As nervous investors flee the euro and other currencies
for the relative safety of the greenback, it's tough to be a
dollar bear. Axel Merk, who has been managing money for
currency and gold investors since 1994, isn't about to change
his downbeat view on the dollar, though. It's a view
that, combined with a liking for gold, has benefited
shareholders in his Merk Hard Currency Fund (MERKX), which aims to
profit from a rise in hard currencies against the U.S. dollar.
(The "hard" refers to stable currencies from nations with
economic and political resilience -- so, generally developed
nation currencies.)
While Merk's fund was down less than one percent in
2011, it is the best-performing currency mutual fund over the
past five years, with an annualized return of 5.3
percent. Lewis Braham spoke with Merk about gold's
prospects, currency plays and whether the current dollar
bullishness will continue.
1. What is your outlook for gold?
Gold is like any other currency, with two major
differences. It is more difficult to print or inflate; ramping
up gold production is difficult. And the market is much
smaller than the currency market and much more volatile. When
gold is volatile, we like it. I don’t like that the volatility
is so low now. When volatility is high you have only folks who
want to own gold for the long term. The momentum traders get
out because they can’t handle the volatility.
When volatility increases, we tend to go into gold. Last
summer we took some profits as gold was going up, and we came
back into gold a tad too early. Historically, we've had 5
percent to 15 percent in gold. Because printing presses
throughout the world are going to be ramped up, gold is going
to do very well. Right now our gold weighting is 10 percent.
[Merk would not give a price target.] Compared to bonds and
Treasury bills, gold looks great.
Equities will perform well if you print enough money. The
challenge is that the markets are chasing the policy makers'
next move rather than trading on fundamentals. That's why we
think the best place to express [our investment strategy] is
in the currency market. That way you don't have to take on
equity risk. There may be opportunities in equities but even
in our equity strategy we do it with a currency overlay so we
can benefit from policy makers' moves.
2. How does gold compare with other commodities or hard
assets?
Gold is the least volatile, with little industrial
use, so is the purest indicator of monetary policies. If you
buy silver, you have quite a bit of the industrial
component, and that demand can affect price. The same is true
with soft commodities, such as grains, where you can have
substantial changes in production from one year to another. In
gold it is just not possible to do these things as much.
3. Where do you see the dollar headed vs. other currencies?
The dollar rally is overdone. Fed Chairman Bernanke has
argued many times that one of the biggest mistakes of the
Great Depression was to raise interest rates too early. The
goal is thus to provide so much stimulus that you err on the
side of inflation [which causes currency devaluation].
4. How do you expect the euro to perform in 2012?
The euro is not going to fall apart. There will be days
of euphoria and days of panic, but the European central bank
is going to keep the banking system afloat and the political
process will move forward -- not in a terribly exciting
fashion, but it will move forward.
The place you can make money will be in currencies of
commodity-producing nations [which benefit from inflation].
Precious metals will do well, which means the Australian and
New Zealand dollar are going to do well because of their
exposure to precious metals. The Norwegian krone and the
Canadian dollar will do well because of their commodity
exposure.
5. Why buy the currencies of those countries? Why not
just buy the commodities themselves, or commodity stocks?
If you look at the risk profile over the years, our Hard
Currency Fund is a play on commodities but at a much lower
rate of volatility than many alternatives. People think
currency predictions are so difficult, but predicting 10, 20
currencies is much simpler than predicting the future for
thousands of stocks. We are plenty happy playing the indirect
way with commodity currencies, where you get the benefit of
the commodity increase without having the direct hit of many
of these commodities or the risk of funds that invest in
mining companies.
6. Why buy a currency fund instead of an international
bond fund, which has currency exposure but also pays some
yield?
If and when rates rise, the long end of the yield curve
for bonds is in great danger. What has happened in recent
years is that people have been chasing yields. Volatility in
long Treasury bonds in the U.S. is way below its historical
norm -- momentum chasers are continuously pushing up the
price. You just have to go back to normal levels of volatility
-- for that continuous upswing to stall -- to be faced with a
very rude awakening where substantial losses can occur.
(Lewis Braham is a freelance writer based in Pittsburgh.)
To contact the editor responsible for this story: Suzanne Woolley, at swoolley2@bloomberg.net
