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Bernanke - Money for Nothing and Dollars For Free

Interest-Rates / Central Banks Jul 14, 2011 - 01:54 AM GMT

By: Axel_Merk

Interest-Rates

Federal Reserve (Fed) Chairman Bernanke, in a verbal duel with Representative Ron Paul, provided insult to injury to hard money appreciating investors. When asked whether gold should be considered money, Bernanke replied: “no”; when further quizzed why central banks then hold gold reserves, Bernanke brushed the question off, suggesting gold is simply held because of tradition.


This occurred after Bernanke claimed that Fed policy has been profitable, as manifested by the billions in profits paid to the Treasury, as a result of the policies pursued. To make it clear: when a central bank prints trillions of dollars to buy securities, those securities will of course pay record amounts in interest. However, it is misleading to conclude that such operations are profitable; the money printed dilutes the very value of the currency those profits are paid in.

Whereas one can’t simply print gold, printing dollars may debase the value of the currency. Claiming that Fed operations are profitable, while ignoring the fact that the currency itself may be debased, is rather irritating to those that believe that a central bank’s role is to pursue sound monetary policy. Sound monetary policy is a pursuit of price stability, not one of generating paper profits on printed money.

Bernanke firmly embraces the U.S. dollar as a monetary policy tool; in our analysis, he has worked on weakening the dollar in both word and action. In the past, Bernanke has testified that going off the gold standard has helped the U.S. recover faster from the Great Depression than other countries that held on to the gold standard for longer. Bernanke has argued that a weak dollar is not inflationary (we disagree). The action of buying government securities by a central bank causes such securities to be intentionally overvalued; rational investors may look overseas for less manipulated returns.

Not surprisingly, the U.S. dollar moved sharply downward as Bernanke started speaking in his testimony to the House of Representatives, where the above exchange between Ron Paul and Bernanke took place.

By Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com

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 www.merkfunds.com.

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 www.merkfunds.com 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

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