Stronger dollar is a bad omen

Ole Hansen, Head of Commodity Strategy at the Dutch Saxo Bank expects a permanent gold rally. In the interview he gave to he talks about how government bonds are becoming more and more risky, and that the approaching return increases will cause significant losses to long-term investors. The legendary security of bonds may end, but the situation is better on share markets – at least as for dividend-paying securities of large and stable companies. We cannot expect a substantial economic growth in 2017; it is more likely that we will have to face recession – something our interviewee holds the appreciating dollar responsible for.

Péter Zentai: Do you agree that the interventions by central banks will live up to their expectations and there will be a stable worldwide economic growth?
Ole Hansen:
I think there are more signs that should cause us worry. The most problematic case – which is connected to easing by central banks – is the global bond market bubble, which will cause extreme troubles for investors once it bursts. The consequences are unpredictable.

Fed will certainly increase interest-rate after the presidential elections…
This is what they have been indicating in their statements. By doing so – intentionally or not – it strengthens the dollar. However, a stronger dollar hurts world economy. Its appreciation only causes enormous problems for emerging, and primarily raw material producer economies that are dependent on it: foreign exchange depreciates, import, which is so essential for them becomes more expensive, and their debt in mainly US dollar keeps growing.
American central banks will not be able to stop this in the near future.
The problems of emerging countries spill over to the developed world and will worsen the situation of big western and Japanese banks, which even now can barely operate in a world lacking interest-rates.

What shall we hold onto in 2017?
Central banks have run out of munitions; further quantitative easing would not make any sense. They did everything they could to somewhat recover the economy. However, they did not really succeed; there is no significant and stable growth.
From next year – according to the expectations of central banks – it is up to politics and governments to apply fiscal stimulants, contribution rationalisations, and tax reliefs. These measures, however, have been stopped by numerous geopolitical and domestic issues, and could lead to internal and external indebtedness, while banks that are required for lending are in a quite bad situation.

What assets do you recommend to investors?
We have to address that long-term investors have appeared on gold, silver, and noble metal markets in general.
It would be a mistake if one assumed that the gold rally has ended in May. It was a temporary stop due to technical issues; mainly the appreciation of the dollar hindered speculators. Now, the appreciation of noble metals is going to be a stable and permanent process, fuelled by geopolitical uncertainties, and the low chance for economic growth or higher interest-rates in the near future. It is an entirely different question that gold might not be a profiting investment with the appreciating dollar as a starting point. However, in depreciating foreign exchange, in euro or yuan, investments in noble metals will definitely pay off.

But there is a price hike on the world market of oil…
That has already ended. According to my prediction, the price of a barrel will be around 45-55 dollars in the next year, and in the coming weeks or months it could even drop to 40 dollars. Though, in two or three years’ time, we can indeed expect increased demand, which will push prices up to 60 dollars. However, at that level, American shale oil producers will enter and stabilize the market since they keep decreasing their production costs.

For the first time, Russia and leading OPEC member states show willingness to cooperate in freezing production levels, which has a clear price increasing effect…
This ‘deal’ proved to be quite short-lived. Saudi Arabia and Iran, just like in the past decades, still cannot row in the same boat: they are sworn enemies in every field. While there were grandiosely presented deals and arrangements, Libya and Nigeria entered the market with eight hundred thousand barrels a day of extra supply – and these two countries are soon going to double this quantity again. The daily oversupply is enormous. Russia – instead of taking measures to lower production costs – tries to pressure the market by freezing production, but this is not sustainable.
We shall say that oil prices will not increase in the near future.

So then it leaves gold only.
And shares – the single asset class that promises positive returns in case of companies that generate profit and distribute dividends to investors. While government bonds used to be the safest, now they are becoming one of the most uncertain assets. Nowadays, investors can find safeness – strangely – in stable companies’ shares.
Investors shall focus on shares, gold, and dollar in the next twelve months.

Original date of Hungarian publication: October 27, 2016