Well now, without further delay, let’s get right to this week’s exclusive interview.

Mike Gleason: It is my privilege now to welcome in Axel Merk, President and Chief Investment Officer of Merk Investments and author of the book, Sustainable Wealth. Axel is a highly sought-after guest at financial conferences and on news outlets throughout the world, and it’s great to finally have him on with us.

Axel, it’s a real pleasure to speak with you, and thanks for joining us today.

Axel Merk: Great to be with you.

Mike Gleason: Now, as we start off, you recently wrote a piece about complacency in the markets. We are seeing extraordinarily low volatility, and there isn’t a lot of interest in safe-haven investments like precious metals at the current time, at least not in the U.S. Axel, talk about why investors may not be showing enough concern and what this complacency says about where we are in the current market cycle.

Axel Merk: Yes, sure. And I’ll be glad to also link it to why it is that, in that environment, precious metals aren’t as quite as much in favor. There have been many reasons given for the low volatility some of them technical, that with more automated trading, that information might absorb more efficiently and theories like that. They might all have a bit of a factor. The main driver in my analysis is the QE (Quantitative Easing) programs of central banks. When central banks print money, so called risk premiaare compressed… meaning junk bonds don’t yield much treasury.

That means peripheral Eurozone debt doesn’t trade at much of a premium versus German bunds. That also means that volatility in the equity market is low. And when volatility is low, evaluations are higher. If you think about it, the way you historically value a stock is through discounting future profits, future cash flows. So, when that discounting is done at a lower rate then the valuations are higher. Low volatility means high valuations.

At the same time, of course, as you pointed out, precious metals have not been exactly in huge demand in that sort of environment. That is because, hey, future cash flows are safe. Now if volatility goes up, then suddenly you’ve got headwinds to those future cash flows. An advantage to having gold that has no cash flow is that we’re merely discounting that change. So, relatively speaking, when volatility goes up, gold is more in favor. That’s one of the reasons why when there’s a so-called crisis in the world, gold tends to do well.

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