Merk: Beware Quick End To Low Volatility

May 30, 2014 What are the key risks for European investors?

AM: Draghi is going to unleash some bazooka to try and debase the euro, but odds are that a lot of it will have been priced in by the time it happens.

I think the biggest risk to market is complacency. Volatility is down in just about every asset class and this invites people to use leverage. It invites people to engage in investing habits that they will regret as soon as volatility flares back up. Volatility is going to come back up and that is bad for all risky assets, they are the most vulnerable. You have launched a Gold ETF recently, why?

AM: Our Gold ETF (Merk Gold Trust ETF (OUNZ)) is a direct competitor to some of the leading gold products out there. The ETF is trading relative to the spot price to gold with a tight spread. The physical gold is held in London and the key differentiator is that investors can take delivery of the gold, knowing that at the time they take delivery they can have the gold converted to coins. Also, from a U.S. investor perspective taking delivery is not a taxable event.

European investors can buy stocks on the NYSE like everyone else and we can facilitate delivery anywhere in the world, but it is not listed in Europe. Is this the right time to launch a gold ETF?

AM: We think gold is going to do just fine.

Draghi and the Eurozone have said that interest rates are negative and will become more negative over time. In the U.S. they can afford positive real rates, so we are going to have a bias toward negative real interest rates as far as the eye can see.

There is also going to be a price to pay for the amount of debt in the world and I think this price is going to be reflected in the price of gold. If nothing else the risk that the dollar will continue to be debased means gold should do just fine. What are your views on sterling?

AM: We are fairly positive in sterling. When Carney came on board he continued with the easing policies. The BoE have been the ones tapering, the Fed has not. It means that because of the tail winds and the economy in the UK, the Brits are going to be one of the earlier ones mopping up some of the liquidity and that is being reflected in a much stronger sterling.

In the short term - for the full year - I wouldn’t be surprised is sterling outperforms the euro. I also think the euro will outperform the dollar.

The only reason I am not fully on board with this is because I think Draghi has overplayed his hand a bit and is more likely to under deliver on weakening the euro.

Axel Merk will talk more about macro trends at the Inside ETFs Europe conference next month in Amsterdam.


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