Outrageous! This is what gets gold to $3,000 in 2023, says Saxo Bank
(Kitco News) - Global economic uncertainty and heightened geopolitical tensions will create a "worldwide war economy" that prioritizes domestic supplies and price caps, ensuring that inflation will remain persistently high through 2023.
Taken to its extreme, this scenario will be very good for gold, with Saxo Bank offering an "outrageous" forecast of $3,000 an ounce.
"2023 is the year that the market finally discovers that inflation is set to remain ablaze for the foreseeable future," Ole Hansen, head of commodity strategy at the Danish bank, said in the report.
In an interview with Kitco News, Hansen added that his price target is not an official forecast, but more of a thought experiment on what happens if extreme scenarios in the global economy unfold.
"It's not so much about being right but starting a discussion on the challenges the global economy faces and how that will impact gold," he said. "Fundamentally, a war economy is inflationary and we expect investors to realize in 2023 that central banks are not going to be able to keep inflation under control."
Hansen said that if inflation remains persistently high, investors will be forced to reevaluate breakeven rates. Any drop in real rate expectations should weaken the U.S. dollar.
Hansen added that gold has been lackluster through most of 2022 as investors continue to have faith that central banks will be able to bring inflation back to 2%. However, he added that 2023 is the year that faith could be shaken.
Hansen said that they see a few scenarios that continue to support higher-for-longer consumer prices, including further development of domestic supply chains, with a particular focus on the energy sector.
A second factor is an improvement in China's economy, which would lead to broad-based demand for raw commodities.
Not only is the Fed expecting to end its tightening cycle early in 2023, but Saxo Bank said that the threat of a global recession will force central banks to pump liquidity back into global financial markets.
These three scenarios taken to the extreme are what would drive gold prices dramatically higher, Hansen said. "Gold slices through the double top near USD 2,075 as if it wasn't there and hurtles to at least $3,000 next year," he said.
Although inflation has fallen from its summer highs, it remains persistently high even as the Federal Reserve prepares to slow the pace of its aggressive monetary policy tightening.
Markets expect the U.S. central bank to raise interest rates by 50 basis points at next week's monetary policy meeting, and they continue to see the Fed Funds rate topping out between 5.00% and 5.25% in the first half of next year.
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USD reserve status to take a hit in 2023
In another "outrageous prediction", the Danish bank sees the U.S. dollar losing its relevance next year as a global reserve currency with nations like China and India and organizations like OPEC+ dealing amongst themselves.
"Recognising the ongoing weaponization of the USD by the U.S. government, non-US allied countries move to leave the USD and the IMF to create an international clearing union (ICU) and a new reserve asset, the Bancor (currency code KEY), using Keynes' original idea from the pre-Bretton Woods days to thumb its nose at the practices of the U.S. in leveraging its power over the international monetary system," said Redmond Wong, Saxo Bank market strategist for Greater China in his report.
Wong noted that currently, 20% of international trade is destined for the U.S.; at the same time, more than a third of international trade is invoiced in U.S. dollars and nearly 60% of global foreign exchange reserves are held in U.S. dollars.
"A natural solution for China and its many trading partners, particularly energy and other commodities exporters, would be to find a new non-national currency reserve asset upon which to trade," he said.
This new global currency would result in non-aligned central banks cutting their U.S. dollar reserves, U.S. Treasury yields soaring and the greenback falling 25% versus a basket of currencies.