Category Archives: General

Axel G Merk: Is Gold Risk Free?

By Axel G Merk, Feb 24, 2015

I’ve long argued that there may not be any safe asset anymore and that investors may want to take a diversified approach to something as mundane as cash. But what about gold? When I mentioned in a recent interview that not even gold is ‘risk free,’ it raised some eyebrows in the gold community. Let me elaborate.

To answer whether gold is “risk free”, let’s look at it from a couple different vantage points:

When we look at gold’s “safety”, let’s look at it from a storage and investment point of view.

Gold storage
Gold is just that – gold. One of the beauties of gold is that it has no counterparty risk. Except when someone touches it. This ‘touching’ can happen in different ways:

• Physical storage. If one stores the gold at home, the ‘counterparty’ one needs to be concerned about is burglars. The same applies in a bank deposit box or specialized gold custodian. Insurance ought to alleviate that concern, but keep in mind that the insurance company is also a counterparty risk.

• Allocated versus Unallocated. Financial institutions in the business of storing gold differentiate between holding gold on an allocated or unallocated basis. Allocated means it is segregated, held on behalf of the client; in the event of a default of the custodian, the gold still belongs to the beneficial owner. In contrast, unallocated gold, also referred to as paper gold, is merely a claim against the assets of the institution.

Central banks like gold because, in the words of former Federal Reserve Chairman Greenspan: “Gold has always been accepted without reference to any other guarantee” (for a summary of stunning quotes by Greenspan on gold in the current environment, please read “Greenspan: Price of Gold Will Rise”).

Gold investment
Assuming one is comfortable with one’s choice of storage, is gold “safe” as an investment? If one asks U.S. regulators, the answer is no: only U.S. Treasuries are considered safe. If you ask gold bugs, the answer may well be that gold is the safer choice and U.S. Treasuries are the riskier choice. Which one is it?

As long as Congress authorizes it, U.S. Treasuries can always be paid back. The payment is in U.S. dollars that can be printed. If you take a dollar bill to your bank, the bank will give you a statement showing that you can get a dollar bill again. Similarly, the bank can go to the Federal Reserve to deposit cash; in return, the bank will get a receipt that it can always ask for its cash back. The guarantee is in the circular arrangement. As a result, to quote Greenspan once again, “We can guarantee cash, but we cannot guarantee purchasing power!”

In the U.S., as in many other countries, there’s a separation of fiscal and monetary policy. This means that while the government steers income and spending, the central bank controls the amount of credit (or the cost of credit) available to the economy. The idea is that the central bank will preserve the purchasing power of the currency. If history is any guide, however, central banks have a very difficult time to preserve the purchasing power of a currency when unsustainable fiscal policies are pursued. And even during “normal” times, a central banker’s idea of preserving purchasing power is an inflation rate of around 2%. As such, since the introduction of the Federal Reserve, the U.S. dollar has lost over 95% of its purchasing power when measured by the Consumer Price Index (CPI).

In contrast, the reason why many investors like gold is because it cannot be as easily “printed” (although gold production can be increased, although not as easily). But that’s also the very reason why governments are not keen on backing their currency by gold: doing so limits the ability of the government to engage in excess spending. It’s for this reason that for the past 100+ years, we have moved further and further away from the gold standard. In doing so, cash is at risk of no longer serving its function as a store of value, a key criteria of money.

We argue that a government in debt does not have its priorities aligned with savers because the government has an interest in debasing the value of its debt. Debasing the value of one’s debt doesn’t solve the debt problem, but it helps to ‘kick the can down the road’, something politicians appear to be particularly good at. In the U.S., we also have many consumers with too much debt and non-voting foreigners owning much of the debt. One doesn’t have to be a gold bug to suggest that incentives are baked into the system for the further erosion of the purchasing power of the currency.

Back to gold: is gold risk free as an investment? These 100 ounces are “safe” in the sense that they will remain 100 ounces: 100 ounces of gold will be 100 ounces a year from now, ten years from now, 100 years from now. But when we talk about a “safe” investment, we need to look at the purchasing power of the investment. Roughly speaking, a suit cost an ounce of gold 100 years ago, as it does today; similarly, a gallon of milk costs about as much in gold 100 years ago as it does today. However, the price of gold measured in any one currency, including the U.S. dollar, fluctuates, at times widely.

For U.S. based investors, most of our expenses are priced in U.S. dollars. If I know I have to spend $1,200 a year from now, I can put the cash aside or buy one ounce of gold. The cash will pay for my obligation. The one ounce of gold may or may not. As such, anything that fluctuates in value versus the U.S. dollar is inherently not ‘safe.’

This doesn’t mean that US dollar cash is preferable to gold. But what it means is that whatever one does with one’s savings is based on one’s risk assessment. Ultimately, investing is about preserving and enhancing purchasing power. The reason why we invest is because we can’t trust our government (this isn’t aimed at any one, but all governments) to preserve our purchasing power. In that process, we take risks. We invest along the risk spectrum from stocks to bonds, from real estate to commodities, to cash or alternative assets. Some reject gold because it’s an “unproductive” asset. So is your twenty-dollar bill. If one wants gold to be “productive”, one can lease it out, although that process introduces the very counterparty risk many investors try to avoid. Allocated gold may be unproductive, but that beats an asset that, by definition, is destructive. In the current environment, real interest rates, i.e. interest rates after inflation, are negative. That may make a brick (of gold) that is unproductive, suddenly comparatively attractive.

Importantly, gold just is what it is. In contrast, when we reference the CPI above, it is subject to the collective wisdom of economists. Even as they try to do the right thing, many feel that annual inflation is higher than reported by the CPI. In fact, how is it possible for the price of a piece of brick to appreciate an annual rate exceeding 8% since 1970?

Some may argue that this suggests gold is in a bubble, however, gold has performed similarly over the 100 year period. In our assessment, the more likely interpretation is that the CPI under-reports inflation.

When it comes to choosing gold as an investment, the question is what the price of gold may do in the future. If history is any guide, the correlation to other investments, equities in particular, may stay low. It’s the positive return expectation that many have an issue with. And anyone who has followed gold for some time knows the price can be volatile. Investors can recently recall the 28% drop in 2013. That year, the S&P soared, so gold fulfilled its role as a diversifier.

In the short-term, investors are concerned about interest rate increases by the Fed: as the return on cash increases, it is competition to the brick that pays no interest. However, the FOMC statement’s last paragraph suggests to us that real interest rates may be negative to low for an extended period: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” Indeed, in our assessment, the U.S., Eurozone and Japan may not be able to afford positive real interest rates a decade from now.

Does this make gold a “safe” investment? No. No investor should have more money allocated to an investment than they can sleep with at night. And we don’t mean physically put under one’s pillow. If one cannot stomach a severe correction in an asset, one is likely over-allocated to that asset.

Talking about over-allocation: what about that equity allocation? For most investors, the equity allocation of their portfolio has done very well. In recent years, we believe volatility in the equity markets has been suppressed by central bank policy. Are you able to stomach a downturn should volatility surge? And if not, where do you hide? It’s that last part for which there’s no easy answer because central banks have created an environment where there may not be such a thing as a safe asset anymore. What investors can do is have a toolbox available to counter the toolbox of central banks. We think investors may want to consider having gold in that toolbox.

This article is written by Axel G Merk of Merk Investments LLC and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Merk Investments, please visit:

The Federal Reserve’s ‘Game of Thrones’

CNN Money, Feb 23, 2015

rate hike coming
Federal Reserve Chair Janet Yellen is facing pressure from Wall Street, Congress and economists over when to raise interest rates.

The next season of “Game of Thrones” doesn’t start until April, but if you’re looking for drama now, pay attention to the U.S. economy this week.

Federal Reserve chair Janet Yellen testifies in front of the U.S. Senate on Tuesday and the House on Wednesday. Don’t expect her to get a lot of hugs and high fives.

The stakes are incredibly high as the Fed debates when to raise interest rates off their historic lows near zero. If the Fed times the increase correctly, the U.S. economy will continue to lift off. If the Fed gets the timing wrong, America could end up in another recession.

Keep in mind the Fed hasn’t done a hike since 2006, when everything looked pretty rosy for the economy.

The world is in a very different place now. It’s a lot of pressure on the 12 people who make up the Fed committee that decides when to pull the trigger on a rate hike.

The power struggle is on: By Washington standards, this is akin to a Game of Thrones episode … with more glasses and gray hair.

The normally congenial Fed members are starting to be a lot more vocal about their views.

Dallas Fed President Richard Fisher believes the Fed should act soon to start raising rates. In a speech earlier this month, he said his fellow Fed members are “at risk of monetary Alzheimer’s.”

“As I have repeatedly reminded my [Fed] colleagues, every single time the Fed has waited for full employment to be achieved before starting to withdraw accommodation, it has ended up driving the economy into recession,” Fisher said.

Yellen and other Fed members have stressed that any decision to raise interest rates this year will depend on continued improvement in the U.S. economy, especially unemployment closing in on the long-term goal of 5% or so (it’s currently 5.7%) and inflation nearing 2% (it’s currently a mere 0.8%).

inflation tumbles down

Wall Street’s consensus is that a rate hike will happen in June, but every word of Fed speeches and statements is scrutinized.

Congress weighs in: Congress and Wall Street are also trying to influence the action. Republican Senator Rand Paul has gone as far as to launch a campaign aimed at getting more political influence over the Fed’s policies. A fund-raising site he put together called “Audit the Fed Money Bomb” has already raised over $88,000.

On the left, Democratic Senator Elizabeth Warren has been outspoken that the Fed came to Wall Street’s rescue after the 2008 financial crisis and forgot Main Street.

March will mark the sixth straight year of the stock market going up. It bottomed out in March 2009 — shortly after the Fed took extraordinary measures to pump a lot of money into the economy.

Things haven’t been as great on Main Street. While employment is picking up, wage increases are still hard to come by.

As Yellen said last year, “In some ways, the job market is tougher now than in any recession.”

Of course, Fed members are quick to point out that had they not intervened during the Great Recession, the U.S. would likely look a lot like Europe right now: stalling and on the verge of a possible double-dip recession.

Bigger debates ahead: At heart, all of this strife comes back to nerves about the first rate hike. It will impact everything from mortgage and bond rates to how much interest you get on your savings in the bank.

America hasn’t done one of these in awhile, and it hasn’t done a hike coming off such a deep recession in an even longer time frame.

The other backdrop to all this is that the Fed board has 12 seats. Two are currently vacant. They are awaiting nominees from President Obama who will need confirmation from the Republican-held Senate. It could shift the dynamic of the Fed’s policy setting.

Furthermore, what happens after the first rate hike is critical. Will the Fed do a bunch of small and quick increases in the months following the first raise? Or will it do a few larger increases? That’s equally as important to get right, if not more so, but few are talking about that yet.

This week’s fireworks: All of this is likely to come up at the hearings this week.

Investors will be watching for any hint of clarity on when a rate hike will be coming. Congress will be listening for ideas on how to impact Fed policy. And Main Street will want to hear continued optimism about the U.S. economy and, especially, wages.

Tension is high, and the players are starting to take shots at each other.

“In the end, we get things done … Congress does not,” Dallas Fed President Fisher, who will retire in March, likes to remind America.


Scared OPEC members want meeting, but Saudis call the shots

CNN Money, Feb 23, 2015

The plunge in oil prices is scaring some members of OPEC.

Nigeria’s oil minister told the Financial Times Monday that the crash in crude oil prices could cause the cartel to hold an emergency meeting. OPEC isn’t scheduled to hold a regular meeting again until June. The last time it met, on Thanksgiving Day, a Saudi Arabia-led OPEC announced it would not cut production to offset an oil supply glut from new U.S. supply. Since then, oil prices have plummeted 30%. It’s hurt some oil producing countries more than others. In theory, an emergency OPEC meeting could open the door for a cut in production and push prices higher. In reality, such an outcome looks unlikely. “There are absolutely no signs that they are going to have an OPEC meeting of substance” anytime soon, said Tom Kloza, chief oil analyst at the Oil Prices Information Service. In other words, even if OPEC held an emergency meeting, the group isn’t likely to shift strategies.

american energy vs opec

Consider the source: It’s important to remember the emergency meeting talk didn’t come from Saudi Arabia — the real power behind OPEC — or even from influential allies like Kuwait and the United Arab Emirates. They were made by Diezani Alison-Madueke, Nigeria’s oil minister. While she does serve as OPEC’s president and is responsible for coordinating emergency meetings, Alison-Madueke also represents one of the countries being hit hardest by the oil price drop. Nigeria, the largest oil producer in Africa, needs oil prices of nearly $120 a barrel to balance its budget, according to Deutsche Bank. But late last year the Saudi oil minister was quoted as saying it wouldn’t cut output even if oil plunged to $20 a barrel.

Saudis have the long view: The Thanksgiving decision, led by Saudi Arabia, to keep pumping oil at current levels appeared to be motivated by a desire to squeeze higher-cost producers in North America responsible for the oversupply of oil.

Saudi Arabia decided it was willing to stomach the low prices and steal back some market share from U.S. shale and Canadian oil sands producers.

The Saudis are clearly taking the long view. Abandoning that strategy now would represent a “remarkable change” of heart by OPEC, Kloza said.

Desperate Nigeria? But maintaining market share provides little incentive to Nigeria. It has all but lost its best customer: America.

U.S. imports of crude oil and petroleum products from Nigeria had plunged to just 1.7 million barrels in November, compared to 36.4 million barrels in July 2010, according to the U.S. Energy Information Administration.

“Here’s the problem with Nigeria. They have an incredibly unstable government, the country is loaded with various factions and corruption and they don’t have foreign reserves to weather the low price storm,” said Kloza.

$35 oil? That storm may last a while longer, too.

Edward Morse, a Citigroup commodities guru who correctly predicted the oil crash back in 2008, warned in a research report on Monday the recent oil price rally “looks like a head-fake,” not a turning point.

Morse, who recently said the “end of OPEC” might be closer to reality now, said oil is not going to bottom out until the spring. He believes crude could sink to $35 during the second quarter and not return to the $60 range until next year.

No wonder Nigeria wants an emergency meeting.


John Rubino: Too Many Houses, Not Enough Jobs

By John Rubino, Feb 23, 2015

Today’s existing home sales report was down another 4.9% to an annual rate of 4.82 million units, the lowest in nearly a year. And this, remember, is in the sixth year of a recovery with reported unemployment below 6% and the Fed preparing to raise interest rates to head off incipient overheating.

Existing home sales 2015

Mortgage rates can’t be the problem, since they’re down lately to less than 4% on a 30-year fixed loan. That’s amazingly cheap, especially to people of a certain age who remember when 7% was a really good deal. In normal times a rate this low would set off a buying frenzy. This year it can’t even keep demand steady.

Mortgage rate 2015

The real problem has nothing to do with housing per se and everything to do with that fraudulently false unemployment number. The truth of the labor market is that 1) most of the new jobs being created are either part-time or low-wage or both and therefore can’t support a mortgage, and 2) most of the improvement in unemployment comes from people dropping out of the workfore and no longer being counted as unemployed. These people also generally can’t get or don’t want mortgages. Meanwhile, the relative handful of Americans who do qualify for loans seem to be choosing cars and college degrees over houses.

Labor force participation rate

And the US, remember, is the global success story. We monetized our debt first and fastest and are now reaping the rewards. But with the rest of the world flat-lining or worse (result: falling profits for US multinationals), the oil sector contracting (result: layoffs in once-booming Texas and the Dakotas), and now housing a net negative with no recovery in sight (result: layoffs of highly-paid appraisers and mortgage bankers), the odds of the Fed raising rates anytime soon are becoming more and more remote.

Much more likely is the US joining the race to negative rates. Somewhere down there must be a mortgage rate (1%…-1%?) that gets us buying again.

This article is written by John Rubino of and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about, please visit: