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Gold Still Looks Good In Environment Of Systemic Instability – Merk

(Kitco News) - One fund manager said that gold still represents the easiest insurance vehicle to protect your portfolio in an environment of growing political and economic instability because of poor fiscal policies.

Axel Merk, president and chief investment officer at Merk Investment, said in an interview with Kitco News that the U.S. and world economies once again face the potential of another crisis - one that central banks like the Federal Reserve might be ill-equipped to handle as long-term fiscal problems need to be addressed.

Axel Merk, president and chief investment officer at Merk Investment

“You can get away with bad monetary policy when the fiscal side is in order but when the fiscal side is a mess, but best monetary policy is not going to rescue you,” he said. “Right now the fiscal policies in much of the developed world are a mess.

Merk explained the U.S. and the world is on the edge because politicians, instead of addressing long-term entitlement issues, have just pushed the problems down the road, adding to future debt burdens.

“You could argue that you could boost this economy if you had a more business friendly environment but if you don’t fix some of the underlying issues they are going to come back,” he said. “We cannot outgrow the entitlement issues that are coming our way. But that is a problem for tomorrow.”

Merk also said continued reliance on debt to deal with financial imbalances and weak economic growth has caused real wages to stagnate over the last decade, creating an environment of political instability. The current political environment has given rise to populist movements around the world as voters voice their frustrations with the status quo, he added; the rise in populism has also created hostility among the different groups in societies, increasing the global instability.

“Politicians around the world have one thing in common: they don’t blame themselves for these problems. It is the problems of the foreigners, it’s the problem of the wealthy it’s the problem of the minority,” he said.

“As we don’t address the fundamental reasons for these issues, political stability goes down more and more,” he added.

At the same time, along with ignoring the fiscal imbalances, governments have relied on monetary policy to promote economic growth, which has had limited he said. Unfortunately, the Federal Reserve, is now in a precarious positions as they try to normalize interest rates in an environment of weaker growth, he added.

 “I happen to be in the camp that if we were to raise rates too quickly we would be pushing this economy into a recession much quickly than otherwise,” he said. “I think the Fed wants to be late in raising rates.”

Although Merk does expect the Fed to pull the trigger on a rate hike in September, the threat of falling into another recession will force the central bank to keep rates well below historical norms, allowing real interest rates to remain negative, a long-term positive for the gold market.

“The world is not going to blow up tomorrow but it means we will have this bias towards lower interest rates,” he said. “Is gold going to go up every single day in this environment? Almost certainly not, but 10 years from now I think gold is going to do much better than many other asset classes.”

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By Neils Christensen of Kitco News;
Follow Neils Christensen @neils_C


Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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