Volatility Will Pick Up And Gold Is A Good Diversifier - Axel Merk
(Kitco News)- Globaluncertainty resulting from the U.S. tax reform and new European financialmarket regulations will continue to support gold prices as financial market liquidity dries upand volatility rises, according to one fund manager.
Axel Merk,president and chief investment officer at Merk Investments, said that somebanks are still trying to grasp the full implications of all the new changes inthe tax code. He added that specifically there is a lot of uncertainty over theprovision that taxes foreign companies that do business in the U.S. Thecompanies are taxed 10% on all money taken out the U.S. also known as baseerosion tax benefits.
Merk saidthere are concerns that this provision could contravene World TradeOrganization rules and other treaties. But He added that this could make somefinancial institutions hesitant to do more business in America.
“The banksdon’t know what to do with this tax law,” he said. “If you are a foreign bankand you think you are going to get taxed on money taken out of the country youare going to be reluctant to do business. Banks transfer money on a regularbased on their funding needs. The credit available from foreign banks is goingto dropand that is going to reduce liquidity in markets.”
But it’snot just the U.S. Merk said that Europe is facing issues after sweepingregulator reform was introduced last week: Markets in Financial InstrumentsDirective, also referred to as MIFID II. The new regulations are designed to offer more protection for investorsand add more transparency for all financial markets: from equities to fixedincome, exchange-traded fundsand foreign exchange.
“It’s amonster for markets and we don’t know what the impact is going to be and thatshould be good for gold,” he said.
Merk saidthat he remains bullish on gold as an important and straightforward portfoliodiversifier in a world that continues to ignore risk. His comments come as theCBOE Volatility Index ($VIX) remains near multi-year lows around 9 points.
With somuch financial uncertainty weighing on market liquidity, Mark said that it isonly a matter of time before volatility picks up. He added that current levelsare unstainable.
“Just lookas your clock on the computer, as certain as the clock ticks forward,volatility will pick up again,” he said. “Historically gold does well asvolatility rises.”
While Merksees an opportunity for the gold market, he sees further weakness in the U.Sdollar. 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 isstill in the early stages. He explained that on an interest rate basis, theeuro has more to gain as its monetary policy catches up to the U.S.
Merk addedthat he doesn’t see the new tax reform adding much stimulus to the U.S. economyas tax cuts have been replaced with new taxes and fewer deductions.
“I don’t think my taxes are going to change soall I’m left with is confusion,” he said. “A lot of companies will now have torestructure their tax plans. It’s going to be messy and it’s going to take awhile for companies to figure out what they are going to do.
By Neils ChristensenFor Kitco News
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