Merk Likes Euro, Sterling & Gold Miners

July 14, 2014 Turning to Korea's main exporting competitor, we're seeing stronger-than-expected inflation numbers coming out of Japan. The Bank of Japan is making bold statements that it's going to hit its 2 percent inflation target. Does this delay or even scrap your previous calls for further easing by the BOJ?
Merk: We let the market tell the story. Whenever the yen behaves as a "safe haven," our view is that the policies are not being effective. When the yen is not rallying on bad news, that to us suggests they're "making progress" and slowly but surely eroding confidence in the yen.

For the time being, yes they have inflation. But they have it in all the places where they don't really need it—in food and energy, most notably. They have made some progress. At first glance, it appears that their consumption tax hike has been stomached by the markets, but I would not draw any conclusions at this stage.

The key challenge still is that structural reform is extremely difficult. While there are some good initiatives such as increasing the number of women working in the workforce,it's going to be very difficult to change those things. In the meantime, the debt in Japan keeps piling up, as progress is very, very slow.

I continue to believe that the biggest threat Japan is facing is that they're actually succeeding. Once they're succeeding, bonds will fall, and it's going to make it impossible to finance their deficit.

As long as we're in this muddle-through environment, the Japanese are going to be just fine. Sometimes we take a tactical long position on the yen, but generally speaking, in the long run, we are still very bearish on the yen. We don't think the yen is going to survive this. Why are JGB yields continuing to fall in the face of these higher inflation numbers?
Merk:The Bank of Japan is printing a great deal of money. They are hoping to boost real economic growth. But instead, what's happening is that investors are just buying JGBs with that. It's as simple as that. Everybody is just recycling the money into JGBs and with that, the yields—for the time being—stay low.

That's one of the reasons we prefer to short currency rather than to short bonds. In Japan at least, it's cheap to short bonds. But it's a very dangerous game to short bonds in general. Shorting a currency is, generally speaking, the more cost-effective way to express a negative long-term view on bonds. Last quarter, you were optimistic on gold miners, which have performed very well since. Do you still hold that same view on gold miners?
Merk: Yes, because gold miners have finally focused on expenses. They were so desperate for growth, in addition to all stakeholders trying to get a bigger chunk when the boom times were there in the gold sector, that anybody who held gold mining stocks knew that it was extremely frustrating. We play gold directly most of the time rather than gold miners.

Still, on the gold mining sector, because costs are going to be under control more so than in the past, because there's a huge amount of pessimism in the market, we think that gold miners should do quite well going forward.

On a broader note, the reason we think gold miners and gold should do well going forward in the context of potentially rising rates is that we don't think real interest rates will be positive. We don't think we can afford positive interest rates in the U.S., in Japan or in the eurozone. You just launched a new gold ETF, ticker OUNZ. Tell us about the ETF and how it differs from current offerings like GLD and IAU.
Merk: OUNZ is a deliverable gold ETF. The key differentiator to the other gold ETFs in the market is that investors may be able to request delivery of the gold that they hold through OUNZ. Taking delivery of gold is not a tax event. You are merely taking delivery of what you already own. We don't expect that everybody is now going to buy their gold and have it delivered through the exchange. But we do believe people like to have that feature available.

If you like to buy an ETF now, but down the road you might want to take possession of the physical gold, with the other gold ETFs, you'd have to sell it and then go and buy a coin. What we can do, while we hold London bars in London—like the other ETFs do—at the time you request delivery, we can do an exchange into other coins. So you can have 1-oz. coins delivered to your home. There's now a bitcoin ETF in filing. What are your thoughts on bitcoin? Do you see it as a legitimate alternative currency?
Merk: It's a technological phenomenon that's rather fascinating. A currency it is not. It actually turns out that as an ETF, they are addressing many of the concerns people have. The bitcoin community is always trying to stay out of the regulatory environment, which is impossible, of course, if you are successful.

The key challenge bitcoin has always had is anti-money-laundering concerns. The regulators would like to know who owns this, and so forth. Once you have an ETF, you have to buy it through your brokerage account. All these concerns have fallen by the wayside.

Having said that, I am not so convinced that market makers will want to touch it. Conversely, it would be very beneficial to the bitcoin community if market makers were engaged, because then, finally, you have a hedging market that's developing, and that's something that's very much been missing in that market.

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