Governments and central banks are throwing all the money they can into financial markets to support a flaying global economy rocked to its core from the COVID-19 pandemic.
Although the world could see the worst downturn since the Great Depression of the 1930s, Axel Merk, chief investment officer and president of Merk Investments, warned investors: "there will be no free lunch."
Merk said that he likes gold as a hedge against these unprecedented measures and the growing risk that the government could make a misstep in financial markets and do something "stupid."
"I am all for it or taking emergency measures if and when needed. But also not forget that we are setting precedent," he said. "When push comes to shove, I'd rather own gold in the medium term than many other things."
Merk's comments come after Federal Reserve Chair Jerome Powell's press conference last week following the central bank's monetary policy meeting. During the conference, Powell noted that in these emergency conditions, deficits shouldn't matter.
With this outlook, Merk said that there is a risk is for significantly higher inflation as governments and central banks do whatever it takes to support the economy.
Although inflation failed to rise in the last 10 years since the 2008 financial crisis, Merk said that the inflation risk is a lot higher now as conditions are different from a decade ago.
"When inflation does come, it's not like the overall price level is just going to rise uniformly. Historically when inflation picks up it, it hits us in different spots. When inflation does come more broadly, we'll, we'll see it in all kinds of bits and pieces and will shrug it off," he said. "Sooner rather than later, it's going to come around and that's usually why policymakers get caught off guard."
Not only is gold attractive in a low interest rate environment because it is a non-yielding asset, but Merk noted that its low correlation to equity markets makes it a good hedge against portfolio risks.
Although equities have bounced off their March lows, Merk said that there is a risk that the global economy will continue to deteriorate. He added that he sees indications that a lot of investors are still sitting on the sidelines.
"It has never happened in the U.S. that we've had both fly into demand shock of this magnitude at the same time," he said. "In 1929, we didn't hit the lows until 1932.
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