Gold, Currencies and Commodities: Axel Merk's Outlook
Axel Merk
Jin Lee/Bloomberg
Axel Merk, of the Merk Hard Currency Fund.
Axel Merk, of the Merk Hard Currency Fund. Photographer: Jin Lee/Bloomberg
Merk Hard Currency Fund
Merk Hard Currency Fund has outperformed its peers over the past five years.
Merk Hard Currency Fund has outperformed its peers over the past five years.
A Dollar Bear
SeongJoon Cho/Bloomberg
As nervous investors flee the euro and other currencies for the relative safety of the greenback, it's tough to be a dollar bear.
As nervous investors flee the euro and other currencies for the relative safety of the greenback, it's tough to be a dollar bear. Photographer: SeongJoon Cho/Bloomberg
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.
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.
For equities in general, they 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.
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
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