What’s the best thing to talk about when the market is firing on all cylinders? Recessions, of...
Gold 1, Dollar 0?
05/17/2013 9:00 am EST
Although gold is down, there are still reasons to hold the metal right now, says Axel Merk of Merk Investments.
All the great things a couple trillion dollars in quantitative easing can buy:
- The stock market is reaching new highs. But investors have a rather difficult time diversifying, as stock prices are highly correlated to the perception of more quantitative easing.
- The average yield on US junk-rated debt falls below 5% for the first time. Our bubble indicator is screaming. Investors should be concerned when any asset or asset class exhibits volatility below its historic norm. Think stock prices "always" going up in the late 90s. Housing "always" going up pre-2007. Or Treasuries in recent decades until now. Or junk bonds.
- The economy is "healing" with unemployment down, but the "improving" picture is masking the fact that companies hire more workers, so that they can cut the average hours worked per employee to fewer than 30 per week to avoid having to provide health care under the incoming Obamacare. Indeed, U-6 unemployment, which includes persons employed part time for economic reasons, just ticked up for the first time since July of last year.
The US dollar may be as vulnerable as ever, with economic growth possibly the biggest potential threat. Should growth be priced into the markets, the bond market might be at serious risk, causing major headwinds to the consumer, but bringing into focus an unsustainable US government deficit.
We don't need to wait for the cost of borrowing to move higher. What's relevant is the market's perception. And should the Federal Reserve double down by keeping borrowing costs low, it might make the greenback all the more vulnerable.
This isn't about whether the dollar will fall; it's about whether there's a risk that the dollar will fall, and what investors need to do to prepare for it.
Is gold the ultimate winner in Currency Wars? Gold has had a rather volatile ride of late, not surprisingly. As the price of gold moved up 12 years in a row, speculators decided that a good thing is even better with leverage.
But good things come to a screeching halt when margin calls force selling. Many investors are sitting on paper losses. Some who bought gold because of a meltdown in the Eurozone are selling their positions. On the other hand, not everyone buying gold because of future inflation is on board.
We buy gold because we believe there's too much debt in the developed world. While Eurozone members are trying to address their debt loads through austerity—with rather mixed results—we believe the US, UK, and Japan are more likely to resort to their respective printing presses. In that environment, we believe gold should perform rather well over the coming years.
So why not hold only gold? Any investment depends on that investor's perspective on opportunities, but most notably also on risk tolerance.
Just as with investing in a single stock, investing in a single currency or in gold alone can be quite volatile. What we like about investing in currencies is that currency wars can be tackled at the core, without taking on equity risk, and while trying to mitigate interest and credit risk.
We may or may not like our policymakers' decisions, but more importantly, those decisions may be rather predictable. As asset prices appear to be chasing the next perceived move of policymakers, the currency market may be the right place to express such views.
Gold can play an important part in such a strategy, but as the recent past has shown, one needs to have a good stomach to get through the patches when there is substantial volatility when gold is measured in US dollar terms.
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