Don't Give Up Your Gold

Key Takeaways

• A more disciplined US Federal Reserve does not fix Washington's fiscal position.
• Higher rates can pressure gold short term without breaking the long-term case.
• Fund manager Axel Merk is still holding his gold and gold-mining shares.

Investors in gold should not assume that a more disciplined Federal Reserve automatically removes the reasons for owning bullion. While tighter monetary policy can help restore confidence in inflation management and interest-rate policy, it cannot by itself resolve the United States' underlying fiscal problems.

That is the central message from Axel Merk, founder of Merk Investments, speaking to Kitco News on 21 September 2026, who argues that monetary and fiscal policy must be viewed separately. In his assessment, Federal Reserve Chair Kevin Warsh has taken steps to restore greater discipline to monetary policy, including raising interest rates as inflation remains a concern. The Federal Open Market Committee lifted the federal funds rate by 25 basis points to 3.75% to 4% on 16 September 2026, its first increase since 2023 (Quartz, 16 September 2026). A more credible central bank may be positive for the long-term stability of the currency, but it does not eliminate the risks created by persistent government deficits and a rising national debt.

Higher interest rates can increase the opportunity cost of holding gold, potentially creating short-term pressure on the metal. Merk conceded as much in June 2026, saying "everything else equal, Kevin Warsh is a headwind to the price of gold", though he expects lower volatility in exchange (Kitco News). However, if fiscal imbalances remain unresolved, the longer-term case for holding an asset outside the financial system can remain intact.

Merk argues that years of exceptionally low interest rates made government borrowing relatively inexpensive and reduced the immediate pressure to address fiscal deficits. A return to more normal interest rates changes that equation by increasing the cost of servicing government debt and bringing fiscal sustainability more prominently into the economic debate. Whether higher borrowing costs will ultimately produce meaningful spending restraint remains uncertain.

Another risk is the enormous investment associated with the AI boom, and the increasing level of debt financing involved. S&P Global counted US$225 billion of hyperscaler bond issuance in the first half of 2026 (Fortune, 31 July 2026). If a debt-funded expansion eventually slows sharply, policymakers could face pressure to reduce interest rates to cushion the economic consequences. Such a shift could once again alter the balance between monetary policy, debt and inflation expectations.

For gold investors, the broader lesson is that monetary policy is only one part of the picture. Gold is not simply a trade on the next Federal Reserve rate decision. Its role extends to portfolio diversification and protection against longer-term monetary, fiscal and currency uncertainty.

Merk therefore remains a holder of gold despite the Federal Reserve's more restrictive stance. He has reduced his exposure only marginally and continues to maintain significant exposure to gold-mining equities. His argument is not that gold will rise regardless of economic conditions, but that the structural issues supporting its role as a form of diversification have not disappeared.

Merk's message to those who hold physical precious metals is not to give them up. Interest rates, inflation and the US dollar are likely to continue influencing gold prices, but so are government debt, fiscal policy and the potential consequences of another debt-driven economic cycle. Gold's role is about maintaining an asset that is not dependent on the solvency or policy decisions of any single government. For Australians holding metal through Ainslie Bullion, the AUD/USD rate is one more variable on top of those.

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This article is general information only and does not constitute financial advice. Past performance is not indicative of future results. Always conduct your own research or consult a licensed financial adviser before making investment decisions.