U.S. Dollar and Euro – Review and Outlook … Going forward, we consider that central banks around the world are likely to err on the side of further monetary policy easing. Our analysis finds that the composition of voting members on the Fed's Federal Open Market Committee (FOMC) is more dovish in 2012 compared to 2011 and is set to become even more dovish in 20131. We therefore consider it very likely that rates will be kept low for an extended period of time in the U.S. and, should economic fundamentals deteriorate, further easing policies may be put in place. Elsewhere, the Bank of Japan appears committed to generating inflation via easing policies, while the Bank of England appears to be more concerned about deflation despite the existence of what we deem to be elevated inflationary pressures (as measured by the consumer price index) … We continue to believe the currency asset class may provide investors with the opportunity to access enhanced risk-adjusted returns and valuable diversification benefits. We are excited about the outlook for the asset class and believe many investment opportunities continue to exist in the space. – Axel Merk, Merk Funds
Dominant Social Theme: Opportunities abound if we just reach out and pluck them.
Free-Market Analysis: For many people this is a terrible time but for those with the wherewithal to invest their funds or the funds of others, the current environment offers many opportunities.
Volatility is the trader's friend. And, man, things are volatile out there. We just received the latest Merk Funds' bulletin – based on a letter to shareholders. It's an interesting one … making the case that both commodity and currency plays offer opportunity in the current chaotic clime.
Merk's analysis involves the perception that many central banks will continue to ease – print more money – in current conditions. This will provide a realignment of various currency values; chiefly, he seems to see opportunities within the context of the Chinese yuan.
Any time in current conditions that central banks add to the money stock, it is likely that commodities, especially gold and silver, will benefit. We have considered the recent gold and silver downturn merly a hiccup on the way to higher highs. Merk seems to agree. Here's some more from the analysis:
The 12-month period ended March 31, 2012 (the "Period") could be described as one of contrasting halves. The first half of the Period was marked by increased pessimism and concern regarding Europe, particularly the periphery nations. In contrast, market sentiment was more optimistic through the second six-months of the Period, and markets exhibited significant strength. During the first six-months ending September 30, 2011, the market – as measured by the S&P 500 Index – returned -13.78%, while the market returned 25.89% during the second six-months ending March 31, 3012 …
All of which should serve to underpin those currencies most correlated with the outlook for economic growth and of countries set to benefit from increases in the price of commodities and precious metals … As such, we favor the currencies of commodity producing nations, such as Australia, Canada and New Zealand. In particular, we do not consider that China will experience too severe a slowdown in economic growth – the recent announcement to expand the trading band of its currency should be seen as a signal that policy makers there believe the risks to the economy have satisfactorily abated …
In China and other Asian nations, allowing the respective currencies to float more freely may act as a natural valve in alleviating the inflationary pressures being experienced. Moreover, we consider China and countries such as Malaysia, Singapore, South Korea and Taiwan to have the pricing power to allow their currencies to appreciate. These countries now produce relatively higher value-add goods and services compared to other Asian nations; therefore we believe they have the ability to pass on price pressures to the end consumer – Western consumers …
We are simple folk and defer to Merk on the analysis of currency swings, especially in Asia. What is clear to us as we have repeated many times is that the world is currently in the grip of a "golden bull." These metals bull markets are alternatives to fiat-money bull markets.
Metals bull markets occur when central bank monopoly paper has so distorted productive facilities that the market crashes and economies begin to unwind. As value is finally perceived to be less than it was thought, money metals begin to appreciate.
Money metals are seen as a safe haven in such times but there are other reasons as well. It is simply impossible to print fiat money forever. The rising prices of gold and silver reflect that.
Eventually gold and silver in physical form will become too expensive and paper gold and silver will become popular. This is when mining stocks catch fire. We're a long ways from that yet.
The golden bull has legs. It is part of a larger cycle, it seems to us, and those who lived through the 1970s know full well that the 2000s, thus far anyway, are a kind of 1970s on steroids.
Within this context, one can shift assets as Merk and many others try to do to fulfill various investment mandates or one can simply sit tight in gold and silver.
It seems to us that these metals will inevitably continue to appreciate just as they did in the 1970s until the cycle runs its course and fiat-money comes back in fashion.
The problem with this latter strategy, as we have pointed out, is that it may involve US$ 5,000 gold and 40 to 50 percent interest rates. Can the system tolerate such numbers?
We would tend to doubt it; at least we would predict it's questionable. And thus, we believe other factors might come into play.
Keep your gold in a safe place. Try not to sell it. Maybe buy more on dips. This is our opinion – not a prediction. As usual, "buyer beware."