Gold Up as the Current Account Deficit Continues its Rise
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.
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Author: Axel Merk
Axel Merk
Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com
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.
The Funds may be appropriate for you if you are pursuing a long-term goal with a 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 Funds and to download a prospectus, please visit www.merkfunds.com.
Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.
The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own 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 Funds are 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. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency 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. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.
This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.
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