Gold Looks Attractive As Higher Volatility Makes Risk Assets Expensive - Axel Merk
(Kitco News)- Monday’sbiggest one-day price drop in the Dow Jones should be a way up call forinvestors that they need to start taking risk management more seriously,according to one asset manager.
In atelephone interview with Kitco News, Axel Merk, chief investment officer ofMerk Investments, said that he doesn’t think the unprecedented drop in equitiesMonday, coupled with a rise in volatility are heralds of a massive marketcrash. However, he added the price action is a signal that the environment ischanging as volatility and inflation rise. In this shifting environment,investors should take more defensive positions in their portfolio.
Merk’scomments come as the Cboe Volatility Index saw its biggest price change onrecord and remains at its highest level in nine years. He added that in thisenvironment he sees gold as an important portfolio diversify.
“Volatilityis going higher. We are not going to back to sub 10 VIX for months at a time,”he said. “When volatility rises risk assets become expensive. Gold looksattractive as risks assets become more expensive.”
Not only isvolatility rising, but Merk noted that inflation expectations continue to buildand U.S. bond yields push higher. He explained that equity valuations look evenmore expensive as inflation picks up. Inthis environment, he said that he expects to see more corrective selloffs -it’s unlikely they will be 1,500-point drops.
“The FederalReserve is going continue to hike interest rates and there will be lessquantitative easing. These factors mean that there will be further headwinds torisk assets,” he said.
While goldonly saw modest gains following Monday’s flash crash, Merk said that the assetcontinues to do its job. April gold futures have seen some moderate sellingpressure Tuesday, last trading at $1,331.20 an ounce, down 0.40% on the day.
Merk warnedthat the gold market will not be immune to further weakness, but he does expectthe yellow metal to outperform equity markets.
“Gold waspretty boring yesterday, but I will take boring over a 1,500 point drop anyday,” he said. “Gold is not always the best diversifier, but it is the easiestone.”
Merk addedthat he thinks that gold will look even more attractive as a long-term asset ashe expects the U.S. dollar to continue to weaken. Although the U.S. dollarbenefits as a safe-haven asset because investors need U.S. dollars to buytreasuries, Merk said he expects the greenback to underperform other globalcurrencies, in particular, the euro.
Inflation isnot just rising in the U.S., but Europe will have to adjust their inflationexpectations, which could force the European Central Bank to tighten itsmonetary policy, he said.
Ultimately,Merk said that investors need to be better prepared for a shifting investmentenvironment, which means having a balanced portfolio that can withstandshort-term uncertainty. He added investors need to start stress testing theirportfolios, taking money off the table from their recent gains and moving thatcapital into more defensive assets.
Along withgold, Merk said that in his personal investment portfolio, he is betting on rising short-term rates,particularly in Europe.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.