Gold at the Center of Chaos (Uncut) 04-23-2025

Gold at the Center of Chaos – Global System Breaking Down | Axel Merk

Hey everyone, welcome back to Kidco News. I’m Jerry Safran. Global markets are entering a new phase of instability.

Inflation expectations are climbing, treasury yields are surging, and gold has exploded to new highs here, even briefly trading above $3,500 an ounce, and Bitcoin is also now trading above $90,000 again as investors search for protection amid the deepening uncertainty out there. At the same time confidence in the U.S. financial leadership is being tested, President Donald Trump’s sweeping tariffs have triggered what some are calling an economic realignment. Tensions between the White House and the Federal Reserve are escalating in public and on social media.

The IMF just slashed its global growth rate forecast to 2.8 percent, the slowest pace since the pandemic, and is warning that downside risks are intensifying. Safe haven flows are shifting, capital continues to move, and underneath it all, the world may be starting to reassess the role of the U.S. dollar itself. Joining me now is Axel Merck.

He’s the President and Chief Investment Officer at Merck Investment. He’s also a Portfolio Manager at the ASA Gold and Precious Metals Fund. He’s been tracking these shifts closely.

Axel, great to see you. Thanks for joining us today. My pleasure.

We got lots to get into. We were talking off air. There’s always lots coming at us, but we got to start with your central thesis because you’ve said that the U.S. financial structure is behaving, you know, more like a hedge fund at this moment.

So what do you mean by that? How does the framework, what does that look like? Help explain to this market volatility that we’re seeing right now. Well, the hedge fund is actually the classic model the U.S. has for decades acted as such where investors borrowed in U.S. dollars and then invested for higher returns abroad, both domestic investors and foreign investors raising capital, borrowing debt. And that’s why historically, anyway, in a risk-off environment, there is a surge in the dollar because there’s a deleveraging of that, quote-unquote, hedge fund.

What has changed is that the tariffs are disrupting financial flows. Trust me, now everybody has heard the saying, the trade deficit with Trader Joe’s, with your shopping center, you have a trade deficit when you buy your goods. Well, imagine that the trade deficit is, quote-unquote, put into balance.

That means fewer financial flows make it back to Trader Joe’s or on the national scale to the U.S., which means that the deficits going forward will have to be financed more domestically. That is the wrench that’s really in the system here. OK, well, I mean, historically, you just mentioned, obviously, when risk rises, the dollar usually strengthens this time it’s falling while gold rises.

You said recently that if there’s a warning signal to watch, it is gold. Of course, we’ve been covering this past year on Kidco News. I feel like I keep talking about these record highs, but with gold seeing $100 moves on a daily basis and now trading above $3,400, what is the market trying to tell us? Yes, there are two things to watch in the most recent environment.

One is gold, kind of the cannery in the gold mines, and the other one, you mentioned inflation earlier, long-term inflation expectations. I’ll get to that in a second. With regard to the price of gold, let’s keep in mind, I sometimes call gold the most direct indicator of the mania of our policymakers.

I’m not trying to be critical with anybody personally, but gold, because it has less industrial use than other assets and because the market, it’s not that huge compared to other markets, you see it has a greater sensitivity to things that are happening. One of the things is that when you have the deficit more financed domestically, of course, the right thing would be, hey, let’s get the trade deficit in order and let’s make sure that we’re not going to have a deficit anymore, but instead, there is a fear that there’s going to be more pressure on the financial system on lower rates and that’s partly what you’re alluding to with pressure on the Federal Reserve. Talk to me a little bit about these structural differences beneath the surface.

Is it purely inflation hedging at this point? It seems like the gold bid seems to be more about political risk, maybe some central bank mistrust here. What are your thoughts? Well, let me get into that. There’s been a lot of talk about the Trump administration or Trump specifically interfering with the Federal Reserve.

Let’s differentiate between a few things. One is it is always a popular sport to use the Federal Reserve as a punching bag. Obviously, Trump has his unique and aggressive style, but the question is, is this rhetoric or is there something happening in earnest? Now, clearly, even when it’s just rhetoric, it puts the Fed in a tough spot because if they were to lower rates, people may say that this is due to pressure.

The one thing I’d like to point to because you mentioned about gold is the important part to watch. Inflation expectations is the other part, not so much short-term, but long-term inflation expectations is what the anchor is of central banking. That is where you can see whether there’s confidence that in the long run, the Federal Reserve will do its job.

Now, many in the audience will say, well, we don’t know what long-term inflation expectations are. The way I would look at it is those are confidence indicators in the Federal Reserve. If indeed there was true interference, more than just rhetoric, we would see that in long-term inflation expectations.

We don’t see that yet, so for those who say that the turbulence in the markets is due to Trump’s tweets on the Fed, I would say, no, not so fast. This is all tariff-related. We haven’t seen any.

If this was true interference with the Fed, I don’t think we have seen anything yet. This would be far more volatility in the markets. Interesting.

I’m going to break into that perspective in just a minute, but let’s finish up with gold. I have to ask you before the Fed, because these big daily price moves in gold, it seems to be signaling a little bit of uncertainty. Even if you’re a gold bug, you love it, but are we close to a top in the rally? I need to get your year-end forecast.

The one thing I’d like to point out is we have not seen any retail frenzy in this. What we have seen is, in the markets more broadly, we have mostly seen a deleveraging. We haven’t seen a panic on the equity side, and similarly on the gold side, we haven’t seen panic buying.

This has all been extraordinary, ordinary, or normal. We haven’t seen any disruptions. You would see, I mean, at Kidco, you would see it.

If the premiums were to shoot up of coins that people get, that means that people are really scrambling to get the coins. There hasn’t been anything out of the ordinary in that sense. Clearly, the significant moves are noteworthy, but let’s keep in mind the market doesn’t price in the future.

The market prices in discounted expectations of the future, and rational people will have different views, and every tweet will change the dynamics. What we do know, to just put that out as a baseline, we do know Trump is serious about balancing trade. He has had that theme since the 80s.

To me, that means that these 10% base tariffs are going to be in effect. Everything else is negotiable, but that in itself will have profound impacts for the plumbing of the financial system, and indeed, it will cause an economic slowdown. I think the price of gold is reflecting many of these things, and that’s part of the reason why the price of gold is moving higher.

Yeah, well said, and you continue, retail continues to be sitting out. I mean, we’ve been talking to dealers with that same perspective, but who has been picking up is central banks. I mean, aggressively, the People’s Bank of China, for example, has been adding gold reserves for five consecutive months, some are calling it a quiet vote of no confidence in the dollar.

I mean, from your vantage point here, is this a de-dollarization story, and if so, what are the real implications here, Axel? Yes, it is, and it’s a question of math. I mentioned this Trader Joe’s story. When you disrupt trade flows, financial flows will be impacted.

The other one is, of course, political. Businesses will always try to sell to consumers, they will find ways, but governments have a choice. Now, one way to think about it is the foreign governments, especially those not friendly with the U.S., are disincentivized to hold U.S. dollar assets.

Now, it’s not in their interest to dump all the dollar holdings, but on the margin, future allocations might be different, and gold is one of the beneficiaries in that process. So that’s the framework through which I look at this. But even the Europeans, they don’t want to be caught in that same situation again that they have been in recent weeks.

Now, the Europeans don’t buy a lot of U.S. treasuries, but it will have an impact on asset allocations. But this decoupling from the dollar’s reserve currency goes back to this earlier theme of the U.S. being a hedge fund. Hedge fund may be a bad name, let’s use the word bank.

The U.S. is the world’s bank, and if there is disruption in these flows and less of a trust, then there will be more local financing. People always argue, hey, there’s no alternative. That’s absolutely correct, but that doesn’t mean there has to be an alternative.

The global financial system can be in retreat. It doesn’t have to be that instead of A, there’s going to be B. We will see more disruption. The short of all of that is, no matter how it plays out significantly, the cost of doing business is going up.

The world is a more expensive place to operate in. We haven’t even talked about the massive spending the Europeans are going to do. All of that creates inefficiencies, and to all of this, I think, are all valid reasons why some investors are buying gold.

One argument against it is that it might be too much of a good thing, and at some point the price will take care of it. I don’t think we’re anywhere near the top of this, because I think the world is just waking up to the fact that the world’s plumbing has been changing. Interesting.

Okay, so what are you thinking? I mean, we’re sitting at almost 34. Every time I look, it’s a little bit of a different number, but are we going to see a $4,000 gold price this year, Axel? What are your thoughts? Well, nobody knows with this volatility. Goldman has come up with some high estimates.

If you draw parallels to the late 70s, those don’t sound so unreasonable anymore. Now, drawing parallels to the past is always a dicey game. I can say that I haven’t – I mean, you mentioned earlier that a portfolio manager, I’m known to be an insider buyer in that I haven’t sold anything, and so I certainly believe that there’s upside, but ultimately, this is a very risky space, both gold and the miners, and it’s not for the faint of heart, so people need to know what risk they can stomach in that space.

Yeah, well said. I can’t wait to get into the miners part of the interview. Before we do, let’s jump back to the Fed, because I’m going to give a little bit of background to the viewers.

I mean, President Donald Trump is turning up the heat on the Federal Reserve. I mean, in a fiery social media post, Trump claimed, quote, there is virtually no inflation, pointing to falling energy and food prices, but he didn’t stop there. He took direct aim at Fed Chair Jerome Powell, whom he dubbed Mr. Too Late, a major loser.

Trump added, there can be a slowing of the economy unless he, there can be rather a slowing of the economy unless he lowers interest rates now. Now, the president’s comments come just as the global financial leaders prepare to gather in Washington and for this week’s IMF and World Bank spring meetings. Chairman Powell, for his part, addressed those concerns in a speech last week.

He emphasized that the Fed must ensure tariffs don’t spark a new wave of inflation, reiterated that price stability is key to sustaining a strong labor market. He also reminded critics that the central bank independence is protected by law, saying that the Fed officials are not removable except for cause. What’s your take on this? I mean, could we see a global reaction if the Fed’s independence is being threatened? Well, let me first maybe mention that the reason why stagflation lasts for many years is because when you’re hit with a supply shock, the politically right thing to do is not necessarily the economically right thing to do.

And the reason I say that is tariffs are a supply shock. The cost of goods is going up. If you react to a supply shock with lowering rates, which Trump is demanding, you will push inflation higher.

And that is the tough spot the Federal Reserve is in. Politically, though, of course, Trump, it would be political suicide if Trump were to say, hey, you’ve got to raise rates because there are going to be fewer goods around. That’s not going to happen.

And so beyond that, the question is how much substance there is to it. It’s, of course, not the first time that a politician is blaming the Federal Reserve using the Fed as an escape code. What we should watch very carefully is who is going to be the next Fed chair.

In a year, Powell’s term is coming up. All his advisors are telling Trump not to fire Powell, not to take that gamble. It would be a huge mistake if he were to do that.

There’s very little upside. It’s only a year until the next person is going to be in town. And so we’ll have to see whether the sort of because that decision will tell the market how much how much pressure Trump can have.

Now, the person that’s been in the news the most is Kevin Walsh, a former Fed governor. If anything, he is known to be a Fed hawk. And that said, he is somebody who is more pragmatic, who seems to understand the Trump language.

So to the extent that if he were the next Fed chair, I would think that that the independence is going to be retained with with him as a Fed chair. But we have to watch that very carefully. And it is hugely important.

And to just add to that, why it is important, an independent Fed leads to a lower cost of borrowing. Imagine if there were real interference and then the Fed chair couldn’t just utter a few words and move the markets, but might have to intervene to get markets to move because there is going to be this this this bombardment from the side. And so it’s in everybody’s interest.

And that doesn’t mean that I or anybody agrees with what the Fed is doing. But the independence itself is is very important and creates a lower cost of borrowing ultimately for the US. I mean, is this deja vu of post-World War II financial repression? I mean, what are the parallels between today and the Fed’s role in the 40s? Because, I mean, you wrote lowering rates into a supply shock is inflationary.

The Fed is in a no win situation. So walk us through what that means now. We got a Federal Reserve that has a toolbox, as Bernanke described it.

And that’s the key difference to the 1930s. We know that when the proverbial SHIT hits the fan, we know the playbook of the Federal Reserve. And so we do know and to to maybe give a different perspective, what the Federal Reserve doesn’t care about the price of gold.

They don’t care about the S&P 500. What they care about is the credit markets, credit spreads. So if credit spreads blow out, meaning if junk bond yields jump higher, they might act.

If the economy as a whole is weakening substantially, they might act. They will not act based on a tweet of the Fed president. Now, the process I’ve called the Fed a debating club.

Yes, I agree. They tend to be late and all that. But when faced with a supply shock, cutting rates is not the right answer.

It puts the Federal Reserve in a tough spot because there is no good choice for them. Yeah, yeah, well said. OK, well, in your recent writing, you warned that if countries stop financing U.S. deficits, we’re entering a very different world.

Are we there yet? I mean, are foreign buyers stepping away from treasuries much like we’ve been hearing? Financial markets are so huge that these changes don’t happen overnight. I talked about the marginal changes in the allocations for reserves in China and whatnot. But the reason why the long bond in the U.S. is selling off, in my view, is a clear indication that deficits will need to be financed more domestically.

And when one tries to think these things through, you have to keep in mind that this is like a game that’s being played, if it were only a game. But Besson, the Treasury Secretary, needs to refinance that. He was hoping that an economic slowdown would allow them to do that.

It’s not happening. Trump is furious. This is tweeting up a storm.

And the question is, what sort of pressure will be applied in the medium term? My own view is that there’s this implicit pressure. Will it, in the end, cause the Federal Reserve to have a bias towards lower rates? And then on the financial flow side, that is far more important for the dollar as a reserve currency. If that exorbitant privilege fades away, it changes the game.

It will increase also the political pressure dramatically. At some point, I would agree to the critics that, indeed, there will be interference in the Fed. If you think about it from a long-term investor’s point of view that wants to create, reindustrialize the US, there’s a carrot and a stick approach.

Tariffs are the stick. The carrots are changes to red tape, cutting red tape and whatnot. But one key factor, and that’s why I mention it here, is fiscal sustainability.

If the fiscal sustainability of the US is not addressed, why would you invest in a 20-year project? Because the government’s incentives are not aligned with the US as an investor. You might get higher taxes. You might get higher inflation or some other sort of expropriation.

And so all of that investors need to digest. Those buying gold have had these concerns for a while. What we are seeing unfold is that those, quote-unquote, fringe views of the gold bucks are becoming mainstream.

And we are just a few steps into that path. Keep in mind that gold isn’t all that liquid when it comes to global financial markets. And so if there’s a flight into gold, you can see dramatic volatility, as we have seen in recent weeks.

And I think that volatility could even get more exacerbated. Come back to the US dollar there for a second, because, I mean, Axel, China’s stepping up efforts to globalize its currency, obviously amid these rising trade tensions with the US. I mean, the People’s Bank of China is now encouraging state-owned enterprises to prioritize the yuan for payments and settlements in their overseas operation, part of a broader push to internationalize the currency.

And then in a new joint note, as China’s central bank says that it will expand cross-border yuan financing, promoting blockchain settlement systems and to support the Shanghai Gold Exchange in boosting the yuan’s presence in global markets. This is from a report released this week, by the way. Is China’s push to internationalize the yuan a direct response to the Trump tariff hikes? And could this mark a turning point in the global currency landscape? Well, of course, China wants to portray themselves as the good guys in this, as the anchor of stability.

But at the same time, trust is built over decades. That is why the US has this exorbitant privilege as well. At the same time, you can destroy it very quickly.

And we’ve seen in recent weeks, I think a lot of damage has been caused to that notion. But again, it doesn’t mean that China will take its place. China appears to try.

And by all means, on the margin, they may have success doing that. I see much more of a splintering of the global financial system. Keep in mind that the Chinese have capital controls.

You can’t have a global reserve currency with the sort of manipulation they do with their currency. And so unless they’re willing to go all the way and have the market confidence that that will persist, you just can’t compete with that. But it doesn’t mean confidence cannot erode with regard to the dollar at the same time.

Yeah. And I mean, we’ve seen it about trust. I mean, U.S. debt approaching 37 trillion dollars, net international investment positions at minus 26 trillion.

How sustainable is the U.S. model if capital inflows slow down? Well, you need the long term issues, entitlement reform. We need that right. Doge is all I call it the popcorn thing.

Right. I mean, it’s and I’m not trying to diminish it. It’s a real, real cost cutting that can take place.

But we need to fix the long term issues. We do also know that the only motivation that politicians appear to understand is the bond market forcing them. And indeed, it has already happened.

Right. I mean, President Trump backed off on some of its tariffs because he called the bond market. I think Yippee was his technical term.

And and so policymakers listen to the markets, but not to a little bit of volatility. We’ll need to see much more, many more dramatic things here when that will be the case that the bond vigilante, so to speak, imposed discipline remains to be seen. The U.S. does have much deeper pockets than notably Greece, because the U.S. can print its own money.

Ultimately, central banks will do whatever it takes to rephrase Draghi at the ECB. And so that’s that’s really when it comes to to some more emergency scenarios, that is really when when the Federal Reserve will, quote unquote, cave. They won’t cave based on a tweet by the president.

Axel, I got you. Speaking of volatility, I got to ask a little bit about Bitcoin because it’s making a strong comeback. It’s rising to its highest level since early March and sparking fresh optimism against among these crypto bulls that we have.

I mean, Bitcoin has surged nearly 20 percent from its April 7th low. The digital asset appears to be breaking away from its usual correlation with U.S. tech stocks and starting to behave more like gold a little bit here, acting as a safe haven asset in a market rattled by these geopolitical tensions and the weakening dollar. We’re talking about this potential decoupling is obviously a welcome shift because people had expected a stronger rally following Donald Trump’s return to the White House.

But despite these recent gains, I mean, it remains well below its January highs. Why do you think we’re seeing a move back into Bitcoin now? Is Bitcoin finally breaking free from its correlation with tech here? Well, we’re talking on a day when the S&P 500 is up sharply. Obviously, this can change every few minutes.

And one of the challenges that Bitcoin has had is it’s been more correlated with risk assets. I would I take exception to it that it’s traded like gold. In the initial sell off, it was both gold and Bitcoin were traded.

Gold has a long history of doing that and then recovering and rallying substantially. And gold did exactly that. The challenge with Bitcoin, I think I’ve phrased it in the past, is it still wants to decide what it wants to be when it grows up.

We just don’t know yet what the dynamics will be. And the extra volatility in the price of gold has actually attracted some digital assets investors that are more in there for the speculative side. The speculators have been somewhat absent or muted in on the gold side.

That’s starting to change on the on the crypto side. That market is maturing, but very, very slowly. So I’d be very reluctant to say that I know what the dynamics will be and whether it’s going to be trading with risk on or risk off going forward.

And that’s been one of the challenges. But at the same time, of course, when when the dollar is weakening rather substantially, then then, of course, anything is possible. Right.

I mean, the dollar index has is below or under now, and nobody or few people would have expected that if he wants to go. Yeah. And I was reading a recent note, too.

And I mean, obviously, we’re watching the gold majors in the mining space and they’ve moved quite significantly. But you pointed out that junior miners are still lagging behind. What are you seeing in the gold equity space right now? I mean, is this where investors should be looking for leverage? Are you positioning ASA for some upside here? So until a few months ago, the majors had the challenge that they were scrambling to catch up on the production site.

And they did that by investing in these huge projects, very difficult to execute on time and on budget. And so as the gold miners got a bit of a bit, the juniors actually benefited more. Now, in the turmoil that we’ve had in recent weeks, it’s a more classic model where money is flowing into the majors because money managers that don’t know that space too well want to be exposed.

So the easiest way to get exposed is in the majors. And then on the on the more junior side, yes, they have moved with the majors. But given the added volatility you typically have in that space, you haven’t really seen much of that.

And so obviously, there are different ways of interpret it. My own interpretation is that the juniors, as they often do in the past, will have substantial catching up and further outperformance of the miners. Again, that’s a highly speculative space.

And my prediction is speculation as well. And I’m just trying to extrapolate from history, which has to be done with great caution. We are focused more on the junior space in what we do.

We help institutionalize assets and help them grow. We think that in addition to price appreciation, company-specific catalysts are helpful. But currently, the inspired space, of course, has done quite, quite well.

Yeah, talk to me. OK, I need to know just a little bit more because there’s obviously a lot of people that are thinking these high prices on the gold front will start to hit these Q2 revenue numbers. I mean, what fundamentals are you watching? Is there any stock picks on the junior side that you can kind of share with us here? We’ve got to give the audience something.

Sorry, I’m not allowed to give you specific names. But the question that the market has been discounting the price of gold, right? I mean, we were at over $1,000 lower and the prices weren’t all that different in many places. Yes, these profits obviously go directly to the bottom line.

The markets are discounting mechanisms, so the question is, how much will these companies benefit? On the cost side, by the way, a key ingredient to cost is energy. Those prices are low. And on the labor side, the other big fixed cost.

Other mining doesn’t do as great as it often does when the price of gold moves higher. And so while there’s never enough labor, the pressure on labor isn’t as high as you would have another bull market. So that’s all good.

We’re more on the junior end. Many developers. And so in that sense, they don’t actually mine anything yet.

That said, because they have this implicit leverage as the price of gold moves higher, you tend to see disproportional returns. Right. Yeah.

I mean, it’s interesting to watch this because markets still feel somewhat complacent. I mean, stocks have somewhat bounced here. The VIX is off its highs.

But you’ve asked whether markets are underreacting to what’s coming. So what’s the biggest risk right now that investors aren’t pricing in? Lots of risk that investors are not pricing in. Yeah.

I mean, start with that. If the risk that that people are not pricing insufficiently is if Trump were dead serious about what he wants to do. It really question is how much flexibility does he have? And historically, he has a lot of flexibility.

So I’m not saying that he’s going to be super rigid. That’s why I indicated earlier that the 10 percent baseline tariffs are kind of my goal post, where he wants to be that even with Europe, he wants to have 10 percent baseline tariffs. He might one of the things that has come up, he might be negotiating that lower if if Europe buddies up against China.

Who knows? But the the real fundamental risk is indeed that changing plumbing of the financial system, that the cost of borrowing for the US is going to be elevated for an extended period, putting ever more pressure on the various scenarios that I’m sure many of your Goldberg guests have said that this is actually moving from the fringe to the mainstream. My own view is that these risks are always there, have always been in the distance. And the reassessment is that, yes, a lot of this could be accelerated quite substantially.

Whether that’s indeed the case, I don’t know, both because Trump can turn on a dime if the markets have a fit. And also just going back to what happened in the European debt crisis. Policymakers are the best can kick us in the world.

And by the way, they change the rules along the way when when things don’t go their way. And so it’s very difficult to be very specific about the risk. But one of the reasons people buy gold is because it’s kind of the catch all hedge that people have.

And the only risk is if it really goes to the stratosphere. Well, at some point the price might be too high. I don’t think we are at that stage, but people have to take the volatility, of course, into account.

And finally, I got to ask you before we let you go, actually, if the shift that we’re witnessing continues, you know, more protectionism, rising inflation expectations, maybe some growing distrust in fiat systems. What does a sound portfolio look like for the average investor right now? One that you can sleep with at night. And I don’t just mean the gold bar under the pillow, but you’ve got to be looking at your portfolio.

And if you’re not comfortable with the volatility, that means you’re overexposed to risk assets. And I said many years ago that investors might want to take a diversified approach to something as mundane as cash. And now with the dollar plunging from your parity to the euro to about 115, people might get that a little bit more, although, of course, most people don’t think in the world in terms of euros.

I mean, even the price of gold is volatile with regard to the dollar. And if your daily expenses are in dollar, that’s kind of your anchor. I think the more important what do your portfolio is that your expenses are in order, because in a world of volatility, you want to make sure that you’re spending less than you’re making.

And the other thing you can do is invest in the one asset that you have control over, which is yourself. Invest in your own skills, in your own purchasing power. I know this may not be the sort of investment advice that you’re looking for, but the other one is to de-lever in a volatile world, because then ultimately it doesn’t matter as much.

The only thing is have a strategy. The specifics of the strategy matter less. If you don’t have a strategy at all, you’re going to be going out and in at all the wrong times every second.

Have a strategy. My personal risk tolerance includes a lot of gold and gold mining, but I’m not going to impose that on others. Yeah, well said.

All right, Axel Mark, president and chief investment officer of Mark Investments and portfolio manager of the ASA Gold and Precious Metals Fund. Joining us today from California. Thanks for this, my friend.

Appreciate it. My pleasure. Cheers, Axel.

I’m Jeremy Zafron for all of us here at Kitco News. Thank you for watching. We just passed seven hundred and five thousand subscribers, if you can believe it.

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