President & Chief Investment Officer
Vice President & Portfolio Manager
Since fall 2022, the inflation rate has slowed but remains a significant issue as interest rates stand over 5% and geopolitical tensions remain heightened. In this CEF Insights Podcast episode, Merk Investments President, Chief Investment Officer & Portfolio Manager Axel Merk and Vice President & Portfolio Manager Peter Maletis share views on the impacts of inflation and interest rates on U.S. and global economies, and on gold, precious metals, and minerals going into 2024.
Merk Investments focuses on gold, precious metals, and minerals, and is the Advisor to ASA Gold and Precious Metals Limited (ticker: “ASA”), a closed-end precious metals fund.
Welcome to CEF Insights, your source for closed-end fund information
and education, brought to you by the Closed-End Fund Association. Today we are
joined by Axel Merk, President and Chief Investment Officer, and Peter Maletis,
Portfolio Manager for Merk Investments. Merk Investments is the investment
advisor of ASA Gold & Precious Metals Limited, ticker ASA. We're so glad
you both can be with us.
Great to be with you.
Thanks for having us.
Axel, since we last spoke in September, the rate of inflation has
slowed but remains a significant issue. The Federal Reserve has raised interest
rates to over 5% and geopolitical tensions remain heightened. Your firm
regularly publishes economic and market research. What is your view on the US
and global economies as well as your expectations for the second half of 2023
and into 2024?
When I look at the outlook, I have as much of a crystal ball as
anybody else, but what I do and what I encourage other people to do is look at
the risks of what can happen and then test the portfolio accordingly. When it
comes to inflation, when you are faced with a period of high inflation,
historically decline is not linear. So even as numbers on the inflation front
have been better, that doesn't mean we're out of the woods. And then related to
that, of course, the "higher for longer Federal Reserve" somewhat is
a way of that. And what that means is, in my view anyway, is that rates will be
high or even higher than they're right now, long enough to put a severe
downward pressure on economic growth. And so that's the context in which we
have to live in and invest in.
Merk Investments has significant expertise in the gold, precious
metals and minerals sector. Given your thoughts on the broader economies, what
is your outlook for the sector?
When you have high interest rates, you would think it should be a
negative for the price of gold. That said, just like any other market, the
markets are forward-looking and from what we see is the market just doesn't
believe that we can have these high rates, especially on a real basis, for too
long. And that's why as we're talking here, the price of gold is just under
$2,000 and that's quite high given the level of interest rates. And that can,
in my view, is mostly consistent with the thought that over time we will get a
recession. The Federal Reserve has to react to it and real interest rates
cannot be sustainably that high. On the gold mining side, these companies need
access to credit, especially the more junior companies. And in this sort of
context, and the important aspect, is there access to credit available? And
that very much aside from the high rates is dependent on the price of gold and
to the extent that we will get a downturn that might be favorable for the
funding environment going forward.
Peter, equity markets have been led by a fairly narrow group of
companies and gold is trading in the middle of its range over the first six
months of the year. Where are valuations in the precious metal space and do you
consider these to be attractive levels?
So, over the last year, I mean we've seen a fairly consistent gold
price as Axel said, and we use that overlay. That's how we look at the gold
equities. The gold price, despite the rising interest rate environment from the
Fed increasing rates, has held in relatively well. The argument could be made
that the valuations in the space are as low as they've ever been, particularly
on the small cap exploration side. The large cap producers have had pretty
significant margin expansion leading up to the last year, but with inflation
affecting everything in the sector, we saw the margins come in over the last
six to 12 months. But that being said, the mining companies, the large cap and
midcap producers have been producing quite well and the equity returns have
been relatively stable. We do look at the ETFs and the inflows of the gold ETFs
and GLD and what we've seen over the last two months is a significant outflow
in the ETFs after seeing significant inflows leading into the year.
That being said, the price of gold has held in, it's up 8.5% year to
date, whereas the ETF holdings are down over 1%. And again, I would go back to
that and say surprisingly where we are in terms of the gold price, the equities
have not performed as well as we would've liked or hoped. The anticipation that
the Fed will lower rates at some point in the next 12 months is a driving
catalyst to forward-looking catalyst that Axel's been alluding to, and that
should be a strong catalyst for the mining companies.
Where do you see the best opportunities among precious metals
On an ultimate valuation level, we still see a lot of value in the
exploration and development companies. They are very depressed because of
access, as Axel said, access to capital is a bit limited right now. As interest
in the sector has been down, as people anticipate the interest rate hikes, we
see that the risk return for these companies going forward in our opinion is
quite favorable. That being said, the midcap producers which have growth in
their portfolio are also quite attractive to us as they not only will react
positively to the gold price, but will react positively to increasing
production, which will generate higher cash flows.
Does this sector benefit from macroeconomic catalysts or is
performance driven more by company fundamentals?
I think the size of the sector warrants, and the macroeconomic
catalysts are the primary driver with the fundamental gold price driving flows
in and out of the sector by not only the sector specialists like ourselves, but
by generalists. And then we see a move into gold that pushes the equities
higher. That being said, within that sub-sector, we obviously are looking, our
job is to look for the specific catalyst of company fundamentals, and that's
where we find our sweet spot is the companies that we see are best situated to
take advantage of the sector catalyst. And then in addition to the
Peter, you manage ASA Gold and Precious Metals Limited, symbol ASA,
which invests in the portfolio of companies in the precious metals and mineral
sector. How is the portfolio currently positioned?
Well, when we at Merk took over management of ASA in early 2019, we
inherited a portfolio that was significantly positioned in the large cap and
royalty space. We decided that a way to differentiate ASA was to move down in
market cap and into the small and exploration companies, which we did between
2019 and 2020. We continue to like the exploration side of the business. We
believe that the large cap, or mainly the large cap producers, but also the
midcap producers need to improve their growth profile going forward. And they
have not spent enough on exploration. And so, they will be using the
exploration companies to do their greenfield or the original exploration on
assets. And then once that's proven up, they will start to buy those companies
to improve their companies going forward. We see the disconnect between the
producers and the exploration companies as pretty significant. The value that
the producers can get by buying these exploration companies is value creative.
What would cause you to significantly change your portfolio
We believe that our investors are investing in ASA for leverage to the
gold price. And so, we continue to believe that sticking with the theories and theses
that we have is what our investors would like. That being said, we have
believed that we get to a point where the prospect for the gold prices going
forward seems to be significantly negative, I guess. We could see a change into
some more defensive names in the portfolio. That might be just some of the more
defensive names, but as of right now, we don't see that kind of thesis playing
out yet and continue to be medium term bullish on the gold price.
Axel, we have spoken before about the positioning of your investment
strategy in an investor's portfolio. What benefits do you believe an allocation
to equities of companies and the precious metal sector provides an investor's
In an economic downturn, the equities are often under pressure, not so
much if we have this so-called soft-landing scenario and investors are looking
through that, but if we are to have a harder landing. Then there might be very
few places to hide in the equity markets. And the precious metal sector on the
equity side, historically has been one that's been a diversifier in that sort
of environment because of the anticipation precisely of the lower interest rate
environment that then might come. And as we've discussed here, there has been
some margin pressure in the industry and prices have been depressed, especially
in the junior companies. And so, if there is a catalyst driven by a
significantly weaker economy, that could lead to a higher gold price and
significant expectations revisions with regard to the opportunities in the
sector. And so, that is one of the reasons.
Now overall, of course, the correlation is low. All that said, it is a
fairly speculative sector, so it's a very volatile sector and investors of
course, may want to take that into account as when they allocate money to the
mining companies, especially on the junior end of things.
Axel, Peter, thank you so much for taking the time to join us today.
My pleasure. Thank you.
We want to thank you for tuning in to another CEF Insights Podcast.
Audio recorded in July 2023.
This material is not and is not intended as investment advice an indication of trading intent or holdings or the prediction of investment performance. All fund specific information is the latest publicly available information. All other information is current as of the date of this presentation. All opinions and forward-looking statements are subject to change at any time.
Merk Investments disclaims any responsibility to update such views and/or information. This information is deemed to be from reliable sources. However, Merk Investments does not warrant its completeness or accuracy. This presentation is not intended to and does not constitute an offer or solicitation to sell or a solicitation of an offer to buy any security product, investment advice or service. Nor shall any security product, investment advice or service be offered or sold in any jurisdiction in which Merk Investments is not licensed to conduct business and or an offer, solicitation, purchase or sale would be unavailable or unlawful.