(07/11/12) You're Overexposed to the Dollar

There are too many ways for the US dollar to creep into your investments unless you take proactive steps away from it, says Axel Merk, who suggests an investment that does this.

Where is the US dollar now and where is it going? Axel Merk is put on the spot here with his crystal ball. Axel, are investors overexposed, do you think, to the US dollar?

Definitely. When investors buy the S&P 500, they think they invest in multinational companies. Most don’t realize that about 90% of the earnings of S&P 500 companies are hedged back into the US dollar.

Similarly, even those buying international mutual funds, most of these mutual funds hold again large multinational companies that try to sell to American consumers. So with that, American investors are very much overexposed to the US dollar.

How much should investors allocate to currency investments?

When we survey investment advisors, we typically get about 4% to 6% as direct allocation to currencies. Other advisors have a more holistic approach, and try to manage the entire currency risk of the investment because even when you invest in the S&P 500, as I indicated, you still have a lot of US dollar currency risk.

Alright, switching gears now: We’re hearing that it's good timing right now to invest in gold. Do you agree with that?

Well, we have a debt-to-GDP ratio of the developed countries of over 100%. In our view, inflation will have to be part of the problem on how these problems are addressed.

Now in Europe, it doesn’t work so well, so default may be part of the answer. But in the US, we have historically been very willing to use a printing press to help out government in managing its deficit. Globally, everybody pursuing austerity is being voted out of office. So we think that gold is going to do very well in the medium to long term in this sort of environment, where the debt is simply not going away and so governments will try to inflate it away.

Okay, a final big-picture question for you. This being an election year, does that make your life easier or more difficult with this kind of uncertainty?

Well, the two candidates we have aren’t all that different, depending on your political persuasion. You may think one has more fiscal discipline than the others, but ultimately both parties, both of these candidates, have shown that they’re willing to spend money in order to get votes, in order to pursue their path.

Inflation is a path of least resistance. Democrats and Republicans agree that ultimately, you may want to debase the amount that you’re paid in entitlements by redefining the CPI, the Consumer Price Indexes.

You’ll find a compromise, but when you have this polarized environment, you’re not going to get major entitlement reform. We simply have the better printing press in the US, and I do believe we’ll use it independent of who’s going to become president.

So for an election year, there’s relatively not as much uncertainty as there has been in past election years.

There’s always a risk that we are right, and that means that there’s a risk that the recent rally we may have had here in the dollar is only temporary, and that we are going to address the problems as they move from Europe to other regions in the world—including in the US where we don’t have sustainable deficits—that the US dollar’s going to be under significantly more pressure.