The age of uncertainty

The rise in the price of gold and silver seems to be steady and lasting. The coming inflation, the negative government bond yield, the lack of economic growth, the return-focused environment, the extreme market volatility, and the now common political and market uncertainties are all contributing to this.
In the interview Ole Hansen, Head of Commodity Strategy at the Dutch Saxo Bank, predicts a gold price more than 1,400 USD an ounce, and a silver price above 20 USD in 12-16 months. Of course, if Brexit is cancelled, these extreme noble metal market speculations will be alleviated; however, if it does happen – which is the more likely scenario – the price of noble metals can skyrocket quite soon.

Péter Zentai: The murder of Jo Cox MP is a terrible tragedy on its own. How did it affect the global capital market?
Ole Hansen: Seeing the immediate drop in the exchange rate of the dollar and gold, and a rise in British and other European securities’ right after the news of the tragedy, we can say it seems that a terrible murder had to happen so that markets would calm down. The majority of investors firmly believe that the martyrdom of the woman, who so eagerly fought for the remain-campaign, would somewhat affect and mobilize the hesitant and unsure to vote for remain at the referendum on Thursday. The results of the first published public inquiries following her death supported the immediate market reactions: many people are returning the money they kept somewhere relatively safe – from the fear of Brexit – to bond and share markets. Both public opinion and capital investment believe that the UK will not leave the EU.

The general atmosphere around the world is characterized by extremities and fluctuations. Price movements on the commodity and capital markets perfectly reflect that. Am I right, if I say that the most brilliant and well-prepared portfolio managers – let alone retail investors – cannot help but take upon the role of gamblers?
I agree with you to the point that lately the ‘playing fields’ have multiplied, just like the number of ‘players’. This process alone increases unpredictability. We have to face that our only chance is to adapt to this.
Currently, the reason why there is such a chaos on markets is that there is no stable economic growth that investors can hold onto. However, central banks are trying to create it by desperate and extreme QE (quantitative easing). The tension grows even further because Fed’s anticipated interest-rate increase did not happen – the situation of the American market is torn by contradicting labour market data and the uncertainty around the presidential elections.
In the meantime, the European Central Bank has already started purchasing corporate bonds. Hearing this news, the yields of the German Bund (government bonds) dropped below zero percent. The negative government bond-yield environment just further deepens uncertainty. Moreover, it awakens investors’ ‘yield hunting instinct’. Europeans, Japanese, and Americans are eagerly trying to make some profit out of their retirement savings at an unprecedented rate. In the meantime – deliberately or not – we take great risks: the rush on corporate bond market and the fact that even these papers cannot yield to more than zero profit is aggravating. This way, second and third rate bonds are becoming the target of investors, even though serious losses can arise from this process. After all, we know that a lot of money – trillions of dollars – has entered the bond market, we can imagine the chaotic fight, which will take place once interest-rate increase commences.

I can hardly imagine any better scenario than the current one for the gold!
Indeed. The constant objection against gold has always been that by stocking up on this noble metal has never led to any profit. However, in the current situation, this argument is invalid: government bonds, which have been regarded as the most stable shelter, and have always made some profit, now not only return nothing, but they even generate loss. The current uncertainty naturally increases the price of gold and noble metals in general. The market events of the first half year – mainly that the price of crude oil doubled, compared to the low point in the beginning of the year – suggest that this price increasing tendency will continue on raw material markets.

Why will the price of oil go up?
The main reason is that the current 40-50 USD per barrel does not encourage exporters to increase extraction. They too believe that the prices are low, and continuing expensive American research and development on the ‘front’ of shale gas and shale oil would not be worth it at such a low price. Extraction and supply is decreasing, while demand is relatively increasing. This leads to rising prices, so the balance between supply and demand has to be achieved at higher prices.

At the same time, property prices keep increasing. In America and Europe, including Central European economies, such as Hungary, wages are on the rise. Is it a sign of a developing inflation behind the stagnancy?
It is inevitable – at least consumer price inflation is. Inflation and adapting to it, the time of preparation is the ‘golden age of gold’. The steadily rising prices of noble metals – especially silver and gold – are the result of the negative yield of government bonds, along with the low rate of global economic growth, which leads to return deficit and extreme market volatility, and finally, the general political uncertainties. We predict a price of 1400-1450 UDS per ounce for gold, and about 20-21 USD for silver in one year’s time.

Original date of Hungarian publication: June 20, 2016