Market players widely fret that a reinvigorated Federal Reserve, showcasing stricter policy discipline, may keep weighing on gold's upside potential. Yet one prominent portfolio manager is voicing a contrarian view: even if the central bank's approach returns to orthodoxy and credibility is gradually mended, the worsening trajectory of U.S. fiscal health remains a separate, stubborn challenge. This means the long-term appeal of gold as a portfolio anchor does not fade simply because the Fed is pulling back on accommodation.
In a recent interview, Axel Merk, founder of Merk Investments, unpacked the interlocking dynamics of monetary policy, fiscal deficits, and bullion's fundamental role, offering investors a distinctly different lens on the asset class.
Monetary Discipline Improves, but It Cannot Solve the Fiscal Mess Alone
Merk acknowledged that Fed Chair Kevin Warsh has made meaningful strides in restoring policy discipline at the U.S. central bank. But he stressed that no matter how sound monetary policy becomes, its effectiveness has a hard ceiling if Washington refuses to impose fiscal restraint. He warned that if fiscal policy is deeply flawed, even the best monetary approach can only achieve so much; and when overly loose monetary maneuvering is paired with unconstrained spending, the macro picture can deteriorate sharply.
This distinction matters greatly for investors in gold. In Merk's view, even if the Fed's current direction aligns with expectations and moves correctly, it does not ease his worries about America's fiscal trajectory. Warsh has been working to steer the Fed away from political entanglements, refocusing the institution on its traditional goals of price stability, steady credit availability, and calibrated borrowing costs. At the same time, Warsh has remained committed to pushing inflation back to the Fed's 2% target. Last week's 25-basis-point rate hike further cements the Fed's policy credibility, following Warsh's earlier signals that policymakers would act if inflation data failed to improve.
"The timing was ripe for a hike, and he executed it decisively," Merk said. He added that Warsh's disciplined style has also helped him build trust gradually within the Federal Open Market Committee.
A Stabilizing Central Bank Does Not Equal an Improved Economy; Fiscal Realities Remain the Long-Term Driver
Merk, however, contends that steadier monetary policy does not resolve the structural cracks in the U.S. economy. Ultimately, he argued, fiscal policy is the core force determining long-term direction, while poor monetary policy only worsens the condition. Translated to gold, this implies that a more credible and disciplined Fed does not necessarily erode the precious metal's long-term investment appeal.
Merk has consistently voiced alarm over the U.S. government's persistent budget shortfalls and the long-term path of national debt. While he believes higher interest rates could eventually pressure lawmakers to curb spending, he doubts that climbing bond yields alone will force Washington to adopt meaningful measures to rein in government outlays.
In the aftermath of the global financial crisis, an era of ultra-low rates suppressed the cost of debt and indirectly encouraged unchecked government borrowing. Warsh's focus on normalizing monetary policy at least diminishes that incentive for excessive leverage and brings the deficit problem back into public debate. Merk noted that restoring policy normalcy is itself helping advance the conversation, adding that "more and more discussion around deficits from markets and the public is a good thing, especially since most voters previously avoided confronting the issue."
Warsh's strategy leans on stronger economic growth and productivity gains to outpace sovereign debt expansion, stabilizing the burden of national borrowing. But Merk believes swinging that ideal scenario is still far from certain.
AI Boom Conceals Debt Risks, and Gold Remains a Premium Diversifier
Merk also touched on how the U.S. tech-driven economic expansion could act as another potential tailwind for bullion prices. The ongoing surge in artificial intelligence investment is, to a notable extent, reliant on borrowed money. If this boom eventually stalls, the fallout from unwinding that accumulated debt might push the Fed toward an easing path to soften the shock. He explained that when a debt-fueled boom finally bursts, rate cuts often follow to cushion the cascading effects on outstanding liabilities.
Amid such layered uncertainties, gold remains a vital instrument for investors seeking to diversify. "With U.S. fiscal affairs descending into disarray, how should investors manage asset allocation? Gold can certainly play that role. Even with Warsh running the Fed, I remain bullish on gold," he said.
Merk's conviction is evident in his portfolio. He revealed that last year, as markets increasingly expected Kevin Warsh to replace Powell as Fed chair, he moderately trimmed his gold position, but the adjustment was quite limited. Additionally, he stays optimistic about gold miners, maintaining a sizable allocation to mining-related assets. At current bullion prices, profit margins for producers remain reasonably compelling.
Closing Thoughts
Markets frequently interpret Fed hikes as a bearish cue for gold, yet Merk's analysis challenges such one-dimensional thinking. Short-term monetary policy may orchestrate price swings, but America's entrenched fiscal deficits, persistent debt pressures, and the latent debt-cycle risks hidden behind the AI investment craze all sustain long-term support for bullion. A tightening Fed may spark episodic volatility, yet as long as structural fiscal issues are not genuinely resolved, gold's role as a hedge against uncertainty will not be easily erased. That provides a thought-provoking long-term reference point for all precious metals investors.
Spot gold price as of 10:22 Beijing time on September 22: $4,347.68 per ounce.
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