Gold Still Looks Good As The U.S. Economy Starts To Overheat - Axel Merk
(Kitco News)- Although gold is struggling to attract investors, it isstill an excellent alternative in a portfolio as it is only a matter of timebefore inflation picks up, according to one fund manager.
In a phone interview with Kitco News, Axel Merk,president and chief investment officer of Merk Investments said that he stilllikes gold in this environment since he doesn’t expect to see a significantrise in real interest rates even as the Federal Reserve keeps pace with risinginflation.
Merk’s comments come as the gold market is attractingsome bargain hunters after Wednesday’s sharp selloff. While gold has managed topush higher, prices are still hovering near a one-year low. August gold futureslast traded at $1,247 an ounce, up 0.21% on the day.
“Interest rates are going to move higher but real rateswill remain low and I think gold will do just fine in that environment,” hesaid. “I still like gold as an important diversifier as inflation moveshigher.”
Not only is the gold market having to digest newexpectations for interest rates, but Merk added that it also has to fightagainst deflationary threats of escalating global trade wars. Wednesday, thegold market was swept up in a broad-based financial market selloff after theU.S. government threatened to impose $250 million in tariffs on importedChinese goods.
Although tariffs are inflationary, Merk explained that theyincrease costs for consumers, which leads to lower consumption and, ultimatelyslows down economic growth. He added that deflationary pressures are negativefor gold.
However, Merk said that he is not worried about the U.S.economy falling into a deflationary recession.
“Although tariffs aren’t good, I don’t see signs thatthis economy is going to tip into a recession any time soon. I think thiseconomy is going to overheat,” he said. “An important issue though is thatpeople don’t know what is going to happen and they don’t know how to invest inthe long-term.”
As to what will eventually drive investors back to gold,Merk said that it will be a sharp downturn in equity markets, which he seescoming as the Federal Reserve raises interest rates.
“What is going to drive gold is rising inflation that isgoing to force the Fed to raise interest rates faster than expected, which willbreak the back of the S&P 500,” he said. “Higher interest rates are the waymany expanding economies have died.”
Merk added that it isn’t just gold that is struggling inthis environment. He explained that all significant safe-haven assets like U.S.Treasuries, the Swiss franc, and the Japanese yen have all failed to catch abid in the current market environment.
“When the S&P 500 keeps going up and up,investors don’t feel the need to have diversified safe-haven,” he said. “[But,]the need to diversify is the greatest when investors don’t think they need it.”
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com 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 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.