Steen Jakobsen Increased Its Gold Investments To 20% - a favourite
posted on
Oct 05, 2015 07:35PM
Golden Minerals is a junior silver producer with a strong growth profile, listed on both the NYSE Amex and TSX.
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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:Macroeconomics.com)
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:
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:
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