U.S. Dollar, Gold Implications of Election

By: Axel Merk | Wed, Nov 7, 2012
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Alia iacta est! As networks projected an Obama victory, there was a sea of red: the dollar is down versus currencies and gold. As pundits will shift the focus on the fiscal cliff, the market appears firmly focused on what may be more relevant: an Obama win favors a continuation of the current easy money policy. Had Romney won, Fed Chair Bernanke would have become a lame duck, undermining the credibility of the Fed's commitment to keep interest rates low way beyond the end of Bernanke's term in early 2014. With this uncertainty removed, the Fed's increased emphasis on employment is here to stay. The market rewards this certainty by bidding up gold, selling off the dollar versus all major currencies.

We don't believe the fiscal cliff is similarly important: in our "worst-case" scenario, the "cliff" will take place; however, once tax increases and spending cuts have taken effect, Republicans may then agree to cut taxes, thereby keeping their promise not vote for tax increases. While the drama may be worth watching, the market impact may be limited. Note, though, the budget deficit would still exceed 3% before factoring in an economic slowdown. Yet, we won't have come a step closer to entitlement reform. Entitlement reform is unlikely to happen, as we believe the only language policy makers listen to is that of the bond market.

Keep in mind, however, that testing the patience of the bond market in the U.S. might be more dangerous than in the Eurozone: the U.S., unlike the Eurozone, has a significant current account deficit. To a significant extent, foreigners finance the deficit by buying U.S. bonds. Should the bond market impose reform on policy makers in the U.S. by selling off bonds, the implications for the U.S. dollar might be far more severe than they have been for the euro.

As we all hope for the best, we would like to point out to that hope is not a good policy, neither for politicians, nor for investors.

 


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Axel Merk

Author: Axel Merk

Axel Merk
President and CIO of Merk Investments, Manager of the Merk Funds,
www.merkfunds.com

Axel Merk

Axel Merk wrote the book on Sustainable Wealth; peek inside or order your copy today.

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.

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.

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