Eurozone Election Hangover

Axel Merk, Merk Funds

May 7, 2012

With the hangover from elections in the Eurozone lingering, which answer is correct?

a) A socialist is in charge in France;
b) Nobody is in charge in Greece; or
c) None of the above

	White Papers Merk White Papers provide in-depth information into currency as an asset class. Portfolio Benefits of The Currency Asset Class The Currency Asset Class: A New Era of Investment Opportunity The Archive: Merk White Papers

The good news about a socialist running France is that his honeymoon shall be rather short. It took the previous socialist President François Mitterrand two years before he shelved his activist agenda and became a moderate. The market won’t be that patient; that’s why we pick answer c) above: the language of the bond market will be the only language policy makers listen to. The bond market is in charge.

What about Greece? It might be possible to put together a minority government of Antonis Samaras “New Democracy” and the former ruling “PASOK” party that is tolerated by the “Independent Greeks.” Panos Kammenos founded Independent Greeks after disagreeing to the terms of his country’s bailout when he was a member of the New Democracy. In the eyes of the Greeks, Germany and the International Monetary Fund (IMF) appear to be in charge; with anger over yielding to demands of those with money, German flags are frequently put on fire during Greek elections. One way to manage Greece’s future would be to give Greece money with no strings attached, except to tell them that no more money will follow suit. That way, the Greek people will own their own problems and can no longer blame others for their plight. In practice, Greece is likely to fall into chaos at some point, as the country has been unable to achieve a primary surplus, i.e. be able to operate before making interest payments; the question in our view is where the resulting anger will be focused.

What does it mean for the euro? The euro is recovering after a dire Monday morning; keep in mind, though, that much of Asia had a holiday and missed digesting the disappointing U.S. unemployment report; liquidity is low, as London is closed for a holiday. Medium term, however, our bigger concern is that big money, such as the Norwegian sovereign wealth fund, is taking a step back from the Eurozone. As such, the odds of more liquidity provisions from the European Central Bank (ECB) have increased. We believe the euro will underperform other European currencies; note, though, that the world, including the U.S., will remain awash in money. The rocky road will continue as policy makers hope for the best, but plan for the worst. This should bode well for commodity currencies in the medium term; of these, the Canadian Dollar, Norwegian Krone and New Zealand Dollar are currently our favorites.

In an upcoming newsletter, we will dive into different attitudes countries around the world have on the austerity versus growth debate and discuss implications for the U.S. dollar versus the currencies of those regions. Make sure to sign up to our newsletter to be informed as we discuss global dynamics and their impact on currencies. Please also register for our upcoming Webinar on May 22. We manage the Merk Funds, including the Merk Hard Currency Fund. To learn more about the Funds, please visit www.merkfunds.com.

Axel Merk

Manager of the Merk Hard Currency Fund, Asian Currency Fund, Absolute Return Currency Fund, and Currency Enhanced U.S. Equity Fund, www.merkfunds.com

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies.

The Merk Hard Currency Fund (MERKX) seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Merk Asian Currency Fund (MEAFX) seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Absolute Return Currency Fund (MABFX) seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Currency Enhanced U.S. Equity Fund (MUSFX) seeks to generate total returns that exceed that of the S&P 500 Index. By employing a currency overlay, the Merk Currency Enhanced U.S. Equity Fund actively manages U.S. dollar and other currency risk while concurrently providing investment exposure to the S&P 500.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

Since the Funds primarily invest in foreign currencies, changes in currency exchange rates affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, emerging market risk, and relatively illiquid markets. The Funds are subject to interest rate risk, which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities, such as for- ward contracts, which can be volatile and involve various types and degrees of risk. If the U.S. dollar fluctuates in value against currencies the Funds are exposed to, your investment may also fluctuate in value. The Merk Currency Enhanced U.S. Equity Fund may invest in exchange traded funds ("ETFs"). Like stocks, ETFs are subject to fluctuations in market value, may trade at prices above or below net asset value and are subject to direct, as well as indirect fees and expenses. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.