'Gold hasn't changed, the price of gold has changed'; What the gold price reveals about the macro-economy - Axel Merk
(Kitco News) - Tuesday, gold shaved $50 off its market value, falling to nearly $1,760. The 2 percent fall in price reveals that the "perception of the macro environment" has changed, and that "speculators" have sold some of their holdings, suggested Axel Merk, CIO and Founder of Merk Investments.
"Gold hasn't changed, the price of gold has changed," he said. "Policymakers don't have many good options, so we might be in for some pain. In the short-term, people are selling everything."
Merk spoke with David Lin, Anchor and Producer at Kitco News.
"The risk is high" that the U.S. economy is heading for a recession, Merk predicted. He cautioned that while two quarters of negative GDP growth is the benchmark for the definition of a recession, "the official word is done by a committee, and they just take that as a contributing factor. They may not declare a 'recession,' because we have low unemployment and other items."
"The markets are telling us it's a mess out there," said Merk. "We were faced with a major supply shock. And when you're faced with a major supply shock, policymakers make the wrong decisions."
He went on to explain that "usually recessions are driven by demand, whereas recession, this time around, is driven by supply."
"Supply shocks are stagflationary," said Merk. "They cause costs to go up, and growth to go down… Part of the problem is not just that [the government] wrote [stimulus] checks, but when we have excessive government debt, and people lose confidence that this is going back into balance, that affects consumer behavior as well."
He went on to suggest that the Fed would continue to tighten its monetary policy, reducing GDP growth, and then would reverse course once inflation numbers look better.
When it comes to monetary tightening, The Fed "doesn't have a choice," said Merk. "The question is whether they'll stick with it… We have to kill off growth, inflation numbers are going to come down, and the Fed may well declare victory. But inflation… is going to pop back up."
Merk said that the correct reaction to inflation is "not to write a stimulus check, but to throttle down demand" and improve the supply-side. He proposed that increasing immigration, while removing domestic barriers to oil and nuclear production, would help ease inflation pressures, while increasing GDP.
Over the weekend, U.S. President Joe Biden posted a Tweet, asking U.S. gas stations to "bring down the price you are charging at the pump to reflect the cost you're paying for the product." In response, Amazon Founder and Chairman Jeff Bezos tweeted that Biden's statements are "either straight ahead misdirection or a deep misunderstanding of basic market dynamics."
Merk said that he agrees with Bezos.
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"The politically attractive thing to say is, 'oh it's the bad guys out there' [causing inflation]," said Merk. "The gas station, right? They're causing all the problems. People aren't that stupid. The problems are far more fundamental… The actual solution is to increase energy production and throttle down demand. There are many things you can do, but they are not politically attractive."
To find out about Merk's stagflation hedges, and his forecast for the gold price, watch the above video.
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