Jay Taylor spoke with Axel Merk about the gold market and mismanagement of global economies by central banks. Merk believes that the United States, Europe, and Japan cannot afford to raise real interest rates. So even if the Federal Reserve delivers a nominal interest rate hike later this year, effective real rates will remain near zero. He expects this to stay the same for at least the next decade, which is very bullish for precious metals and gold.

Highlights from the interview:

"[I was at] The Stanford conference hosted by the Hoover Institute… A couple of interesting pieces there. One of them was Mr. Warsh, who was a [Federal Reserve] Governor during the 2008 crisis, saying that people are just reading statements during the FOMC meeting. There’s not really any debate. You need to have comities, you can’t just have the Chair decide on everything…

"The most noteworthy comment came from Charlie Plosser… What he said is that we should go back to basics on central banking. Clearly, our audience should maybe get rid of them entirely, but what he said is to let the Fed just have an inflation target and nothing else. What he means with that is when emergency liquidity is provided, the Fed shouldn’t do that. The Treasury should authorize it. The Fed can then provide the money maybe short-term. But if the money sticks around at the Fed, it should be swapped with Treasuries. So basically the Fed gets out of politics and doesn’t buy anything but Treasuries…

"I’ve always argued that you can get away with a pretty bad central bank if you have good fiscal policy. But if you have bad fiscal policy, the best central bank won’t help you. Ultimately, they’re the hostage of the government…

"Multiple speakers, including John Williams, the San Francisco Fed President, said, ‘Hey, during the gold standard things weren’t so bad. They worked pretty well. You were able to take the government out of many of these things.’ But he did lament that ultimately it did break down; whenever there was a crisis, people got off the gold standard…

"Clearly, gold precious metals wealth has been shifting eastward. But the question is there some sort of conspiracy with people saying, ‘Oh we got to pile up the gold and take it away from the Americans or Europeans or whoever might have it.’ I don’t think so. It just happens as a result of wealth shifting. If you need money, you liquidate what you got…

"Yes, the status of the reserve currency is gradually being diminished, but I always compare it a little bit to a frog in a boiling pot. By the time it has happened, it’s going to be too late. Sure, we can warn about it, but it’s just a process, a grinding process with ups and downs. At the end of the day, yes, the dollar won’t be the reserve currency anymore, and yes, the renminbi will be more important, and yes, the Chinese are going to have more gold…

"The German Bunds… plunging as they did in just a few days the other day is a sign that central banks are just sipping from a straw from the ocean. Ultimately, the market forces are stronger. But they do control the printing press. One has to be careful, because these are big boys you’re fighting against… When these big banks print billions and trillions, it’s going to have ripple effects in all kinds of markets…

"Generally there are two major trends [making the euro weaker than the dollar]. It’s the interest rate differential, and then there’s the fear of potential contagion with what’s happening in Greece… I think the Greek contagion is overrated… Greece’s problems are mostly problems for Greece…

"Conversely, with regard to the interest rate differential. Right now we had a couple of days of good economic data in the US, so everybody thinks the US is going to be tightening. Things aren’t that great in the US, and things aren’t that horrible in Europe. We have a cyclical recovery in Europe, and in the US the recovery is not going quite according to plan. We’ve had this talk about a rate hike forever. I’d like to remind people that we’re still at zero… As we raise rates, the Fed all but promises to be behind the curve… The FOMC says in their statement even if the economy goes back to normal and unemployment goes back to normal, the Fed will have rates that are lower than otherwise normal. Meaning, real interest rates are going to continue to be zero to negative. In that sort of environment, I don’t know why the US should be so far ahead of everyone else…

"Gold has held up very well in the light that the dollar has really been on a tear. So one has to put that into context. Gold was up twelve years in a row. Lots of speculators piled in on the upside. Then we had this major correction and we probably overshot on the downside. Now, everybody is waiting for what the next step is. If you have positive real interest rates, that would clearly be a competition to gold… It’s a herd mentality we see over and over again…

"My view is that rates are low to negative now. I don’t think we can have positive interest rates in the US, in the eurozone, or in Japan anytime really for an extended period for the next decade. We’re just going to kick the can down the road…

"I think these rates are currently just driven by momentum traders that are piling in… I don’t think they reflect fundamentals anywhere in the world. Rates should be much higher, but central banks have talked up the prices and lowered these rates. They’re just setting themselves up for a surprise down the road. These are all just canaries in the coal mine… Once you start messing with asset prices on the scale that central banks have, you’re just asking for trouble down the road. It’s difficult to say where exactly it’s going to happen. The one thing I keep point out is look at the equity markets. We haven’t really seen a huge sell-off there. That’s really where I see the biggest risk right now…"