"We don't think the Fed will sit by idly," Axel Merk says in predicting another inflationary blast of quantitative easing
"The global economy is healing, so we are told. Yet, the moment the Federal Reserve (Fed) indicates just that -- and thus implying no additional stimulus may be warranted -- the markets appear to throw a tantrum. In the process, the U.S. dollar has enjoyed what may be a temporary lift." So notes Axel Merk of Merk Funds in a new paper titled "Recovery -- Who Are We Kidding?"
"In our view, the reason why the Fed is committed to keeping rates low until the end of 2014 is precisely because the Fed does not want to be perceived as tightening too early. Why the end of 2014? Well, because it's not today or tomorrow. We believe nobody -- not even at the Fed -- knows whether the end of 2014 is the right date. ...
"Deflationary forces have favored the U.S. dollar and been a negative for gold
. As indicated, however, we don't think the Fed will sit by idly as the markets price in tightening before the economy is 'ready.' As such, a flight into the dollar out of gold
might be an opportunity to diversify out of the dollar into a basket of hard currencies, including gold
"With regard to the stock market, it may do well should the Fed think of another round of easing, but let's keep in mind that the stock market has had a tremendous rally in recent months.
"If investors consider investing in the stock market because of the Fed's monetary policy, why not express that same view in the currency market? After all, currencies -- when no leverage is employed -- are historically less volatile than domestic (or international) equities. Currencies may give investors the opportunity to take advantage of the risks and opportunities provided by our policy makers without taking on the equity risk."