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Outrageous outcomes? Not quite, if inflation continues at this rate: Saxo

Bryan Wu
Bryan Wu • 7 min read
Outrageous outcomes? Not quite, if inflation continues at this rate: Saxo
Saxo’s outrageous predictions for 2023 include a UK which, under a new Labour government, calls for a referendum to rejoin the EU — sending the pound sterling back 10% up versus the euro. Credit: Saxo
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Gold prices surged to a nearly two-year high of US$2,000 (around $2,700) per ounce in March this year, only to drop to below US$1,8000 because of a firmer dollar, as investors ponder inflationary data and the magnitude of rate hikes to come.

Yet, if central banks fail to keep inflation under control, gold might rocket to US$3,000 in 2023 — as investors finally come to terms with the fact that inflation will remain “ablaze” for the foreseeable future and is not merely “transitory”, says Ole Hansen, Saxo Bank’s head of commodity strategy.

This conjecture comes from Saxo Bank’s 20th annual Outrageous Predictions, an attempt not to be correct but to explore ideas and circumstances that the market may not yet have considered, to provoke insightful discussions.

Saxo qualifies that these 10 predictions do not constitute its baseline 2023 forecasts but notes that outrageous events with the element of surprise bring about significant market moves.

The surreal nature of the world in the past several years has allowed some of Saxo’s past predictions to materialise. For example, Saxo — citing the lack of investments in renewable energy — predicted at the end of 2021 that the plan to end fossil fuels would receive a “rain check”. Some three months later, Russia invaded Ukraine, sending energy prices spiking, says Hansen.

The war economy

See also: Winning the loser’s game

The unabating conflict between Russia and Ukraine on the doorstep of continental Europe has inspired some of Saxo’s calls. Three of its other predictions for 2023 examine how Europe may respond to the crisis in Ukraine in a new era of increasingly fickle US politics and politicians no longer as committed to continental security.

Thus, in recognising that national security is one of its “highest priorities”, EU members will stump up EUR10 trillion ($14.25 trillion) over 20 years to form the EU Armed Forces by 2028. The bid to arm this new army will spur leading European weapons contractors to outperform the broader European market by 25%, says head of FX strategy John Hardy and head of macro strategy Christopher Dembik.

Next, Dembik spots the political dysfunction taking shape in France, despite French President Emmanuel Macron winning his second term in June 2022. The Saxo pundit says that
subsequent legislative elections saw Macron’s party in a minority, forced to make compromises — and could lead to his resignation as soon as early 2023.

See also: Time to invest in Asia Pacific real estate market: M&G Real Estate says

With Macron’s resignation, Dembik expects the euro to suffer from an initial “wobble” and then eventually stabilise. “The sense of crisis galvanises a broader anti-populist coalition under new leadership,” he explains, adding that French and German sovereign debt bonds could also converge.

Finally, in a callback to Saxo’s 2015 forecast for the UK’s EU referendum — that ultimately materialise — the tables might turn in 2023. Market strategist Jessica Amir predicts that the UK will suddenly find itself far too small to pretend it can remain an independent actor in a much bigger world — and hold an “UnBrexit” referendum next year.

The way Amir sees it, the record brief tenure of Elizabeth Truss as UK’s prime minister made the country’s policy dilemma clear. “Supply-side tax cuts and demand-boosting subsidies for energy are a toxic cocktail for a country’s bond and currency markets when that country runs massive twin budget and trade deficits,” Amir says.

She predicts that current PM Rishi Sunak and Chancellor Jeremy Hunt will take Tory popularity ratings to
unheard-of lows as their brutal fiscal programme throws the country into a crushing recession, with unemployment soaring and, ironically, deficits soaring too as tax revenues dry up.

In the event of a snap election and a Labour win next year, with the promise of an “UnBrexit” referendum
and a win for the “ReJoin” vote, Amir says the pound sterling will recover 10% compared to the euro and 15% compared to the Swiss franc on the anticipated boost to the London financial services sector, after a weak performance in early 2023.

Two sides of the dollar bill

As Europe faces a shooting war, the currency war could intensify elsewhere. Greater China market strategist Redmond Wong is provisionally forecasting that in recognition of the US government’s ongoing weaponisation of the US dollar, non-US-allied countries will walk out of the IMF and agree to trade with new reserve assets.

For more stories about where money flows, click here for Capital Section

While less than a fifth of international trade is destined for the US, Wong says over a third of international trade is invoiced in USD, and nearly 60% of global foreign exchange reserves are in USD. “The ban on transactions with Russian sovereign entities in February 2022 after Russia’s invasion of Ukraine sent shock waves across countries not allied militarily with the US as the magnitude of the ban far exceeded sanctions on Iran, Venezuela and other countries in recent decades,” he explains.

As such, these countries wonder if their US assets — and even their assets in euro, Japanese yen and British pound — could be subjected to freeze orders arbitrarily imposed by the US and its allies overnight.

China’s renminbi has been touted by many as the new reserve currency, but Wong says China prefers to have fuller control over its currency and has shown no interest in abandoning cross-border capital controls. Another important aspect hampering the use of the renminbi in trade is that many non-US allies are wary of China’s rise in influence and power, he adds.

Wong believes that a natural solution for China and its many trading partners, particularly energy and other commodities exporters, will be to find a new non-national currency reserve asset upon which to trade.

He predicts an economically-defining conference attended by the Opec+ countries, mainland China,
Hong Kong, India, Brazil, Pakistan, Central Asian countries, and tens of African Union members to set up an international clearing union based on a new accounting unit and reserve asset.

This would see non-aligned central banks vastly cutting their USD reserves, sending US Treasury yields soaring and the US dollar falling 25% compared to a basket of currencies trading with the new asset.

When inflation persists

This or any similar crisis for the USD could set the wheels in motion for Hansen’s prediction on gold. He reckons that Fed policy tightening and quantitative tightening could drive a new snag in US treasury markets and force new “sneaky” measures to contain treasury market volatility that essentially amounts to new de facto quantitative easing.

And with the arrival of spring, Hansen says China could decide to pivot further away from its zero-Covid policy, touting effective treatment and possibly even a new vaccine. “Chinese demand unleashed again drives a profound new surge in commodity prices, sending inflation soaring, especially in increasingly weak USD terms as the Fed’s new softening on its stance punishes the greenback. Under-owned gold rips higher on the sea-change reset in forward real interest rate implications of this new backdrop.”

On top of surging inflation, Hansen predicts that gold could receive a “blast of support” from three directions. First, the geopolitical backdrop of an increasing war economy mentality of self-reliance and minimising holdings of foreign FX reserves preferring gold.

Second, massive investments in new national security priorities, including energy sources, the energy transition and supply chains, would also spur gold prices upwards. Finally, policymakers moving to avoid a debacle in debt markets as a mild actual growth recession — but not in nominal prices — sees global liquidity on the rise.

According to him, these could be the requisite conditions for gold to slice through the double top near US$2,075 and reach at least US$3,000 next year while the VanEck Junior Gold Miners index, which measures a basket of early stage gold miners, quadruples in value.

In 2023, Saxo says investors could risk overestimating the likely recession’s positive impact on inflation. “With or without a housing and credit recession, a nation’s almost inexhaustible need to invest in the new priorities of the war economy will ensure a tilt toward more inflation risks. From securing long-term energy supplies to reshoring production to building local supply chains for vital goods and expanding military capabilities, any slowdown in demand from the private sector will be compensated, and then some, by public sector spending.”

Supposing Saxo’s thesis of the war economy proves correct in 2023, persistent inflation is to be expected — and if inflation were to continue any quicker than half its pace in 2022, Saxo says it can almost guarantee outrageous outcomes.

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