‘Greatest Miner Opportunity In A Generation’ is Here, Says Axel Merk
Summary
Market Outlook: The S&P 500 continues to show strength, with major banks like Goldman Sachs raising year-end targets amidst a $15 trillion rally, while the mining sector experiences significant gains driven by rising gold and silver prices.
Hard Assets Surge: Gold has reached new highs, trading around $3,750, and silver has broken out to a 14-year high at $44, signaling strong market interest in hard assets.
Mining Sector Boom: The gold miners index has surged over 50% this year, with companies like Barrick showing significant growth due to potential new projects, indicating a major opportunity in mining.
Silver Market Dynamics: Silver's price action is influenced by its dual role as a monetary and industrial metal, leading to high volatility and potential for significant price movements.
Federal Reserve Policy: The Fed's internal debate on interest rate cuts highlights uncertainty in monetary policy, with some officials advocating for more aggressive cuts amidst slowing economic growth.
European Fiscal Concerns: France's fiscal challenges and sovereign downgrades contrast with Italy's upgrades, affecting perceptions of stability within the Eurozone and impacting central bank actions.
Investment Opportunities: The mining sector presents a significant margin expansion opportunity, with major producers needing to balance capital discipline and new asset development in politically stable regions.
Gold's Role in Portfolios: With rising gold prices and fiscal uncertainties, investors are increasingly viewing gold as a valuable asset for diversification and risk management in their portfolios.
Transcript
[Music] Hey everyone, welcome back. I'm Jeremy Saffron. As we kick off the week, the story on Wall Street is one of resilient strength. Despite calls for a break, the S&P 500 saw a small gain today, holding nearrecord highs after a $15 trillion rally from its April lows. Major banks like Goldman Sachs are even boosting their year-end target, setting historical strength during rate cut cycles from the Fed. But the most dramatic action is in hard assets. This morning, gold is establishing a new range in record territory, trading firmly in the low $3,700. I think almost 3750 on the spot side. And silver, it's also been the real story, breaking out of its 14-year high, pushing into $44. And that range in the move has captured the market's attention. Now, meanwhile, the ultimate leverage play to the metals theme, the mining sector. Well, as you can imagine, it's on fire as well. The gold miners index has now surged over 50% this year and we're seeing major moves in individuals like bareric just this morning on news of a potential gamechanging US gold project. Now to make sense of what these powerful signals uh signals rather mean for the months ahead. We're joined by founder and CEO of Merc investments, Axel Murk. His firm has $2.5 billion invested in the gold miners. Although Axel, with this price action, uh I think you're maybe worth a little bit more on that fund. Good to see you. Good to see you. Yes. Uh just to give you a sign of where we are, we currently manage a little over 2.9 billion and we had less than half than that under management 12 months ago. Wow. Wow. So, uh you're obviously, you know, full in due diligence mode here looking at where to catch a bid. I want to get into minors, but before we do that, let's talk a little bit about this divergence in in risk assets. I mean, let's start right there with silver. We're seeing this major breakout to a 14-year high, pushing it to $44. I mean, we'll see. This is the time of taping anyhow. And for years, you know, the market has discussed a persistent structural supply deficit in in physical silvers. And I'm I'm wondering if this powerful price action is the first sign that this physical reality is finally kind of, you know, overwhelming the paper markets and inserting itself in the price discovery mechanism or or is it something else? I think as any silver investor knows investing in silver is one of the more gut-wrenching experiences. So you have to take any any good news as you can and and part of the reason is that on the one hand it behaves like gold. It has the characteristics of a monetary metal but then it has the industrial component. And so whenever there's the perception that the economy plunges, silver is a headwind. And and on a day where we're talking, it is not too surprising that the S&P is also higher as the as as silver is breaking out further to the upside. And I think that's a sign that we have both a Fed that's easing and at least for today, the glass is half full with a with regard to a relative perception of economic growth. But that's part of the reason you have this this much higher volatility in silver because it just every day wants to decide something different as to where where price action ought to be. Yeah. No, it's been I mean obviously we know it's notoriously volatile and its last major peak was in 1980. How do we we know that this is isn't another speculative kind of fever that could quickly reverse, you know, especially given its strong correlation to the industrial economy which the Fed itself sees as weakening. Well, clearly gold, gold miners, silver, it's all somewhat in the speculative category. By the way, the price of silver historically has a volatility of the S&P 500 with burst to the upside, but silver obviously more volatile than that. Um, how do we know? Well, of course, we we don't have a crystal ball. What what we do know is that a lot of the speculative money in recent years had moved over to the meme stocks to digital assets. And in recent weeks, we have seen some of that come back um come back in the sense that digital assets, especially as we're talking today, are are under pressure. Um how long these trends move, how long they that's very very difficult to say. The speculator is is not a loyal investor. In my assessment, we're in the early innings of that. um what it means for practical purposes is that that volatility will remain elevated if it's not going to get more elevated. And so calling the top though to the extent that speculators would take over and I don't think they've taken over but they have an influence is is extraordinarily difficult and I'm not even going to try to to do that. Yeah. I mean, we're not doing a Bitcoin segment today, but I did have you on back in April, and you were talking about, you know, it kind of maturing and in contrast to the strength that we're seeing in tangible assets. Obviously, there's a different dynamic in the digital asset space. We see Bitcoin kind of holding its own here while a wave of leverage washed out that Ethereum and kind of the altcoin markets. What does this split tell you about how sophisticated capital is assessing risk right now? Well, in some ways, it's good news. And uh last time I think I said um Bitcoin still wants to decide what it wants to be when it grows up. And and the the the the the reference was that crypto assets are highly correlated with risk assets and the gold of course has a proven track record of being uncorrelated. Although with gold that's phasing in and out and today of course the crypto investor will prefer to go to the upside that the fact that it's moving in the opposite direction I think is actually a healthy sign. um there there may well have been too much speculation in the short term there. I hear there's some liquidation and whatnot. And so those are signs of a of a healthy market. Um obviously this quote unquote healthy market can can turn into gut-wrenching if it goes down too much for for some investors. Yeah. Yeah. You're you're not kidding there. Everyone watching tightly trying to kind of decipher it. I want to get to gold, but before we do that, let's connect these market moves to the policies that are obviously fueling them. I mean, I want to talk about the Fed because this morning we're seeing a remarkable public debate among Fed officials. On one hand, you got St. Louis, you know, St. Louis Fed President Mussol. He's he's saying that there's limited room for cuts. But then on the other end, you know, you got Fed Governor Steven Mirren just gave a speech with Bloomberg arguing the policy is quote well into restrictive territory and that he dissented last week because he wanted a half point cut, not a quarter point. What does this open division at the Fed tell you about the certainty of the path forward? Well, first of all, Powell himself has said it would be abnormal not to have disagreements because we do have on the one hand inflationary pressures that that persist. On the other hand, we have an economy that's slowing and uh according to to various sources presumably so weakening more precipitously than than previously anticipated. I am not a fan at all of of Fed officials telling the public what they will do. It provides a mental actor to them. They ought to react to to to data. Now obviously you can have the view that we should have cut more. That's that's all fair. But there are several coming out saying oh I will have one cut this year two cuts this year. That is that is not how monetary policy um is supposed to work. That's a crisis tool where you try to manipulate the yield curve. They're supposed to say, "Hey, we go into the room and then decide." Now, the quote unquote good news may be that it the monetary policy is less relevant. There is such draconian action happening on the fiscal side uh in various directions, be that tariffs, be that other measures that that seems to have kind of sucked the air out of the room. For the Fed, it's more long-term whether that so-called independence will be preserved. And for that I what I'm looking at is who the next fret chair will be and whether that's a person of of of substance who can independently pursue pursue a new agenda and potentially reform the Fed as well. Any any guess on on who that might be or or or is what I'm kind of hearing from you in layman terms actually is we're almost seeing some some live televised job uh you know for those for those calling for a fit cut. Yes. So if you want to reform the Fed in earnest, Kevin Walsh is the person to have. He is somebody who before um all this became a political hot potato was calling for reform at the Fed. He says when you've gone off track, you got to got to go back to basics. He is in the camp that the Federal Reserve is doing too much. Uh I don't like political interference in the Fed because it makes monetary policy less effective and and more expensive. But the way to fix it is to get out of politics at the Fed. Um when you buy mortgage back securities, you're allocating money to a specific sector of the economy. That is fiscal policy. When obviously pandemic and and various financial crisis actions are fiscal policy, not monetary policy. So it is not surprising that there's more interference. And so if you want to if you want to have somebody who understands it and actually structure changes that are within the given law um Kevin Walsh is a person um just as a reminder we just had this five-year review by by by Jeremy Powell and it it was your typical lame duck review. They basically didn't change anything. Didn't admit anything has gone wrong in recent years and it's not surprising that that there's political interference as little as I like it. Yeah. Yeah. Interesting. I mean, you know, some would say that a hawk like Worsh seems to kind of be the exact opposite of what President Trump has been demanding from the Fed. Do you think an appointment like that would create even more public conflict between, you know, the Federal Reserve in the White House, leading to more volatility, not less? Well, any Fed chair is going to pursue a policy that they deem right. Um, and uh Kevin Walsh has called for easier policy. what what Kevin Bush has also done also before it became a political hot potato. He has said that the data that the Fed is looking at is really bad. This was before the the jobs numbers were discredited and whatnot. And what he's pointed out is that we need to look more at real time data. Um keep in mind right we used to have real-time data. The Federal Reserve looked at the yield curve and got got information back. the Federal Reserve used to intervene in the markets to set the federal funds rate and and see any any issues flaring up with any particular banks um in that process. We don't have any of that anymore. And as a result, the Fed officials are reading the tea leaves. They're debating club uh and and are bound to be late and and so um what you need is you you need some and and of course the communication strategy on top of that um has substantial shortcomings these days. um you need somebody who appreciates those sort of things and and uh in in my book Kevin Borsh is the guy to do it. Then there's a bunch of people who will do the status quo. That's a likely scenario. And then of course you could go the other um direction where you have somebody who is who is doing exactly what the administration wants. That would be very negative um because it would increase uh long-term borrowing costs. um by all means um President Trump is is is in every right has every right to have an opinion but when somebody influential torpedoes monetary policy credibly when it's more than just uh regular politics with any which every president has done maybe Tom Morson and others um it means that the Fed can't just move the markets with a few words it will be more expensive to to move the markets and and that that just raises the cost of borrowing for everybody right you know and at the same time the price of geopolitical ical safety is also being repriced. I mean in Europe, France is now being called the new poster child of fiscal woe. I mean suffering its second sovereign downgrade in just a week just as Italy earns an upgrade. For a central bank or or a large institution looking for stability, what does it signal when a core European economy like France is seen as a rising fiscal risk? Well, the central bankers will just always focus on the problem of the day. The problem in Europe is that you have a draggy style central bank. It's Madame Lagard now that will do whatever it takes. That's really the curse of central banking. They want to be independent, but ultimately that independent is is is not possible. The fiscal policy is not in order. So on the one hand, everybody quote unquote wants France to get its its pension system under reform, to get its budget deficit under reform. At the same time, Madame Lagard at the most recent ECB meeting confirmed that if that the quoteunquote transmission mechanism will be monitored closely that is not Fed speak but ECB speak for saying they will buy French bonds if those bonds were to blow out which again means that the market cannot exert pressure on politicians. And if there's one thing that we have learned from Greece and other countries that policy makers will only take make the tough choices when the market forces them to do so. And if if the market will not make the tough choices because of central bank intervention um then then we're not going to get any reform. And that's uh that's I think that's the baseline. It's one of the reasons why why precious metals are doing well because views that used to be fringe views are moving more towards towards the mainstream. And while not everybody is embracing them because the market is comparatively small um that gradual change has an impact and if I can make one more point is that one big change that has happened in recent months is and I think I mentioned this on your program I believe that tariffs don't just impede the flow of goods they have an impact on financial flows deficits will have to be financed more domestically as trade is disrupted and that in the absence of of fiscal reform exerts increasing pressure on monetary policy which is exactly what we've been seeing. Yeah. Interesting. And I mean on the euro projects I mean does this kind of fiscal divergence where a core country like France is weakening prove that the euro can never be a true kind of independent comp competitor to the US dollar because of it lacks its single kind of unified fiscal backbone? Well, there's only one US dollar, but that doesn't mean I mean, and we can criticize something about every country. That doesn't mean that currency can't rise or fall. Keep in mind that Europe is on an extraordinary spending spree. Um, where they want to spend hundreds of billions on, in Germany's case, 500 billion euros on defense plus 500 billion euros on infrastructure. One thing I'd like to point out that year to date the uh the Swedish um currency is actually the the best performer and Sweden um fun fact here is the one country that as a percentage of GDP has the highest defense spending and so Europe needs to spend more on defense and that spending um provides economic growth. Of course it can also provide inflation. Um the other thing in Europe is that as far as the I can see nobody expects any any changes in interest rates whereas in the US there's expectations of of more rate cuts coming up. Yeah. Well said. Uh and we'll bring up Sweden here in a in a few minutes because we got to get to the the potential looming October 1st uh breakdown of kind of what's happening in Washington too. But I want to get to the producers because obviously this all leads us to them. I mean given your firm's significant position in this area, I kind of want to do a deep dive. I mean, with the miners index up over 50% this year and some of these major banks calling for much higher gold prices, are we witnessing the beginning of the single greatest margin expansion opportunity for the sector in a generation? Yes, I think is the short answer. No, I'm not I can't give any investment advice here. Clearly the market has valued the gold in the ground less so than it has in the past because even though these miners have gone up quite substantially um compared to what's um what's in the ground um I would think there's there's more more upside potential. Now there are many reasons maybe why the market has been reluctant. One is the there might be some people may think that these prices are not sustainable. But more importantly, investors have just been burned too many times. In the past when the price of gold has gone up, there has been the price of oil has gone up and about up to a quarter of the cost of mining is is energy. Workers want to have more higher salaries. Governments want higher taxes. Um but in the current environment, those cost pressures have been have been comparatively benign. And so yes, there will be margin expansion. Although on the major producers because they have their balance sheet in order, they have less leverage than they used to have. Which of course doesn't change the fact that many of the juniors have tremendous leverage and they have been struggling to keep up. I mean that's it's it's it's a I'm chuckling here because of course they have done very well but historically speaking money first goes into the major producers and then with an amplified impact in the more junior miners again be causes a speculative space I can't just tell people to to put money into it. Um but if history is any guide I would not be surprised at all if that were the case. Yeah it's interesting. I mean you know when we talk about the majors while the rising gold prices obviously you know a clear tailwind miners also face these rising input costs for labor steel energy as we kind of know uh when we talk about these elevated inflation you know rates in the US and we talk about getting to two and it's not I mean how much of a risk is there that this inflation in the real economy could eat away at those producer margins you know making maybe the expansion less dramatic well a little bit of course will will be there. Uh but we we do have a Federal Reserve who who has clearly put its emphasis on on on the jobs market now and is downplaying the inflation risks. Um the the labor shortages are not that significant compared to how they've been in the past. And uh and similarly on the the machinery input, I mean we talk about terrorists all the time, but a lot of the gold mining doesn't happen in the US. So these tariffs matter much much less than they would would otherwise matter and so yes there will be cost pressures but nothing at least currently I don't see it compared to what we've seen in in some of these other cycles. Um clearly need to keep an eye on it. Clearly need to see how sustainable is um and of course the the funding window is is quite open these days. So we'll have to see what discipline are there in the deals. Um but while the there is optimism and we've seen more retail participation I think the institutional participation is still modest evaluations in in these merger activities are are still quite disciplined. Um and so the it's impossible to say whether that window is going to be a few weeks or a few years and uh it's it's for the time being I'm I'm very comfortable with where we are. Yeah, the margins have been incredible to watch and and most have been, you know, simply trying to increase them. I mean, there seems to be a strategic split developing. We have majors like Igno uh Eagle, obviously they're emphasizing discipline while junior explorers report spectacular high grade drill results. I mean, as an investor, you just kind of talked to us a little bit about it, but how do you balance the safety of a cash flowing major against the explosive potential of some of these junior explorers? Well, we've always tried to focus on opportunities where there is more than just a potential margin expansion because of a of a higher gold price. So, we like to invest in the in the more junior developers that as they get added to indices, for example, there might be there's more investors are coming in, there's going to be a margin expansion or multiple expansion and so forth. So that what isn't just dependent on the higher price of gold but but of course there there are various ways um you can make money in in this segment and and even the I I don't want to talk too specifics about the miners but um some of them have had some issues and they are behind them and so no wonder that that the market is playing catchup with them. It's also not surprising that that is as interest is broadening that the majors are are prime beneficiary for the time being right and so for now this market is behaving even though we've had extraordinary returns somewhat as one would expect um and if anything because the price of gold has been high and getting even higher as we speak right um these are these are very rational moves now does it mean the one thing I'd like need to point out is of course when you have such high upside volatility. We know that volatility can work on the downside as well. And why I'm not concerned about it at this moment. Um any investor needs to be aware that that that is of course absolutely possible. Yeah. Well said. And and of course, you know, we're not going to ask you for the stock picks. We know we can't ask you for it, but I do want to talk a little bit about the majors because we're seeing shares of Bareric surge on the news of this new potential gamecher project in the US. I mean, how important is it for the major producers to not only show capital discipline, but also to actively develop and derisk major new assets in safe jurisdictions like the United States? I'm hesitating because you put a lot in this. Um first of all I you say safer jurisdiction the US the US has as much geopolitical risk as any other not as any other jurisdiction but there is political risk clearly with the current administration if you're on federal land um gold was elevated to be a strategic mineral and and the the the the permitting and so forth is is greatly greatly e so that is that is a very very positive tailwind. Um the the other part of the reason why I was hesitating responding the majors have underinvested and uh and they are there isn't enough there aren't enough discoveries of of size for them to to catch up and it's part of the reason why they some of them have gotten involved in these huge copper gold projects. That doesn't mean they can't execute, but it changes the risk profile of these companies and and and they they can't just gobble up all kinds of small miners. They've clearly decided on a different path forward because it's it they they can't gobble up enough. And so that's why the opportunities I think in the majors and and in the more junior space are going to be quite distinct going forward. Um keep in mind of course that the ETFs cannot easily handpick securities, right? and and and the active management in the space is is still um very very limited which on the positive side provides tremendous opportunities for for the active manager. And the one thing maybe I should add is the the gold mining sector has the greatest dispersion of returns um of any S&P sector, meaning the returns are all over the place. Active management matters much more so and you're dealing with a a rapidly depleting asset. Yeah, that's a good that's a good piece of advice. I mean, with gold at record highs, a skeptic would say that this, you know, newfound capital discipline is actually a sign of weakness. That the majors are struggling to find quality large-scale deposits to replace their reserves and kind of choosing, you know, buybacks and dividends instead by their default. I mean, are the producers at risk of shrinking their production profiles in this bull market? Well, yes, that that is a risk. uh they will always do what investors push them to do and for years they they told them to to get their balance sheet in order and and so they did. Um but of course the the the flip side of that is that there's less leverage in their balance sheet and and and so investors have to pick and choose kind of their their their what they want to do. Um clearly when when there's an extended bull market everybody would like them to be more lever. Um and and so we'll just have to see how the companies react. I mean, the good news is that when you decide on a project, you're not going to assume current gold prices. You're going to go with far lower gold prices. One of the questions we we asked them at conferences like what what price do you get in? And if they get too far ahead, that then that's a that's a concern. But if you if you budget at a much lower price, which you have to do for operational reasons, then of course it's fantastic when the price of gold goes higher. But the the folks digging the gold out of the ground, most of them are good at digging. They are not necessarily gold bucks, right? Um and and and so they it's the operational technology that they worry about and so they should, right? And a higher gold price is fantastic for them, but they will make the operations work even at a much lower price. Of course, you you made the point there that, you know, these large institutions are still significantly underinvested in the mining sector. What what what do you believe is the key catalyst that will kind of force them into start allocating serious capital to this space? Is it a sustained period of gold over a certain price or or is significant and prolonged downturn in the general equities? I think that's exactly it, right? I mean, it's a there's nothing that attracts gold investors like a rising gold price and uh investors are scrambling to get more gold exposure should the S&P perform poorly. in the initial downdraft, should there be a severe market correction, everything may go down in quotes. Um, but then the Federal Reserve would react and and then miners tend to recover and go up much more at least if history is any guide, right? Um, and and so it's that sort of environment. There are of course different types of investors. They invest for different reasons, but investors concern about valuation and looking for diversification, that's that's a big part of it. and uh and and so given that the equity markets continue to be elevated um there is plenty of more opportunity for people to be concerned about valuation um and especially should we indeed have a bare market in stocks especially a more severe one um that might also help the miners that's that's not a forecast for today or tomorrow but just something to keep in mind totally I mean as you watch your own fund obviously this price action there's been uh some significant jumps Uh, are you worried that the price of gold's going too fast, too soon? Are you happy with a little breather here? What's your thoughts? Um, I've been in this business for too long to get too emotional about these these price moves. Obviously, one feels better when the portfolio is is up. Um, the and as as we're trying to do on these conversations, right, we there is a price action, then we're doing a macro overlay on top of it. Now obviously it's not our macro talk that will move the markets. It is the supply and the demand and we're trying to understand of what is driving it. Um to me those decisions we are seeing here are very rational. Now I might be biased right I mean when when your your business is dependent on gold and gold mining I might be biased. So I try to listen to to the input of of others. What I do see is that a lot more asset allocators outside of the gold space, historically outside the gold space, are pointing to gold as one of the few things that they might want to add to the portfolio as quote unquote insurance. Uh again, right, this is not a safe bet to be in that space. But as the views are broadening that something is a miss structurally on the fiscal side um which something that of course your audience has heard forever um but is is making it more to the quote unquote mainstream. Um I do think that there continues to be significant upside potential. Yeah. Interesting. Okay. Well, let's pull the the lens back a little bit and look at the road ahead. I mean I want to bring in fiscal policy as you kind of suggested. You and I were chatting this morning and in the US we know Congress is once again facing a standoff over government funding with an October 1st deadline just days away now. Axel, I mean this seems very uh you know kind of stark contrast to what's happening in Europe where we're seeing these major spending initiatives on infrastructure and defense and and you just brought up that Swedish crona. I mean it's the best performing G10 currency. Uh, and I think you were talking a little bit about how you highlighted this morning how it's tied to that country's defense spending. I mean, the bigger question is is how do you analyze the investment landscape when you compare US fiscal paralysis with Europe's proactive fiscal stimulus? Well, all else equal paralysis would mean less fiscal spending. Um, if we get a a shutdown, Rand Paul, I think, phrased it appropriately. The way you get a compromise is the Republicans get a little bit more defense spending and the Democrats are getting a little bit more assurances on on entitlement spending and so you end up spending more when you have these compromises. Um all of this is really noise because it the the big entitlement spending issues are driving are driving the expenses. But yes, net we are fiscally expansionary in Europe whereas we at least have had attempts with Doge and similar to contain some of the spending. So at least the expansion of the spending in the US is is less than it have been and and potentially less than than in some other places notably Europe as well that that really wants to spend more on defense and and infrastructure. And so the way I I look at it is that we live in a world where politicians need to make promises to get reelected. Um we have a rise of populism in many parts of the world which also means more spending. We have the cost of doing business going up. Um be that because the US can't be the the securing the seas globally anymore, be that because of tariffs or other geopolitical events. Um we have a climate change and you may think of it what you want but it will increase the cost of doing business in the medium term. So these are and then we have demographics of course that um with uh that just exacerbate many of these these trends with regard to to the fiscal obligations and and so when you look at it all you say well why don't you hold some rules right as as a as a quote unquote insurance that doesn't mean the equity markets can't go higher in that sort of environment especially when you have enough of a deregulatory push by all means there are some areas that could benefit Um, but I I think the one thing that's assured is that our politicians will globally will not come to the senses and favor fiscal discipline. Um, especially if if you're going to face another election at some point in your future. You know, this this combination of of easy money and and these fiscal questions has some drawing historical parallels. The Wall Street Journal recently featured this cover story. I don't know if you saw it. They were discussing the potential for a blowout market rise followed by this 1929 style crash. I mean you've suggested that to understand this we need to look a little bit deeper specifically at the policies of President Koolage and Hoover. So walk us through this historical parallel and what it tells us about the current situation. Yes. So first I'd like to mention in the late '9s Greenspan warned about irrational exuberance but it took years for the market to ever top. So timing this is very difficult. Um with a contrast to today's environment with 1920s there are many many differences. President Kulage was kind of a somebody who was a government minimalist. He wanted the government to be out of anything and everything. Um, including not even the helping when there was a national disaster is one of the reasons why Hoover became president because this was just a time when when radio became national and so anybody's plight locally became national news and Hoover was a hands-on person who who who helped organize um some of the uh the the help in national disasters. Um what he had done is as he was elected he had made some election promises um including some on tariffs and being a a man of his words he he followed through with them and that exacerbated then then the downturn um there's there's there's some other key differences one of them like to highlight um when during the time when Hoover was rising in influence it was President Hoover and even before he was president who was really at the dawn of the public believing in experts He believed you need to have national economic data. Um you need a national data on health in order for government to do the right thing to help the economy. We've gone full circle and now experts are the bad guys. This was also the 1930s. We had the expansion of the administrative state and we in that in reverse. So while there are parallels um we're really coming full circle here. The context in both places is of course that valuations are very high and if a wrench is thrown into that through what whatever means it may be we might know what wrench it's going to be or not um that can that can cause a severe correction of course at some point. Interesting. So so given those key differences specifically the Fed's ability to intervene aggressively does that mean then actually I mean the primary risk for investors has kind of changed here. Are we now in an environment where we're less likely to see a sudden deflationary crash like 29 and more likely to see this slow grinding decline? What are your thoughts? We we had we had more reliance on gold back then as well whereas now we have a micromanagement of the economy. I like to remind people in banks mismanaged interest rate risk and the Fed all but bailed them out. There's a reason we haven't had this recession. The Federal Reserve believes and if you read Bernagi's book that he wrote during the pandemic, he firmly believes that it's the Fed's job to to ever more micromanage the economy and that that will of course that creates this put option that that gets asset prices to be to to be ever higher. Um, of course that doesn't mean they always go higher because at some point the market may have enough and they'll go in reverse. That said, we know that the reaction of the Federal Reserve will be to again foam the markets. And so it is not surprising to me that the price of gold is moving higher and that if if the solution to everything and anything is easier policy. Yeah. Yeah. I mean, Morgan Stanley's strategists are floating uh run it hot scenario for 2026 where the Fed cuts into a strong economy potentially causing earnings to come in much stronger than expected. Is that a plausible outcome in your view or is that policy path that risks unanch anchoring inflation expectations entirely? Well, yes and yes. I mean, it's a we keep in mind we have a midterm election coming up. Um, that means we need boost to economic growth ahead of the midterm election. And so while we had a lot of headwind with uh freedom liberation day and whatnot, um we will have a greater emphasis of things that are presumably providing a tailwind for the economy. And so the quote unquote run it hot scenario is is a scenario. There's so many different options that that I I don't want to say that this is the most likely one. I happen to think that there are plenty of indicators why the economy is slowing down. Usually if there's just one or two of them, it might be okay. But if you have both Europe and China slowing down, for example, then it would cause a recession in the US. The Europe is going to be very expansionary. China also wants to keep his economy going. So a growth scenario is certainly possible. Um, as a gold investor, I'm looking at where we are in kind of the this economic cycle and we are in an easing cycle and unless inflation really whacks us, that's a technical term. I I think that the Fed will continue on its course, it might end up moving slower than expected. But keep in mind, it doesn't matter what the Fed will do. It's it what matters to markets what is what might happen. So if there's anticipation that the Fed will continue to be an easing path, that's good news. Just as when we were in a higher or longer environment, um junior miners in particular had depressed valuations because um funding conditions were tight because it was intentionally the credit conditions were intentionally tightened. We are far away from that and it's one of the reasons why the miners are doing well as well. Uh let's tie this all together before I let you go kind of for the investor. I mean given everything we've discussed the Fed's actions this fiscal imbalance and the repricing and hard assets has the very definition of of value changed here Axel I mean are traditional metrics like PE ratios taking kind of a backseat to things like tangible assets and you know resource scarcity things like that well the difficult part about assigning a PE ratio to to the miners that don't produce is that there is no earnings um and and and So what we do is we invest more so than in earnings, we invest in management teams. The scarcest resource in the mining sector and in many other sectors and if we look at the potential of these um with the current price of gold, the potential is is tremendous. Now that said, of course, there are plenty of of aspects in in the equity markets where you have um PE multiples and and yes um many of them are stretched, right? And so um if there is value, yes, it's it's scary to say, but um I happen to think there's better value in many miners. Um even though they have risen quite dramatically than than in in many other places. Again, when I say these things, I do have to add the caveat that this volatility is is is is for the speculator only here or in to be consumed in small bites. Now, full disclosure, I have fairly substantial exposure to that sector. It's about the risk you can afford and uh and that you can you you you're able to to to match. Yeah. Yeah. Well said. You don't want to be holding the bag. Uh we try and advise everybody on that one here as well, especially in this market. I mean, uh is it just metals and miners? Is there any specific sectors or themes that you believe that maybe the market's overlooking before I let you go? Well, on the on the mining side, right, the the developers in particular, the more junior side has kept up. Um but there is in my view much much more potential for them to just do what they historically have done. Now of course it doesn't need to play out that way. So I I do need to throw that out. Um yeah otherwise in the markets right it's the what people forget is that the way to think about diversification is going is during good times um in 2008 a lot of people lost a lot of money when when things came crashing down because they were riding the wave too much. It ultimately depends on anybody's investment process, but I would like to encourage people is have a process. And uh what I'd like to add is it doesn't need to be a good one, but if you don't have one at all, then you're almost certain to lose money. Yeah. Yeah. Don't just go in buying it all. All right, Axel Mark of Merc, thanks for your sharp and essential analysis of the landscape here, my friend. I appreciate your time. My pleasure. A historic repricing of assets is clearly underway here from the breakout in silver to the powerful moves in the mining sector. Of course, we'll be tracking all of these developments right here at Kiko News. And if this is the kind of in-depth analysis and you want to stay ahead of these market defining moves, make sure to hit like the video and subscribe right here to the Kiko News channel. Let us know your biggest takeaway from Axel in the comments section below. I'm Jeremy Saffron. Thanks for watching. We'll see you next time. [Music] Heat. Heat. N. [Music]
‘Greatest Miner Opportunity In A Generation’ is Here, Says Axel Merk
Summary
Transcript
[Music] Hey everyone, welcome back. I'm Jeremy Saffron. As we kick off the week, the story on Wall Street is one of resilient strength. Despite calls for a break, the S&P 500 saw a small gain today, holding nearrecord highs after a $15 trillion rally from its April lows. Major banks like Goldman Sachs are even boosting their year-end target, setting historical strength during rate cut cycles from the Fed. But the most dramatic action is in hard assets. This morning, gold is establishing a new range in record territory, trading firmly in the low $3,700. I think almost 3750 on the spot side. And silver, it's also been the real story, breaking out of its 14-year high, pushing into $44. And that range in the move has captured the market's attention. Now, meanwhile, the ultimate leverage play to the metals theme, the mining sector. Well, as you can imagine, it's on fire as well. The gold miners index has now surged over 50% this year and we're seeing major moves in individuals like bareric just this morning on news of a potential gamechanging US gold project. Now to make sense of what these powerful signals uh signals rather mean for the months ahead. We're joined by founder and CEO of Merc investments, Axel Murk. His firm has $2.5 billion invested in the gold miners. Although Axel, with this price action, uh I think you're maybe worth a little bit more on that fund. Good to see you. Good to see you. Yes. Uh just to give you a sign of where we are, we currently manage a little over 2.9 billion and we had less than half than that under management 12 months ago. Wow. Wow. So, uh you're obviously, you know, full in due diligence mode here looking at where to catch a bid. I want to get into minors, but before we do that, let's talk a little bit about this divergence in in risk assets. I mean, let's start right there with silver. We're seeing this major breakout to a 14-year high, pushing it to $44. I mean, we'll see. This is the time of taping anyhow. And for years, you know, the market has discussed a persistent structural supply deficit in in physical silvers. And I'm I'm wondering if this powerful price action is the first sign that this physical reality is finally kind of, you know, overwhelming the paper markets and inserting itself in the price discovery mechanism or or is it something else? I think as any silver investor knows investing in silver is one of the more gut-wrenching experiences. So you have to take any any good news as you can and and part of the reason is that on the one hand it behaves like gold. It has the characteristics of a monetary metal but then it has the industrial component. And so whenever there's the perception that the economy plunges, silver is a headwind. And and on a day where we're talking, it is not too surprising that the S&P is also higher as the as as silver is breaking out further to the upside. And I think that's a sign that we have both a Fed that's easing and at least for today, the glass is half full with a with regard to a relative perception of economic growth. But that's part of the reason you have this this much higher volatility in silver because it just every day wants to decide something different as to where where price action ought to be. Yeah. No, it's been I mean obviously we know it's notoriously volatile and its last major peak was in 1980. How do we we know that this is isn't another speculative kind of fever that could quickly reverse, you know, especially given its strong correlation to the industrial economy which the Fed itself sees as weakening. Well, clearly gold, gold miners, silver, it's all somewhat in the speculative category. By the way, the price of silver historically has a volatility of the S&P 500 with burst to the upside, but silver obviously more volatile than that. Um, how do we know? Well, of course, we we don't have a crystal ball. What what we do know is that a lot of the speculative money in recent years had moved over to the meme stocks to digital assets. And in recent weeks, we have seen some of that come back um come back in the sense that digital assets, especially as we're talking today, are are under pressure. Um how long these trends move, how long they that's very very difficult to say. The speculator is is not a loyal investor. In my assessment, we're in the early innings of that. um what it means for practical purposes is that that volatility will remain elevated if it's not going to get more elevated. And so calling the top though to the extent that speculators would take over and I don't think they've taken over but they have an influence is is extraordinarily difficult and I'm not even going to try to to do that. Yeah. I mean, we're not doing a Bitcoin segment today, but I did have you on back in April, and you were talking about, you know, it kind of maturing and in contrast to the strength that we're seeing in tangible assets. Obviously, there's a different dynamic in the digital asset space. We see Bitcoin kind of holding its own here while a wave of leverage washed out that Ethereum and kind of the altcoin markets. What does this split tell you about how sophisticated capital is assessing risk right now? Well, in some ways, it's good news. And uh last time I think I said um Bitcoin still wants to decide what it wants to be when it grows up. And and the the the the the reference was that crypto assets are highly correlated with risk assets and the gold of course has a proven track record of being uncorrelated. Although with gold that's phasing in and out and today of course the crypto investor will prefer to go to the upside that the fact that it's moving in the opposite direction I think is actually a healthy sign. um there there may well have been too much speculation in the short term there. I hear there's some liquidation and whatnot. And so those are signs of a of a healthy market. Um obviously this quote unquote healthy market can can turn into gut-wrenching if it goes down too much for for some investors. Yeah. Yeah. You're you're not kidding there. Everyone watching tightly trying to kind of decipher it. I want to get to gold, but before we do that, let's connect these market moves to the policies that are obviously fueling them. I mean, I want to talk about the Fed because this morning we're seeing a remarkable public debate among Fed officials. On one hand, you got St. Louis, you know, St. Louis Fed President Mussol. He's he's saying that there's limited room for cuts. But then on the other end, you know, you got Fed Governor Steven Mirren just gave a speech with Bloomberg arguing the policy is quote well into restrictive territory and that he dissented last week because he wanted a half point cut, not a quarter point. What does this open division at the Fed tell you about the certainty of the path forward? Well, first of all, Powell himself has said it would be abnormal not to have disagreements because we do have on the one hand inflationary pressures that that persist. On the other hand, we have an economy that's slowing and uh according to to various sources presumably so weakening more precipitously than than previously anticipated. I am not a fan at all of of Fed officials telling the public what they will do. It provides a mental actor to them. They ought to react to to to data. Now obviously you can have the view that we should have cut more. That's that's all fair. But there are several coming out saying oh I will have one cut this year two cuts this year. That is that is not how monetary policy um is supposed to work. That's a crisis tool where you try to manipulate the yield curve. They're supposed to say, "Hey, we go into the room and then decide." Now, the quote unquote good news may be that it the monetary policy is less relevant. There is such draconian action happening on the fiscal side uh in various directions, be that tariffs, be that other measures that that seems to have kind of sucked the air out of the room. For the Fed, it's more long-term whether that so-called independence will be preserved. And for that I what I'm looking at is who the next fret chair will be and whether that's a person of of of substance who can independently pursue pursue a new agenda and potentially reform the Fed as well. Any any guess on on who that might be or or or is what I'm kind of hearing from you in layman terms actually is we're almost seeing some some live televised job uh you know for those for those calling for a fit cut. Yes. So if you want to reform the Fed in earnest, Kevin Walsh is the person to have. He is somebody who before um all this became a political hot potato was calling for reform at the Fed. He says when you've gone off track, you got to got to go back to basics. He is in the camp that the Federal Reserve is doing too much. Uh I don't like political interference in the Fed because it makes monetary policy less effective and and more expensive. But the way to fix it is to get out of politics at the Fed. Um when you buy mortgage back securities, you're allocating money to a specific sector of the economy. That is fiscal policy. When obviously pandemic and and various financial crisis actions are fiscal policy, not monetary policy. So it is not surprising that there's more interference. And so if you want to if you want to have somebody who understands it and actually structure changes that are within the given law um Kevin Walsh is a person um just as a reminder we just had this five-year review by by by Jeremy Powell and it it was your typical lame duck review. They basically didn't change anything. Didn't admit anything has gone wrong in recent years and it's not surprising that that there's political interference as little as I like it. Yeah. Yeah. Interesting. I mean, you know, some would say that a hawk like Worsh seems to kind of be the exact opposite of what President Trump has been demanding from the Fed. Do you think an appointment like that would create even more public conflict between, you know, the Federal Reserve in the White House, leading to more volatility, not less? Well, any Fed chair is going to pursue a policy that they deem right. Um, and uh Kevin Walsh has called for easier policy. what what Kevin Bush has also done also before it became a political hot potato. He has said that the data that the Fed is looking at is really bad. This was before the the jobs numbers were discredited and whatnot. And what he's pointed out is that we need to look more at real time data. Um keep in mind right we used to have real-time data. The Federal Reserve looked at the yield curve and got got information back. the Federal Reserve used to intervene in the markets to set the federal funds rate and and see any any issues flaring up with any particular banks um in that process. We don't have any of that anymore. And as a result, the Fed officials are reading the tea leaves. They're debating club uh and and are bound to be late and and so um what you need is you you need some and and of course the communication strategy on top of that um has substantial shortcomings these days. um you need somebody who appreciates those sort of things and and uh in in my book Kevin Borsh is the guy to do it. Then there's a bunch of people who will do the status quo. That's a likely scenario. And then of course you could go the other um direction where you have somebody who is who is doing exactly what the administration wants. That would be very negative um because it would increase uh long-term borrowing costs. um by all means um President Trump is is is in every right has every right to have an opinion but when somebody influential torpedoes monetary policy credibly when it's more than just uh regular politics with any which every president has done maybe Tom Morson and others um it means that the Fed can't just move the markets with a few words it will be more expensive to to move the markets and and that that just raises the cost of borrowing for everybody right you know and at the same time the price of geopolitical ical safety is also being repriced. I mean in Europe, France is now being called the new poster child of fiscal woe. I mean suffering its second sovereign downgrade in just a week just as Italy earns an upgrade. For a central bank or or a large institution looking for stability, what does it signal when a core European economy like France is seen as a rising fiscal risk? Well, the central bankers will just always focus on the problem of the day. The problem in Europe is that you have a draggy style central bank. It's Madame Lagard now that will do whatever it takes. That's really the curse of central banking. They want to be independent, but ultimately that independent is is is not possible. The fiscal policy is not in order. So on the one hand, everybody quote unquote wants France to get its its pension system under reform, to get its budget deficit under reform. At the same time, Madame Lagard at the most recent ECB meeting confirmed that if that the quoteunquote transmission mechanism will be monitored closely that is not Fed speak but ECB speak for saying they will buy French bonds if those bonds were to blow out which again means that the market cannot exert pressure on politicians. And if there's one thing that we have learned from Greece and other countries that policy makers will only take make the tough choices when the market forces them to do so. And if if the market will not make the tough choices because of central bank intervention um then then we're not going to get any reform. And that's uh that's I think that's the baseline. It's one of the reasons why why precious metals are doing well because views that used to be fringe views are moving more towards towards the mainstream. And while not everybody is embracing them because the market is comparatively small um that gradual change has an impact and if I can make one more point is that one big change that has happened in recent months is and I think I mentioned this on your program I believe that tariffs don't just impede the flow of goods they have an impact on financial flows deficits will have to be financed more domestically as trade is disrupted and that in the absence of of fiscal reform exerts increasing pressure on monetary policy which is exactly what we've been seeing. Yeah. Interesting. And I mean on the euro projects I mean does this kind of fiscal divergence where a core country like France is weakening prove that the euro can never be a true kind of independent comp competitor to the US dollar because of it lacks its single kind of unified fiscal backbone? Well, there's only one US dollar, but that doesn't mean I mean, and we can criticize something about every country. That doesn't mean that currency can't rise or fall. Keep in mind that Europe is on an extraordinary spending spree. Um, where they want to spend hundreds of billions on, in Germany's case, 500 billion euros on defense plus 500 billion euros on infrastructure. One thing I'd like to point out that year to date the uh the Swedish um currency is actually the the best performer and Sweden um fun fact here is the one country that as a percentage of GDP has the highest defense spending and so Europe needs to spend more on defense and that spending um provides economic growth. Of course it can also provide inflation. Um the other thing in Europe is that as far as the I can see nobody expects any any changes in interest rates whereas in the US there's expectations of of more rate cuts coming up. Yeah. Well said. Uh and we'll bring up Sweden here in a in a few minutes because we got to get to the the potential looming October 1st uh breakdown of kind of what's happening in Washington too. But I want to get to the producers because obviously this all leads us to them. I mean given your firm's significant position in this area, I kind of want to do a deep dive. I mean, with the miners index up over 50% this year and some of these major banks calling for much higher gold prices, are we witnessing the beginning of the single greatest margin expansion opportunity for the sector in a generation? Yes, I think is the short answer. No, I'm not I can't give any investment advice here. Clearly the market has valued the gold in the ground less so than it has in the past because even though these miners have gone up quite substantially um compared to what's um what's in the ground um I would think there's there's more more upside potential. Now there are many reasons maybe why the market has been reluctant. One is the there might be some people may think that these prices are not sustainable. But more importantly, investors have just been burned too many times. In the past when the price of gold has gone up, there has been the price of oil has gone up and about up to a quarter of the cost of mining is is energy. Workers want to have more higher salaries. Governments want higher taxes. Um but in the current environment, those cost pressures have been have been comparatively benign. And so yes, there will be margin expansion. Although on the major producers because they have their balance sheet in order, they have less leverage than they used to have. Which of course doesn't change the fact that many of the juniors have tremendous leverage and they have been struggling to keep up. I mean that's it's it's it's a I'm chuckling here because of course they have done very well but historically speaking money first goes into the major producers and then with an amplified impact in the more junior miners again be causes a speculative space I can't just tell people to to put money into it. Um but if history is any guide I would not be surprised at all if that were the case. Yeah it's interesting. I mean you know when we talk about the majors while the rising gold prices obviously you know a clear tailwind miners also face these rising input costs for labor steel energy as we kind of know uh when we talk about these elevated inflation you know rates in the US and we talk about getting to two and it's not I mean how much of a risk is there that this inflation in the real economy could eat away at those producer margins you know making maybe the expansion less dramatic well a little bit of course will will be there. Uh but we we do have a Federal Reserve who who has clearly put its emphasis on on on the jobs market now and is downplaying the inflation risks. Um the the labor shortages are not that significant compared to how they've been in the past. And uh and similarly on the the machinery input, I mean we talk about terrorists all the time, but a lot of the gold mining doesn't happen in the US. So these tariffs matter much much less than they would would otherwise matter and so yes there will be cost pressures but nothing at least currently I don't see it compared to what we've seen in in some of these other cycles. Um clearly need to keep an eye on it. Clearly need to see how sustainable is um and of course the the funding window is is quite open these days. So we'll have to see what discipline are there in the deals. Um but while the there is optimism and we've seen more retail participation I think the institutional participation is still modest evaluations in in these merger activities are are still quite disciplined. Um and so the it's impossible to say whether that window is going to be a few weeks or a few years and uh it's it's for the time being I'm I'm very comfortable with where we are. Yeah, the margins have been incredible to watch and and most have been, you know, simply trying to increase them. I mean, there seems to be a strategic split developing. We have majors like Igno uh Eagle, obviously they're emphasizing discipline while junior explorers report spectacular high grade drill results. I mean, as an investor, you just kind of talked to us a little bit about it, but how do you balance the safety of a cash flowing major against the explosive potential of some of these junior explorers? Well, we've always tried to focus on opportunities where there is more than just a potential margin expansion because of a of a higher gold price. So, we like to invest in the in the more junior developers that as they get added to indices, for example, there might be there's more investors are coming in, there's going to be a margin expansion or multiple expansion and so forth. So that what isn't just dependent on the higher price of gold but but of course there there are various ways um you can make money in in this segment and and even the I I don't want to talk too specifics about the miners but um some of them have had some issues and they are behind them and so no wonder that that the market is playing catchup with them. It's also not surprising that that is as interest is broadening that the majors are are prime beneficiary for the time being right and so for now this market is behaving even though we've had extraordinary returns somewhat as one would expect um and if anything because the price of gold has been high and getting even higher as we speak right um these are these are very rational moves now does it mean the one thing I'd like need to point out is of course when you have such high upside volatility. We know that volatility can work on the downside as well. And why I'm not concerned about it at this moment. Um any investor needs to be aware that that that is of course absolutely possible. Yeah. Well said. And and of course, you know, we're not going to ask you for the stock picks. We know we can't ask you for it, but I do want to talk a little bit about the majors because we're seeing shares of Bareric surge on the news of this new potential gamecher project in the US. I mean, how important is it for the major producers to not only show capital discipline, but also to actively develop and derisk major new assets in safe jurisdictions like the United States? I'm hesitating because you put a lot in this. Um first of all I you say safer jurisdiction the US the US has as much geopolitical risk as any other not as any other jurisdiction but there is political risk clearly with the current administration if you're on federal land um gold was elevated to be a strategic mineral and and the the the the permitting and so forth is is greatly greatly e so that is that is a very very positive tailwind. Um the the other part of the reason why I was hesitating responding the majors have underinvested and uh and they are there isn't enough there aren't enough discoveries of of size for them to to catch up and it's part of the reason why they some of them have gotten involved in these huge copper gold projects. That doesn't mean they can't execute, but it changes the risk profile of these companies and and and they they can't just gobble up all kinds of small miners. They've clearly decided on a different path forward because it's it they they can't gobble up enough. And so that's why the opportunities I think in the majors and and in the more junior space are going to be quite distinct going forward. Um keep in mind of course that the ETFs cannot easily handpick securities, right? and and and the active management in the space is is still um very very limited which on the positive side provides tremendous opportunities for for the active manager. And the one thing maybe I should add is the the gold mining sector has the greatest dispersion of returns um of any S&P sector, meaning the returns are all over the place. Active management matters much more so and you're dealing with a a rapidly depleting asset. Yeah, that's a good that's a good piece of advice. I mean, with gold at record highs, a skeptic would say that this, you know, newfound capital discipline is actually a sign of weakness. That the majors are struggling to find quality large-scale deposits to replace their reserves and kind of choosing, you know, buybacks and dividends instead by their default. I mean, are the producers at risk of shrinking their production profiles in this bull market? Well, yes, that that is a risk. uh they will always do what investors push them to do and for years they they told them to to get their balance sheet in order and and so they did. Um but of course the the the flip side of that is that there's less leverage in their balance sheet and and and so investors have to pick and choose kind of their their their what they want to do. Um clearly when when there's an extended bull market everybody would like them to be more lever. Um and and so we'll just have to see how the companies react. I mean, the good news is that when you decide on a project, you're not going to assume current gold prices. You're going to go with far lower gold prices. One of the questions we we asked them at conferences like what what price do you get in? And if they get too far ahead, that then that's a that's a concern. But if you if you budget at a much lower price, which you have to do for operational reasons, then of course it's fantastic when the price of gold goes higher. But the the folks digging the gold out of the ground, most of them are good at digging. They are not necessarily gold bucks, right? Um and and and so they it's the operational technology that they worry about and so they should, right? And a higher gold price is fantastic for them, but they will make the operations work even at a much lower price. Of course, you you made the point there that, you know, these large institutions are still significantly underinvested in the mining sector. What what what do you believe is the key catalyst that will kind of force them into start allocating serious capital to this space? Is it a sustained period of gold over a certain price or or is significant and prolonged downturn in the general equities? I think that's exactly it, right? I mean, it's a there's nothing that attracts gold investors like a rising gold price and uh investors are scrambling to get more gold exposure should the S&P perform poorly. in the initial downdraft, should there be a severe market correction, everything may go down in quotes. Um, but then the Federal Reserve would react and and then miners tend to recover and go up much more at least if history is any guide, right? Um, and and so it's that sort of environment. There are of course different types of investors. They invest for different reasons, but investors concern about valuation and looking for diversification, that's that's a big part of it. and uh and and so given that the equity markets continue to be elevated um there is plenty of more opportunity for people to be concerned about valuation um and especially should we indeed have a bare market in stocks especially a more severe one um that might also help the miners that's that's not a forecast for today or tomorrow but just something to keep in mind totally I mean as you watch your own fund obviously this price action there's been uh some significant jumps Uh, are you worried that the price of gold's going too fast, too soon? Are you happy with a little breather here? What's your thoughts? Um, I've been in this business for too long to get too emotional about these these price moves. Obviously, one feels better when the portfolio is is up. Um, the and as as we're trying to do on these conversations, right, we there is a price action, then we're doing a macro overlay on top of it. Now obviously it's not our macro talk that will move the markets. It is the supply and the demand and we're trying to understand of what is driving it. Um to me those decisions we are seeing here are very rational. Now I might be biased right I mean when when your your business is dependent on gold and gold mining I might be biased. So I try to listen to to the input of of others. What I do see is that a lot more asset allocators outside of the gold space, historically outside the gold space, are pointing to gold as one of the few things that they might want to add to the portfolio as quote unquote insurance. Uh again, right, this is not a safe bet to be in that space. But as the views are broadening that something is a miss structurally on the fiscal side um which something that of course your audience has heard forever um but is is making it more to the quote unquote mainstream. Um I do think that there continues to be significant upside potential. Yeah. Interesting. Okay. Well, let's pull the the lens back a little bit and look at the road ahead. I mean I want to bring in fiscal policy as you kind of suggested. You and I were chatting this morning and in the US we know Congress is once again facing a standoff over government funding with an October 1st deadline just days away now. Axel, I mean this seems very uh you know kind of stark contrast to what's happening in Europe where we're seeing these major spending initiatives on infrastructure and defense and and you just brought up that Swedish crona. I mean it's the best performing G10 currency. Uh, and I think you were talking a little bit about how you highlighted this morning how it's tied to that country's defense spending. I mean, the bigger question is is how do you analyze the investment landscape when you compare US fiscal paralysis with Europe's proactive fiscal stimulus? Well, all else equal paralysis would mean less fiscal spending. Um, if we get a a shutdown, Rand Paul, I think, phrased it appropriately. The way you get a compromise is the Republicans get a little bit more defense spending and the Democrats are getting a little bit more assurances on on entitlement spending and so you end up spending more when you have these compromises. Um all of this is really noise because it the the big entitlement spending issues are driving are driving the expenses. But yes, net we are fiscally expansionary in Europe whereas we at least have had attempts with Doge and similar to contain some of the spending. So at least the expansion of the spending in the US is is less than it have been and and potentially less than than in some other places notably Europe as well that that really wants to spend more on defense and and infrastructure. And so the way I I look at it is that we live in a world where politicians need to make promises to get reelected. Um we have a rise of populism in many parts of the world which also means more spending. We have the cost of doing business going up. Um be that because the US can't be the the securing the seas globally anymore, be that because of tariffs or other geopolitical events. Um we have a climate change and you may think of it what you want but it will increase the cost of doing business in the medium term. So these are and then we have demographics of course that um with uh that just exacerbate many of these these trends with regard to to the fiscal obligations and and so when you look at it all you say well why don't you hold some rules right as as a as a quote unquote insurance that doesn't mean the equity markets can't go higher in that sort of environment especially when you have enough of a deregulatory push by all means there are some areas that could benefit Um, but I I think the one thing that's assured is that our politicians will globally will not come to the senses and favor fiscal discipline. Um, especially if if you're going to face another election at some point in your future. You know, this this combination of of easy money and and these fiscal questions has some drawing historical parallels. The Wall Street Journal recently featured this cover story. I don't know if you saw it. They were discussing the potential for a blowout market rise followed by this 1929 style crash. I mean you've suggested that to understand this we need to look a little bit deeper specifically at the policies of President Koolage and Hoover. So walk us through this historical parallel and what it tells us about the current situation. Yes. So first I'd like to mention in the late '9s Greenspan warned about irrational exuberance but it took years for the market to ever top. So timing this is very difficult. Um with a contrast to today's environment with 1920s there are many many differences. President Kulage was kind of a somebody who was a government minimalist. He wanted the government to be out of anything and everything. Um, including not even the helping when there was a national disaster is one of the reasons why Hoover became president because this was just a time when when radio became national and so anybody's plight locally became national news and Hoover was a hands-on person who who who helped organize um some of the uh the the help in national disasters. Um what he had done is as he was elected he had made some election promises um including some on tariffs and being a a man of his words he he followed through with them and that exacerbated then then the downturn um there's there's there's some other key differences one of them like to highlight um when during the time when Hoover was rising in influence it was President Hoover and even before he was president who was really at the dawn of the public believing in experts He believed you need to have national economic data. Um you need a national data on health in order for government to do the right thing to help the economy. We've gone full circle and now experts are the bad guys. This was also the 1930s. We had the expansion of the administrative state and we in that in reverse. So while there are parallels um we're really coming full circle here. The context in both places is of course that valuations are very high and if a wrench is thrown into that through what whatever means it may be we might know what wrench it's going to be or not um that can that can cause a severe correction of course at some point. Interesting. So so given those key differences specifically the Fed's ability to intervene aggressively does that mean then actually I mean the primary risk for investors has kind of changed here. Are we now in an environment where we're less likely to see a sudden deflationary crash like 29 and more likely to see this slow grinding decline? What are your thoughts? We we had we had more reliance on gold back then as well whereas now we have a micromanagement of the economy. I like to remind people in banks mismanaged interest rate risk and the Fed all but bailed them out. There's a reason we haven't had this recession. The Federal Reserve believes and if you read Bernagi's book that he wrote during the pandemic, he firmly believes that it's the Fed's job to to ever more micromanage the economy and that that will of course that creates this put option that that gets asset prices to be to to be ever higher. Um, of course that doesn't mean they always go higher because at some point the market may have enough and they'll go in reverse. That said, we know that the reaction of the Federal Reserve will be to again foam the markets. And so it is not surprising to me that the price of gold is moving higher and that if if the solution to everything and anything is easier policy. Yeah. Yeah. I mean, Morgan Stanley's strategists are floating uh run it hot scenario for 2026 where the Fed cuts into a strong economy potentially causing earnings to come in much stronger than expected. Is that a plausible outcome in your view or is that policy path that risks unanch anchoring inflation expectations entirely? Well, yes and yes. I mean, it's a we keep in mind we have a midterm election coming up. Um, that means we need boost to economic growth ahead of the midterm election. And so while we had a lot of headwind with uh freedom liberation day and whatnot, um we will have a greater emphasis of things that are presumably providing a tailwind for the economy. And so the quote unquote run it hot scenario is is a scenario. There's so many different options that that I I don't want to say that this is the most likely one. I happen to think that there are plenty of indicators why the economy is slowing down. Usually if there's just one or two of them, it might be okay. But if you have both Europe and China slowing down, for example, then it would cause a recession in the US. The Europe is going to be very expansionary. China also wants to keep his economy going. So a growth scenario is certainly possible. Um, as a gold investor, I'm looking at where we are in kind of the this economic cycle and we are in an easing cycle and unless inflation really whacks us, that's a technical term. I I think that the Fed will continue on its course, it might end up moving slower than expected. But keep in mind, it doesn't matter what the Fed will do. It's it what matters to markets what is what might happen. So if there's anticipation that the Fed will continue to be an easing path, that's good news. Just as when we were in a higher or longer environment, um junior miners in particular had depressed valuations because um funding conditions were tight because it was intentionally the credit conditions were intentionally tightened. We are far away from that and it's one of the reasons why the miners are doing well as well. Uh let's tie this all together before I let you go kind of for the investor. I mean given everything we've discussed the Fed's actions this fiscal imbalance and the repricing and hard assets has the very definition of of value changed here Axel I mean are traditional metrics like PE ratios taking kind of a backseat to things like tangible assets and you know resource scarcity things like that well the difficult part about assigning a PE ratio to to the miners that don't produce is that there is no earnings um and and and So what we do is we invest more so than in earnings, we invest in management teams. The scarcest resource in the mining sector and in many other sectors and if we look at the potential of these um with the current price of gold, the potential is is tremendous. Now that said, of course, there are plenty of of aspects in in the equity markets where you have um PE multiples and and yes um many of them are stretched, right? And so um if there is value, yes, it's it's scary to say, but um I happen to think there's better value in many miners. Um even though they have risen quite dramatically than than in in many other places. Again, when I say these things, I do have to add the caveat that this volatility is is is is for the speculator only here or in to be consumed in small bites. Now, full disclosure, I have fairly substantial exposure to that sector. It's about the risk you can afford and uh and that you can you you you're able to to to match. Yeah. Yeah. Well said. You don't want to be holding the bag. Uh we try and advise everybody on that one here as well, especially in this market. I mean, uh is it just metals and miners? Is there any specific sectors or themes that you believe that maybe the market's overlooking before I let you go? Well, on the on the mining side, right, the the developers in particular, the more junior side has kept up. Um but there is in my view much much more potential for them to just do what they historically have done. Now of course it doesn't need to play out that way. So I I do need to throw that out. Um yeah otherwise in the markets right it's the what people forget is that the way to think about diversification is going is during good times um in 2008 a lot of people lost a lot of money when when things came crashing down because they were riding the wave too much. It ultimately depends on anybody's investment process, but I would like to encourage people is have a process. And uh what I'd like to add is it doesn't need to be a good one, but if you don't have one at all, then you're almost certain to lose money. Yeah. Yeah. Don't just go in buying it all. All right, Axel Mark of Merc, thanks for your sharp and essential analysis of the landscape here, my friend. I appreciate your time. My pleasure. A historic repricing of assets is clearly underway here from the breakout in silver to the powerful moves in the mining sector. Of course, we'll be tracking all of these developments right here at Kiko News. And if this is the kind of in-depth analysis and you want to stay ahead of these market defining moves, make sure to hit like the video and subscribe right here to the Kiko News channel. Let us know your biggest takeaway from Axel in the comments section below. I'm Jeremy Saffron. Thanks for watching. We'll see you next time. [Music] Heat. Heat. N. [Music]