Merk Likes Euro, Sterling & Gold Miners

July 14, 2014

ETF.com: The ECB just unleashed a round of unconventional stimulus measures to which the currency hasn't reacted much to, at least not yet. What moves do you expect from the ECB next?
Merk: Let's put this into context. The reason the euro hasn't reacted much is because negative deposit rates don't really matter when there are no deposits left. It's a negative rate on deposits at the ECB. Those deposits are just about depleted.

Secondly, the new initiative that has been taken, I have no idea why they should be negative for the euro. First of all, it will be a long time before they'll be implemented. Secondly, if indeed credit growth is being stimulated, that should be a net positive for the euro.

The one thing that is a negative for the euro is that Draghi has promised to keep rates lower for longer. That's a medium-term negative, but at the same time, I don't expect really much from the ECB. They have to do their homework. They have to learn to be patient.

The biggest project they have is to streamline regulation in the banking system and to help those banks to clean up their balance sheets. Those things don't happen overnight. They are at work and they're making progress, but that's a long and steady project that they are undertaking.

ETF.com: Do you expect the ECB to eventually engage in outright quantitative easing, or outright eurozone bond purchases?
Merk: What they have announced so far—they call it a TLTRO—is really just yet another liquidity facility. Any project that wasn't worth financing at a fraction of a percentage point is now a couple basis points cheaper. So it makes you wonder whether that's really going to make the difference.

Secondly, the outright purchases that some people are talking about—I have no idea what they're supposed to be achieving. The yields in the eurozone are extremely low. I don't know what benefit a tad lower yield should do. In the weaker eurozone countries, yields have already plunged from 6, 7, 8 percent to sometimes 2 percent.

That is an amazing stimulus. So, I don't quite know what outright purchase should achieve, other than grabbing some headlines. Keep in mind also that there will be very strong resistance to outright purchase from the Northern European countries. As such, I think yes it's possible.

But the odds of outright purchases happening are very, very low. For the time being, Draghi is buying time with all these initiatives he's undertaken. They'll need to show some results for it. So any next steps are going to be a far way off on them.

ETF.com: Yesterday [7/8/14], Samsung gave poor guidance, claiming the strong Korean won is eating into its profits. Do you have a view on the won, and do you expect currency intervention there?
Merk: The Korean Central Bank is one of the more volatile central banks. First of all, people should be aware that Korea is one of the more liquid markets. So whenever money goes into Asia, it goes to Korea first. Conversely, it leaves Korea first. The Korean government can turn on a dime. Whenever these fears come up, you see a U-turn in policy. So anything can happen, from a policymaking point of view.

The broader problem is twofold, though. Everybody is printing money. So the folks who print a little bit less tend to have a strong currency, and conversely, global demand is not there. Samsung is a poster child for that. Everybody has a smartphone these days.

The next big thing, we're all hoping that Apple is going to invent it, but don't bet on that happening. We have an economy that's making progress. But we do not have gangbuster growth around the world. That's not going to change. It's not going to change with a weaker won either.

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