(Kitco News) - One fund manager is expecting 2016 to be the year of fear. And as the Federal Reserve looks to raise interest rates, the place investors will want to be is \ gold, he said.
In his 2016 outlook, Axel Merk, president & CIO of Merk Investments, warned that the “risk premia” in financial markets is starting to shift as the Federal Reserve tries to engineer an exit strategy from its years of ultra-loose monetary policy. He explained that the shifting risk environment and reduced liquidity will lead to more volatility and that could be disastrous for complacent investors who have been chasing gains in equity and bond markets.
“Complacently is going to lead to fear,” he said in an interview with Kitco News on Thursday.
Merk added that he sees 2016 as the start of an attitude shift in the marketplace, where investors take a more conservative stance; selling into equity rallies to preserve the gains they have made instead of buying dips.
He explained that he sees the gold market benefiting from growing defensive strategies as investors look for assets with a low correlation to equity and bond markets, preserving their wealth.
What makes gold a good investment is its simplicity he said. “It’s just a brick. It doesn’t do anything. It is the world around it that changes,” he said. “But, I think next year investors are going to look for that type of stability.”
Another asset that has a low correlation to equities and bonds is cash, said Merk. But he added that he doesn’t see that as a great option because, despite rising nominal interest rates, real rates will be negative, reducing the U.S. dollar’s purchasing power.
Merk said that he also likes gold in 2016 because of the high level of negative sentiment currently in the marketplace. While investing in the U.S. dollar could be a good “safe-haven” strategy, Merk argued that he doesn’t see much potential in the long run.
“A lot of good news has been priced into the U.S. dollar and a lot of bad news has been priced into gold,” he said. “Everybody says that you have to be out of gold. When everybody says something you should be careful.”
While he wouldn’t rule out more short-term weakness in gold, Merk explained that he is looking at a longer-term risk/reward scenario. The risk of gold going down 20% is dramatically less than equity markets going down 20%, he said.
“The U.S. economy has done reasonable well compared to the rest of the world but at the same time the markets are tired.” he said. “The best of the money is made just before the market turns around.”
By Neils Christensen of Kitco News; nchristensen@kitco.com
Follow me on Twitter @neils_C
