Why I launched OUNZ, the deliverable Gold ETF by Axel Merk, Merk Investments
June 2nd, 2014
InvestmentNews calls it “the gold bug’s dream ETF” — well, gold bugs come in various shades of gold, and some of them may be difficult to please. I had the more modest goal of bringing to market a physical gold ETF that addresses some of the perceived shortcomings of other ways of investing in gold. I’ll share some of the amazing journey behind the new Merk Gold Trust, a gold ETF that allows investors to take physical delivery of the gold represented by their shares, recently launched on the NYSE Euronext (NYSE:NYX).
Interests of governments in debt are not aligned with those of investors. In the U.S., in my assessment, we may be better equipped than in other places to “kick the can down the road,” but it will come at a price. The price may well be the purchasing power of the dollar. I believe there is a bias towards negative real interest rates (interest rates net of inflation) baked into the system. Gold pays no interest – but when paying, the shiny metal may be preferred over a currency where real interest rates are negative. My concerns for negative real rates include:
- Coming out of the 2008 credit bust, my interpretation of former Fed Chair Bernanke’s statements suggests the Fed should firmly err on the side of inflation to avoid removing stimulus too early as it that would cause deflationary forces to dominate once again.
- To my knowledge, Fed Chair Janet Yellen is the first Fed Chair to suggest the Fed’s dual mandate is not a conflict, arguing inflation is not a concern. I get concerned when others are complacent. Yellen appears singularly focused on employment: in her first speech as Fed Chair she discussed how accommodative monetary policy could help people find jobs by telling the story of three people who had trouble finding work but omitted the fact that two had criminal records (which – in my assessment anyway – might explain their struggle to find a job more so than the level of interest rates).
- More importantly, I don’t think we can afford positive real interest rates. Looking at the projections of the Congressional Budget Office (CBO) a decade from now we may be paying over $900 billion a year in interest on government debt (marketable Treasury securities), up from about $200 billion currently. And the CBO does not think the average interest rate we will be paying on our debt will go back up to what has been the historic average; if it were, we would pay $1.2 trillion a year in interest expense alone. Fear not, I don’t think this is going to happen; the price for this, however, may well be negative real interest rates, providing a potential catalyst for inflation and a weaker dollar.
- In Japan, where the challenges are even greater, I cannot see how the government can finance its debt should the reform policies be successful and economic growth ensue. With economic growth the cost of borrowing may rise. In the past we have indicated that our price target for the yen is infinity as we don’t think the yen can survive this. Keep in mind that Japan is no Cyprus, so fasten your seat belts in case my forecast becomes reality.
- In the Eurozone, where we believe it is structurally more difficult to “print money”, ECB head, Draghi has said real interest rates are negative and will become even more so.
To me, asset allocation is about scenario planning, not whether I’m right or wrong (many years ago, I wrote my Master’s Thesis on probabilistic decision making). In my view, investment professionals have a fiduciary duty to take scenarios into account that might have a significant adverse impact on their client portfolio. One does not need to have a negative outlook on the world to like gold. In past Gold Reports and Gold White Papers we have shown that gold has played a valuable role in an optimal portfolio, not just over the past decade but also over many decades, even the past 100 years. The statistical characteristics of gold have historically been attractive. The reason gold raises emotions with many is because an investment in gold suggests that one would rather hold a gold brick than invest in a productive company. But then again, the $20 bill in your pocket also does nothing. The brick, at least, doesn’t change – it’s the dollar value of the brick that changes. There’s a time and place for everything – hence the mantra of diversification.
Bernanke used to refer to “the toolbox” of the Fed. Similarly, I believe investors should have a toolbox to be prepared for what may lie ahead. I got to thinking in earnest about this toolbox in 2003 when the then incumbent head of the ECB Wim Duisenberg said, “We hope and pray the global adjustment process will be slow and gradual.” –In fact, a reference to a “disorderly adjustment of global imbalances” was a risk cited by the ECB every month in its statement until about the time current head, Draghi, took over. This “adjustment process” is a thinly veiled reference to a potential dollar crash. When I heard central bankers revert to “hopes and prayers”, I knew it was time to act; time to create a toolbox.
Birth of Merk Funds
In looking to assemble my toolbox I wasn’t particularly happy with the tools available in the marketplace. When I looked at the holdings of funds I considered my clients and myself and I had something to nag about with just about each one of them. I didn’t like fund companies engaging in securities lending. I didn’t like fund companies taking what I thought were unreasonable risks for the sake of squeezing out a basis point here or there. I was looking at pure plays but all I could see was opacity. Not satisfied with complaining, I decided we had to create our own products. In 2005 we launched the Merk Hard Currency Fund (MERKX). Some refer to this Fund as a strategy for those who believe we have the better printing press than the rest of the world; investing in a managed basket of currencies. I love the strategy and we have a formidable track record in adding value. (For more information, please download “Dollar is King?”) While I love this strategy as a long term diversifier out of the dollar while being able to capture opportunities along the way, the Fund has not been the most popular with investors of late as they are lured into thinking the dollar has to rise going forward. Never mind that the dollar historically has not benefited from rising rates – at least not during early and mid-phases of a tightening cycle. MarketWatch, in a May 16, 2014, article, referred to me as a “vindicated dollar bear.”
In 2008 we launched the Merk Asian Currency Fund (MEAFX), a fund that seeks to benefit