Gold Up as the Current Account Deficit Continues its Rise

By: Axel Merk | Sat, Jun 18, 2005
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The first quarter current account deficit has been released; it was higher than "the market" expected. Now $195.1 billion, an annual run rate of $780.4 billion; at this rate up 17% from the 2004 current account deficit of $665.9bn. It is the broadest measure of international transfers of goods, services, and investments. Foreigners now have to purchase over $2bn U.S. dollars a day, just to keep the currency stable. The Organization for Economic Co-operation and Development (OECD) recently warned the deficit may reach $900bn in 2006.

All of this on the backdrop that recently released inflation numbers are very tame. The consumer price index (CPI) was a bit weaker than expected as oil prices had pulled back in May. Since the end of May, however, we have gold again near $440 an ounce, we have oil above $57 a barrel.

The same picture continues: prices of goods imported from Asia remain stable. Everything that we cannot import, such as the cost of education, healthcare, or local craftsmen, is getting ever more expensive. Housing prices remain in the stratosphere.

In the meantime, analysts on Wall Street tout any news as good news: "A high dollar is good news for imports; a weak dollar is good for exports; high interest rates are a sign the economy is strong; high oil prices show that our economy is not dependent on oil; the CPI is low; Greenspan says a flat yield curve is no indication of a coming recession, it's different this time."

The only warning signs we see that not everything is perfect in this world is that gold is climbing and the dollar heading down once again. The current account deficit, in our view, is the single biggest factor that exerts long-term pressure on the dollar. To quote former European Central Bank president Duisenberg, "We hope and pray that this adjustment, which is unavoidable, will be slow and gradual."

At the Merk Hard Curency Fund, we rather focus on diversifying out of the dollar and into hard currencies than rely on the prayers of our central bankers.


Axel Merk

Author: Axel Merk

Axel Merk
President and CIO of Merk Investments, Manager of the Merk Funds,

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.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

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