Conversation with Axel Merk on Gold and Euro at FreedomFest – Merk Funds

Last week I was at FreedomFest in Las Vegas and met many who are influential in the advising of what investors should do with their money. I met hedge fund manager and author Jim Rogers, Steve Forbes, editor-in-chief of business magazine Forbes, John Stossel and Sentator Rand Paul. I gave each of them the currency I created called the Barackazillion, which mocks our current currency (in more ways than one) because it can be printed on a printing press.

I told each of them it’s the world strongest currency, and asked them if they want to know why. My answer was, because you can’t tear it in half! Got a few laughs. The Barackazillion is made of a very strong Yupo Paper that can’t be ripped. It’s unique in other ways that mock our current Federal Reserve Notes. It’s the only U.S. currency with a smiling president on it. You’ll notice it says “This Note Is For All Debts Where Accepted” on the top left? This is the key with any currency, including gold. But understanding currencies priced in each other is better left to the experts, and Axel Merk is one of those experts.

Axel Merk is President and Chief Investment Officer of Merk Investments LLC and his funds specialize in the management of currencies. Axel Merk is also author of a book, Sustainable Wealth, and someone who I will be promoting in my forthcoming book, “Illusions of Wealth.” There will be a need for his type of expertise in the years to come.

Axel Merk Has 50% of His Net Worth Invsted in Physical Gold 

In my conversations with Axel Merk, I learned that Axel himself keeps 50% of his wealth in gold. I found this to be quite telling as I have only heard of one other person whom I respect and admire, Dow Theory Letter writer, 88 years young, Richard Russell who has recommend investors put 50% of their wealth into gold over the years and is still a fan of gold and cash (currencies).

Axel Merk’s latest article is titled Gold in a (Un)Tapered World. Some of the key points from that article follow;

Bernanke also said that a key reason he started the taper talk was speculation he and his colleagues had seen in the markets. Greenspan called it “irrational exuberance” in the 1990s and got a lot of heat for trying to control asset prices. But make no mistake about it, Bernanke’s taper talk was his irrational exuberance talk. Our take is that Bernanke is less interested in tapering, but concerned about some of the side effects of his policies that cannot be ignored any longer.

In summary, we think Bernanke may soon find the glass to be half empty, encouraging him to err on the dovish side, a likely positive for the price of gold.

Interest Rates and Stock Market Returns

As many of you know, I have been dollar bullish since about September of 2011. I still am. This is hard for many in the gold promoter world to understand (some call them gold bugs), but it is primarily because most don’t really understand what a dollar is or represents. They typically talk of inflation and hyperinflation and government spending eating away at the dollar’s purchasing power, and say that since 1913, the dollar has lost 95% or 98% of its purchasing power. But most people didn’t take their dollars and put them under their mattresses, but rather put them in the bank or invested them. You see, from 1933 forward, people were only allowed to own more than $100 worth of gold. This meant that to earn anything on your money you had to invest it in the bank or the stock market. This resulted in the following returns from 1933 to 1936.

 

There is a similar situation going on today with dollars and the stock market. Bank CD’s pay very little in the way of interest today. Take a look at the following chart and what paltry returns investors are getting for staying in cash at present.

Of course this is BEFORE taxes! Perhaps cash under the mattress isn’t so bad? But in reality, most investors are putting their money in the stock market in search of a better return. What they don’t realize is this stock market is simply a bubble forming and fueled by large banks who sell their bonds and mortgages to the Fed to the tune of $85 billion a month and take the proceeds and speculate where they can.

Some of this money received by the banks has gone into derivatives, as the nations largest banks today hold more sub-investment grade derivatives than they did at the height of the financial crisis we just got over. They never learn! The reason is they fully expect that if they make a mistake either the Fed or the Taxpayer (TARP) will be there to bail them out! So much for the Frank/Dodd bill where oversight was put into the hands of the Fed (wolf in charge of the hen house). 

Some of this bank money has flowed into gold and silver derivatives where the big banks, primarily J.P. Morgan Chase bank, have began to trade in this market more heavily as I pointed out in an article written in December 2012; Thoughts On Gold Price Manipulation. This is the only time I have ever used the “manipulation” word in my article titles, but I do so with verifiable facts, not speculation. The price of gold was $1,708 an ounce then and I said “watch the $1,531 mark as a low they may want to take out” which they did by April of 2013. This is what market makers do.

But what happened after 1936 following a nice run in the stock market? 1937 saw a big drop of 35.34% followed by a blip up and the beginning of WWII and 3 straight down years for the market. This decline can partly be blamed on WWII, but it doesn’t explain 1937. What happened in 1937 that correlates to 2013/2014? From Wiki, we read the following; “this share price fall was triggered by an economic recession within the Great Depression and doubts about the effectiveness of Franklin D. Roosevelt’s New Deal policy.” The New Deal focused on what Historians call the 3 R’s; Relief, Recovery, and Reform; “That is Relief for the unemployed and poor; Recovery of the economy to normal levels; and Reform of the financial system to prevent a repeat depression.” Can we see a repeat today with Obamacare? I believe the answer is yes.  

The folks at CNBC never talk about the turmoil in the Middle East as they don’t want to spook the market. But it’s there. All of the media would rather you discuss Trayvon Martin and George Zimmerman, rather than allow you to hear about the $1 billion a month to monitor the skies of Syria; the many killed in Cairo clashes, the 500 Al-Qaeda prisoners who were freed (escaped) in Iraq; and the continued wave of bombings in Iraq killing many. Let’s also not forget about Iran who Congress and the President can’t even agree on anymore as the White House isn’t happy that Iraq is doing business with Iran. This is a powder keg waiting to explode and their will be stock market implications. Interesting how the U.S. has supported both Iran and Iraq and been against both over the last 40 years. 

Here are the latest returns of the S&P

Anyone see a pattern comparing 1933-1936 and what the dollar/banking situation was to the 2009-2013 period? Will we now head to a repeat of the 1937-1941 market downturn?  Stay tuned.

Where Will It Be Safe to Invest Your Hard Earned Dollars?

If indeed we are headed to rougher waters, which is what my new book “Illusions of Wealth” will foretell, this brings us full circle to what Axel Merk offers in his currency funds. The Merk Hard Currency Fund is one that I think will do well in the coming years as volatility hits the stock market. It presently has an allocation of 13.3% to gold, which you won’t find in many currency funds. While it is heavily invested in the Euro at present, it doesn’t have the PIIGS risk associated with holding Euro’s as it invests in the various stronger economies of Europe like Germany and France. Axel’s main reasoning for holding more Euro related holdings at present is that unlike the U.S., the Euro has no budget deficits to deal with. While this is true, they do have the PIIGS to deal with. The Euro has in fact become stronger versus the dollar the last week or so. Below is a list of its current assets by sector.

You can see by the above chart that during the financial crisis of 2008, the fund, while down slightly, held it’s own down about 5% while the S&P lost 37%. The goal of course is to not lose money, but 2008 was a unique situation whereby most everything lost value. However, gold did end the year higher and I believe “this time” the financial crisis will have investors scrambling for gold.