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By Nadia Papagiannis, CFA | 09-15-2010 05:14 PM

Merk: Why Currencies as an Alternative

Currency markets can provide liquidity, diversification, and, surprisingly, less volatility than equities, says Merk Investments' Axel Merk.

Nadia Papagiannis: So we have problems with investing in equities in general. We have problems investing in U.S. dollar fixed income. So, where do we go? So that basically leaves currencies and international currencies.

Axel Merk: It keeps Morningstar in business to try to help investors to go through these issues. We're trying to do it on the currency side because in the currency side, first of all, currencies are traditionally less volatile, unlike their reputation. When the euro moves from 128 to 129, or 129 to 130 it makes headlines, but a stock with equivalent move doesn't make headlines.

You have the liquidity, dwarfing the liquidity in other spaces. You can by design create a portfolio that has a low correlation. For example, you take a long position on Australia, short position on New Zealand, on the currency, we cannot guarantee to make money with that, but the returns generated by that sort of strategy almost certainly will have a low correlation to most other things investors will be doing.

And so, you have something that many investors are not utilizing enough. And so that is why we are offering mutual funds in that space to try to give investors another opportunity to find diversification in an environment that's increasingly difficult to find diversification in.

Papagiannis: So, you're talking about the currency markets, how they are not as volatile as the headlines make them out to be. Why is that?

Merk: Well, first of all, most folks in the currency market use leverage, but you don't have to use leverage in the currency market. We don't use leverage typically on any of our funds. And the reason why a currency move makes headlines is because it affects millions of people; it affects major economies when the euro or the yen moves by a cent. That affects the export capacity of a country. And so it's important, it's relevant.

But at the same time if you look at the journalist covering the space they tend to focus on the tick-by-tick data or what's happening in a day. At the same time it is quite possible to invest in currencies on the longer-term basis; that's what we focus on. Making a macro call that if a country spends and prints more money, well odds are that that currency may weaken over time. We happen to be more positive on a Eurozone than many people are, because in the Eurozone over €240 billion in liquidity was withdrawn in July. Austerity measures are implemented seriously. We think there is value to be had there. And they are taking care of the problems, whereas in the U.S. we're not. And so you are able to make investment decisions based on longer term fundamental causes while in the currency market.

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