone claims to be a buy and hold investor until they have drawdown or a volatility, and I always go back to it. It's like all right, you can show me all these charts from here until tomorrow. People forget that. Every single one of these bars right when you're looking at a daily chart like that's a long time right.

Speaker 1:

if you think through through the emotions, you go through, yes, and maybe thinking through it is not a good idea for some people right, um say, turning off, um bubble evasion isn't a bad thing. I mean, one of the reasons you do your service and then some other folks do is to allow the general investor to just have an appreciation of what the pros do, right? So one of the dirty secrets in our industry is that a retail investor is chronic. The professional investor does risk management. What the hell is the difference? Right, speak big. The difference is maybe that you do it more with a system, right, and the one thing an investor, in my view, should have is a system. It doesn't need to be a brilliant system. A mediocre investment approach is better than no investment approach where you flip-flop based on the latest and greatest that you hear somewhere on level vision.

Speaker 2:

I want to go back to hedging, because there's all kinds of different types of things that you can hedge. You can hedge inflation risk, you can hedge drawdown risk, you can hedge counterparty risk. What are the hedges that gold hedges?

Speaker 1:

Yes. So gold is this odd asset that, when you do historic studies, an amazing diversifier much of the time, most of the time, and you never quite know why you should hold it for the future, because it's this barbaric relic that doesn't really do anything. And so the price of gold, first of all, has a correlation of near zero to most other assets, notably the S&P 500. But it doesn't mean the correlation is always zero. What it means is that correlation phases. It's sometimes positively correlated, sometimes negatively correlated, sometimes not correlated. Volatility of the price of gold is historically actually similar to that of equities, but it can zoom up and be significantly more volatile. And so, when all is said and done, since 2000, it's been a very, very profitable investment with its ups and downs. Now, ultimately, because it has that lack of correlation, it may help diversify. And so if you think that the S&P 500 might be a little punchy, then you might want to think about something else. And gold may play a role in that. And, of course, the other drivers, the way we like to classify the gold investors, you have the diversification investor that like to classify the gold investors. You have the diversification investor that tends to work most of the time more so, obviously, when people are concerned about valuating the stock market In 2022, very little work in terms of diversification and gold was a bit of a disappointment, but in most years it seems to work. Then there is the investor that's worried about the purchasing power of the dollar, and that used to be a fringe investor that is moving more towards a mainstream investment thesis and, notably, it means that more people are interested in gold.

Speaker 1:

You might love what the incoming Trump administration is going to do, but they have not focused on entitlement reforms. Let those be successful and I wish them all the best. They are not going to be able to fix entitlement by shaming people into not wasting money, and obviously there's going to be lots of. Obviously, my guess is, lots of gifts are going to be handed out in order to get these tax cuts that Trump introduced in the first administration extended. So there it is a hedge, but hedge, of course, doesn't mean perfect hedge. There's no guarantee that the price of gold is moving higher, and one thing maybe in terms of any hedge, including gold, it is not so much about what will happen. It is what might happen. If you think there's a risk of a certain scenario unfolding, then think about how you can take that into account in a portfolio location. And I say that because as time moves forward, well, it's again. The markets are discounting mechanism. It looks again back of what will happen.

Speaker 1:

And to just round out the kind of sort of investments you have, you obviously have foreign central banks. They've stepped up the buying ever since we imposed sanctions on Russia and others because the dollar has been weaponized. And then, lastly, don't underestimate the speculator. The speculator has moved more towards digital assets, meme stocks and the like. They're not very loyal. So should we have a huge run in precious metals, they may come back. You see that on the gold mining side more that they are a little tepid there right now. They've been burned too many times, which also means it might be anyway. There's good value there. So you have different types of investors. But a hedge means, again, different things to different people. Cash is a hedge, right Shorting bonds could be a hedge, but by all means there's a negative carry trade if you've ever seen one, the correlation argument is the most powerful one.

Speaker 2:

It's one of the few diversifiers, right? And that's the joke about diversification. It often fails you when you need it the most because people think having 500 stocks is diversified. In reality it's not. The question of hedging, of course, then goes into perfect hedge versus imperfect hedge. So shorting is a perfect hedge, right. Market goes down one for one. You're short, you make money. The opposite way. There are times, briefly, where gold is correlated and times, briefly, gold is not correlated on average or negatively correlated On average. It's zero, to your point. How should we think about how much to hedge a portfolio with gold? Because it's a challenge, right? If you don't have enough of a hedge, it may not make a difference, so why even bother doing it?

Speaker 1:

Well, that's absolutely right. And if you have a very significant downdraft in the markets, I mean I have enough great to have been through a few bear markets. The younger generation may not have been through two. Maybe a very short-term one in COVID, right, and one of the challenges, of course, I mean you can reduce equity allocation, but we all know people are very, very bad at getting back into the market and so it's not an easy one for many.

Speaker 1:

Now I'm on the record of having substantially more in gold and gold mining and public filings that I have now closed in front, for example. So I have substantially more than most others have Indeed. It's just we talk about kind of market instruments. I've also diversified beyond the liquid markets. I've invested in forest and other things on the side of things, real estate as well, so it's really about what you're able to afford to do. But yes, if you want to have a dent, um, maybe more. Now we talked about gold a lot um, gold, I indicated, has volatility similar to the stock market. The on the gold mining side, you can get that's what you choose to do significantly more volatility, especially if you go down to the development and exploration companies, because in some ways they're really options that they strike gold. Now, most of these know that there's gold, but they must be able to execute and then build a mine that's going into production, and so the significantly higher volatility allows you to get a diversification with a smaller allocation.

Speaker 2:

So about miners a little bit more. I mean, a lot of the miners, I think, get a lot of. Their earnings are driven not just by the price of gold but obviously the price of oil, because it's very energy intensive to do the mining. I am curious if do you suspect that under a Trump administration energy prices will drop and that maybe becomes even more bullish or a reason to consider mining stocks?

Speaker 1:

You mentioned a bunch of different topics here. So the development companies actually don't have some of the energy cost because they don't produce anything yet, but, yes, the producers. One of the very significant costs is energy. The big producers have numerous challenges. They have many cost issues. Just take a step back here a little bit.

Speaker 1:

In the bull market after the immediate aftermath of the financial crisis, the market wanted them to get bigger, so they acquired ounces at great cost. They overpaid. Then we had a protected bear market. The market told them to get their act together and so they underinvest and they now produce so much cash that they actually have much less leverage to the price of gold. They've gotten so large that they now have to take on these very large projects. These tend to be cut-of-gold projects where it's difficult to be on time and on budget. What we focus on more is more the smaller folks. It's the difference between building a 2,000-square-foot home versus a McMansion that's more custom-built on the smaller houses kind of you know the drill, no pun intended, and know exactly what to do. And so finding one of the scarcest resources, by the way, mining is finding good management teams. But you invest in management teams that can develop these mines on time and on budget. Now to answer your question, so yes, the cost of energy is a significant contributor and yes, we will have an administration that will try to help increase fracking, I think, in particular, and that all else equal will have a positive impact on miners.

Speaker 1:

Now maybe to take a step back again. One thing I like about gold is it is so simple, it is just gold, and the moment you even look to silver, you have more complex dynamics. And, of course, when you go to mining, you have execution risk for the management, you have geopolitical risk, you have many other risks, and to say that all miners are going to go through the roof because energy prices are going to go down might be a great oversimplification. The one thing to caution is when the price of gold moves higher, it is often not necessarily, but often associated with other commodity prices moving higher as well, with other commodity prices moving higher as well, and so it is not that straightforward to simply say, oh yeah, termination is on low energy prices and therefore gold miners are going to go up. I wouldn't jump from one to the other quite that easily. What I think is most important in the mining side is to invest in management teams much more so than investing in a particular entity, because the price of oil might move up or down somewhat.

Speaker 2:

So let's talk about it, because that's like old school stock analysis, right? So we talk about investing in management teams. How do you identify what a strong management team is does versus the ones which are more just talk?

Speaker 1:

If they've done it before. I mean that's the simple answer. That's a line, piece that, beer it before.

Speaker 2:

I mean that's the simple answer that's that beer, that beer, that beer.

Speaker 1:

That that's the One of my children. She's very young still, but she had a successful exit in the startup and she was able to raise money for a second startup. And the electric power plants don't like these people doing. They pivot all the time right, but they invest in the management team, and so, similarly, we have funded a shell company where they didn't have an asset yet, just trusting the management team. And, by the way, typically what happens is when these mines get developed, there is a fairly confined client and it's assumed that they successfully execute, and what then happens is that they want to redeploy some of that cash and to use it to expand to the local site. Sometimes they look for a new site, and the reason why investors allow them to do that, rather than saying, hey, return all this money to shareholders, is because he gave them the money in the first place, because that specific management team knew how to execute and you want them to do more, right more, and so you want them to do more and, as a result of that, you trust them. And it is as I mentioned. It's the scars. There's plenty of gold in the ground, but getting that out on time and on budget is difficult.

Speaker 1:

You're nagging me here with asking my audience, our audience, what platform you're watching this. So please drop that in. And I don't know how you do these things right. I have all these questions come on the side. I have you. I have to have a coherent sentence. I was once, by the way, many years ago, um on, uh, on TV in the studio when these TV studios still the major stations still paid for a studio, and I was joking, before we went on the air, that you could do anything. And so the guy in the teleprompter plays a soccer game when I was trying to be on Fox Business. I'm giving a coherent answer.

Speaker 2:

I mean, was it a good game? You're going to watch a game, at least like oh, it's a good game. Okay, so you mentioned this point about commodities and obviously one of the big themes for a Trump administration is deregulation in general. Let's talk about how deregulation could impact commodities broadly and maybe gold in particular, because I think this is where it gets interesting. You kind of alluded to a fracking point. Obviously that's the most obvious one. Are there other interesting things about the commodity trade?

Speaker 1:

Well, in the gold mining space, where we manage the frozen fund, geopolitical risk I would maybe capture that more broadly is a question that comes up all the time. And the US has geopolitical risk. I'm getting your permitting done. I mean, if you go to a country where there's a military dictatorship, the chain of command is pretty clear. You need your pay from kind of a few people only, right.

Speaker 1:

And, by the way, in Mexico, right, the previous government was very much against open pit mining. So we have a new government and recently a statement came out that actually there's a lot of jobs that are generated in that field. So that's a positive. That tends to give a tailwind to the companies. And then the miners. In Mexico they were depressed, somewhat depressed until the election and they've come a little bit back.

Speaker 1:

And so in the US family, of course, yes, the regulation is positive, but don't forget there are so many different layers of regulations really that obviously, if you have on the federal side more tailwinds rather than headwinds, that's helpful, but it doesn't mean that you can suddenly develop a mine or any big infrastructure project overnight. You have to work with the local communities as well. And, by the way, ESG, that was the buzzword and became a dirty word a little bit in many political circles In the gold mining space and in mining space in general. That existed way before it was a political thing. You've got to take care of your local community. You've got to be able to to to deal with environmental standards and everything else, because otherwise you cannot execute something on time on budget because you'll get sued, you'll get shut down, you'll get this and that and and say it just makes prudent business sense to be able to attract the right talent.

Speaker 1:

I mean I mentioned the management teams are a rare commodity in mining. It's not just the management teams, the folks that are going into mining is not the sort of things most people want to have on their business in the US these days, and so it is difficult to attract power and so you've got to take care of everybody to do this. And deregulation certainly helps. It certainly helps. But take strategic minerals right. It is not like tomorrow we're going to kind of have all the permits done everywhere. It will certainly help advance many, many projects, but we are still dealing with the realities on the ground that if there are some interest groups that doesn't like something, there will be some holdouts.

Speaker 2:

What about from the standpoint of just availability of capital? Talk about the sources of financing for some of the gold mining companies and maybe how freeing up the banks from a regulatory perspective could unlock more flow.

Speaker 1:

Well, there are various sources of capital, but the fewer than they used to be. Actually, we just had a meeting the other day. It used to be, for example, the Canadian retail investor used to fund, provide funding for risk funding, kind of early stage funding to many projects, and those guys have to some extent gone away. The place where you actually have retail investors is Australia. In Australia it appears to be much cooler to invest in mining, and so in Australia we've seen proportionally anyway a significant up. You do have the folks that tend to invest in mining family offices that have previously had success in investing in mining, and one of the things that we do is we try to team up with some of these families that have capital and because it's not about just funding a mine or development, funding is usually available only for a year or two and then they have to go back to the capital market, so you want to team up with folks that are going to be there again the next time around. If you look at the price dynamic, by the way, in this space, those miners can really boost the portfolio in a bull market, but in the higher for longer environment that Powell had, that the Federal Reserve had, where financing conditions are, by design, tight. While there was funding available to the better mines, the valuations were lower, and so there is that sort of risk.

Speaker 1:

There are some banks that are active in that space. I haven't heard much that they're going to be substantially more active. I think they just they do. And, by the way, one of the things that banks look at we as investors get excited when the price of gold goes a little higher. Anybody that wants to raise money for a mine. They need to think about a substantially lower price of gold to be profitable, because these projects take many years and while you or I may think the price of gold is going to go higher, you cannot develop a mine simply saying, oh, I need to have the price of gold at $2,600, $2,700 an ounce in order to be profitable. It has to be significantly lower, because there will always be some risks and some cost overruns one way or the other, and say there ought to be quite a significant buffer. And it's part of the reasons why analysts in that space tend to have a much more conservative price for the price of gold when they run their models.

Speaker 2:

Switching gears a bit. We got the good old FOMC decision this week. I know you're an avid Fed follower. I don't know if you're a Fed fan Probably not, but a Fed follower nonetheless, like most people like to be in the media at least Any thoughts on what could change here in terms of, maybe, whatever Powell says. It does look like there's a real concern that inflation is really accelerating.

Speaker 1:

Yes, as you're talking about, and I actually got quite excited that Kevin Walsh is on the list of potentially succeeding Powell. That said, if there's one thing that goes against him, is that he's already on that list, so that's usually not a good omen, because he has some more sensible views. By the way, here's somebody that, before AI was super hit, talked about that. The Fed needs to broaden its range of ways of trying to project growth. One of the criticisms I have about the Fed needs to broaden its range of ways of trying to project growth. One of the criticisms I have about the Fed is that it's taken its own gauges away After 2008,. By managing the market, micromanaging the market you're taking away the mirror. You can't look at the year curve anymore and see what the market thinks about the outlook, because it's the Fed that's managing it, and so using AI, so to speak this is something that Rush had advocated way before AI was popular is something that could be helped.

Speaker 1:

Now, if you look at the current Fed, the framework they have is a backward-looking framework. They still, by the way, have this backward-looking inflation averaging framework on the books, which is fairly asinine. I think that's the available short term, but think about it. What will deregulation do? And so, as investors, we have forward look. The Federal Reserve is backward-looking. And the Federal Reserve, by institutional process, cannot say we think Trump will do this and that and therefore we'll have tighter policy. No, they will have to wait for the policy to be decided on, then they have to wait for the market impact, and then they have this thing called debating club or FOMC more formally, and then, with a delay, they will act, which means almost certainly they will again be late.

Speaker 1:

And if you think about it right the policy of the term administration you take the deregulation side or any other policy it's perceived to be pro-business I would tend to agree which means it's pro-growth right, which means the economy should grow a little bit more. And then, at the same time, how much fiscal discipline is going to be there? I have my doubts there. So all of those are kind of elements that suggest that maybe, just maybe, inflation is not completely beaten and the framework that the Fed has means they'll be late, then maybe they'll be tough again, and so all of that creates a far more volatile framework than, in my view, it needs to be.

Speaker 1:

I think it would be far more helpful if the Fed just got out of the way, had a rules-based approach, and then we would have far fewer knee-jerk reactions now, just because that's what I wish. It's not what we have to deal with, um, but I would. My guess would be that, yes, inflationary pressures are going to build up again, and then the fed will again have to do something. Um, again, one thing I should caution is most of these crystal balls are wrong, and it's about the risk of whether any of that is right or not. It's more a food for thought than a prediction that this is necessarily what's going to happen.

Speaker 2:

But let's face it, it's clear that there's still way too much liquidity in the system, because you can see it in some of these silly meme coins that are going vertical and worth hundreds of millions, if not billions of dollars in market cap. I mean, it looks like 2021, all over again, but with a much higher interest rate floor.

Speaker 1:

Well, I mean, the one thing that Greenspan taught us in the late 90s is that irrational exuberance can last many years. And that gets me back to right. What do you do about it? Right, very few people could time the top in the markets in 2000. And so to me, it's a process of gradually taking chips off the table or reallocating, rebalancing, and, in that sense, right. And there's one reason why I like gold and gold miners. Right, because that is one way to diversify.

Speaker 1:

Cash is a diversifier. I happen to think that the's not going to happen. Rates will be a little higher. So canvas isn't such a bad diversifier. I mean it again. It depends on the risk profile and it comes back to whether, if you want to have an impact on your portfolio, if you're, if you're, the bigger part of your portfolio goes down. Um, what do you do about it? And and and, in many ways, people want to have the cake and eat it. And the one thing I like to remind people for most people, their goal in life is not to beat the S&P 500, but to be able to afford the retirement. Do not have the assets to live themselves and whatnot, and so if you have something that doesn't keep up with the S&P 500, is that a terrible thing? Or is that something that yeah, so be it, because I can achieve my goals in different ways as well, because I own whatever real estate is, or own a little bit more cash or bonds, or gold or world miners.

Speaker 2:

Okay, let's talk about identifying. Let's go back to gold mining stocks. Here You've got a lot of experience, obviously, in the space. Let's talk about market cap spectrum large cap, mid cap, small cap. When it comes to miners, where are the opportunities highest? I think most people would probably naturally think just go for the largest, they've got the resources. I get the sense. You think that's not the way.

Speaker 1:

Well, it's just like the risk and opportunities are different, the dynamics are very different, and so I talked about gold. On the mining side, the big producers in my view, they are in a pretty bad spot these days. They have shown that they aren't able to execute on these huge projects. They need to integrate somewhere. So there are numerous issues. People reallocate from the major ETF to the closed-end fund that we mentioned. By the way, I'm not trying to pitch that too much here. There's some important disclosure on the website. If you go and travel from Merck Investments to the Gold Niners, the sweet spot in our view is kind of in the mid-cap producers producers, if you want to have in a producing mind. What we focus on is on the smaller space, on the development space, and the reason part of the reason we do that is that that's more of a venture capital approach and as and not all these companies will make it, but to the extent that these are successfully executed, you have historically a disproportionate value gain. As larger investors go in, say, we go in fairly early next round or two rounds later, the mutual funds often come in. The mutual funds are already more reluctant to go into these often very illiquid names because they have these daily flows, daily inflows and outflows often very illiquid names because they have these daily flows, daily inflows and outflows. And ETF is not going to help fund the development of a mine. But what happens and I mentioned Australia first that kind of Australian retail investors like gold miners. They are also quite index-driven some folks, and so as you get added to indices there or in Canada or in the US, and so as you get added to indices there or in Canada or in the US, the multiple on projected earnings tends to go up as these companies mature, and so there's a potential for disproportionate value gains. Similarly, when there is a fundraiser and these companies raise money, often warrants are available and then, by the way, we can help structure some of these deals how they come along. When you have a warrant, you have economic leverage in the sense that you have an option to buy more shares at a given price down the road and that warrant is in the money. So I do that and it's a win-win in our view, because we can get additional shares at a preset price. That might be attractive when the price has gone higher, but that also gives the one, gives the company, more funding for the operations, and so they like that as well, and so we like that particular opportunity set that comes with it.

Speaker 1:

It is not for everybody. It is a very volatile space. I'm certainly not saying everybody should pile their money into that. What happened just on the tail end. As far as dynamics is concerned, we had a webinar a few weeks ago and I encourage anybody to access that where we show in what sort of environment those gold and gold miners and the junior funds do well and, by the way, we are more junior than the junior mining ETF that's available in the market. But the environment that was hostile over the past 20 plus years is one where you have very low interest rates and very high inflation, and if you think we're going to go back into that, that might not be a place to be in that space. In an environment where rates come down, that's historically a very positive place to be. And again, it is not so much about what will happen but what might happen. That's how investors allocate and I think that's how people should think about the OVO environment.

Speaker 2:

I love this question from Hyper TV on YouTube. What do you think happens first? Ai and automation takes over, unemployment plummets and we're going to live happily ever after, or Fed defaults and we're doomed. All right, leave that up there. You got a lot of them.

Speaker 1:

I can't. I can't back. Yeah. So maybe on the last bit, first, we know that the rules change along the way when any government entity is in trouble, right? So having the Bank of Israel, by the way, has had a negative net worth for a long, long time. So who cares? So they can print the money, right. And the European Central Bank? Technically, the member countries should pay in when there is a loss. In the US, they call it a deferred asset. When there's a loss, right. So people come up with all kinds of interesting banks. So good luck on the quote-unquote defaults when you print your own money. That's not going to happen. But the key thing here, I mean, we can joke about it, we can criticize the Fed.

Speaker 1:

The one thing I would like to say is that the incentives of a government in debt and of investors are not aligned. They are not on the same team, and so their incentive is to debase the purchasing power Indeed in Europe. They really would love to have a digital central bank currency, but one of the key ingredients is that you have to be able, as a central bank, to debase the currency right. That is kind of what, from a government point of view is how you can finance those deficits. It's the most brutal of taxes because it hurts the middle class and the poor people the most. The wealthy tend to be able to manage that, but it's something to think about AI taking over. Certainly, ai is taking over energy consumption, that is, your Google search takes much less energy than chat GBT search and increasingly, the old people, by the way, they use Google, the younger folks use chat GBT. I feel young because of the reason. I asked chat GBT numerous questions. But there is just like any innovation. It's going to create new jobs and dislocate other people and whatnot.

Speaker 1:

Am I living happily ever after? Yes, I mean, isn't that a concept All right, or something like that? So I'll just leave it at that. By the way, to put a little bit of no-transcript, being the world's policeman is expensive, and so that is one reason why purchase metals in general kind of have a higher premium built in, in my view, and we all spoil that. Things are great, things are peaceful. It's a thing, um, I'd say. I think October 7th last year showed what happens when, when you, when you have a failure to imagine Um and I don't want to be too dark here, but I do think that, um, a lot of things can happen, and, uh, that doesn't mean prices go down right Necessarily. Lockers do get ready for things, but, um, as far as living happily ever after, I think what people can do is invest in their own happiness, and that's usually by investing in their own health and not endorsing your I mean your fasting thing here, right, or for the year you don't need anything.

Speaker 2:

Yeah, one thing that I think helps to live happily ever after is following X or Merck's X accounts. Let's talk about places that people can find your content and also your newsletter.

Speaker 1:

Yes, so on X Twitter at Axel Merck is the place to follow. That's probably the easiest way I get my views unfiltered. I cannot talk products there. Merckinvestmentscom is our website. We do have a few other product-specific websites, but you can get there from Merck Investments. Merck Investments has a newsletter sign-up the webinar I referenced. If you don't want to listen to the full webinar, a PDF is available if you click on the webinar and you can go through the slides that show about the different environments where, where different segments, how they perform. Um, that's a place to be that um. But yes, and of course, on michael michael's various channels, um, if he has me on again, that's where you can see me as well pretty sure, pretty sure I will have you on again.

Speaker 2:

Thank you everybody for watching this episode of Lead Like Live, which is sponsored by Merck Investments. Learn more about Merck Investments on their website. Make sure you follow Axel Merck, who's one of the greats in the industry, and hopefully I'll see you all in the next episode. Now I'm going to go run to Manhattan to go have lunch with Hal Lambert, who is also a really interesting character.

Speaker 1:

Thank you, Axel, Appreciate it. I like that here. I'm in California, it's 8 am here and I'm going to have lunch pretty soon too, so I like having lunch at this time of the day Cheers. Thanks and take care.

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Michael A. Gayed, CFA

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