Jp Morgan Now Wildly Bullish on Gold? | State Politicians Try to Hijack Gold Market

Mike Maharrey: Greetings. I’m Mike Maharrey and I’m joined once again by Axel Merk. He’s the president and chief investment officer of Merk Investments. How you doing today, Axel?

Axel Merk: Good to be with you again.

Mike Maharrey: Absolutely. Always a pleasure. I was telling my wife about you the other day and I told her that in my view, you are one of the more reasoned and levelheaded voices out there. I read your posts. I love reading your feed on X.

Axel Merk: I don’t know whether that says much about me or about the sort of people that you hang out with.

Mike Maharrey: Maybe a little bit of both to be quite honest with you, and I’ll be honest, I myself, I can get caught up in emotions sometimes and I think sometime that can be to my detriment.

Axel Merk: Don’t forget that my speech is censored because we manage money. For those who don’t know me, we manage for over $4 billion in the gold and gold miners, and so the SEC keeps an eye on what I say, and that said, since that’s been happening forever, I’ve kind of embraced that and so my more moderate analytical tone is kind of becoming part

Mike Maharrey: Of part. Well, I think in this day and age it’s necessary because there’s so much noise and I guess hype for lack of a better word. So, it is nice to see reason breakdown analysis.

Axel Merk: I also try to be humble in that sense. I mean nobody knows what the markets are going to do tomorrow. I like to point out the risks that are out there and until people can kind of crosscheck their own thesis against that, that’s kind of how I see my role rather than telling me, oh, gold is going to go up tomorrow or down tomorrow because we ultimately don’t know. I mean, I might be enthusiastic about it or might be whatever, but ultimately what I can do is kind of get you out of your comfort zone to think a little bit differently about things.

Mike Maharrey: Yeah, absolutely. And I like to think. So, along those lines, I kind want to get your impression on the recent selloff we had in both gold and silver, very significant. I was looking at some of the percentages are in some of the top selloffs for a day that we’ve seen in a long, long time, and I’m curious to how, from your perspective, how did you kind of view that and how did you react to it as it was going on? What was kind of your thoughts as you saw this happening?

Axel Merk: Well, first of all, as we are speaking on February 19 during market hours, gold is still up over 15% year to date, and I like to just point that out in perspective. Yes, the volatility has been substantial including some pretty severe down days, but at the end of the day it’s still up year to date.

And the way I think I have framed it to myself is that speculators are, back in the old days when we were both much younger, gold bugs were big speculators. They loved the action and then the meme stocks started to compete with gold and SPACs and crypto and everything. And so while the core gold investor was still there are the different types of investors in precious metals, the speculator kind of lost interest during this protracted bear market. And as of about a year ago, plus minus speculators have briefly been coming back and what happens when speculators are back, when there’s a trend they pile on and with leverage if they can, and then you get the sort of stuff that we’ve seen in recent weeks, and of course the initial sell off has been I think a very, very healthy one because you need to shake out the weekends periodically, but of course the first wave isn’t everything.

Then the more margin, margin calls and margins are increased. And what I find very encouraging is one of our products that we manage is an open-end product and we’ve had inflows on some of those down days, and unlike what many people in this industry think, I believe retail investors are actually quite smart. Maybe it’s the sort of investors that we cultivate, and that may be the case when I talk to our transfer agent in one of our products, they say, yep, our investors ask different questions than investors in other products. So, maybe because we do a lot of education, but when I see others, I mean take these as opportunities and I’m not making investment recommendation, then that is I think, very noteworthy that they are buying the dip rather than throwing in the towel. And then of course, I don’t need to tell you anything, right. The overall interest has been quite substantial. It’s been broadening and it’s incredibly noteworthy. And then of course, I mean I don’t need to tell your audience anything, right? Even if the price of gold were come down substantially, the margins and the minus are just breathtaking in the current environment, and so it’s a very fascinating time to be in the market.

Mike Maharrey: Yeah. I’m curious about this, and this was something that I was talking with our CEO Stefan Gleason about a little bit and he wanted me to ask you if you’ve noticed any increase in retail investment flows into your funds, mining stocks, bullion? Has anything changed in the last several months? Because there’s this perception, I think that particularly in the US, a lot of American investors are still kind of sitting on the, in terms of precious metals, that a lot of this is being driven from Asian and eastern investment. Do you see that or do you see more interest evolving here?

Axel Merk: Yeah, first of all, I’m a bit in a unique perspective, I wouldn’t say that necessarily what I see is representative what happens in general, but let me just give you what I have seen. One product we have is a closed-end product, meaning we don’t have daily flows, so we can see the volume pick up and we do see somewhat of an investor turnover, although there’s some unique aspects happening at this product that might influence that. We have an open-end product. Now, I specifically don’t list the names because of compliance of it that I have, but where we have seen the buying on the dips volume has picked up substantially in that product. It’s an exchange product where volume has picked up, but net has been buying activity. The other thing that we see is we work with wholesalers in the precious metal side and a few months ago their business was very, they had very little business because there were buyers and sellers amongst the retail dealers and they cut out the wholesaler, and so there was very little metal ordered from the mint, whereas in the environment we’ve had in recent weeks, what has changed is that they’re so busy that some of them are hitting their insurance limits in the amount of shipments they can do in a day.

And so, that suggests that there is demand and then another corner of this investment world. Back to the institutional side, we have started to see that generalist investors of large fund complexes joining meetings of mining companies that are mid-tier and smaller, and so that is potentially big money that could flow into there. And that’s kind of a broadening of the interest. That doesn’t mean that they necessarily invest, but having them in the room is something that’s somewhat new, but more broadly speaking, yes, it’s still a niche product. It’s still a niche market, and I don’t think there’s a “frenzy” to get that, and quite the opposite. I mean, well, what we do see is that the sort of concerns that the gold bucks have always had are moving from the fringe to the mainstream, and there’s still a long way for that to be completely mainstream, but the marginal buyer does make a difference and those forces are firmly in place.

Mike Maharrey: That makes a lot of sense to me because just from my perspective when I’m talking about some of these things that I’ve been talking about for a long time, such as the risk of dollarization and the problem of the national debt and inflation and these types of things, I’m getting a lot more of nodding of heads in a positive way than I was. It’s much less, as you say, kind of not so much of a fringe thing, but a lot more people that are just your average person out there I think are starting to see that.

Axel Merk: Yeah, I don’t know whether I would ascribe to, in a positive way, when I hear the national debt. But as we are talking, the Wall Journal has a cover page article about how massive the debt is, the potential of GDP to debt is now expected to rise based on the CBO. Now obviously the CBO is notoriously inaccurate in the predictions, but the direction is of course, right, in the sense that there is no effort to get the big spending items under control. We got deficits that are just, let’s say astounding, and investors are thinking about, ‘What can they do now?’ Does that mean the price of gold has to go up every day? No, of course not. But it is something that gets the attention of investors way beyond the traditional gold bug.

Mike Maharrey: Yeah. How would you react to this? I read an article today and it was basically summarizing JP Morgan analysts and they were making a case for $8,000 gold based on this idea that gold is kind of moving from, as you described it, this niche product that is typically seen as a hedge for crises and things like that, to more of a mainstream hedge and an investment in your portfolio. Does that resonate with you as well? I think it does from what you said, but I kind of wanted to put an exclamation point on that. How do you react

Axel Merk: Yes. Well, the one thing I’d like to just add to that is the precious metals market is small, and when unquote Main Street takes note of it, price moves can be substantial. That is really, I think that is a message that I think people don’t realize. We see everything you can buy with a click of a button these days, but it makes a difference whether you go to the treasury market, go to gold market, and when people reallocate from gold to precious metals, it has outsized moves in that market. Now, obviously the gold is not a bond, right? I mean it’s a completely different risk profile, but we do see investors kind of move more towards trying to figure things out. Already in 2005, I said investors might want to take a diversified approach to something as mundane as cash. And what I meant with that is that the potential for the erosion of the purchasing power of the dollar do you diversify to other currencies and to precious metals. And like then the years of debt crisis came along and nobody wanted to do anything anymore about other currencies, but precious metals have of course stood the test of time.

Mike Maharrey: So, let’s talk a little bit about the Fed because one of the primary drivers, at least this is kind of the theory that sparked the big selloff, was the announcement of Kevin Warsh as the new Fed chair and the perception is that Warsh is going to be at least more hawkish than a lot of the other candidates might have been, and he kind of has this perception of being an inflation warrior. And I’m curious if you agree with this analysis of him, and if so, why do you think Trump picked him when he keeps hammering for lower interest rates?

Axel Merk: I have How many hours do we have to talk about Kevin Warsh because I love expanding on that. First of all, the selloff was not triggered by his announcement. The reason I say that is you would’ve seen that in other parts of the market. The what was priced in in terms of rate cuts did not budge, and it was really a selloff. That was a reaction to the significant leverage there was in various markets, including on the precious metal side. To address the last part of your question, Trump in my view chose Warsh because he’s the only candidate or he was the only candidate who would address the fundamental ailments at the Fed. He has been consistent in his criticism on the communication strategy on veering beyond monetary policy. Remember, monetary policy is about interest rates, not about micromanaging the economy. He is about getting the Fed to do less by doing that, getting the fed out of the political crosshairs.

And some people have said, ‘Oh, Warsh has said some of these things because he wants to get the job.” Well, yes, he has spoken up more of late, but he resigned as a governor. He supported the emergency measures in 2008, but then had made it clear that they must be withdrawn immediately and wound down. And when Bernanke did not do that, he resigned out of protest. And ever since then he’s been very, very consistent in that. And so, in that sense, he is a back-to-basics guy at the Fed. Now, I realize that many, your audience don’t like the Fed, no matter what, but as far as if you have a credit-based system with a central bank, he is the one who can reform it within the confines of existing law. And I say that because if you want to just throw out the Fed entirely, you need something new.

Well, guess what? To do that you would have to go back to Congress. There are some people that might say that if Congress gets involved, they might mess it up. There might. And so kind of Kevin Warsh is the best thing you can get to reform the system from within the given parameters. So that’s the second one.

The third answer I’ll give you on where he stands on policy, yes, he’s historically known as a hawk, but he is also, he has made this very clear in his speeches. He has said that the only way for the, and he has criticized the Fed by the way, for facilitating deficits with 0% interest rates egging on Congress to do that. But he has said that the Fed really needs to also be aware that we are going to experience or experiencing a productivity boom. And by the way, so far the data is supporting him, and so he’s in the productivity boom camp, whereas Chris Waller, one of the other candidates who he’s a Fed president right now, was more on the camp saying the economy is doing poorly. That’s why we need to cut rates. And by the way, just to add to that, Powell in December at the press conference started to allude to the productivity boom, and so he basically has been paving the way for a new Fed chair that is on the productivity bandwagon, and it is the key reason to close the loop on that, why the markets didn’t have a violent reaction when Kevin Warsh was announced because there is a consistency in that sense in the market. There was no utter surprise, I should say, for full disclosure that I’ve gotten to know Kevin Warsh over the years. As you may be aware, I’m attending a bunch of conferences where there are folks that are present and I’ve really learned to appreciate Kevin Warsh, and so it’s going to be super interesting to the extent that I might be critical of his policies going forward, knowing as much as I know about him that how to monitor that.

And by the way, these things about going back to basics, they’re not going to affect the interest rates tomorrow or the day after, right? The economy drives that, and yes, and it doesn’t really matter whether interest rates are going to be a quarter point low or higher tomorrow, but the entire framework matters. And when you’re getting more away from this debating club attitude, that’s always late to having a more consistent framework that’s all healthy and in the long run makes monetary policy more efficient when there’s less political interference. So it matters on the margin, it matters in the long run. It matters to get the fed out of politics. Now, Trump will presumably always have something to say when rates move, but he is the right person at the right time for the Fed.

Mike Maharrey: That’s a really good analysis of that. I really appreciate that. I know that Warsh has been one of the things he talks about a lot. He talks about rate cuts, but he also talks about the fact that he believes that the balance sheet should be smaller and more streamlined, and he believes that if they can do that, then that will allow them to lower rates on the other side of the scale, which will help Main Street. And I can see the argument there. My question to you is do you think that he will be able to accomplish that given the issues that we have in the bond market? Is it realistic for the Fed to be able to shrink its balance sheet in this environment?

Axel Merk: Well, here, I’ll give you just my personal opinion because I don’t know the exact details of what Warsh has in mind. There’s one thing he said that he’s going to work with treasury. Clearly it makes no sense that both Treasury and the Fed are managing duration. And so swapping the portfolio with treasury, dumping the bonds onto treasury and getting T-bills on something I think is a good idea. But that itself, of course doesn’t allow you, that allows you to get out of duration management on the Fed side even if it was never intentional. But that doesn’t shrink the balance sheet itself. The way you can shrink the balance sheet is you go back to the pre 2008 way of managing, managing interest rates by having the New York Federal Reserve intervene in the markets and manage interest rates through open market operations. Now, I have to tell you, the folks at the New York Fed that I have talked to don’t like that at all.

They think it’s an arcane thing that is super stressful and there’s no benefit in it. I am in the camp that says, no, it is absolutely worthwhile to go back to that. Paying interest on reserves as the current model is politically a nightmare because you’re paying tens of billions to banks. And when you intervene in the markets to set rates, which you can do, the reason by the way this can be done is then you can go back to a minimalist balance sheet, then you don’t have to have this huge balance sheet. If you do that, you see problems spike up when you just foam the runway, so to speak all the time, you don’t see underlying problems. But when you manage the rates with the daily interventions, you see problems flare up before become huge issues. Now, that’s one of the things I would love to see.

I don’t know whether Kevin Moore is on board with that, but that would be the way to lower the balance sheet. Otherwise, if you just lower the balance sheet from where you are without doing anything else, it doesn’t work because we’ve seen it that then there’s some crisis somewhere happening. And so we will see of what he will do. He obviously needs to get the other folks on the Fed on board with whatever he does. Some people say he’s been a bit antagonistic, and yes, he’s had a sharp tongue, but from how I’ve gotten to know Kevin Warsh, he’s actually quite a team player. And I wouldn’t be surprised if he can get people on board on whatever he’s planning to do. Maybe he won’t achieve everything he wants to do, but I think he can get quite a bit done.

Mike Maharrey: That’s good to hear because that was one of the things that I was going to comment that I was making, or at least it ran through my head, is that this is one guy among a number of board members and you’ve got all of the various presidents and stuff. So the fact that he has that ability will bode well.

Axel Merk: Yeah. Well, leadership matters. And I say that in particular, let’s take communication strategy right now. Every Fed president seems to want to be on CNBC when there’s some economic data released. And when you ask them, they say, well, we scheduled this weeks ahead of three months ahead of time. I didn’t know that economic data release that day, and why do you comment live on economic data anyway? And then the other thing you’ll hear is that the Fed presidents don’t really report to the chair. They’re really independent. But I am certain that if the chair sets the tone and tells them to behave and do certain things differently, that will have an influence. Now, that doesn’t guarantee that every Fed president is always going to do exactly what the chair does, but we’ve had, obviously there have been numerous scandals at the Fed, and is it just tough coincidence that those things happen and not, I mean, the best and the treasury secretary said if this were to happen at a big corporation, the CEO would be out.

Now, obviously that’s playing into the administration’s drive to cause some painful for Powell, but he’s making a point I a good point that they need to run it tighter ship. And so having new leadership there helps and to just, we talk about Powell is a lawyer in some ways, an administrator. He was not providing thought leadership, I don’t think on anything. I mean, take the five year review that they do. There was nothing that came out of that. And so, people may or may not appreciate everything that Ken Warsh is going to do, but at least there’s a guy who has a vision on how to take things. And I mean, I am certainly going to give him the benefit of the doubt to give him a chance. Now that just as a caution, that doesn’t mean that he can fix the fiscal problems.

Mike Maharrey: It’s not his job!

Axel Merk: All he can help not to make it worse.

Mike Maharrey: Right. Well, that’s good to hear. I really appreciate that insight on him and the fact that you know him that really kind of helps adds a little bit of credibility to what you’re saying. So, I appreciate that. I’m going to get you on this…

Axel Merk: Again, I take no claim that I’m going to be right in anything that I say. Absolutely. My opinions are based on my own analysis.

Mike Maharrey: Yeah, yeah, yeah, exactly. And I think that’s a healthy attitude to maintain. I’m going to get you out on this one. This is just kind of a fun question, and my colleague Josh wanted me to ask you this, but I think it’s a fun question. Do you have a favorite coin or bullion product that you really like? And if so, why do you like that particular thing? And it doesn’t have to be because of any kind of financial thing, just because you happen to like it.

Axel Merk: Well, I’m biased, right? We manage a physical gold exchange shared product. I cannot name the name here because then there’s a different things that are triggered, but that’s my favorite. So, you can go to MerkInvestments.com and then go from there. It’s a product where you can buy gold on the exchange and take delivery if you want to. But I guess the question is always the proof in the pudding. I own quite a few shares in that. Other than that, I own a bunch of kilo bars, which is may be not so sexy. But a fun fact that some of you guys may not know. In 2003, I started a Golden College savings fund where every year I looked at a year of a four-year college, an expensive one, and then started planning. At the time we had little kids, we only had three kids and later the fourth one.

And how much gold do you have to put aside each year so that by the time that the youngest is 21, you’ve paid for college? And the price of college tuition went down every year went priced in gold. And so that was a positive. And then just fast forward, one of our kids had one of these expensive college experiences. Number two, we were very lucky, she’s a college dropout, does the startup world, and then two others went to state schools, or the last one is still in that. And so in that sense, the kilo bar, if you’re talking about the physical space, it’s been the most popular one in what I have at least. I do have some other coins as well, but I think that might be a little different answer than you get from others. So that’s my answer.

Mike Maharrey: No, that’s a great answer. I love it. And I love that you’re saving for your kids’ education in gold. That’s really, really cool. Well, before I go, I do want, you mentioned the website once, but I do want you to very specifically point folks to your website and where they can go to learn more about what you do and maybe get a little bit more information than you’re at liberty to give in an interview.

Axel Merk: Sure. MerkInvestments.com is our website. We manage over 4 billion in gold and gold miners. I’m on social media @axelmerk. I can’t talk about products on social media, but you’ll get my musings on the latest, be that on Kevin Warsh or the deficit or gold, and I’m quite reachable. So, feel free to reach out anytime. We do have a free newsletter at MerkInvestments.com as well that you can subscribe to.

Mike Maharrey:

Very cool. Your X feed is one of my favorites. I really do enjoy, like I said, just because you give this balance thing, and I always feel like you’re making me think as opposed to trying to convince me of something.

Axel Merk: I enjoy that. By not being radical, I don’t splash as much as others do, but the reason I do it anyway, even if my tweets don’t get much traction sometimes, is instead of taking notes that I can’t read anyway because I can’t read my handwriting, when I listen to a press conference, I tweet because that helps me memorialize what happened. And those who care get to see it, and those who don’t, well they don’t. But I do it for my own sake as much as for anybody.

Mike Maharrey: Yeah, I’ve done that before too. I often use comments on Facebook just as note cards. Somebody will make a comment and I’ll write something really along, which isn’t really for them at all. It’s because I want to formulate my ideas on that. So, that’s a good strategy. Well, I always enjoy talking to you. You’re a pleasure and I really appreciate you taking a little time out of your day to hang out with me. So, I hope you have a great rest of your week, and I’m sure we’ll have you back on in the next few months.

Axel Merk: Have a golden day. Yep,

Mike Maharrey: You too.