Axel Merk
Merk Hard Currency Fund
You want to own gold. Maybe you’re worried about the potentially detrimental inflationary effects emanating from the Fed’s and global central banks’ policies; maybe you’re worried that the fiscal cliff agreement is simply kicking the can down the road and fiscal Armageddon looms on the horizon. Whether you’re in search of inflation protection, a safe haven asset, or both, gold may be a part of the solution.
Regardless of your reasoning, owning the ultimate currency is not as straightforward as you might think. To help out, we’ve compiled five common mistakes associated with investments in the precious metal. Avoiding the common pitfalls may help provide you with the desired investment exposure while minimizing any unanticipated drawbacks. Ultimately, we hope the following list can help reduce investment
headaches associated with your future gold investments.
1. Gold Stocks Ain’t Gold
A frequent mistake made by investors is to invest in gold mining companies (both juniors and majors) as a substitute for gold. There are a couple of reasons why this may be a mistake. Firstly, gold mining company’s stock price does not precisely track the price of gold.
That’s because lots of other factors influence the share price of a company: management, cost pressures, mining diversification, stage of the mining process, to name just a few. This problem is generally more acute for juniors than majors, because juniors often have yet to “strike gold,” therefore the stock price often trades more like an option. Moreover, many mining companies don’t only mine gold, many also mine silver, palladium, diamonds etc. This dynamic also holds for baskets of mining companies – baskets of miners have significantly underperformed the price of gold over recent years.
Some investors believe gold mining stocks may provide more attractive investment exposure to gold than gold itself. The investment thesis is as follows: gold mining companies are able to take advantage of an increase in the price of gold through enhanced operational leverage; as the gold price goes up, mining companies’ margins widen, ultimately increasing the bottom line. However, this theory is predicated on fixed costs staying relatively constant. Unfortunately, recent performance does not support this investment idea. Indeed, gold mining stocks, on aggregate, have significantly underperformed the price of gold. The reality is that mining is a highly energy- intensive undertaking, and therefore many of the costs are closely linked to energy prices, such as oil, which has also experienced significant increases in price. As a result, many mining companies have not produced the anticipated high level of profits. Additionally, governments may demand higher taxes and employees higher wages from mining companies should profitability increase, further limiting the upside potential for shareholders.
The Merk Hard Currency Fund is a no-load mutual fund that invests in a basket of hard currencies from countries with strong monetary policies assembled to protect against the depreciation of the U.S. dollar relative to other currencies. The Fund may serve as a valuable diversification component as it seeks to protect against a decline in the dollar while potentially mitigating stock market, credit and interest riskswith the ease of investing in a mutual fund. The Fund may be appropriate for you if you are pursuing a long-term goal with a hard 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 Fund and to download a prospectus, please visit www.merkfund.com. Investors should consider the investment objectives, risks and charges and expenses of the Merk Hard Currency Fund carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Fund's website at www.merkfund.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest. The Fund primarily invests in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Fund owns 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 Fund is 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. As a non-diversified fund, the 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. The Fund may also invest in derivative securities which can be volatile and involve various types and degrees of risk. For a more complete discussion of these and other Fund risks please refer to the Funds prospectus. The views in this article were those of Axel Merk as of the newsletter's publication date and may not reflect his views at any time thereafter. These views and opinions should not be construed as investment advice nor considered as an offer to sell or a solicitation of an offer to buy shares of any securities mentioned herein. Mr. Merk is the founder and president of Merk Investments LLC and is the portfolio manager for the Merk Hard Currency Fund. Foreside Fund Services, LLC, distributor.
Editors’ Picks
EUR/USD remains offered below 1.1800, looks at US data
EUR/USD is still trading on the defensive in the latter part of Thursday’s session, while the US Dollar maintains its bid bias as investors now gear up for Friday’s key release of the PCE data, advanced Q4 GDP prints and flash PMIs.
GBP/USD bounces off monthly lows near 1.3430
GBP/USD is sliding in tandem with its risk-sensitive peers, drifting back towards the 1.3430 area, its lowest levels in the month. The move reflects a firmer Greenback, supported by another round of solid US data and a somewhat divided FOMC Minutes.
Japanese Yen hangs near one-week low vs. USD amid worries about Japan’s fiscal health
The USD/JPY pair gains positive traction for the second straight day – also marking the third day of a move up in the previous four – and climbs to over a one-week high, around the 155.35 area, on Thursday. Spot prices, however, retreat a few pips during the early European session and currently trade just above the 155.00 psychological mark, up nearly 0.20% for the day.
Editors’ Picks
AUD/USD shrugs off losses, retargets 0.7100
AUD/USD partially fades Wednesday’s pullback, managing to regain balance, leave behind the earlier drop to the 0.7020 zone, and trade with modest gains ahead of the opening bell in Asia. Moving forward, the preliminary PMIs will be the salient event in Oz on Friday.
EUR/USD remains offered below 1.1800, looks at US data
EUR/USD is still trading on the defensive in the latter part of Thursday’s session, while the US Dollar maintains its bid bias as investors now gear up for Friday’s key release of the PCE data, advanced Q4 GDP prints and flash PMIs.
Gold surrenders some gains, back below $5,000
Gold is giving away part of its earlier gains on Thursday, receding to the sub-$5,000 region per troy ounce. The precious metal is finding support from renewed geopolitical tensions in the Middle East and declining US Treasury yields across the curve in a context of further advance in the Greenback.
XRP edges lower as SG-FORGE integrates EUR stablecoin on XRP Ledger
Ripple’s (XRP) outlook remains weak, as headwinds spark declines toward the $1.40 psychological support at the time of writing on Thursday.
Hawkish Fed minutes and a market finding its footing
It was green across the board for US Stock market indexes at the close on Wednesday, with most S&P 500 names ending higher, adding 38 points (0.6%) to 6,881 overall. At the GICS sector level, energy led gains, followed by technology and consumer discretionary, while utilities and real estate posted the largest losses.
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