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Currency Manager Axel Merk Talks Money as Inflation Hedge

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“It’s still an asset class investors are not sufficiently looking at,” said Axel Merk. Granted, as president and chief investment officer of Merk Investments and its flagship Merk Hard Currency Fund, he has something of a dog in the hunt, but with the possibility of higher inflation, Merk makes a strong argument for the currency sector.

Axel MerkMerk (left) takes this argument to the Morningstar ETF Invest Conference on Thursday as part of a session titled “The Inflation Boogeyman—How Do I Protect My Portfolio?” with co-panelists Christopher Goolgasian of State Street Global Advisors and Mark Carlson of Northern Trust.

“People were told for so long that inflation doesn’t matter,” Merk said at the 2012 FPA Experience in San Antonio on Monday. “The expectation of inflation did spike after the announcement of QE3, and the Fed had been buying TIPs, which has made them very pricey for the public as a hedge.”

He added that the consumer price index may not be enough of a protection, especially with health care inflation, because the government has simply been changing the definition of CPI, as was seen during the debt debate last summer.

“The question then becomes why someone is buying equities,” he posited. “Is it because John Chambers of Cisco is a great CEO, or because of QE3?

QE3 makes us more dependent on the Fed, but “why would you take on the noise of the Fed if you just want an inflationary hedge?”

Currency is volatile, but not if it’s not leveraged, he explained.

“The annualized standard deviation of the S&P 500 is in the low 20% range, which spiked to the low 40% range during 2008,” Merk said. “The dollar index was in the low teens and spiked to 13%.”

With currency, he concluded, you can take a direct view of what policymakers are up to without the noise of the stock market.

“People say you have to research all these currencies, but what are 10 currencies versus 1,000 stocks?” he said. “But clearly you have to do your homework.”


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