Volatility Will Pick Up And Gold Is A Good Diversifier - Axel Merk
(Kitco News) - Global uncertainty resulting from the U.S. tax reform and new European financial market regulations will continue to support gold prices as financial market liquidity dries up and volatility rises, according to one fund manager.
Axel Merk, president and chief investment officer at Merk Investments, said that some banks are still trying to grasp the full implications of all the new changes in the tax code. He added that specifically there is a lot of uncertainty over the provision that taxes foreign companies that do business in the U.S. The companies are taxed 10% on all money taken out the U.S. also known as base erosion tax benefits.
Merk said there are concerns that this provision could contravene World Trade Organization rules and other treaties. But He added that this could make some financial institutions hesitant to do more business in America.
“The banks don’t know what to do with this tax law,” he said. “If you are a foreign bank and you think you are going to get taxed on money taken out of the country you are going to be reluctant to do business. Banks transfer money on a regular based on their funding needs. The credit available from foreign banks is going to dropand that is going to reduce liquidity in markets.”
But it’s not just the U.S. Merk said that Europe is facing issues after sweeping regulator reform was introduced last week: Markets in Financial Instruments Directive, also referred to as MIFID II. The new regulations are designed to offer more protection for investors and add more transparency for all financial markets: from equities to fixed income, exchange-traded fundsand foreign exchange.
“It’s a monster for markets and we don’t know what the impact is going to be and that should be good for gold,” he said.
Merk said that he remains bullish on gold as an important and straightforward portfolio diversifier in a world that continues to ignore risk. His comments come as the CBOE Volatility Index ($VIX) remains near multi-year lows around 9 points.
With so much financial uncertainty weighing on market liquidity, Mark said that it is only a matter of time before volatility picks up. He added that current levels are unstainable.
“Just look as your clock on the computer, as certain as the clock ticks forward, volatility will pick up again,” he said. “Historically gold does well as volatility rises.”
While Merk sees an opportunity for the gold market, he sees further weakness in the U.S dollar. Although the Federal Reserve is forecasting three rate hikes in 2018, he said that the U.S. central bank is late in its hiking cycle, while Europe is still in the early stages. He explained that on an interest rate basis, the euro has more to gain as its monetary policy catches up to the U.S.
Merk added that he doesn’t see the new tax reform adding much stimulus to the U.S. economy as tax cuts have been replaced with new taxes and fewer deductions.
“I don’t think my taxes are going to change so all I’m left with is confusion,” he said. “A lot of companies will now have to restructure their tax plans. It’s going to be messy and it’s going to take a while for companies to figure out what they are going to do.