Gold Is Simplest Diversifier Against Overvalued US Dollar & Stocks (Video)

Axel Merk spoke with Greg Hunter of USAWatchdog about his reasons for buying gold. For Merk, it comes down to two things. First, the Federal Reserve and other central banks have trapped themselves – real interest rates need to remain near zero or negative. Second, basic valuations are way overextended – US stocks and the dollar are both due for painful corrections.

The dollar isn’t has healthy as it used to be. The story line had been that rates are going to go through the roof, because everything is fantastic in the US and everywhere else is going to go to hell. The real world is more tones of grey. In that sort of environment, the dollar, just like the stock market, is way over extended…”

Highlights from the interview:

“When you look at cash paying negative interest rates on a real basis after inflation, then a brick [of gold] suddenly doesn’t look so bad anymore. The Federal Reserve has had a policy of near-zero interest rates, and has been trying to keep rates so low that after inflation, you’ll have a negative return. I would allege that the Fed is all but promising to be behind the curve. That means even as the Federal Reserve is trying to raise rates – emphasis on ‘trying’ – and as they eventually will, they will be behind inflation. That means if inflation is going to tick up, yes they will raise rates – but net, real interest rates going to continue to be negative. And if I look out a decade from now, I don’t see how the US, Europe, or Japan or many other countries can afford positive real interest rates. Then, of course, if you look at valuations, I happen to think these stocks are expensive and we are due here for a bear market… For all those reasons I think gold is a simple answer investors should be looking at as diversifier…

“What the central banks have been achieving in recent years – they’ve been breeding complacency. When interest rates are at these extraordinary low levels, what happens is that – we see it in the junk bonds, for example. They don’t yield anything. You see it in the eurozone… Peripheral debt doesn’t yield anything. The same thing happens in the stock market. The way you see it in the stock market is volatility has been very low. When volatility is low and prices are rising, what can possibly go wrong? You buy stocks. The thing is, what happened this summer, what has changed this – I think we’ve kind of turned the switch – rather than the glass being half empty, where people are buying the dips. They’re now going to sell the rallies…

“At some point, [the Fed] will try to raise rates again and this taper tantrum, or whatever you want to call it, is going to come back. The reason it is coming back is because it has to come back. With rates going back away from the zero level, risk premia have to rise. That means fear has to come back into the market. Volatility has to go up. And in an economy where you’ve based a recovery on asset price inflation, you have a big problem on your hands…

“The dollar rally has pretty much evaporated, although people aren’t aware of it yet. Even Janet Yellen, in her latest press conference, talked about the continued rise of the dollar. Well, between the most recent two FOMC meetings, the dollar fell versus all but one major currency, yet she talked about the rising dollar. The reason she did that is because the index she looks at looks at emerging markets, and those have had some problems… The dollar isn’t has healthy as it used to be. The story line had been that rates are going to go through the roof, because everything is fantastic in the US and everywhere else is going to go to hell. The real world is more tones of grey. In that sort of environment, the dollar, just like the stock market, is way over extended…

“People always like god looking backwards, but looking forward, they’re always the same thing – ‘Why should I buy this brick when there are other entities around?’ Well, because the pricing might not be right for those things. Ultimately what is going to happen, at some point it is going to take on a momentum of its own, and then we’re going to get the momentum players come in and gold is going to take off. That’s usually when I get more cautious. I don’t like it when everybody else likes what I have…”

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