Merk Hard Currency Fund Trusts Europe

You also have a large stake in gold via the streetTracks Gold(GLD Quote) ETF. Is this your statement on inflation?

Gold is the ultimate hard currency. It does not report to any central bank and is not subject to interest rate moves. Gold is benefiting from the negative real interest rates in America. We talk about low headline inflation numbers in the U.S., but most people agree that inflation is quite higher than stated in the core CPI. So when you put your money into a savings account you are losing purchasing power. As long as that is the case, gold will be an attractive alternative because it holds its value in an inflationary environment.

The dollar's rise in 2005 hurt your fund. What is your outlook for the dollar in 2006?

What is going against the dollar is that the ECB is starting to raise rates while the U.S. Fed is ending its interest rate hiking cycle. So the interest rate differential is going to decrease and the trend is going to change. Inflation is picking up in the U.S., which is a negative. And the corporate incentive to repatriate foreign dollars is also ending. The overwhelming theme, of course, is the dramatic current account and trade deficits, which continue to escalate.

But isn't the European economy in worse shape than ours?

The Europeans don't have a trade deficit. In fact, they have a trade surplus. And while the European economy has not done too much in the last couple of years, the savings rate has improved. When Europeans were told they were not going to have enough money to retire, their response was to save. When Americans were told that their pensions were in jeopardy, their response was to take more money out of their homes and charge up their credit cards, so savings declined. In the end, Europe is in a much stronger situation right now when it comes to saving, while America is in a weaker spot.