Silver Back at $80, Copper Near $6 - Axel Merk Says This Isn’t a Bubble

Key Concepts

• Shifting Global Order: The post-World War II era of US dominance is ending, leading to a world where geopolitical power significantly impacts economic costs and commodity prices.
• Rising Commodity Prices: Precious metals (silver, gold) and industrial metals (copper) are experiencing price increases driven by geopolitical factors, state activism, and supply chain disruptions.
• Decoupling of Precious Metals: Precious metals are becoming less correlated with traditional bond market movements, increasing their appeal as a store of value.
• Investment Strategy Shift: A move towards investing in mining companies transitioning from development to production, prioritizing self-funding and cash flow generation.
• Importance of Process: Having a defined investment process, proactively rebalancing, and tracking market flows are crucial for success in the evolving market landscape.

Geopolitical & Macroeconomic Landscape

Kitco News’ Axel Merk discusses a fundamental shift in the global order, asserting “The post-World War II era is over. In the new era, power matters.” This transition is characterized by the unsustainability of the US acting as the global policeman, evidenced by increased intervention in conflicts like Ukraine, Gaza, and Latin America. This retreat is leading to increased “state activism” – substantial government spending on infrastructure and defense, particularly in Europe (over a trillion dollars), which, while potentially stimulating growth, is inefficient and contributes to rising commodity prices. Merk frames this as an increase in the “cost of doing business” due to geopolitical dynamics, including higher insurance costs and potential supply insecurity. The US, having benefited from the “exorbitant privilege” of the dollar’s reserve currency status, is seeing this disrupted by tariffs.

Market Observations & Price Action

This geopolitical shift is manifesting in rapidly rising prices for key commodities. Silver is trading above $80/oz, approaching its all-time high of $83.90, driven by its dual role as an industrial and monetary metal. Copper prices are near $6/lb, influenced by inventory pulls into the US ahead of tariff deadlines, indicating anticipatory stockpiling. Gold is also experiencing significant gains, with futures surpassing $4,500/oz, and is increasingly becoming a significant component of central bank reserves, surpassing the US dollar, driven by concerns about fiat currency debasement. Despite these price increases, mining companies aren’t trading at all-time highs due to investor distrust, fears of windfall taxes, and concerns about margin erosion.

Investment Strategy & Portfolio Construction

Merk manages over $3.8 billion in the sector, significantly outperforming benchmarks (nearly 200 percentage points against the junior minor benchmark). His current investment strategy focuses on companies transitioning from development to production, particularly those generating sufficient cash flow to self-fund expansion – a shift from prior investments in exploration-stage companies (pre-2022). He identifies a “sweet spot” in these cash-generating producers, while also recognizing opportunities with well-managed spin-offs from larger mining companies. Merk’s firm utilizes an “All-In Sustaining Cost” (AISC) analysis to evaluate mining companies, determining break-even points and potential leverage to price increases. They also actively participate in private funding rounds inaccessible to most retail investors. Merk publishes monthly holdings on their website, but cautions against simple replication due to time lags and active portfolio management.

Navigating the Current Market Environment

Merk warns investors relying on outdated strategies (“the old playbook”) that their portfolios will likely be heavily weighted in Artificial Intelligence (AI) and advises having a stable income source independent of portfolio performance. He references Alan Greenspan’s 1996 warning about “irrational exuberance,” emphasizing the importance of risk tolerance: “you got to be comfortable with the risk you're taking.” He stresses the value of having an investment process, any investment process, over having none at all, and cautions against impulsive investments based on social media hype. A core principle is to define the rationale for each investment before making it, and continuously “test your theory.” Proactive portfolio rebalancing “when times are good” is advocated over reactive adjustments during downturns. The key takeaway is to “track the flows” rather than “trade the headlines,” focusing on underlying market dynamics.

Conclusion

Axel Merk’s analysis paints a picture of a rapidly changing global landscape where geopolitical power and state activism are driving up commodity prices and reshaping investment strategies. The end of the post-WWII era demands a shift away from traditional investment approaches, emphasizing the importance of a disciplined process, proactive portfolio management, and a focus on companies with strong fundamentals and self-funding capabilities. Understanding the underlying market flows and acknowledging the increasing geopolitical costs of doing business are crucial for navigating this new environment.