Merk Increases Gold Position; Avoids Swiss Franc

February 03, 2015

Axel Merk is considered one of the top currency experts in the industry. He is president and chief investment officer of Merk Investments, based out of Palo Alto, California. Merk is the manager of the Merk mutual funds, including his flagship Merk Hard Currency Fund. He recently launched the Merk Gold Trust (OUNZ | B-100), a "deliverable gold" ETF. Merk is a regular on CNBC and Bloomberg TV, and the author of "Sustainable Wealth."

Merk recently sat down with to discuss the ECB's recent quantitative easing program and the Swiss National Bank's decision to scrap the 3-year old euro peg. He also explains what he expects from the Bank of Japan, his bullish case for gold, and how he's positioning his currency basket for 2015. The ECB just announced a 1 trillion euro quantitative easing program. Was that amount bigger than expected?
Alex Merk: Draghi wanted to surprise the markets and he was a tad above everybody else's estimate. The day before, there were some rumors out that it would be 50 billion a month. It wasn't really a rumor; it was leaks. That caused the euro to weaken for about five minutes. The joke was going around, "Well, 50 billion a month gives you five minutes of your weakness." So the next day, he announced 60 billion a month, and clearly the euro has gone down.

So yes, it was a little bit stronger than expected. But the real thing about it is I don't think anybody, not even at the ECB, knows what impact it will have on the market. The reason is that unlike the QE programs in the U.S. and Japan, we have a negative deposit rate at the ECB. So you can't just sell your securities to the ECB and then park the cash at the ECB.

So, you're comparing apples to oranges when you give a certain amount. He just threw out a number, wanted to overwhelm the markets. He did a little bit of that. The program's expected to last at least through September 2016. What will this do to the euro in the coming years? Do you have a forecast for the euro?
Merk: The goal for Draghi is to weaken the euro. He is not going to stop until and unless he achieves that. The reason I'm skeptical about that is that if you look at, first of all, what's priced in, QE in the U.S. caused the dollar to weaken on the announcement, but when the actual purchase was started, the dollar started to recover. In Japan, it's a little bit different. There, the yen has continued to weaken, but the program is overwhelmingly larger as a percentage of GDP.

I'm not so convinced he'll achieve what he does. The dollar has been soaring over the past six-plus months on the back of a rising equity market. The key reason is that people are chasing returns and foreigners that think the rest of the world is awful and the U.S. is great, are putting their money into the US.

If risk is off for whatever reason, money is being pulled out of the U.S. and the dollar is weakening. We see it on a day like we're talking here, where the dollar is down and the S&P is down simultaneously. In fact, the euro is up in that environment. It seems whenever risk-off has come into play, the Japanese yen has surged. That being the case, do you still expect the yen to continue its plunge?
Merk: Yes. What we have said is that whenever the yen behaves in its traditional way, that when risk is off, the yen is rising, it suggests that Abenomics is losing steam; that it is not working; that the market is losing faith in Abenomics. Then the question is, will the Bank of Japan double down or not? That's usually the wave that we have seen. We're talking about a surge in the yen, but we're still substantially weaker than we have been some time ago.

So yes, it still has some of the safe haven characteristics. In fact, I'm fairly pessimistic about the euro's equity markets, and I do think that the yen can benefit in that sort of environment. But, long term, we continue to be very pessimistic on the yen.

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