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moneymetals

Axel Merk Exclusive: Inflation & Precious Metals to Rise, Fed to Act Late

Well, now without further delay, let’s get right to this week’s exclusive interview.

Axel merk

Mike Gleason: It is my privilege now to welcome back Axel Merk, President and Chief Investment Officer of Merk Investments and author of the book Sustainable Wealth. Axel is a highly sought after guest at financial conferences and on news outlets throughout the world and it's great to have him back on with us.

Axel, it's a pleasure to have you join us again today and thanks very much for coming on.

Axel Merk: Great to be with you. What a week.

Mike Gleason: Exactly. Well, Axel when we spoke to you in February the equity markets were in the midst of a sell off and some significant volatility, which had been extraordinarily low, came roaring back to life. Since then, the stocks have recovered some. The S&P regained about half of what it lost by the end of February and has been trading in a range since then.

Our thoughts are that precious metals are trading inversely correlated to equities markets, at least for now. Unless we get a pullback in stocks or more appetite for safe-haven assets it will be hard for metals to get much going to the upside. But what are your thoughts on the relationship between gold prices and stock markets, Axel? And what factors do you expect to be driving stocks between now and say the end of the year?

Axel Merk: Sure, and for context I think we should just mention we are talking before the Non-Farm Payroll Reports (are out), so who knows what's happened to markets since we have talked? One of the things I don't recall if I mentioned in February is, ever since last December, and I still believe in that, the markets have been a bit like a washing machine. That correlations have been breaking down. And, if you go back to, kind of, all the way to the financial crisis, that's the 2008 one, not the one from a week ago, that means that whenever there was a crisis the Fed bought treasuries. And so whenever “risk” falls off, when equities are plunging, bonds were rising. And that kind of ingrained this perception about certain types of correlations and so, similarly, the price of gold was actually reasonably highly correlated to that of treasuries. And so we got this thing that gold and the stocks are sometimes moving in tandem, sometimes they move in opposite directions.

Since January 1970, if you look at monthly correlations, the correlations between stocks and bonds is 0.00. So, there is no correlation. Yet, we get caught up in this thing that, for months at a time, sometimes there’s a correlation that is significant. I think the most noteworthy thing of late is that yields have been, until a good week ago, have been matching higher and the price of gold was falling up. And then, conversely, when bond yields were falling, gold didn't rise.

And so, gold has kind of marched on its own in some ways and I happen to believe that a lot of the buyers of gold these days are doing it because they are concerned about the equity markets because of volatility spiking. And the reason why volatility and the price of gold are related is because gold doesn't have cashflow. And that means the future cashflows don't get discounted more, whereas, if you have a quote unquote risk asset, like equities, and volatility increases, those future cashflows get discounted more and the prices of equities, all else equal, tends to fall. So, that's why in “normal” circumstances the price of gold should rise when equities tumble. Obviously, that doesn't always happen.

Mike Gleason: You pay more attention than most people to events in Europe and the European markets. Lately, troubles in the PIGS nations have crept back into the news. Populace in Italy and Spain are making hay by opposing EU imposed austerity and it's a reminder that deep fundamental issues remain and the union may not survive. Let's start by getting your take, if we can, on the overall status of the EU. Will there be any high-profile exits, perhaps by Italy or Spain? Is Great Britain going to complete its exit? Or are you expecting the EU to weather the storm here, Axel​? 


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