Steen Jakobsen Increased Its Gold Investments To 20%

Written by Steen Jakobsen, Chief Economist & Chief Investment Officer, Saxo Capital Markets.

An economy can’t grow from unproductive investment into real estate, banking and the service industry, which has been Australia’s response to the collapse in mining investment and growth.

Australia is flirting today dangerously with recession as Q2-2015 GDP QoQ printed a weak +0.2% QoQ only avoiding a negative number due to an increase in government spending of +2.2%. To illustrate how weak a +0,2% GDP number is it’s important to understand that technically, Australia has difficulties going into recession as the demographics component rises +1.5% due to strong population growth. (Source:

I remain deeply sceptical of Australia’s own ability to renew and reform but think that global macro trends will finally enforce the much needed changes to the Australian “one trick pony economy”.

Australia remains a political mess with no accountability even within any of the political parties. The cost of doing business in Australia relatively high as unions, arcane labour market laws and little flexibility on the regulatory side makes Australia highly expensive to operate in. The collapse in mining investments was there for everyone to see, but no one from the policy side reacted and worse they even incentivised investors and savers to go long more speculative real estate to replace the lost growth.

I will argue Australia has resigned to accept that the future of Australia is in the hands of the global macro trends, a sad result, as Australia is one country which could design and dictate its own future.

Australia, you have everything: resources, landmass, smart people and demographics. You need to set up a more ambitious agenda and accept that reform and change is the way forward. The best way to illustrate the uphill struggle for Australia is to look at Australia’s terms-of-trade – the price of goods between Australia and its trading partners:

The below chart is from Wall Street Journal:


The terms of trade have collapsed more than 30% since the commodity cycle peaked in 2010/11 and like the rest of the world the ”deficit” in GDP growth has been filled by expanding the credit in the case of Australia from households significantly.

Australia and its currency AUD is an excellent proxy for world growth – being long the AUD you are long: China, world growth, iron ore, agriculture, metals and short the USD – the exact things I want to be long right now.

The last few quarters of macro trends has been a perfect storm for emerging markets and Australia but the help is around the corner in my opinion: The storm was started by the fact that global debt since the Great Financial Crisis has increased by 57 trillion US dollars (Source: McKinsey report: Debt and not so much deleveraging) or an increase in debt to GDP globally by 17% to 286% on average!

In other words, the slight growth experienced since the GFC is and has almost entirely been financed through extending more cheap credit. Half of the $57bn of new debt was originated by Australia’s major trading partners: Emerging markets and China. They funded their deficits and negative capital flows by going to the US capital market and raising USD debt. This worked smartly as long as interest rates were “low for longer….” and the USD remained cheap. But when the dollar started appreciating the problems began to show:

  • A strong dollar reduces the demand for commodities, increasing the capital needed to finance emerging market economies, which then import less capital goods and other commodities reducing the exports from developed markets like the US, Europe and Australia.
  • No-one benefits from a stronger USD in a global economy where money is based on a FIAT money system, financed in USD, with USD reserves and USD as the transaction currency for most goods traded! Welcome perfect storm!

However there is a silver lining: By definition the path of least resistance for higher growth then becomes a cheaper USD! Something which I think will start to happen especially now that Federal Reserve managed to lose the little credibility it had left post its non-hike in September.

Fed windows on hiking rates is closing: US growth remains disappointing, China and world growth keep going down, lower commodity prices is lowering inflation which means that going into October there is my estimation equal chances of the Fed’s next move being a hike as being a cut in rates (quantitative easing mark 4!). This a dramatic change since this summer, but also something which could save Australia from the abyss of recession.

Saxo Capital Markets main scenario for balance of 2015 and into 2016 is this:

  •  Fed will not hike in 2015. We’ll see a weaker USD.
  • Gold (& silver) will be the best performing asset class into the end of Q1-2016. SCM sees gold in 1400/1450 by end of Q1-2016.
  • AUDUSD is a buy below 0.7000 – SCM estimates the long-term rate needed to support the Australian economy is approximately 0.8000
  •  Mining and metal companies are trading at a deep discounts and emerging markets are the only place in the equity space where you can find both fundamental value and opportunistic plays. Of course going long emerging markets here needs to be selective and with tight stops but the value is immense.
  • China will continue to weaken on top-line growth, but everyone I talk to in shipping insists that freight going to China remains high, indicating a potential for a positive surprise story on China at the end of 2015. Don’t forget China started cutting rates in late Q1 and the normal lead-lag time on monetary policy into the economy is six to nine months and finally, no one it pricing the incoming Silk Road plan properly.

I have personally moved 20% of my assets into gold-related investments and I will begin to increase my exposure to both the AUD itself and the mining sector in Australia over the next few months – the macro case is there:

The market is oversimplifying China risk and underestimating what the Silk Road will mean combined with a highly likely additional global easing coming from European Central Bank and the Bank of Japan certainly but also increasingly likely from the Fed (Q4).

Now I need the price action to confirm the view.

I’m the most optimistic I have been on Australia in the last decade but for one reason only: It can’t get much worse!

– Edited by Clare MacCarthy

Receive these articles per e-mail

Subscribe for the free weekly newsletter and receive 3 papers about physical precious metals investing