Easing trade tensions do not mean gold’s rally is over - Axel Merk
(Kitco News) - Gold has room to move higher, but investors should not expect it to move in a straight line, according to one fund manager.
Although Axel Merk is bullish on gold in the long-term, he warned investors should expect more volatility in the near-term as markets continue to react to trade tension headlines. His comments come as gold prices drop more than 2% on the day with December gold futures last at $1,528 an ounce.
Gold is under pressure due to easing tensions between China and the U.S. The two nations are planning to hold preliminary talks later this month to kick-start negotiations in October.
Merk said that it is in President Donald Trump’s best interest to work towards a deal with China. He said this would steer the U.S. economy away from a recession. He added that Trump probably has until the end of October before trade tariffs have a material impact on U.S. economic growth.
“For Trump, there is an interest to have a strong economy heading into an election year, but time is quickly running out. It could also be too late; we have to wait and see,” he said.
However, Merk said that a trade deal with China is not necessarily a negative for gold as the risk shifts to whether or not the U.S. economy overheats. He explained that rising inflation, which has been dismissed as a non-issue for years, could be the next trigger to drive gold prices higher in the long term.
Taking the trade issues out of the equation, Merk said there are other factors that investors will have to face in the next few years: growing support for Modern Monetary Theory, which promotes the idea of deficit spending; the uncertainty surrounding the 2020 elections, and increasing economic risks in Europe, just to name a few.
“A lot of things can happen and because I don’t own a crystal ball, I am going to own some gold to protect myself,” he said. “Equity markets are still overvalued. There is still a need for diversification. It’s always the threat of something happening that moves gold.”
Merk added that investors also need to pay attention to negative real interest rates.
“When everyone wants to debase their currency, the only thing left standing is gold,” he said. “This debasement process does not happen quickly, it’s a slow grinding process and rates are only going to go lower.
Merk explained that the Federal’s “symmetric” view on inflation, means that the central bank is going to be prepared to let the economy run hot, which would mean even lower to negative real interest rates — an environment that is positive for gold.
“Ultimately, real interest rates are going lower and that means gold prices are going higher,” he said. “The Federal Reserve is trying to use monetary policy to solve the issues that are plaguing the economy, but it won’t work. You need to resolve the traded issues and there is only one man who can do that.”