In this episode, Axel Merk—renowned macro investor and founder of Merk Investments which manages over $2 billion in assets—joins us to break down the economic fault lines shaking today’s markets. From exploding U.S. debt and central bank missteps to the enduring power of gold, Axel gives an unfiltered look at what’s really driving inflation, interest rates, and global market dislocation. If you’re serious about understanding the macro trends shaping your wealth, this is a conversation you can’t afford to miss.
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Transcript
Monetary Metals:
Welcome back to the Gold Exchange podcast. My name is Ben Nadelstein. I am joined by Axel Merk. Axel is the CIO and founder of Merk Investments, which has over $2 billion in AUM. Axel, welcome to the show.
Axel Merk:
Great to finally be with you, Ben.
Monetary Metals:
Yes, it’s been far too long, and we finally got you on the show. Very excited about that. Axel, let’s start with just a brief overview of maybe your background, who you are, how you got into the gold space, just so people know a bit about who you are.
Axel Merk:
How I got into the gold space? I can tell you that the first time I invested in gold in Ernest was in the early 2000s. We launched our first mutual fund in 2005 that always had a gold component in it. We nibbled in gold in various ways or forms. We launched a gold product in 2014, and then we started managing a gold mining fund in 2019. And how I got into that, as I mentioned, we started our first mutual fund in 2005. That was actually a currency fund, the hard currency fund. And part of the reason it was a currency fund rather than a gold fund was because I needed to differentiate myself. We were, and it was our first public retail product. And as you can tell, I have an accent, so I pick up currencies. I sound like an expert. If I have an accent, might as well apply that. But in all seriousness, what we did is I’ve always been somewhat of a macro person and focused on deep dive into central banks. I trust we’ll talk about the Federal Reserve quite a bit, but I’ve had the pleasure and the torture of listening to just about every ECB call and just about every FOMC call.
And so I root my opinions based on fundamental research. And all of that is, of course, relevant for the gold space. And then the eurozone debt crisis came and people said, oh, we don’t like the dollar, but we don’t really like anything else either. And so whenever we veered away from currencies, or anything more traditional, our investors pushed us back. We once had a mutual fund in the market that had a currency overlay, a fantastic product, but we couldn’t sell it. And so that didn’t live too long either. My own background, I actually have a master’s in Artificial Intelligence, so I’m super hip in many things, a master’s in Computer Science. Now, that is from a few years ago. That master’s degree was in 1992, but I have an opinion about things, so that hasn’t changed. I have quite a quantitative background, although for most of my public communication, I focus on the macro things. And in our shop, you mentioned a little over 2 billion, currently 2.4 billion in gold and gold mining. What we do is really we are very analytical, and yet we love focusing on the qualitative thing. We marry the two, and you can torture yourself in many different ways, and we do it by doing deep dives into both, and as I indicated, having opinions about everything.
Monetary Metals:
Let’s start in that gold space for a second. Usually, gold is just a interesting asset to have in a portfolio because it moves differently than stocks do and bonds do. Often, it’s hard to have it correlate to anything. For a lot of people, they actually want an asset in their portfolio that is uncorrelated. Starting there, how is it in terms of analyzing from maybe a quantitative perspective, gold and gold prices? Because part of the appeal of gold is it’s so hard to pin down. And yet, on the other hand, you have to have some strategy or some way of thinking about gold and where it’s going in the How do you marry those two paradoxical tensions?
Axel Merk:
Well, we can talk about that for ours because you list various topics. And if need be, I can disagree with myself. But let me first untangle some of what you have said. So gold, people say gold is not correlated to anything else. Well, that’s almost true. If you look at the returns of gold over the long run, you’re correct. The correlation to just about any other asset class is near zero. But that doesn’t mean it’s always zero. It’s morphing in and out. Sometimes it’s positively correlated to equities, sometimes negatively correlated to equities, and sometimes not correlated to equities. There’s one thing it historically is more correlated to to others, and I say historically, because even that hasn’t applied as much of late, which is so-called real interest rates, long-term real interest rates. And if you just have real interest rates, it’s supposed to be what you get after a net of inflation. And of course, Because many in the audience will argue, Well, what the heck? We don’t know what long term inflation is anyway. And then who cares about these government metrics to begin with? Well, the relevant part is that you can actually measure what the market thinks it is.
And if you look at correlations, just abstractly speaking, it makes sense that gold moves when the perception of the long term value of the currency is changing. And so think about it, you’re holding this barbaric relic in the long run, and your competition is long term cash. Well, it’s worth holding it if your cash is depreciating in value, is not holding up its value. And so these long term inflation indicators, by the way, are confidence indicators in my view. They don’t tell you what inflation is going to be a decade from now, but it tells you about the confidence that the market has in monetary policy. And so the other one, of course, you said, right, you got to know how to deal with it. The beauty about gold is that it’s so simple. And unlike silver already, it has very little industrial use, which makes the dynamic simpler. The other side The benefit of that is that it attracts more technical investors. Because they are a few of fundamentals, it attracts more technical investors, and that can become a self-fulfilling prophecy. And so it reacts more into technical analysis than other things And then, as you point out, diversification and whatnot.
The way we look at this sector is that I believe that different types of investors. There’s the diversification investor. That’s often the professional investors as well. There’s the purchasing power investor who’s mostly concerned about the erosion of the purchasing dollar and purchasing power of the currency. And of course, much of investing is about that. Gold is just a pure play of doing that. Another investor is the speculator. They haven’t been around too much, but if gold is on a good run, they might jump on the bandwagon, increasing volatility. They are more in meme stocks these days. And then, of course, you got central banks and you got actual jewelry usage. And so all these different types of investors have slightly different dynamics.
Monetary Metals:
I want to ask you about why do you think institutional allocation to gold has been, in general, pretty low or pretty small, whether it’s family offices or broader institutions. Then when you go to the far right, you get central banks where some of the biggest institutions in the world, and they love gold. And then, of course, you have some retail traders who also love gold. And yet it feels like there’s a trough in the middle where, I don’t know, a family office goes, gold, I don’t know, I have other options. Why do you think there’s that weird trough in the middle where the smaller investors might like gold, large big investors like central banks love gold? And then in the middle, there’s this gap where gold is often missing.
Axel Merk:
Well, we all have our own investment objectives, so to speak. And first of all, the gold space as a whole is fairly small. That’s Let’s not forget that. I mean, as we’re speaking today, and I said I’m not going to talk about specific securities, but NVIDIA hits $4 trillion in market cap. You just don’t have that anywhere else. I’m not giving an investment recommendation here on the video or anything like that. But the gold space is small, and even the large mining companies, they’re not that huge. And so that’s something to keep in mind. I think the key reason why there are a lot of investors not investing in gold is because it’s not income generating. It doesn’t produce things. It just is. And by the way, what I tell them is, well, I mean, nowadays people may not hold much cash in their wallet anymore, but there’s a purpose of a $20 bill in your wallet, even if it doesn’t generate any income. It’s just you got to think about what is the purpose of it. And of course, one thing that’s been changing is many of those fringe gold bug views are moving more towards the mainstream as more and more people are concerned about the things that you’ve been talking about forever.
On the central bank side, not all central banks love gold. Many central banks hold it for historic reasons. The Federal Reserve holds it at a well-legislated price. The European Central Bank holds it based on market value. The central banks that tend to like gold are the ones that are not necessarily on friendly terms with the US. Because they’re looking for ways to diversify away from the dollar. And it is not easy to do that. And they are certainly not piling all their money into gold, but gold is one of the beneficiaries of that trend. And with the exception of a few central banks, the Swiss is one of those exceptions. Central banks typically do not invest in equity markets. It’s not their job. They have a mandate. And so if you veer way too far from the mandate, especially as a large institution, you don’t do that. And gold is the thing that doesn’t fit anywhere. As I mentioned, these days we are pure gold mining shop. And so we We’ll address our processes to that. But think about a gold product in another shop, a mutual fund or some other product. And they are subject to this wonderful compliance overhead.
And kudos to anybody somebody who is not working in the industry because the compliance overhead has been running these shops. And the risk profile, the dynamics in that space, they’re just so different from what happens in the typical equity portfolio. So it’s always a stepchild. And these portfolio managers have to fight that. Well, yeah, there’s a little liquidity in my mining securities, but that’s where the value is type of thing, right? And so it just doesn’t work well in the standard done. And so what we see is that, as you point out, some retail investors love it. Smaller advisors tend to be able to make decisions based on conviction. But the larger they get, the more cookie cutter they become. And I don’t want to discredit any large advisors because some of them are really good, but their processes are more standardized. And gold doesn’t often make it into the models that they pursue. It’s because it doesn’t quite fit into what they’re doing.
Monetary Metals:
I want to ask you in terms of that quantitative part, which we spoke about in the beginning, about how real rates and gold have diverged. What is your take as to why that’s happened? Because on one side, you could say, oh, it’s something about real rates that have changed. You could say it’s something about gold that’s changed, or you could say it’s actually neither of them, and there’s some broader thing that’s changing gold prices. Why do you think there’s such a break?
Axel Merk:
Well, we have to differentiate between correlation and causation. And the correlation is clearly with the weaponization of the dollar. When the incentives were increased, and I looked through the lens of incentives with anything that’s happening in the world, and when the US weaponizes the dollar, it’s an incentive for the rest of the world to diversify out of the dollar. And so there’s clearly correlation there. Whether that is the actual reason, one never knows. And similarly, if we were to interpret the gold action of today, the media loves to give everything a storyline, whether that is the actual reason, who knows. But to me, that is a very, very valid explanation. Now, you can say that for other reasons, that suddenly that dislocated, and maybe the price of Gold is overvalued because of that. But one of my themes is that the one factor I did mention in these groups that affect gold and the correlation to real rates. The other thing that I didn’t mention is geopolitics. When the world becomes a less stable place, the price of gold tends to go up. And we saw that when the initial strikes happened on Iran, it briefly went up, and then, of course, it came down again.
And I say, of course, because the market tends to get used to these crises for better or worse, the crisis may not abate. And the reason I mentioned it in this context is one thing that I believe is that we’ve had a fundamental change in the security profile of the world. The peaceful period we’ve had since World War II has somewhat come to an end. And what we see, be that in Ukraine or in Gaza or Iran, are just symptoms of a new era. And in that new era, the cost of doing business has gone up. That’s a very nice way of saying the world is becoming a dangerous place. When the world is more dangerous place, doing business in the world is more dangerous. The cost of doing business is going up and people are going to be stuffing more money into, or at least more currency, into things to get things done. And so we’ve had some of that also happening around that same time. And so those might also contribute to that correlation breaking down. I wouldn’t rule out that correlation entirely. The other thing that has happened, and that may well be a contributing factor is, I noticed we haven’t a word about the Fed yet.
The Fed is less relevant than they had been, and in many ways it’s a good thing. And of course, that’s more pronounced with our new administration, if we can still call them new. There is so much happening on the policy front that whether interest rates are 4 % or 3 % are really a sideshow. And so that may also be a key contributor. And I hope we get to terrorist because I think that’s a key driver for the price of gold as well. I’ll be glad to get into that. But you asked me about the real rates. That happened way before Liberation Day, of course, way before some of those tariffs have come into place.
Monetary Metals:
I do want to get to tariffs. Before we end on the gold train, I want to ask you the difference in your mind between gold and gold miners. So a lot of people have this rule of thumb, this basic assumption that, Hey, when the gold price goes up, the gold miners should go up even more because they’re basically gold with leverage. That’s the quote. Gold with leverage is what gold miners are. How accurate is that idea? Is it inaccurate? And when people are looking at this space where you’re saying there’s going to be maybe a harder to do business, well, gold mining is a business. A bar of gold is not a business. It’s just a bar of gold. So how do you think that different dynamic that we’re heading into is going to affect gold versus gold miners?
Axel Merk:
Sure. First of all, from an investor point of view, investing in gold and gold mining, it’s not always the same investor. The gold investor is often the conservative one. And And from a regulatory point of view, I have to say, Hey, the price of gold is as volatile as the equity markets. If you’re living expenses on dollars, of course, there’s a risk in it. But it’s still considered a safe haven. It’s the fear trade and so forth. And so on the gold mining side, you could argue it’s the same thing amplified with the leverage you point out. For practical purposes, though, the gold mining investor is often the speculator, or it’s somebody who wants to use a smaller location and more bang for the buck, so to speak, because of the increased volatility. On the actual dynamics, what you’re pointing out is, of course, the theoretical model that when the cost of mining is fixed, the price of gold goes up and your margins explode because it’s all incremental revenue. Historically, especially the last bull cycle, what happened was that when the price of gold went up, well, the price of mining also went up because the cost of energy, about a fifth of the cost of mining is energy, went up.
Workers wanted to have higher wages. Governments wanted to have higher taxes. And then in addition to all of that, these mining companies engaged in an acquisition spree and didn’t use share all the money too well. So investors were very disappointed that that leverage didn’t take place. And so what happened then in the protracted bear market is the market told these big miners, Hey, get your act together, which they did. The balance sheets look much better of the bigger miners. The flip side of that is that the leverage to the price of gold is much less when your balance sheet is, quote unquote, very solid. The other thing that happened is that these large mining companies under-invested. And so now when you mine, you’re depleted your reserves and you’ve got to figure out a way to replenish that if you want to stay in the size. And in order to play catch up, and I’m putting a little bit of words into the mouth, but that’s my interpretation, these big companies have engaged in these huge, mostly copper gold projects in some jurisdictions where You don’t know what the situation is going to be like by the time you get a return on your capital.
So the risk dynamics have changed, and there’s been a lot of disappointment on the large miners. In the meantime, because these large miners hadn’t been playing the acquisition game, you’ve seen some mergers in the mid-tier and others. And the real money, in my view, is to be made more in the junior space as these companies are being institutionalized as they grow. There’s a lot of value there. The challenge is we have moved to a space that’s very passive. An ETF cannot participate in funding rounds. It cannot invest in private companies. The the near zero interest rates have fired everybody who was an active investor. At the same time, the dispersion of returns, since you wanted me to be quantitative, in the gold mining space is greater than any other sector in the S&P. The plain English way of saying that is the returns are all over the place or to be more self-serving, active management matters. It matters what you do. And by the way, what we do is we invest in what we believe is the scarsest research of them all, which is good management teams. And so we do venture capital light. And what basically happens in practice is that the management teams who have previously done well, have an easier time of getting capital than some newbies showing up, Hey, we found some gold, we’d like to get it off the ground.
And of course, there are some nuances there. But on the gold mining side, you got the greater volatility. As you go more to the junior space and the explorers and developers, they’re more like options, a little in option on striking gold. And so that then really creates some additional talk, if you want to call it volatility. Historically, When the market gets into that space, it goes first into the majors and then to the more junior companies with some amplified effect. And if you look around what’s happening now in the industry, in the higher for longer environment where credit conditions were tight by design, it was difficult for these junior companies to have access to capital. That has eased, the equity window is open. You see a lot of funding taking place, but there is still a lot of discipline. And it’s difficult to say whether that period is going to last a few months or 10 years. And so when asked to watch how that space plays out, overall, though, the market is paying much less for an ounce of gold in the ground than they used to. And that may be in part because they’ve gotten burned so many times.
And to me, it just means there are still opportunities in that space. And even though that space has done very well, I think that there is still a tremendous upside given where the price of gold is.
Monetary Metals:
You’re the perfect person to ask that question to. Okay, now I want to go to the AI area because obviously, tariffs and AI, I think most people say, what is the connection there? But I do think that there is a potential war on, if you want to call it a soft war or a Cold War, on this AI train, where people are saying, Hey, if this AI is potentially as powerful or as economically advantageous as we think it could be, we really want to have, let’s say, chips in our country or AI in our country, and we want to make sure that we’re getting the benefit of AI and not a competitor, whether it’s China or someone else. So do you think that the tariffs are a way to start getting the market ready for more reshoring, more on-shoring, which means, hey, we need to have, whether it’s chips in our country or mining in our country so that we can create solar panels in our country so that when the time comes to use AI to leverage this, the United States won’t need to rely on China for solar panels or China for chips. Do you think that’s where the tariff and the AI conversation begins?
Or do you think the tariffs are one thing, AI is completely separate, and there just happens to be some overlap?
Axel Merk:
Let me give you the answer you probably I didn’t expect. I think tariffs on their own have a profound impact on the price of gold and completely unrelated to AI. And the reason is, I’m sure everybody has heard this example of you go to, you have a Trade deficit with a supermarket, right? Because you’re buying the goods, you give them the cash. Well, that cynical comment aside, if you’re trying to balance trade, you’re not only going to reduce the deficit in the goods, you’re impacting financial flows. And so on the macro level, when there is an effort to reduce the trade deficit by force, you will impact financial flows. And that is the key reason why long term interest rates in the US have gone up without the price of gold falling down, because the the financing of the deficits we have has to come more from domestic hands. And of course, there are side effects on that, including the increased pressure on the Federal Reserve to lower the funding costs, because politically, it’s not very convenient when the long term rates go higher. Now, of course, the proper solution to that is to lower the fiscal deficit.
And of course, we’ve had DOGE efforts, but we haven’t had any serious efforts on most entitlements. They’ve been in the Tax Reconciliation Act. There’s some taming on the Medicare expenses, but most of these things are not. So when I think about terrfs, my immediate reaction is about, okay, you’re impacting the financial flows, and that increases the cost of boring. And the reason why the price of gold has done well whenever new terrfs have announced is because of the impact it has on the financial flows. And by the way, just even though we hear you every day, we have some news on different terrors, in my assessment, President Trump would love to have a 10% a 10% base rate on everybody and some punitive rate on certain countries and as need be to try to courier stuff, certain things. And having a 10% base rate on everything, on everybody, does have a serious impact on the financial flows. It does. And by the way, the implications go much further. It does impact that so-called exorbitant privilege that we can use. The US is really a hedge fund where we borrow a loan in the US to invest for bigger returns abroad, and tariffs throw a wrench into that engine.
So that’s the way I look at that. Now, let me try to address getting a little closer to your question. So When you have an effort to do reshoring, you can use carrots and you can use sticks. And so it tears other sticks. And the question is, how much long term benefit can you get from that? How much can you coerce people? In my view, it is far more effective to do it with carrots. And the typical carrot would be tax incentives, deregulation. And of course, the current administration does both. They say, let’s do terror, let’s do deregulations. And in many ways, you want the bad stuff out of the way first. That’s why we had the terraces first. And now we have the tax bill. We’re going to have a midterm election in a year and a bit. And so I think we’ll see much more on the regulation side. All that said, if you look at the most recent thing that was announced, the potential tariff on copper prices. Well, if you think about that, where are the copper smelters? Most of the copper smelters are in China. There’s very little capacity in the US.
And so They’ll have to figure that one out, right? Of course, they would like to increase the copper production domestically, but then they got to give some export credits for that. They got to just putting the tariff in place is not We’re not going to fix that so easily. The other thing is, if you want to build a copper smelter, it’s going to take a minimum of about five years. Well, in five years, we may have a new administration. So would you invest that money to get that up and running? I’m not saying the initiatives to try to reshore are good, but there are always unintended consequences to all these things. And I think one has to have an open mind and just be analytical about what might happen. On the AI front, I think it was the head of the video, he said, well, the reason he wants to be in China as well is because ultimately for any of these chips to succeed, you need to have an ecosystem of developers that build on that stuff. And if you restrict access to a region, well, the developers are going to go in different platform and people are not going to use it.
And so it’s always easier said than done that we want to have it only in this place, but real life is a bit more complicated. Ultimately, I think if you provide the right incentive structures, you can achieve a lot. What we do know, of course, for the AI in the context of commodities more broadly, that it’s incredibly energy intensive. And one of the things, since we’re talking about terrorism and all that, gold has been elevated to a strategic mineral. When the executive order was passed on strategic minerals, gold was added. And obviously it applies to federal land. But it makes a big difference, right? Because these permitting processes take forever. And when I mentioned earlier, we invest in management teams. Key thing is you need to invest in teams that know these local jurisdictions, that know how to get things done. And clearly, if you have a government that’s friendly, and these things change, not just in the US, but in any other country, that make it easier. And the US, historically, is not a low risk jurisdiction for mining because rules change. It takes forever to get stuff done. Having something like a cutting off the red tape is tremendously helpful.
Monetary Metals:
Absolutely. And I’ve been wrestling with that exact question myself. And I’ve asked many guests, Hey, even if we do have this deregulation, this cutting of red tape, this fast tracking of whether it’s mining or nuclear, solar, whatever it is, is there enough time for someone to invest and say, Hey, I know in the next three years, I have President Trump. He’s going to back me, and I’m going to make this, whatever, copper smelter. But in year four, what if it’s someone different? How do you look at that risk?
Axel Merk:
Well, obviously, the nice thing about businesses is they’re always eager to make money, right? And so they’ll try to find a way to make it happen. One of the reasons why the Trump administration isn’t just cutting 10 % here and there, but it’s dismantling entire departments is because it’s just so much more difficult to rebuild. And so if you want to have a more longer lasting impact, And of course, some of your listeners may like this and some may not. But just from, again, from an incentive point of view, you dismantle the entire infrastructure, which makes it less likely that’s going to be rebuilt. Now, of course, you’re setting precedent that you can do all kinds of stuff with executive water, and so that creates some other risks. It’s a hallmark. And one of the reasons why we haven’t built as much in the US in general, and why companies like Facebook and Google have been very popular is because when you have too much administrative overhead, you will invest in anything that has a short term return. If you invest in a project that has a 20 year return, you need certainly, and by the way, a key ingredient here is fiscal sustainability.
If you don’t believe that in 20 years from now, the government is going to have its house in order, why would you invest? Because the government is going to take your money either through taxation or through inflation. And so to me, that is as important as a red tape. Now, don’t get me wrong, I work in a completely overregulated in the industry, my compliance overhead in our, we manage over 2 billion. I can still consider ourselves a small business. The money that we spend on compliance and legal fees is just incredible. And much of it is not exactly serving a good purpose, I would argue. But it’s this administrative infrastructure that feeds on itself. And then when I talk to executives in other industries, they have the same story. And so there’s a lot that can be done. Now, the good news is that even on the on the sides of the Democrats, there is a drive towards dismantling red tape. If you think about the dolling topics of the left, like affordable housing, for example, the left nowadays fully understands that it’s policies that they advocated for a long time that to a significant extent responsible for the housing shortage.
So the left and the right, they aren’t actually that far apart on many issues. They would never admit it. And the other thing, though, that’s happening, and that’s good for the price of gold, not necessarily for other things, is that both the left and the right and Europe, if I can add that Asia has always been there, they are heavily banking on industrial policy. And what I mean with that is what a government that chooses winners, where they want to be. Biden administration wasn’t too solar that you mentioned. The current administration has some other darling projects. In Europe, your listeners almost certainly heard, right? Germany wants to spend €500 billion on defense. Well, they don’t even know how to procure stuff in that amount, right? And in order to get that done, they needed to promise their coalition partner to also spend 500 billion on infrastructure. The EU, Mr. Draghi, the former head the ECB, then Prime Minister of Italy, wrote a paper saying that we need to invest 5% of the EU budget, about a trillion euros, of the EU, of the, of the EU GDP, not the budget, of the GDP in infrastructure.
The motivation there is to have joint Euro bonds that are guaranteed by all the countries. But that’s the government activism. And of course, China has always done it. And so this idea of lesser fair economics, both on the left and the right, is currently not in vogue. Usually when the government does stuff, it’s not the most efficient way of deploying capital. And I’m trying to be friendly here. But all that to me suggests that maybe gold might do just fine in that world. Let’s not forget the other topic, climate change. And people have different views about it. But I think most people agree that no matter what we do, it’s going to be expensive, be that people building places that are more resistant to floods or be it government dolling out subsidies to keep them there in other ways. All of that sounds expensive to me. And on top of that, politicians on the left and the right, and we saw it in the most recent Budget Reconciliation Act, money seems to be growing on trees. You can spend it on anything. And so we may not know exactly what’s going to happen, but I think it’s not going to be cheap.
Monetary Metals:
Yeah. There seems to be no political will, desire, or incentive to spend less money. For some people, whether you agree or not, they think Elon Musk is a very successful industrialist, whether you look at his market cap or the things that he’s worked on. Even that guy went into the government and said, I’m going to try to lower the budget deficit or lower the debt. He was like, All right, never mind. We’re going to Mars. That seems a bit easier. It seems like there’s no real either will, power, incentive to get the debt lower. I do want to ask you as someone who alluded to your bona fides in the AI space, do you think AI is the answer that we’ve all been waiting for on the growth side, where finally we can say, Oh, we’ll just ask the AI, how do we increase GDP? Oh, we’ll ask the AI, how do we do XYZ? Or do you think that’s a boon doggle?
Axel Merk:
I think it was Neil Ferguson. He is an economic historian who said that the amount that’s being invested in AI hasn’t been invested since the building out of the railway network. It’s a huge percentage of GDP that is affected, so it will have a profound impact. Now, is all that money going to be spent extremely efficiently? Well, maybe not. But just as when the railways, most of them went out of business, but that then spawned other industries, so other things will happen. I like to look at more like in the ’90s, there was an amazing Dot Com frenzy. And of course, pets.com doesn’t exist anymore, but we got other things that came from that. So we can have a bubble here or there, but that thing will move us forward. I personally use AI on a daily basis. I pay, I think for ChatGPT, 25 bucks a month, and I think I get a couple of thousand dollars worth of value out of it every day. So I think that there is more value there. The adoption is going to dramatically increase. You can empower, just as the Internet empowered anybody in the world with Internet access to do many things, you can do so much more with AI.
Now, does that mean everybody will know what to do with AI? I mean, most people still use a fancy computer for nothing more than a typewriter. I mean, you can waste good technology for many things. That said, and by the way, I’ve rarely had so many returns on Amazon since I started using ChatGPT because I’m convinced I’m ordering the right stuff and I’m ordering the completely wrong thing when I get that stuff anyway. So there’s going to be waste of that sort as well. But it will have a huge impact. The one impact we see is that there’s suddenly a fascination on both on the left and the right for nuclear energy. I mean, it’s been way overdue, but it changes attitudes. The And of course, it also helps to cut out middle management, it seems. And we see it on the programming side, basic programming. You don’t need a programmer for everything. You can have a computer do it. It will free up resources. That’s a part of the way of phrasing it for new creative things. The big fear I have is overregulation. The established players have a tremendous interest to protect themselves.
The Orwellian dystopian ideas they have are very scary for things that are close to the heart of many gold investors that mingle with libertarian ideas. There are ideas out there that because you can do bad stuff with AI, the computers should really be monitoring the user so that if you search for something that could be illegal, that will be an immediate report to the government type of thing. And this may sound strange, but they are some very influential people that advocate for those ideas. So who knows how that’s going to end? Another way of maybe phrasing that is, I just quoted Neil Ferguson, so let me quote him again. By the way, fantastic. Fantastic writer on economic history. In a book he called, I think, The Square and the Tower, or The Tower and the Square. He compares, he talks about how robust societies are and says societies that are networked societies from ground up are robust and can handle the changes. Hierarchical societies will crumble. And he draws parallels to the invention of social media, to the invention of the printing press, and then says how societies collapsed because of those changes. Now, he talks about social media.
That book was written before the invention of AI, but it’s the same thing. These are tremendously new ideas, new technologies The so-called establishment cannot cope with it. And if you are in a country that is, quote unquote, rigid, you might see some failures. One of the beauties of the US is that we are very flexible. We can adapt. And of course, not everybody likes the changes that are happening necessarily, but we can adapt, whereas other countries might fail. And when I talk about there’s going to be less peace than we’ve had, I think that’s in that theme, that there are some tremendous changes that AI will introduce, and there are tremendous opportunities, but we should not be naive and think that there’s not some bad stuff that’s going to happen as well.
Monetary Metals:
As we end on the AI front, I want to ask you how you think it might affect mining and the sector in general, because obviously, there’s going to be this incredible demand for energy, where that energy might come from, whether it’s nuclear and getting minerals for nuclear or solar, getting materials for solar. It all pushes me towards, wow, there’s going to be a real need for more mining, whether it’s raw materials. Do you see that as an accurate portrayal where AI, if it is as bullish as a lot of people are expecting it to be, those investments will also bleed into mining, or is it more sophisticated than that story?
Axel Merk:
The short answer is I don’t know. And the reason I say that is because I have some thoughts on it, but my portfolio managers don’t seem to agree, and so I might be very wrong. The reason I say I might be very wrong is that I live in Silicon Valley. I to pay high taxes. One of my friends pitched me this idea about mining with AI, and there are some technology companies out there. And I showed that to my portfolio managers. And of course, we are a step removed. It’s the teams that are involved. And they’ve only had a luquem interest in that. It hasn’t had any traction. Mining is really a nuts and bolts type of business, and you need to know how to dig stuff out of the ground type of thing. Now, does it mean the place where it can really help is in anything from grant writing to writing proposals, to writing funding proposals, especially if those government subsidies can help tremendously, as you point out. And on the energy side, a price of energy might be going up because there’s just going to be such a demand that has an impact.
To what extent it will impact mining? I don’t know. Maybe on the automation side, but the bigger mining sites, they have some sophisticated machinery already. I don’t know is my short answer. I’m sure it’s going to have some an impact. I don’t think it’s going to be a game changer on the mining site. The thing to remember on mining is that even something as rare as Earth, they’re not rare. It’s just it’s difficult to get them on off the ground because you don’t have much of them in the ground anywhere. But if you dig up enough stuff, then you can squeeze some grams out of it, right? And so it’s in what ways AI will help in their I don’t know. I’m sure it’s going to be in every chip and every detail somewhere, somehow.
Monetary Metals:
Yeah, I did listen to an interesting discussion, A, about rare-earth metals and B, about the magnets. And apparently China has a big source of these magnets. But for the right price, I guess you can start finding magnets in other places.
Axel Merk:
You can find them anyway. You can find them in the US. But building these mines is not easy. And of course, it’s again, you asked about you’re going to invest for several years. Think about If the tariff on copper is going to be introduced, well, is the tariff going to stay in place? What protection are you going to have? And that’s very, very difficult. And certainly on policy is really a key ingredient for for people to invest. And so now what we currently have is strategic uncertainty, and that may work for certain things, right? It might help in the reshoring. I continue to believe that the carrot approach is a far more effective one. And you can do short term things like allowing accelerated depreciation. Having a good tax structure is, I think, a very helpful one in the long run. And then just on permitting and general administrative overhead, certain things. There’s a lot that can be done.
Monetary Metals:
Axel, as we are heading towards the end of our interview, I want to do a series of rapid fire questions you can answer as short or as long as you want, but they’ll be all over the map in terms of topic. So let’s start with a fun one, which is the Fed. We didn’t talk much about the Fed today, but let’s talk about the Fed chair. Who do you think is going to get the nod from Trump? Do you think it’s going to be a Trump loyalist, someone who says, I’m pushing down rates no matter what. Let’s go to negative. If we can go to negative, do you think it’s going to be a cent? Do you think it might be our friend Judy Shelton, who we just interviewed? Who do you think is going to get that nod for the Fed chair? And do you think that’s going to matter?
Axel Merk:
It matters if it’s Kevin Warsh. Otherwise, it doesn’t matter. Kevin Warsh is the one person who will structurally change the Fed. He has been very vocal critic on structural issues, on processes, on how they should go about it. We have the five year review at the Fed. They get nothing done with a lame dark Fed share. We don’t have a proper framework or anything. Of course, we know what they do. Kevin Warsh would be a godsend, in my view, to the Fed. I know this respect to Judy Shelton. I think she’s great, but I don’t think she is going to get the job. And so that’s why I focus on him. If it’s one of the other names that are in the news, we’ll get more of the same.
Monetary Metals:
What do you think about this inflationary environment that we have been? Do you think inflation is something that investors should still be worried about, or should they more be worried about, whether it’s deflation or stagflation? Where do you think that inflationary regime is currently?
Axel Merk:
Our common friend, Ben Bernanke, wrote a book during the pandemic where he quickly added some chapters in the end on inflation because it suddenly came out. And the one thing I say friend, because there’s one thing I agree with him, is that once you have high inflation, it’s not a linear process. And it’s one of the key reasons why Powell is still concerned about the lowering rates because you just don’t know. And there are many other reasons you don’t know right now because of the volatile policies and other factors. But the inflation is always a concern and should always be a concern. Inflation is a very cruel tax. And the way I look at it is look at where government incentives are and the government incentives are to inflate. They don’t get their act together on the fiscal side, and so they have inflate one way or the other.
Monetary Metals:
Okay, next one for you, which is in a similar topic. Do you think that we will see negative real interest rates? So obviously, there’s negative nominal interest rates as well. But do you think we’re going to see negative real interest rates and where do you stand on the nominal interest rate question as well?
Axel Merk:
Well, eventually, yes. So I’m just looking at my Bloomberg and the 10-year real rate as priced into the market is 1. 96 77%. So it’s positive right now. I think the years of the zero interest rate environment, we have snapped out of those. Can we get back into them? Of course we can. And again, according to Bernanke, he thinks that everything that has happened is just a toolbox and we’ll double down. Part of the reason we haven’t got a recession is because we are ever more micromanaging the economy. Yet another part of the question.
Monetary Metals:
Yeah, well, actually, that was right into my next one, which is why do you think we didn’t see a recession when so many analysts were predicting one?
Axel Merk:
Well, I mean, first of all, from investors’ point of view, it doesn’t really matter. It always matters what might happen, not what will happen. So to just, one shouldn’t get too frustrated about it. You manage your portfolio in terms of the risks in it, not of what actually happens on the ground. But I think the most… To double down on the example I just gave is when When you bail out the banks for mismanaging the interest rate risk, we would have had a recession had that not happened. I think that is the key driver here. Otherwise, we’re just always pushing out that risk of a recession. We, of course, have a very dynamic underlying economy, and we’ve had some animal spirits unleashed with this administration coming in as well.
Monetary Metals:
Okay, next one for you. What What do you think could change gold sentiment overnight? We’ve seen, obviously, there’s been geopolitical risk that has moved gold. There’s been tariffs that have moved gold, trade wars, inflation. What do you think is possibly that next thing in change of sentiment for gold?
Axel Merk:
Well, if Congress gets its act together and we’re going to introduce fiscal sustainability, then gold is going to go down the drain. So if you think there’s a high risk of that, then that would change it. We’re in an environment where we believe interest rates are going to continue going down. We, as a not just me personally, but the market, that’s historically a favorable environment for a price of gold. Obviously, it’s had a huge run up. There’s no assurance it’s going to continue. They’re not going to have some consolidation. But you mentioned negative rates. In a financial repression environment, there are times when gold doesn’t do well, especially when there’s any anticipation, just as we had in the high or low for long environment, that the Fed is going to do something about it. And then, by the way, to just to that, historically, when any country reports higher than expected inflation numbers, the currency often goes up. And the reason is not that inflation is so good, but it’s because the expectation is that the central bank of that country will do the right thing. And then it’s only over time when they realize, oh, they didn’t, that then the currency weakens again.
Monetary Metals:
What’s something that you’ve changed your mind about, a belief that you used to have, and maybe you changed your mind, but specifically about gold? Because we have a lot of gold investors. Some some new, some old, some veterans. What’s something that maybe they can take away from something that you’ve learned in your experience in the gold space?
Axel Merk:
My goodness. I mean, be humble in this space, although I’m not saying that. I didn’t use to be humble. But investing in gold makes any investor humble. I push back against most of the conspiracy theories. I haven’t changed my mind on that. I’ve always had that view. And the reason is that gold investors think they’re special. Every market in which there are derivatives, there is this, quote unquote, manipulation. It comes with that territory. And also to anybody who thinks that the government is going to go back to a gold standard. Don’t believe the government is going to bail you out on this. If you want a gold standard, have your own personal gold standard and that other countries are going to go together and do something. They can’t agree on anything internally. They’re not going to be able to cooperate on anything. So I would discount a lot of that noise that you hear out there. I change my mind all the time on things. What I try to do is I like to go to the sources and make up my own mind. I’m not always right, but I can test in my own views against the market perception and have opinions and then make my investment decisions based on that.
Monetary Metals:
Well, for those looking to get on their own personal gold standard, they can check out monetary-metals.com. Okay, last question for you, Axel, which is, what’s a question I should be asking all future guests of the Gold Exchange podcast?
Axel Merk:
What they do personally, whether they just talk about the stuff they do or whether they actually live it. I think that’s always, I think, a good question. And then you can ask them what they think the best investment is. And to answer that question, I think investing in yourself is probably the best investment you can do because you can control the become generating machine that is yourself better than when you trust something else. But yes, the asking people whether they put the money where their mouth is. And the other part of that is, I think it makes a huge difference whether people actually manage money or not, because there’s a different… And I’m not saying one is necessarily right or wrong, but it completely changes the perspective. As a manager, we have an institutional mandate to do certain things. The negative way of phrasing it is, oh, I’m talking my own book. But it’s a different way of thinking about things. And when you hear things about when that was the flight of gold out of London to New York and whatever it is. I actually live that stuff and know some of the players involved in these things.
It makes a huge difference versus you just grab a headline from somewhere. And so do vet the credentials on the air. It doesn’t mean somebody’s wrong who just has a view, but I think the context matters, and it’s good for the listeners to be aware of the context.
Monetary Metals:
Axel, this has been a fascinating interview. It’s been great getting to know you and your perspective. Where can people find more of you and your work?
Axel Merk:
Merkinvestments.com is our website. I can’t discuss our products here, but we can get there from our website. We have a free newsletter. If you’re on Twitter, @Axelmerk is my handle. Again, I can’t tweet about products, but I will share my views, mostly on monetary policy and precious metals, and then some other things to just get to ran when I need to ran about something. But yes, follow my work, and then maybe just back with you at some point in time in the future.
Monetary Metals:
Axel, absolutely. We’d love to have you back. Thanks so much for the great interview.
Axel Merk:
My pleasure.
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