Gold & Silver No Longer “Over Bought” – Still WAY Under Owned

Mike Maharrey: Greetings. I’m Mike Maharrey. I’m an analyst and reporter here at Money Metals and I’m very thrilled to be joined this morning by Alex Merk. He is the president and CIO of Merk Investments and a fantastic analyst, and I’m really excited to be able to talk to you today. How are you doing?

Axel Merk: I am doing very, very well and since you’re starting, my speech is censored, and you’re already starting by saying I’m quote unquote fantastic. I am fantastically opinionated. Let’s put it this way. I must not take any endorsements. So, in that spirit let’s, proceed.

Mike Maharrey: One of my strategies with interviewing guests, I like to blow up their head a little bit first get you feeling cocky. So…

Axel Merk: Well actually on that note, sorry to digress right away, somebody, this was before the recent sell off. Oh, we got to take the victory lap and so forth, and I said, “No, no, I’ve been around the block enough times.” Got to be humble, but because have this a little bit of a doomsday scenario, you’re supposed to have a glass of champagne every night because you got to enjoy the times when the rough time. So got to be humble, but you can still party. So how’s that?

Mike Maharrey: Absolutely, I love it. Well, let’s talk about the selloff because I think that’s top of everybody’s mind right now. What do you make of it healthy correction or the beginning of the end of the gold bull market?

Axel Merk: So, let me try to say a few things that maybe not everybody says the same thing because there a gazillion opinions out there and most of them, I think most of the folks have no clue what they’re talking about. The first thing, anybody who has as much gray hair as you, I do remembers that there is a good history of gold. That way the price becomes more volatile. Volatility can explode in the price of gold, and obviously we are at over $4,000 and so the normal amounts are larger and so it is with significant precedent that volatility is surging in the precious metals market. The second one is, again, if you’re old enough, you know that gold used to be the place where the speculators were at home and then after protracted bear markets and amazing meme stocks, SPACs crypto and whatnot, the speculator kind of look for different places, but the speculator is not a very loyal investor. And when there is a good run, they’ll come back. And that’s exactly what we had seen. And what the speculator does foremost is increase volatility. And then of course we got some other fundamental drivers that are changing.

But the key thing is we’ve had obviously an amazing runup and so the selloff is noteworthy. The one thing that is not part of the equation I think is very relevant is retail. Historically, when you have a dramatic runup, you have a retail frenzy, and you probably know this at least as well as I do, since you do physical gold with retail in your business, if I’m not mistaken, retail is selling or has been selling. There’s been a little bit of a balance. I see it on the wholesale side. The wholesalers are cutting back because they’re not selling anything because the retail gold dealers get plenty of inventory from consumers. And so the wholesalers are actually having a very rough time right now. They’re not ordering from the mints. Why would you order from the mints if there’s plenty of supply out there that is not consistent with a speculative craziness on top? And if you look at the physical ETF flows, which to a significant part has a retail compound and there had been buy, now we are talking today on Thursday the 23rd of October overnight there were significant redemptions, but still we’ve had contributions and also anecdotally in recent days, I have seen significant purchases of both minus and also of the physical gold. And so those are some very unique facets that we have, I think that we have to see in the context here. But clearly, yes, we’ve had a dramatic selloff on the back of a dramatic rise. And of course we can talk more broadly of what this rise has cost in the first place.

Mike Maharrey: Yeah, absolutely. I kind of wanted to get your take on particularly the silver squeeze we’ve recently seen and I think that the mainstream analytics, we had a displacement of metal, not enough in London, too much in New York, and they’re going to move the metal and everything’s going to be fine. Do you think maybe there’s something a little more fundamental going on though in the silver market?

Axel Merk: I am laughing because I’ve talked to vault managers and if you have any of them on the air, have them put makeup on because these guys are tired. They’re pale. They have worked extra hours. The one thing if you deal with the physical metal, you got to realize is that an ounce of gold is 4,000 bucks. An ounce of silver is 50 bucks, which means if you want to take a million dollars of silver, it’s a huge amount compared to gold. And when you ship that stuff first to the US and then back, there are some amazing logistical challenges that you’re dealing with. The vaults, by the way, love it that the precious metals are coming back to London. You need to, if you are trader that clicks on a button and buys and sells, you don’t see what’s happening behind the scenes. But it is important for these markets for there to be liquidity.

And as much as people like to spread out, oh, we’d love to trade it in Shanghai or Switzerland or Singapore or New York or whatever it is, the logistics matter. And I like to remind people of the negative oil prices we had several years ago, the small print matters in these things and the fact that these markets have been orderly is a testament that overall things are working. I mean there are always these conspiracy theories, but the markets react to the small print. And overall I would say these markets have been working very well. Now that doesn’t mean that somebody doesn’t get squeezed, right, of course. But you see it in the markets and that’s a good thing. It’s a good thing that these markets are working. And the fact that, I mean the simplest way to look at it for the general investors, if you look at the spreads that the physical gold ETFs or silver, they work fine, which means the operations are working. They might be sweating behind the scenes, but the operations are working.

Mike Maharrey: Yeah, it’s interesting. Money metals actually sent a pallet of silver bars to India a couple of days ago. So it kind of goes to the fact that these logistical things are happening behind the scenes. And there was really a scramble in India to get physical metal. So, it is really been interesting watching the dynamics of this.

Axel Merk: And it’s silver rather than gold, right? Because gold has gotten too expensive. By the way, this is iced tea, not beer that I’m having while talking.

Mike Maharrey: Well, no judgment here. You do you! But yeah, so let’s talk a little bit more about some of the kind of underlying things that are going on. Jamie Dimon recently warned about cockroaches in the private debt market and I read a former Fed advisor, I think she was the advisor to the Dallas Fed President a few years ago, and she said that she thought some of this volatility that we’re seeing is actually a rush to cash because of a lack of liquidity in the system. She was kind of piggybacking off of the cockroaches thing. Do you see this kind of underlying trouble in the private debt markets or was Jamie exaggerating a little bit?

Axel Merk: Well, you mentioned a bunch of topics. How many hours do we have? Let’s talk first you didn’t answer that question, but let’s first talk about liquidity. Liquidity in general is skin deep, these and has been for a while. All this liquidity we see is because they’re market makers taking advantage of arbitrage opportunities, but they all rely on a lead market maker in an ETF for example, and they have no skin in the game. So the moment something goes wrong, they step aside and say, oh, it’s just kidding. And then the spreads can blow out. So that’s the first thing.

On the private credit side in general, that’s of course a huge, huge area. And there are traditional players, there are unlevered players, there are many levered players also on the private side. And of course in an extended economic expansion. And keep in mind, we haven’t had a proper recession because the Federal Reserve has engineered that, hey, the banks mismanaged interest rate risk. Oh nevermind. We’ll have a band aid for that, right? And so of course there will be issues. And by the way, in that sense, the volatility we’ve seen, at least on the precious metal side is super healthy. It might be gut-wrenching, especially if you’re leverage, but volatility is a disincentive to use leverage and it shakes out the weekends.

The other way though, since we’re talking about precious metals here, and I mentioned retail hasn’t been participating and not part of the frenzy, obviously central banks play a role, but I think a big component of the runup in the price of precious metals has been safe haven investors that historically invest in bonds being disillusioned with bonds and allocating to precious metals. Now, they might have second thoughts when they see the volatility that they get in gold, but it’s not like if you have your traditional 60/40 portfolio, you might not be so comfortable with your bond portfolio because this notion that deficits unsustainable has gone beyond the gold bug community entering the mainstream. And the key thing here to keep in mind is that the debt markets public and private are vastly larger than the precious metals market. And so you don’t need much of a reallocation to boost the precious metals prices.

And I’m not saying that everything that’s reallocated goes into precious metals, but I do think that’s a key and under-reported driver as to why precious metals markets have gone up. But back to your question, what’s happening on the private credit side, there has been a structural shift, a commoditization that a lot of things that have been private are now more publicly accessible. And so to just give you an idea, I dunno whether you view know it, we manage over 3 billion in gold and gold miners in public products. And so we have experienced structuring public products and the public product, the key difference you’re private on is that you can publicly advertise. And also not just that you can publicly advertise, but you can use retail money if you’re structured properly and invest it in products that are only open to accredit investors or other standards that are higher for institutions.

And so you can package through the regulatory machinery, a product where you can provide access to things that historically are only accessible to very sophisticated investors into a retail product. And now you can take the view, and I happen to be part of that, you shouldn’t restrict people from what they can invest in, but if you just think about what’s happening in the market and it’s a very high fixed cost operation, and so the bigger players have an advantage in that, but it provides access. But at the same time, of course it changes the dynamics of the underlying market and not to kind of PPO what Jamie Diamond says. It of course provides also tremendous competition to the traditional business model of JP Morgan and when private actors do it in their own way, but that doesn’t mean he’s wrong. I mean it means that when the margins are tighter in the private credit side, you might not be fully reflecting the risks of what these folks are doing.

Mike Maharrey: Yeah, I think that was kind of the position that the governor of Bank of England took when he testified before parliament, I think it was earlier this week. And he talked about these same issues in the private credit market here in the United States. So yeah, that absolutely makes sense. So my boss, money metal, CEO, Stefan Gleason, he wrote an article that he just published today and he kind of called the mainstream financial industry in the United States dollar-centric. And we generally compare dollars to other fiat currencies. And this dovetails a little bit with the post that you had on X the other day about the fact that everybody talks about the dollar and the dollar index and the resiliency of the dollar, and yet we’re seeing gold skyrocket. Do you kind of agree with where Stefan is coming from that maybe we’re a little bit too focused on the dollar here in the United States?

Axel Merk: We are very dollar focused. Are we too dollar focused? I don’t know whether there is a right or wrong answer to that. Obviously for most Americans, they’re primary expenses on US dollars. And so you and me, I probably have more gold than the typical person and maybe our audience as well, but our daily expenses are still in dollars. And as we have seen in recent days as we’re talking here, the spot price of gold is up 50 bucks, the futures up over a hundred bucks as we’re talking. And so that is not a stable coin. Prices are not listed in gold, and so it is natural. The other part of course is, and maybe give one reason why price of gold has gone higher, I’ll lead to that. The entire global machinery is based on this exorbitant privilege the US has where we through the fraction reserve system, through the anchor of the US dollar, an ability to borrow cheap and US dollar to invest for higher returns abroad.

Other countries, emerging markets in particular historically tap into. That’s why when you have, and that’s, that’s akin to a short position on a dollar. That’s why when you have a risk off environment, you need to cover your short position, which means that you’ve got to buy back the dollar because you borrowed in US dollars. But it also means, and let me make a political comment here, and I’ve said that on your program before, when you throw a wrench in global trade, you are not just affecting the flow of goods, you are affecting the financial flows as well. And so you are putting sand in this machinery called exorbitant privilege. You don’t destroy it entirely, but that engine has to sputter a little bit, which means for practical purposes that US deficits need to be financed more domestically and you get all the side effects including more pressure on the Federal Reserve to keep rates low.

And the one thing, since you’re mentioning we are too dollar centric, people say, “Oh my God, well the dollar will always be the center of the universe, so to speak, because there is no good alternative. Just look at the mess they have elsewhere in the world.” My response to that is there does not need to be an alternative. The alternative is increased fragmentation, just less activity, more domestic activity. And yes, it will be haphazard, but it means that the cost of doing business is going up and you have the cost of doing business going up for many other reasons as well. More nationalist policies favoring industries, not just in the us. China has always done it. Europe does it more. We’ve gone away from globalization. And when we move away from that, as much as there might be justification from a national security interest, it creates inefficiencies, which means it’s a higher cost of doing business and ultimately it means more money is going to be spent pursuing an agenda and ultimately that’s a tailwind to the price of gold.

Mike Maharrey: Yeah, I think what you were driving at, and correct me if I’m wrong with your post, was we talk about the dollar, they talk about dollar resiliency and they pointed the dollar index, “Oh, the dollar’s getting stronger.” But that’s not necessarily the best gauge because it is comparing with other fiat currencies and when you compare it with gold, you recognize the inherent weakness maybe in the whole fiat system. Is that kind of a good summary?

Axel Merk: And by the way, as a reminder, the dollar index is a static index that was developed decades ago and the Euro has a 56% weighting, I think in it. And so the dollar index is basically the Euro and then a little bit extra. And so when French president Macron has a cold, the dollar index moves. And so keep that in mind. So when we talk about the dollar index, we kind of have to talk about Europe. And Europe by the way, is spending a gazillion, again, not very effectively, they are increasing their military spending. And guess what? They don’t even have the procurement channel, so they’re going to throw out a trillion dollars or euros or whatever it may be. And at the end of the day, we’ll get a little bit of economic growth, but not much else.

Mike Maharrey: I just read today the US national debt eclipse 38 trillion I think yesterday and we were just at 37 trillion 2 months ago. So it’s crazy the way the debt is ballooning.

Axel Merk: How that happens with compounding and then whatnot. Yes. By the way, on that note, I dunno whether you saw the headlines, the new prime minister in Japan is going to, was planning to have a significant stimulus package to fight inflation. And the idea is that you can’t make that stuff up, but the idea is that anybody who has been affected by higher inflation is going to get some sort of subsidy and that’s going to cure inflation. And noteworthy though is this is a conservative prime minister, at least in label. And so we love to blame this or that politicians are ultimately all the same. And it’s just to keep that in mind. And of course in the US we don’t have anybody really who has at least power that takes fiscal sustainability seriously. Not just in words, but also in action.

Mike Maharrey: Yeah, absolutely. You mentioned the Fed. Has the Fed surrendered to inflation?

Axel Merk: Has the Fed surrender to inflation? We have a lame duck fed chair who has not had intellectual leadership on where inflation should be. If you ask Kevin Walsh, who is a former Fed governor and one of the candidates to succeed, to succeed, Powell, his answer would be yes. Because if you look at the economic projections, they are suggesting inflation is going to be more than 2% in the medium term. And so in that sense, yes, there will be more inflation and continue talking here. Even more important than your guess is that I have a dog who’s my attention, so no, no, I’m back with you. So this is real life here.

Mike Maharrey: I may not even edit that out.

Axel Merk: No, no, no, no, no. And not my iced tea here either.

Mike Maharrey: No, absolutely not. The iced tea, which really does look like beer, but I’m going to take your word for the iced tea. So I wanted to kind of wrap up with this, another post that you had on X. I actually did see the thing about the Japanese, the stimulus package to deal with inflation, and I got a real chuckle out of that. But you said this, I thought this was interesting. You said public service announcement, gold hasn’t changed. It simply is what shifts is our perception of the shiny metal. So can you elaborate on that? I think I know what you’re driving at, but I’d love for you to kind of flesh that out.

Axel Merk: Yeah, I found it out there every once in a while because we get so excited about gold and what does that be excited about? It’s just a piece of metal, it’s barbaric relic and whatnot. But of course the perception changes. And historically, and I say historically, and I’ll expand on that in a second. Historically it competes with cash. If cash were to preserve your purchasing power, why would you want to hold gold? Well, the reason you don’t hold cash is because you think maybe cash is not going to preserve its purchasing power. And while nobody knows what inflation will be in the long run, there are various market measures of just that, right? Tips yields the real yield that you can get on your cash.

And so when the perception is that yes, the Federal Reserve is not going to look out for your interest, and by the way, the ultimately monetary policy is hostage of fiscal policy. We started with drug. You do whatever it takes. You try to be independent, but for practical purposes, they’re not. And so yes, the idea is ultimately that gold is the constant out there. Gold has this magic ability to go to where wealth is because you can afford to have gold. And so retail is selling gold, which means they need to cash in. I mean, a lot of times when people sell gold, it is because they inherit something, they don’t understand the value of it, they need to pay some bills and whatnot. And there’s some coin dealers that I live in California, right? There’s lots of immigrants in California. They hand in their numismatic based coins, and then the coin dealers actually travel to Asia to sell them because the value is higher in Asia than you get for here. And so they make a market and their way of earning a living, but that way the precious metal is moving to where the value is. But again, the gold is the constant here.

And that’s why I’m sure some of your guests or you have talked about, well, you’ve got to think about gold in terms of ounces that you own rather than daily price. It’s ultimately, it’s a luxury you can do if you can afford it. And that’s where gold ultimately then stays with the folks who have the strong hands and who can afford it.

Mike Maharrey: Yeah, that makes sense. I mean, it’s a wealth preserver, and if you don’t have any wealth, you don’t have anything to preserve. So that totally makes sense of how you look at it. But it is interesting how our perception can change and that just, and everybody’s perception is different. It’s interesting listening to mainstream financial people here in the US because with the big sell off, you’re starting to hear,

Oh, it’s over. Gold’s done just so much. They go so quickly to negativity about gold. But for some reason, the mainstream financial networks around here in the us, they don’t tend to ever be really bullish.

Axel Merk: It’s weird, as I mentioned the outset, my speech is censored and everybody interprets their regulator a little bit differently. But one of the things you’ll never hear me say is I don’t give a price target. It’s just my compliance won’t let me. And I don’t know what the price is going to do tomorrow. The way I look at any market and any investment is in terms of risk and to just, as I mentioned, I live in California where real estate prices are outrageous. Well, the house that I’m in, and I’m here talking from my home office, we bought this house in 2009 when prices were down. And the reason was not that suddenly prices were cheap, but it was a question of risk assessment. We have a very countercyclical business, hint hint, we had gold. And so 2008 was a good year for us. And so the risk of buying something that’s overpriced was much less than in other years.

And so we were able to buy into this crazy real estate market in California. And the one thing that’s somewhat upsetting in the current environment, in the current gold rally is that the equity markets are doing so well because you would hope that you can take advantage of this countercyclical nature and strike a bargain when you go shopping for a car or this or that. And of course there’s some pressure points in these markets and so forth. But given where we are in the precious metals market, you would think that the gold investor has a much easier time buying other things, but it turns out other prices haven’t corrected downward. So something ought to give. And in that sense, it’s a fair question. What we’ll give now, we may be biased here, but the fact that retail in particular has not been a big part of the rise here and has actually been buying quite a bit also in the sell off, suggests to me that this may not be over, but that’s ultimately just an opinion, right?

Mike Maharrey: Yeah, absolutely. Well, where can folks go to follow Axel Merck’s opinions? I know you’re very active on X, and I love following your X Feed. I check it out almost every day. Are there other places folks should go?

Axel Merk: MerkInvestments.com is our website. We have a free newsletter. You get some information on the products we have. I mentioned we have a physical gold product. We have a close end fund in the gold mining sector, focusing more on the juniors. Can’t talk about the products yet too much. But MerkInvestments.com, sign up for the newsletter. And yes, @AxelMerk is my Twitter handle.

Mike Maharrey: Outstanding. Well, I really appreciate you taking time out of your day and drinking a little beer early in the morning. I mean tea early in the morning, but it’s always great to catch up with you and get your insights, and I really appreciate the fact that you have a little bit of a broader view than just what’s going on here in the US and that’s always kind of a good perspective to get. So thank you so much and we’ll definitely have you on. Again,

Axel Merk: Thanks. And everybody fasten your seatbelt.

Mike Maharrey: Absolutely click.