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Gold Price Trend Forecast Summer 2019

Is Your Investment Portfolio a House of Cards?

Stock-Markets / Financial Markets 2014 Jun 05, 2014 - 03:34 PM GMT

By: Axel_Merk

Stock-Markets

The S&P 500 continues to hit new all time highs, but is your portfolio built on a house of cards? The politics to kick the proverbial can down the road may unleash dynamics that could be hazardous to your wealth.

The one thing politicians throughout the world have in common is that they rarely ever blame themselves. They tend to diffuse responsibility or place blame on groups such as political opponents, the wealthy, or foreigners.


If you now add that we have very real and major challenges in the world, it may be reasonable to assume that policy makers will continue to remain engaged in “fixing” things by blaming others. As an investor, if nothing else, this means asset prices may continue to move away from fundamentals and reflect the next perceived intervention by policy makers. This presents challenges for investors trying to maintain the real purchasing power of their portfolio and avoid a major drawdown at the wrong time.

Going forward we may continue to see less political stability as weakness in the real economy breeds discontent. In the U.S., they vote for more populist politicians, helping to explain the rise of the Tea Party and the Occupy Wall Street movement. In the Middle East, where rising food and energy prices comprise a much bigger portion of disposable income, people revolt as they can’t feed themselves anymore. In Japan, Abenomics is introduced by a populist prime minister.

Meanwhile both monetary and fiscal policy create a more challenging landscape for real economic prosperity to emerge. Instead of a rebirth following the global financial crisis we get a phony house of cards that may come down on the heads of investors who think that policy makers have their best interests in mind.

One of the most relevant dynamics for investors to be aware of is that the interests of a government in debt are not aligned with the interests of investors. A government in debt has an incentive to debase the value of its debt, whereas investors have an interest in earning a positive real return on their savings.

Last week, I attended a conference at Stanford’s Hoover Institution, where academics, as well as four acting Fed Presidents, pondered about the future of central banking. One of the presenters, Stanford Professor Dr. Martin Schneider, had some blunt words that were as obvious as they were controversial: monetary policy cannot be conducted in a vacuum, and is very much dependent on fiscal policy. He pointed out that as interest rates rise, taxes would have to go up to pay for the higher cost of servicing the debt. Dr. Schneider presented a simplified model of the world, arguing that in the U.S., in today’s environment, both government and citizens would benefit from inflation- the losers are foreigners. Now anyone can take issue with a simplified model; and I could also argue why everyone loses with inflation. Such details should not distract from the message, though:

  • Inflation debases the value of government debt
  • Inflation debases the value of consumer debt
  • If you are a consumer with savings, sorry, you are in the minority and your interests will have to take a back seat
  • Given that foreigners hold large amounts of Treasuries, they are on the losing end in an inflationary environment

We can argue whether inflation is a problem today or whether it is not. But it’s difficult for me to argue with the above. The conclusions I draw are:

  • Political stability throughout the world will continue to decline
  • Traditional diversification can’t be relied upon as asset prices reflect the next perceived move of policy makers rather than fundamentals
  • Asset bubbles will be fostered
  • Bonds are vulnerable
  • The U.S. dollar is vulnerable
  • Investors may need a toolbox to counter the toolbox of policy makers

The investment tools we have been focusing on to tackle these challenges at the core are currencies and gold. Gold may do well as the value of debt (and with it the dollar) is debased; gold also has historically had a low correlation to other asset classes, thus serving as a candidate diversifier going forward. Currencies can also serve as valuable tools: with currencies, one can design a portfolio that has a low correlation to other asset classes; currencies are historically less volatile than gold. On the other hand, other countries also face challenges, so some thought has to be put into a currency driven strategy.

We can’t know for certain that either currencies or gold will protect investors against a collapse of the proverbial house of cards, but we are afraid that ignoring these dynamics could be perilous. I will expand on this discussion and provide more feedback from my takeaway of what the Fed Presidents and others said at the above conference in our upcoming webinar on Wednesday, June 24 at 4:14 ET please register.

If you haven't already, please make sure you have signed up for our newsletter so you never miss a Merk Insight again. Also, if you find these analyses valuable, spread the word on social media by posting a link to this article. Follow me on Twitter to receive real-time an alysis of market-moving events.

Axel Merk

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

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 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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