Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What's Next for The U.S. Dollar and Gold?

Currencies / US Dollar Sep 04, 2014 - 03:32 PM GMT

By: Axel_Merk


One reason markets tend to get a little nervous in September is that it's time for investors to ponder about their asset allocation for the remainder of the year and beyond. With the markets at or near record highs and the US dollar on a roll, what could possibly go wrong? Let's look at what's next for the dollar, gold, and currencies.

A couple of highlights:

  • Equity markets are at or near record highs;
  • Measures of complacency are near record levels (for example, the VIX index, a measure of implied stock market volatility, is near historical lows).
  • 10 Year U.S. Treasuries are yielding around 2.4%, near record lows.

The theory is that with the U.S. pulling ahead, the greenback must win. A couple of caveats to this theory:

  • The U.S. recovery might not be as healthy as it appears: the housing market remains vulnerable; many retailers have challenges; inventory stuffing might be happening at some tech firms; and how can the U.S. recover when Europe and parts of emerging markets are slowing down?
  • U.S. real interest rates are increasingly more negative than Eurozone real interest rates. With the Fed all but promising to be late in raising rates, odds are that the differential will increase. In this context, the notion of an exit appears absurd.
  • There is no historical correlation between a rising interest rate environment and a stronger dollar. That's because U.S. Treasuries might lose in value as rates rise, providing a disincentive for foreigners to hold the greenback.
  • In our analysis, the Fed's actions have made risky assets appear, well, less risky, causing everything from stock prices to junk bonds to be more expensive. This is referred to as a compression of risk premia. We go as far as arguing that our recovery is based on asset price inflation. As such, should the Fed truly pursue an "exit", risk premia might expand once again, putting not only asset prices, but the entire recovery at risk. As a result, we have warned investors about a potential crash.

Yet, it's clear that the euro has been underperforming of late. Why? In our assessment, the euro's weakness is not due to interest rate differentials, not because of monetary policy. Instead, the tit-for-tat sanctions between Russia and the European Union are causing a serious blow to both confidence and economic activity. As an investor, you might say you don't care why a particular security or currency is down, but it does matter in terms of assessing the outlook more broadly. Market participants scream for more easy money from the European Central Bank (ECB), but printing money won't ease tensions with Russia. In recent years in particular, a lot of emphasis has been on the ECB, as the ECB is the one body in Europe that can decisively act. But while we will mince every word of ECB head Draghi, we might be watching the wrong spectacle.

There have always been loud euro bears. The euro bulls, yours truly included, have held the upper hand while pointing out how ineffective monetary policy is in weakening the euro. But when other factors - i.e., the Ukrainian crisis - set the tone, the euro bulls are stepping aside, allowing the bears to pile in. And boy have they piled in, with short positions the largest since the peak of the Eurozone debt crisis. That in and of itself can, of course, create the dynamics for a bounce back in the euro. But for the euro to resume its ascent, the Ukrainian crisis must be resolved. And that's a challenge, as Russia's President Putin might have an interest in perpetual instability in the region. The situation isn't helped by the fact that Europe historically outsources its foreign policy to the U.S., with a U.S. President that takes what looks to be a more European approach to foreign policy. The only "good news" is that markets tend to get used to any environment. In the short-term, though, the euro appears to be bouncing around based on a mix of rumors and action coming out of Russia and Ukraine. Like everything else in Europe, the process is a messy one. Incidentally, Putin understands Europe much better than Europe understands Russia. For him, sanctions may be a low price to pay to re-assert Russia's influence over Eastern Ukraine.

And why is gold down if geopolitical tensions are high and rising interest rates aren't real (pardon the pun in a negative real interest rate environment)?. Well, as of this writing, even with recent drops in the price of gold, the shiny metal is up over 5.5% in dollar terms year-to-date. We can pick other horizons over which it is down (such as over the past 12 months) and yet others over which it is up. We don't like to buy gold because of geopolitical tensions, as such tensions - more often than not - tend to be short-lived. We like gold long-term because we don't think we can afford positive real interest rates. A Newport Beach based portfolio manager places interest rates in the "new normal" environment at about 2%. We sympathize with that view, but would like to add that this may well mean that we will live in a persistent state of financial repression, meaning real interest rates may be negative as far as the eye can see. For those more inclined to look at the short to medium term, let's keep in mind that many of speculators in gold have been shaken out of the market and would like to argue that the remaining holders of gold are reasonably "strong hands" these days, i.e., those buying gold actually like gold. That's in stark contrast to buyers of many other assets, including the S&P, where buyers merely buy the stock market to keep up. On the Nasdaq in particular we have started to see some excesses that are rather reminiscent of the dot-com bubble.

So which currency should you invest in? Some might say the Swiss franc, as the Swiss are conveniently not joining sanctions against Russia; Swiss cheese exports are surging as Russians love foreign cheese, but can't get French or other European cheeses anymore (no offense meant, but they don't miss American cheese). Indeed, the Swiss franc has outperformed the Euro of late. But let's not forget that the Swiss National Bank has put in a ceiling on the Swiss franc versus the Euro; betting against that might be an uphill battle.

Instead, we have long suggested investors look a little bit off the main stage, notably Australia. Many wrote off Australia as a tumbling mining sector and a threat of a Chinese hard landing, amongst others, caused headwinds to the Australian dollar. But as happens all too often, that's exactly where there is value to be found. In the major currency space, the Australian dollar is the best performing currency year-to-date. And while the Chinese Yuan is down year-to-date, it's only behind the Brazilian Real in the emerging market space over the past three months.

On Tuesday, September 16, 2014, please join me for a "fireside chat." We will make most of the hour available for you to ask questions. Please register to participate. We no longer record our webinars (the regulatory overhead is too much hassle), so join live to get answers to the questions you always wanted to ask.

If you haven't done so, also make sure you sign up for Merk Insights to receive analyses like this one straight to your mailbox.

If you haven’t done so, make sure you sign up for this free newsletter. Please share this newsletter with your friends.

Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds,

Rick Reece is a Financial Analyst at Merk Investments and a member of the portfolio management

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in