Lead-Lag Live

Golden Opportunities: Unlocking Potential in Gold Mining with Axel Merk and Peter Schiff

• Michael A. Gayed, CFA

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As market uncertainties rise, an age-old asset is regaining its allure—gold. In this episode, we delve into the shifting dynamics of the gold market, featuring insights from experts who navigate this fertile landscape. With gold prices climbing, there's palpable excitement among industry players, but is it justified? Our discussion uncovers the reasons behind the renewed interest in gold mining stocks, contrasting the performance of larger companies versus promising junior miners.

We take you through the upcoming BMO conference, where executives gather to discuss the future of the gold sector—a hotspot for the latest investment opportunities. With insights into recent U.S. gold import data and the implications of political and economic factors, our guests help clarify what investors should watch for moving forward.

Join us as we explore the dispersion of returns within the gold mining sector and underscore the importance of active management. We’ll guide you through the complexities of investing in gold and emphasize how macroeconomic trends affect gold prices. It’s a golden opportunity to be informed about an asset that has historically weathered economic storms.

Whether you're a seasoned investor or new to the gold game, this episode promises rich insights that could elevate your investment strategy. Tune in, engage with our content, and navigate this intriguing financial landscape with us. Don’t forget to subscribe and share your thoughts!


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 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:

I think it's been over a year, I think, since I've hosted a space. I used to do spaces like all the time back in the day and then I opted to do more videos. Hopefully, this will be an interactive, solid space. So everybody that's here, I want to make this engaging, which means I'm going to invite several of you up. I want to make this as conversational as possible, so feel free to ask questions to me, to Axel Merck. Axel, I can assume you hear me, ok, I hear you. Well, yes, ok, cool, hi, everybody, perfect, all right. So, folks, I appreciate those that follow. Cool, hi, everybody, perfect, all right. So, folks, I appreciate those that follow.

Speaker 1:

Obviously, and you know, we're going to touch on a whole bunch of different topics, from gold to markets, to flight, to safety, to everything you can imagine. Do me a favor, as we're live here Like repost, try to get this room as full as possible. Any kind of help any of you can provide, we'd much appreciate it for the rough hour here. This conversation is sponsored by Axel Merck's firm, merck Investments. He is one of my clients, friend, partner and overall good human being to have in my life. So, with all that said, my name is Michael Guyatt, publisher of the Lead Lagaport. Again, I'm going to be inviting several of you up here. Axel, I want to get right into it. You had mentioned that there's some kind of major conference that either you're attending or that you're going to be attending fairly soon, talking about gold and gold's been absolutely unbelievable, really since October of 2023. I'm curious, industry wise, are you seeing more and more excitement, more and more hype? Are these conferences getting more and more full, or is there still a lot of skepticism?

Speaker 2:

Yeah, the conference I'm referring to is the BMO conference. Bmo is one of the major brokerage firms that is active in the space, facilitating many of the deals, and both our portfolio managers and our closed end fund are at the conference. It's a conference that helps catch up with many executives, especially of the smaller mining companies as well Just about every company that we invest in and then many more are present there. We, of course, see the management team throughout the year as well. In recent years the attendance has been somewhat lukewarm from the generalists. Obviously, portfolio managers show up, but then it's always interesting who else shows up? And Peter and Jamie, who run our closed-end fund. They are busy there so they haven't had time to brief me on all their conversations and they obviously they brief us on non-mergers that are being announced and whatnot.

Speaker 2:

But overall, as I think anybody knows, the gold mining space continues to be underloved. But things are happening there and the good news about the space being underloved is that we think that, despite the run-up we've seen in many of the securities, it still has good values. By the way, to make this interesting, one of the things that I think many people may not be aware of, in our analysis, the gold mining space is the one with the greatest dispersion of returns in any S&P sector. What that means is that the different mining companies have vastly different return profiles, and the reason I mention it is because it's one of the spaces where I think an excellent argument can be made for active management and we can talk about kind of the downsides of the index hogging in that space. But it's an actively, it's a space for the active manager, and these conferences are part of it?

Speaker 1:

Are the CEOs of these companies, or are the executives getting more and more bulled up and excited? I mean, let's face it, it's been kind of a long period of nothingness for gold in a lot of these companies in general. So is there, is the mood shifting?

Speaker 2:

Well, I mean, of course, a higher gold price is a positive, but the reason I kind of toned out what you say is these guys are in the business of shoveling gold out of the ground. Right, they are not you and I and many, many folks listening. They get all excited about these things, but you think about it when you have to run a business and you have to get gold out of the ground, you worry about operational things and, importantly, you worry about containing your costs, and you would not be able to raise money if you said, okay, we need $3,000 an ounce to get gold out of the ground. Now, that said, it is, of course, a tailwind to have a higher gold price and many of the small miners they need to go back to the market once a year or once every other year to raise additional capital, and so, of course, it helps to have a positive environment.

Speaker 2:

In that sense, the mood is turning more positive, but it is far from euphoric. They've just been burned too many times, they've been around for too many years, so they're executing, so they're executing. And ultimately, what happens at the other end of the spectrum, from the investor side? It continues to be the guys that get to raise capital are the ones who have had successful exits, and it's the same thing in the gold mining side, and so they. Of course, higher gold prices is a positive, but they tend not to get carried away. What's a bigger?

Speaker 1:

driver of performance historically? Is it the price of gold, the price of oil, the price of interest rates, price of capital? I mean, you know, it seems like there's a lot of different things that are impacting the space, which makes it maybe more challenging to really get a handle on.

Speaker 2:

Well, the scarcest resources in the space is good management, and so good management is really makes all the difference in terms of price. Now, what you're alluding to is, of course, the many, many disappointments that have happened in this space, and there isn't a simple answer. But let me give you a few different answers here. The major gold mining companies they have done what investors want them to do, which means they got their act together after overspending in the previous bull market, which means they're underinvested, which means their balance sheet is in good shape. But it also means that they have less leverage to the price of gold and they're playing catch up. And so those guys are invested or targeting some of these huge projects which have many risks to them, most notably that they cannot execute on price and on budget. And so what we like to focus on is more kind of the smaller bite projects where, of course, you have operational challenges that come up with any real issue. But you mentioned energy.

Speaker 2:

Well, gold mining for the producers, is energy intensive.

Speaker 2:

So, yes, of course the price of oil matters For the smaller ones, for the developers, if they're not in production, the price of oil is obviously far less relevant, but there it's more kind of, and in recent years, one of the key things was indeed the Federal Reserve, because when the Federal Reserve, by design, has tight financing conditions, it means it may be difficult to access financing, even though these mining companies of course try to get financing on the equity side much more than on the debt side.

Speaker 2:

But it impacts the price, and so it depends on the stage of the growth they're in. It depends on many factors A talent it's not hip to go into mining, and not in Australia or Canada either. So finding people that actually work these things, finding management teams and the boots on the ground on the more junior level are challenges, and so one of the good news in the current environment is that the big inflationary fears are somewhat mitigated, and also things like lithium, for example, isn't it as hit as it had been, and so the availability of workers is a little bit easier. So many of the headwinds and, as I tried to allude to, they can be rather differentiated are less so than they had been, and of course, on top of that, the icing on the cake is that the price of gold is quite favorable right now.

Speaker 1:

Typically when you have high volatility in equities, does gold more often than not diverge? I mean, from the work that I've seen, gold has some of the properties of that sort of flight to safety dynamic. When you have a major drawdown in equities, gold tends to either be done a lot less or actually rally to counter. I'm curious to hear your thoughts on that, because the tone of the market seems to be very different here.

Speaker 2:

Sure. Well, investors invest in gold and gold miners for all kinds of reasons. You're referring specifically to the diversification investor and many people have heard that the price of gold has a near zero correlation to equities in the long run. But it is not zero all the time. It tends to morph in and out. It's sometimes positively correlated, sometimes negatively correlated, sometimes not correlated. What you're referring to is the sort of more severe downturn environment and I like to frame it in the context of interest rates that, let's say, you have the shocking surprise that the economy is weaker than expected and that means the Federal Reserve might be lowering rates faster than expected, and that means the Federal Reserve might be lowering rates faster than expected. In that sort of environment, if it's a shallow recession, then the market is a discounting mechanism and equities might not be heard much. But if the market anticipates a more severe recession, then traditional equities may well be significantly impacted and the urge of investors to diversify is all the greater. And the gold miners come into play here because they benefit from the lower interest rate environment which helps the price of gold. And so it's when you have, and the extreme scenario was, of course, 2008. But in that sort of environment, gold miners tend to shine. Now it doesn't have to be that extreme and we have it on our website at MerckInvestmentscom.

Speaker 2:

We have a link to a webinar on the closed and on the mining space and we show in what environment the gold miners tend to do well, tend to do well and we're just shifting from what we call kind of a high interest rate, high inflation environment to a high interest rate, low inflation environment and, I apologize, a lower interest rate and still somewhat high inflation environment, and it's the anticipation of what might happen in the future that provides a boost to the space.

Speaker 2:

And in fact, this is the space that we're in that historically, if we look at the last 20 years, has been the most favorable one for the gold miners and we see that, of course, in these gold miners developing well. I have, for compliance reason, I have to say there's no assurance that that will persist, but it's really only the environment where we had this very low interest rates and the high inflation, the financial repression environment, that the gold miners perform poorly. Currently we are somewhat in the sweet spot and part of the reason is that these markets are forward-looking and even though this recession that everybody forecasted forever never happened. It is what might happen next. And because the market is a discarding mechanism and the market is expecting that this environment is such that it appears to be favorable to the miners for the time being.

Speaker 1:

Let's talk about some of the other diversification benefits of it. And obviously gold's been a much better risk off in quotes hedge, certainly during false signals of scares in the cycle the last several years. Do you get a sense that there's been more and more allocations in general to gold, to gold miners, or is it one of those trends that people are observing it, they're talking about it but they're not really playing it?

Speaker 2:

All of the above and there are some shifts in the focus within the space. So the first of all, aside from the diversification investor, there's the investor worried about the purchase and parallel dollar. There is also the speculator. The speculator has largely been absent, and what I mean with that? They've been attracted more to meme stocks, digital currencies and whatnot, but we have seen increased interest in what we do. That may well be more specific to what we do directly, and I alluded to that. The major miners have had some issues with the large projects, and I alluded to that. The major miners have had some issues with the large projects, and so there's been quite a bit of disappointment in the large miners.

Speaker 2:

And since we focus more on the junior space, we have been getting a lot more attention.

Speaker 2:

We've had a lot more conversations in recent months and people are trying to figure out how to invest in that space. As anybody on this call hopefully knows, it's a very speculative space and there are different ways of investing in it. We focus, as I alluded to, in investing in management teams and then we help finance these companies to we call it. We help institutionalize these companies, participate in deals and help them grow larger so that then other investors in future funding rounds can join in, things that are very difficult to do outside for individual investors in particular, and so it's not clear to me whether the kind of the overall space has got much more attention, or just what we do simply because we are in a space where we happen to think that there are a lot of opportunities. It does look like investors tend to agree or maybe, more importantly, they are disillusioned with the major ones and they're looking for before abandoning the space entirely, they're looking for other ways of potentially playing that space.

Speaker 1:

Peter, I am ready to come up. Feel free to come up anytime on this. On the junior miners, is it a similar dynamic to what we see big picture wise, with just small caps in general versus large caps, meaning there's a huge divergence that's happened over the last several years between the larger players in the gold space, gold mining space, versus the smaller players?

Speaker 2:

Well, it's a more complex dynamic in the sense when you invest in a junior miner, you're literally buying an option for them striking gold, and so the talk, if you want to call it, the leverage you have is dramatically higher than simply the little nuances in performance in other sectors in the market.

Speaker 2:

And so, after the Federal Reserve put that in the fall of 2023, after Powell kind of toned down the hire for long environment, those companies started to come to life.

Speaker 2:

The higher for long environment, those companies started to come to life. But, all that said, the market as a whole is paying less for an ounce in the ground than it used to, and indeed we shifted in recent years from explorers to developers, because you can buy developers cheaper than you can buy the explorers and help them become development companies. And so another way of saying that is that the values continue to be befrissed. Now, if you look at the returns, some of them have been rather substantial, but given where the price of gold is, one could make the argument that they could be significantly higher. And I'm a known insider buyer in that space, and the reason I am is because I do think that the market is slowly waking up to the opportunities there and, as you pointed out earlier, equities in general are expensive and there are more investors looking to diversify. So to me I can stomach the volatility in the space and I certainly like the value that's available there.

Speaker 1:

I think a lot of things are expensive. Peter, I want to bring you into the conversation. I've been seeing your posts on Japan and the reverse carry trade. I'm glad I'm not the only crazy one that's been hammering that for the last year or so as being a tail risk. I know you've been a longtime gold bull. I was talking to Axel here about you know, is there excitement in the space? Gold bull, I was talking to axel here about you know, is there excitement in the space? And it seems like in general there just isn't, which is probably why the trend continues. Um, any thoughts on, uh, gold sort of as a, as a signal? Uh, throughout all this I've been saying that repeatedly that gold is sending a warning and equities have just not heated it as they've gotten more and more expensive. But, um, is there a message in the way gold's been behaving the last year or so?

Speaker 4:

I think so. I mean, axel and I have, you know, been watching and buying gold for a long time. You know, I, when I first started recommending gold and buying it for my clients, I was like it was under $300 an ounce. So it's basically 10x over that time. And you know people haven't heeded that warning at all. You know, the stock markets, you know, until very recently were at record highs I mean not priced in gold, of course, they were far from record highs in terms of real money, but investors didn't really pay attention to what gold was saying. Investors didn't really pay attention to what Gold was saying. But I think you know it's about to say it a lot louder in the next several years because I think the debt problem is really going to kick into a higher gear here.

Speaker 4:

Because you know, the Fed prematurely aborted the feigned inflation fight. It never raised interest rates into restrictive territory. The credit continued to grow the entire time the Fed was hiking. So rates never got high enough to cut off the credit growth which is part of what's inflation is the expansion of money and credit. And even though they slowed down the expansion of money, they never slowed down the expansion of credit. And of course, money is. Supply is growing once again, and so even the way the Fed measures inflation. It's risen now for the past four or five months in a row. Most recent month, cpi is annualizing 6.2%. Most recent quarter is 5%. It's on an uptrend.

Speaker 4:

The Fed's going in the wrong direction. The Fed's cutting rates, but I think what's going to happen is the hidden recession that I think we've been in for the past year or more is going to be laid bare, probably in the first year of the Trump presidency. That's going to create a lot of pressure on the Fed to cut rates more. A lot of pressure on the Fed to cut rates more, maybe even return to QE to keep long-term interest rates from rising to stimulate the economy. But that's going to happen at a time where inflation is high and headed higher, so it's massive stagflation.

Speaker 4:

The Fed has no plan for that. They admitted that. All they can do is hope it doesn't happen. They've never stress tested a bank for that, because they know the banks would fail. So I think that we're headed for a real currency and sovereign debt crisis that we've been heading for for over a decade. But the fact that we've been able to postpone the inevitable just made all the underlying problems worse. And you know I think you know you guys are talking about gold stocks. You know it's amazing to me. You know I put more of my own personal money into gold mining stocks than I did to gold because I was so bullish on gold I thought I would make more in gold stocks and I outsmarted myself.

Speaker 1:

And in that allocation have you tilted larger, smaller? I mean, what part of that gold mind space?

Speaker 4:

Mostly, mostly the bigger companies, you know, and I've done well with, like Franco Nevada and Silver Wheaton and Agnigo Eagle. But I've also had a lot of money in Newmont and Barrick and you know they've just been, it's been like dead money for 20 years and I've had, you know, although a lot of my Newmont and Barrick I acquired not because I bought them but because I own the companies that they acquired over the years. But I have bought some. But you know, I have a lot of money in gold stocks and silver stocks and I would have just done better off if I just owned all physical gold, you know, given that you know where I started buying it. But I think the reason that gold stocks are as cheap as they are right now is because Wall Street has been bearish for the entire rally, especially the last couple of years, where the public has been net liquidating gold. Overall, last year it was net outflows of GLD, net outflows from GDX and GDXJ. Um, you know, I think part of that has to do with the euphoria in tech and AI. Part of it also has to do with the distraction created by Bitcoin, uh, and the idea that it's better than gold. It's the new gold, it's digital gold. I think that's kind of taken away some of the marginal retail buying. But it's also kept a lot of the focus off of gold in the media and the financial media that is preoccupied with Bitcoin and barely mentions gold, even as it hits new record highs every day.

Speaker 4:

So that's great for the central banks because they get to buy it without a lot of competition. Central banks don't buy silver. That's why it's still cheap and they don't buy the mining stocks. But I'm continuing to put money into these stocks. I mean I haven't bought any in the recent weeks for myself, but I did buy quite a bit months ago in the last correction. I mean I tend to add to my own positions when there's a meaningful correction because I've got so much money in these stocks, having been accumulating them for 20 years. But you know I have a much bigger position now than I did then. I mean I'm positioned very well for these stocks to go up 10X or you know, I think that's going to happen and for people who are gambling on Bitcoin, I think it's a much better risk reward to get in these mining.

Speaker 2:

Maybe, peter, you should be investing with us. You are one of the few ones that actually beat the price of gold. Let me expand a little bit on what you say, peter, because you've made some very interesting points. This recession that quote unquote never came. One of the reasons is that the Federal Reserve is ever more micromanaging the economy. If you bail out the banking system when they mismanage interest rate risk and whatnot, sure we're not going to have a recession and whatnot? Sure we're not going to have a recession. But I think it was just our statistic that 10% of the top 10% taxpayers spend over 50% of retail spending in the US these days. So there is a yes, I would 100% agree. There is a latent recession. We just don't see it On the price of gold, just where it might go. Historically speaking, gold is always the sort of thing you want to be glad you had. With hindsight never quite know what you have in the future.

Speaker 2:

As Peter is pointing out, a key reason why gold and also gold miners have had more tension is because of the concerns about the fiscal sustainability. And as much as some on this call will love and others may hate what the current administration is doing, I'd like to remind everybody that fiscal sustainability is really not top of the agenda. There is no entitlement reform. There's talk about making the tax cuts permanent, but not in any way that would fix the long-term issues and with the tight majorities in Congress it's, in my view at least, very unlikely to happen. You have to give gifts to everybody to get this stuff passed, and while we might get more growth with deregulation, while we might get a kind of the enthusiasm to invest unleashed with the current administration by some people, none of that fixes the big long-term issues.

Speaker 2:

And the thing that has changed. When Peter and I talked in the early 2000s, we were on the fringe. Now it's becoming mainstream to talk about the fiscal sustainability and in my assessment that is a huge positive for the price of gold. I have to talk in this convoluted way because my speech is regulated, but I put my money where my mouth is, having been on the record in buying the gold miners.

Speaker 4:

Yeah, you know the other thing that people don't seem to understand. You know, if we're going to really make America great again and go back to a country that manufactures and doesn't run trade deficits, where we can produce for ourselves, that transition involves a protracted recession with big drops in asset prices, much higher interest rates. Trump doesn't seem to appreciate that. He thinks it's going to be an immediate golden age and that foreigners have been taking advantage of us. It's actually the reverse. We take advantage of the world because we consume what they produce, we borrow what they save. So the world has been subsidizing the American standard of living, now to the long-term detriment of America, because these trade deficits have a cost. You know we're selling off our cows to buy milk. You know foreigners accumulate assets as we go deeper in the debt. So there is a long-term price to be paid for this profligacy, but in the short run, we live a higher standard of living as a result, and there's no way to get from where we are to where we need to be without a lot of people losing a lot of money and without a big short term decline in our living standards, as we have to stop spending money. People have to stop buying stuff so they can save money, so we can take the savings and build factories and recreate supply trains and train workers so that we could be self-sufficient again. But we're not going to have that because Trump did not prepare the electorate for austerity.

Speaker 4:

Going to have that because Trump did not prepare the electorate for austerity and I believe that you know, as soon as the recession is back, trump is going to be back to the same old stimulus let's send out stimulus checks, just like he did during COVID. All that was a mistake during COVID. The whole policy, the fiscal and monetary response was completely wrong. But that's all they can do because they can't allow a real recession to run its course. Because it means you know banks fail. It means you know.

Speaker 1:

I don't, I don't sorry, we're a softened generation. I mean you use the term protracted contraction or recession. It's like when was the last time we actually had a recession that lasted for more than two months? Yeah, it doesn't seem like there's no.

Speaker 4:

They won't allow it. They won't allow it. But the recessions are actually the cure for what ails the economy. You know the government screws the economy up with artificially low interest rates that misallocate assets, lead to bubbles and all kinds of mistakes that are made, and it's during the recessions where they're corrected. But you know, the politicians intervene, but so we're heading for a big crisis. Nobody still gets that.

Speaker 4:

You know, as we're talking, you know gold is down about 50 bucks today, which you know is nothing compared to what Bitcoin is down Actually $43, 48, now almost 50. But when you look at what's happening with gold, right, so gold's down about one and a half percent. But now the gold stocks. You know, although GDX is down 3%, gdx stays down, you know, a little over 3%. You know it reacts to the daily move in the price of gold without realizing that gold is still above 2,900. I mean, that is a very high price for these gold mining companies that are not even really priced for 2000 gold, let alone 2900. But the market still reacted.

Speaker 4:

Traders, oh, gold is down, so sell the gold mining stocks without any regard for how cheap they already are.

Speaker 4:

This, this is all a bunch of noise and especially since gold is likely to be closer to000 at the end of the year than 3,000. And sure, mining costs are going to go up, but not nearly that much, you know. So most of these stocks are trading the big stocks are probably trading as single digit multiples of what they're actually going to earn in 2025, you know, which is a massive discount to the S&P, which is ridiculous, because they probably should trade at a premium, especially given where gold is likely to go to the S&P, which is ridiculous because they probably should trade at a premium, especially given where gold is likely to go. Gold is up 10x, but it's really not up very much at all If you compare it to where it was in 2011,. It's only up 50% since the 2011 peak and we've created a lot of money since then and a lot more money is going to be created. I mean, gold's already gone up, you know, 100x from where it was when the Federal Reserve was started, because it was $20 an ounce, and now it's.

Speaker 1:

And, by the way, I remember very well in 2011, the gold bugs and the sentiment and the beating of the chess bag. You don't have any of that today. I want to get Eric.

Speaker 4:

I know, I remember very well that period and people gave me a lot of shit because I was saying gold's going to go to 5,000. And of course it's going to go to 5,000, but a lot later than I thought. But now I don't say 5,000. It's going to 20,000 or 30,000. I mean, you know it's a moving target because the supply of money in the world dollars and euros and yen and pounds have exploded since then. So to try to figure out where gold should be, it's much higher now than I thought it should have been back then and I want to get eric because he's been waiting patient.

Speaker 3:

Go ahead, erica hi mike, uh, thank you for having me on, yeah and uh, peter, hey, I just want to say I'm your big fan and, um, you're one of the biggest reasons why I go into gold.

Speaker 1:

By the way, Axel should be a bit. You should be a fan of Axel's too. In fairness, I mean, Axel's the man. Okay, I'm just going to stop yes.

Speaker 3:

Go ahead, but I was listening to the Peter show back in 2018 and 2019. And I really loaded up back when it was around 1200 bucks. So thank you, Peter. Thank you for that. Anyway, I got a question for Peter. Peter, do you know that in the last two and a half months the US imported around's been a lot of speculation as to who owns that gold and why it's being imported?

Speaker 4:

Are they trying to front run potential tariffs? Is it US gold that was leased out, that we're trying to get back into Fort Knox so that when we go there it's there? I don't know, but it is very curious.

Speaker 2:

Yeah, let me. Let me maybe put some clarity on what's happening there. As some of you guys know, we do have about 15 tons of gold stored in London. It's part of one of the things that we do, and so we monitor this market very, very carefully. It's the threat of tariffs that got folks to say well, if we want to have gold in the US, we might as well have it available before tariffs are imposed. And, by the way, nobody thinks that gold is going to be targeted explicitly. The idea is that there will be some blanket tariffs and gold will be caught up in that, possibly sorted out later on. But the folks at the COMEX, where historically inventories are very, very low, have decided we want to have more gold. It turns out London boss the institutionalized boss, that are in London are are not suitable for Konex, so gold has actually been sucked from London via Switzerland, where they're converted to kilobars, to the US.

Speaker 2:

Now there is plenty of transportation capacity, there's plenty of refining capacity, capacity, but a lot of the gold that the clearing brokers in London that provide liquidity in the market in London are enabling is stuck at the Bank of England. The Bank of England has a completely antiquated inventory system. Typically, when you have your gold with a bank or an institution, you have a palette where you have your gold and at the Bank of England they start to do computer entries when gold is shifting around. So any one palette could have the gold of a gazillion of different customers. And while the gold is there and they can procure it, it takes forever, and so when I last talked to them about a few weeks ago, the backlog was until the middle of April to get any additional gold orders into the pipeline, and that means there's a shortage, a potential shortage of gold available.

Speaker 2:

Now the beautiful thing is that there's this beauty thing called the price. So if there were to be quote unquote not enough gold in London, you would see either the price of gold move higher if there wasn't enough at all, but more so if the bottleneck continues to be the end of England and it were to become critical, you would see the spreads in the gold exchange-traded products widen because selling and buying would be different. And so it's the spreads and the gold exchange rate of products you want to watch. In the meantime, of course, the allocated gold remains allocated gold in London. And the other thing if there were tariffs imposed.

Speaker 2:

The one thing you would expect, of course, is that the premiums for coins that you buy in the US might go up, but also the premiums for US coins might go up because the demand might shift. So there's all kinds of stuff happening, plenty of space for conspiracy theories. But the one thing I would like to relate this to is when we have the negative crisis in oil, there is physical movement of gold involved, and all these decals matter. And one thing maybe, before I kind of wrap up here on this one, is that the price of gold. When you hear the price of gold, what that is is the price of gold offered by the clearing brokers in London, and the price of gold in other locations might be different, but the price of gold that we typically hear quoted, that is a very specific price of gold in London.

Speaker 1:

I love it. Let me get you back up here, peter. So I just saw you uh dropped off eric. Does that help explain things? Yeah, that's pretty good, thank you. Thank you, and I can be a fan of that. Thank you very much. There you go exactly. Uh, yes, I do want to uh talk about kind of more recent market action and and get uh actually your take as well as peter, if you come up here.

Speaker 1:

Um, I've been alluding to this idea that it seems like the tone's a little bit different. The last several days was almost more like it's a growth scare and what it's making me say that is unlike what we've seen the last three and a half years, which has been my personal hell. Markets go down, yields go down. You're starting to see that kind of more classic flight to safety disinflation, maybe deflation pulse that's beating. Flight to safety disinflation, maybe deflation pulse that's beating. Anything that you can point to Axel that suggests that that's, or maybe at a cycle turn here where maybe the thinking shifts from that high inflation, higher rates, to now this more classic inverse relationship, kind of kicking in.

Speaker 2:

So, talking about the broad equity markets, I think we have seen classic signs of a topping out phase. I've compared this environment to the late 90s and early and then 2000, specifically, with the key difference, of course, is that the debt situation is very, very different, and so it's one of the reasons why, in the current environment, the price of gold is reacting much more, and as we're talking today, I just I sent a message to one of my team Now this is selling pressure here, and the response was they're selling pressure everywhere. And, of course, when you have a credit bubble or a euphoria on investing in the MAC7 or whatever you might want to call it, at some point something will tire out. But it's not like people are just flipping a switch. Remember, in 2000, the NASDAQ topped out in March and I think the S&P only in September. It takes a while for this enthusiasm to kind of fizzle out, and then we already have this environment where only the top 10% of earners are spending a great deal, and we have this shadow recession, or whichever way Peter called it right. And so now, if you had equity markets at lunch, it could well be that the appetite of the high-end consumer to spend is also fizzling out, and then, yes, then the Federal Reserve is likely to react, which is a good thing for the price of gold.

Speaker 2:

Keep in mind that almost always when the Federal Reserve cuts rates, they didn't plan to do that as aggressively as they did. Things rarely ever worked the way that they were planning it. And just one more thing on the Fed they have their five-year review now. Not once have they admitted how they completely screwed up the inflation they just planned. Oh, everybody had the same problem, and so I don't expect much of substance to come out, other than that one of the things that happened in recent years everybody's hero, ben Bernanke and I'm being a bit sarcastic here, just in case, kind of was praising this increased micromanagement that the Federal Reserve is doing. So the folks at the Fed actually think what's happening is a good thing, and they can quote unquote manage this economy ever better, and to me that's more of a command economy type of thing than anything else.

Speaker 1:

Peter, I'm curious if you have any thoughts on this. It's like I said, I think it's an interesting change in the environment here, and it looks like you're on mute, by the way.

Speaker 4:

I mean, good news is bad news or bad news is good news. Look, I think the markets rallied most recently on the Trump win and the idea that this is going to be pro-growth, good for business lower taxes so I think that was the last leg of it. But I think that the markets are overpriced and have to come down, given the reality of much higher interest rates than what anybody expected. I was one of the few people who was forecasting that long-term rates would rise as soon as the Fed started cutting short-term rates, and most people didn't expect that to happen and they were surprised. So, given what's happened to rates, I mean stocks need to come down, and I think people are starting to realize that the Fed really no longer has the control over the long term rates unless it goes back to quantitative easing, which it's still saying it's not going to do. It's still doing quantitative tightening, and so rates are going to go up. Even if the Fed were to cut rates more on the short end, it's just going to put more upward pressure on the long end.

Speaker 4:

You know that's the predicament that the Bank of Japan is in. When they printed their 4% CPI a couple of days ago and yields started to rise, the Bank of Japan came out and said okay, we're going to start buying bonds if yields keep rising like this. And then the market turned around briefly. But if the Bank of Japan prints more yen to buy more bonds, it's just going to push up Japanese inflation even higher, which is the reason that Japanese yields are rising. You've got an overnight rate in Japan of a half a percent and you've got four percent inflation heading in the upward direction, and at some point I think maybe this year Japan is going to have to officially acknowledge that its goal of achieving two percent inflation now has to be fought in the other direction. I mean, they're still pretending that they're trying to get their inflation rate up to 2%. Now they need to get it down to 2%, and they haven't even acknowledged that that's the case, and in fact, none of these central banks are going to be able to get.

Speaker 1:

Is it fair to say I made that. I put out that post which went a little viral. I said you know, literally the entire country of Japan is insolvent if you mark the market and nobody gives a shit. And like, am I crazy and thinking that gives, given the way that yields are acting, given how much leverage there is from Japan?

Speaker 4:

Well, I think Japan is more solvent. In the US, I mean, japan could liquidate their treasuries. That would pay off a good chunk of the debt. But you know, the Japanese people have a lot of savings. They can pay higher taxes, you know. So I think Japan is more able to afford this debt than probably we are.

Speaker 4:

But you know, the bigger problem I was just trying to point out and try to make is all these central banks, you know, are now going to have to lie in their own bed, so to speak, because they all created this myth of a 2% inflation target and nobody had a 2% inflation target until inflation was below 2%. And then and of course it was never really below 2%, but the way they measure it, it was. And so you know, Ben Bernanke, you talk about him he came up with the idea of a 2% inflation target in 2012, when inflation measured by core CPI, pce, was 1.8. And he said well, that's not enough, we need two. As if they could micromanage it to that degree and dial up 1.8 to two.

Speaker 4:

But there never was a mandate for 2%. The unofficial target was always zero, because the Fed's mandate was price stability, not prices that go up by 2% a year. But they only came up with that asinine number as a target to justify 0% interest rates, to justify QE. But now they're stuck. Now they're stuck saying inflation has to be 2%. They're never going to get it back down there. And the origin originally was New Zealand, but New Zealand never had a 2% target. They had a 2% ceiling when they initially Now they have a target between 2% and 3%, because they were forced to raise the ceiling when they couldn't meet it. But it was supposed to be a ceiling.

Speaker 2:

One of the challenges that all the central banks have is that they don't have a strategy. They are completely doing things off the cuff, and we saw that obviously last December when it became apparent to everybody that they're just shell-shocked. Oh my God, the election changes things. They have taken away their gauges. They used to be able to look out on the yield curve as to what the market is thinking these days. They have managed to yield curve so much that they don't have it anymore, and they used to have insight into what's happening in the banking sector with the treasury desk that they had at New York Fed. Now they pay interest on reserves and have a convoluted set of regulations that distort everything, and so they're reading the tea leaves, they have a debating club, and then they lack a long-term strategy. And then anybody should be surprised that the result is quote unquote suboptimal. And, by the way, one of the side effects of micromanaging the economy is that you have inefficient capital allocation, and so all of that means you have a higher cost of borrowing. You probably get higher inflation when all this comes.

Speaker 2:

The reason why anybody pays attention to the Federal Reserve at all is, of course, because they have the bazooka, but it would be very helpful if they just got out of the way and replaced the debating club with something else like a rules-based system.

Speaker 2:

In the absence of that, we have to live with it, though, and so we know what they will do. They will cut rates when there is a recession, and otherwise they'll be noodling around. They'll keep rates a little bit higher than many people anticipated, and the rest has to deal with it, and the dealing with it is I mean. Peter says Trump is going to write stimulus checks in a recession. I don't know whether it's going to be a stimulus check or not, but it's certainly something of a stimulative nature, right, and we know the playbook of the policymakers, and in all of that, gold just does nothing. Gold just is. The price of gold changes, of course, and, when it's all said and done, the interests of government and the interests of investors are not aligned, and one of the ways that I personally deal with it is I have a gold allocation to hedge the craziness of our dear beloved policymakers.

Speaker 1:

I note a little sarcasm in that, Eric. I saw you unmuted yourself. I don't know if you want to add some additional questions or comments. Yep.

Speaker 3:

Thank you, michael. So I just want to move back to the tariffs situation with the gold impulse, and initially I actually agree with Axel. I'm talking about a month ago when this situation first came about. But since then a lot of data came out and I have a lot of questions regarding that narrative of tariffs being the primary reason of why the gold flows into the US shot up like a rocket. I said just earlier that total impulse of physical gold into the US in the last two months is approximately 2,000 metric tons. That's from the StoneX and also BullionBalt, which, as you know, they are a member of the, from the StoneX and also Boolean Belt, which they are, as you know, they are a member of the LBMA. So I think that number is reliable.

Speaker 3:

Now, if you guys recall, in 2020 to 2021, the total number of weight of amongst of physical gold that was imported into the US was around 600 metric tons. So this is pretty extreme for two and a half months for the US to import 2000 metric tons into the country. Now, the COMEX only imported approximately 674 metric tons during that time. So two-thirds of that are from OTC imports, like over-the-counter somewhere. Okay, so back to the tariffs narrative. Why back to the tariffs narrative, why I mean it doesn't make any sense, because why would somebody anybody import all this physical gold in such a hurry in two months just for a potential tariff? That may or may not happen. And I may add that the massive impulse of physical gold started at the end of December 2024. So that's a full month, a month and a half actually, before Donald Trump announced the tariffs.

Speaker 2:

The market doesn't wait for tweets by Mr Trump, but Donald Trump was even present that tariffs might have been coming.

Speaker 3:

He wasn't even in the market at that point.

Speaker 2:

Well, that's correct, but of course there was anticipation that he's going to go in. But the broader point here is that these markets are efficient and the market mechanism works, and it is actually very cost effective to move gold from London to the US, as crazy as it sounds. It's because the kilo bars trade at a slight premium over the London bars, which means it doesn't actually quote unquote cost much to move the gold from London via Switzerland, have it refinedinery to KiloBars and brought them to the US, and so when the market participants believe there might be an arbitrage opportunity, by all means it's going to be sucked in that direction. The one thing that I'd like to point out is that it is only London that has the mechanisms in place to actually facilitate institutional trading at scale, and no other place, including COMEX, is actually really good at doing that.

Speaker 2:

And I'm not saying that gold is not going to the US. What I'm saying is that any distortions in the price you will see in the pricing mechanism works right. Comex gold might be priced differently from London Gold, and if then there's going to be more demand for London Gold and it's not available, guess what? That price is going to go up. So all I'm saying is that this market is actually functioning and, yes, we can speculate as to why it's happening and maybe disagree on the details. What I'm saying is this market is actually working as it should.

Speaker 3:

I don't doubt that it's functioning. But let me ask you another question. Axel Reuters reported on January 29th that the total amount approximately okay, the total amounts of physical gold from the LVMA to the ComEx is approximately 400 metric tons made to the ComEx is approximately 400 metric tons. Now, that would make sense because the ComEx inventory numbers of total impulse since the end of December is now at 674 tons, like I said before. So that progression makes sense. If the impulse didn't shrink during that time period, right. But remember what I said earlier During this time period the total number of gold imported into the US was 2,000 metric tons. So we are talking about two-thirds of this not from the LBMA, from OTC markets that Before you over-interpret the data too much.

Speaker 2:

You use the word now. I'd be very careful with that, because a lot of the data that we get is delayed, and so you might be comparing apples and oranges on some of these things and so jumping to conclusions as to where that is and whatnot it could be. There could be things in transit, there could be many other things. We're dealing with physical gods here and strict reporting guidelines by the different entities, and so there will be discrepancies, and it doesn't necessarily mean that something is out of the ordinary or out of order. I mean, of course, it's out of the ordinary to have that much gold being shifted to the US, to have that much gold being shifted to the US. I just be careful in reading conspiracy theories into things, when people are collecting data from different sources that may not be compatible and then trying to impose a narrative to it. What we do know is that this movement is happening right. I mean that nobody is disputing but we also know, of course, that the US has a history of confiscating gold and other things. Right, currently, it's in the interest of market participants that want to have gold in the US to actually put it there in case a terrorist were to be imposed, and the cost of doing so is low.

Speaker 2:

Now, can that create distortions in other markets? Sure, and notably and we haven't talked about that as much enough the Bank of England. Already a decade ago I was told by the roles managers there that the only reason why they really do business with the Bank of England is because the Bank of England they're so large. But it is a pain in the butt to deal with that, and when it is a squeeze like we have right now, those operational aspects come to the forefront and might create dislocations in the market. The quote-unquote good news is that these dislocations will be visible, and I alluded to on the most basic level is the spreads and the gold ETFs, of course. The other place of course you can look at is the gold lease rates. They are off their peak, by the way, and so I don't want to be here too alarmist, because that one here suggests that some of that pressure is abating and this market might be finding a new equilibrium.

Speaker 1:

So your pressure is being abated. I do have to wrap this space up because I've got a podcast I'm hosting literally in two minutes. Special thanks to Peter Schiff for joining and, of course, axel Merck. Eric appreciate you participating Everybody. Please make sure you follow Peter, make sure you follow Axel. Also make sure you follow Eric. I mean, why not? You know and follow me. We'll do a few of these spaces. I'll try and do these a little bit more often, but thank you, ryan, for joining and actually any parting words on your end.

Speaker 2:

Well, if you are interested in a gold standard, have your personal gold standards. Don't trust the government to take care of you.

Speaker 1:

I think Peter would agree with that.

Speaker 4:

Thank you, buddy.

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Michael A. Gayed, CFA

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