The Chief Economist and Chief Investment Officer at Saxo Bank: Things Are About To Take A Different Turn In 2015 - Gold will likely go higher in 2015

This article is based on an interview conducted by Claudio Grass, the Managing Director of Global Gold based in Switzerland, with Mr. Steen Jakobsen. Mr. Jakobsen is the Chief Economist and Chief Investment Officer at Saxo Bank, where he has served for a total of 14 years, including two years where he left to act as Chief Investment officer of Limus Capital. He is a renowned economist and trader with more than 25 years of experience in the fields of proprietary trading and alternative investment. The topics covered in the interview range from monetary policy to business cycles and precious metals. This is the full interview in Q&A format.

Current monetary policy has made the public more aware and more critical of Policymakers

Mr. Jakobsen previously described the western central banks’ policies of quantitative easing (QE) as “unconventional”. He has always made an analogy that doing quantitative easing and easy monetary policy is like breaking your arm: putting a cast on it protects the arm from further damage, but keeping the cast in place for 5 years results in a loss of 90% of muscle power which is exactly what quantitative easing does to the economy. He points out that there is no empirical or practical indication of any link between low interest rates and easy monetary policy and the ability to regenerate growth. According to Jakobsen, growth is driven by the optimism and willingness to invest in real people and real jobs. What QE does is simply that the individual gets paid through and by the virtue of quantitative easing with paper money. In Jakobsen’s view, we have never been allowed to have a down cycle since 2008. But now, there is finally going to be a down cycle because central planners can’t print more money. As Jakobsen puts it: “Now is the time for the real economy to take over”.

Jakobsen is a firm believer in the business cycle, and sees a seven-year cycle in play. The last peaks in the cycle were in 2000 and 2007. Before that, it was in 1993, and before that, it was in 1986. There are exactly 7 years between the peaks and the lows that followed and that is why he is so optimistic about 2015. We will see a new low for everything next year, which could trigger a significant improvement towards year-end. Mr. Jakobsen believes that things are so bad they can only get better. Take Russia, for instance. Today it is minutes, maximum days away from having capital restrictions. Capital restrictions are also in place in Cyprus and in Iceland. This suggests that the world is turning inwards and not outwards. But, according to Jakobsen that creates more crises and not less crises, and that is good news!

Focus on the micro-level!

From a business cycle point of view, Jakobsen believes there could be a potential recovery. He says: “As you know, I go to over 30 countries and what really makes me positive is that wherever I go, whether Argentina, South Africa, Australia, Indonesia, wherever, I always meet smart business people, people who want to do the right thing, people who work hard. And this is in countries which are perceived to be negative on a macro-scale. So, what I am really arguing for is different, I think on the micro-level. I think entrepreneus on an individual are strong enough and know what to do in a crisis and do what is right, maybe not the first day but over time you will. So I think the seven-year cycle is more relevant for me, because I think it takes seven years, maybe four years for all the policy mistakes to run out of steam and then the real economy takes over. It is really my firm belief in the little guy, the little business man, the SMEs. Don’t forget, if you have a debt, someone else has a credit, right? Of course, what we’ve seen over the business cycle is that the total levels of society remain the same but if the levels come down through the haircut, we will be in a better position.”

Gold will likely go higher in 2015

Being the Managing Director of a bullion service provider, Claudio Grass explains that gold is one of the safest assets. In contrast to most other assets, it is something that has been highly valued for thousands of years and if owned and stored correctly lacks any form of counterparty risks. Gold is a form of monetary insurance, especially in the current environment. What is Steen Jakobsen’s take on this viewpoint? In fact, he partly agrees. As an economist and as a practical guy he has a hard time with the argument of having the safest storage of value in an asset you dig out of the ground. As an economist, he would rather invest in people and in things one believes in than in gold. But having said that, of course the reality is that gold is the one asset that survived over time and throughout history and not only decades, but centuries and thousands of years. So he buys the argument.

Jakobsen argues that in the current economic environment that what a metals trader needs to focus on is deflation. When deflation bottoms out, which is something likely to happen during Q1 of 2015, it will be the biggest buy signal for metals. Jakobsen’s base scenario is that Q1 and Q2 will become the worst part of the business cycle with the lowest inflation expectation, the lowest growth, the lowest ability to do anything and increasing volatility at the same time. But he believes that as this low energy, as these low interest rates and as the terms of trade for Europe improve, we will see a better second half than we’ll see a first half. And underneath that, the inflation expectation should pick up. Jakobsen sums up his outlook for the near term saying: “I think right now, gold is overall driven by a strong Dollar and negative inflation expectation. I think both will very much stabilize by the end of December and as we come towards the end of Q1 we’ll see very clear signs that the crisis is getting deeper but that inflation expectation is coming back. I am increasing my exposure into metals and commodities; I am already quite exposed to commodities through aluminum and mining. I’ve been buying very slowly into mines. I think actually metals, mines and people’s real jobs are coming back. And that is good. Low demand is good for inflation… so for the first time in many years I’m actually seeing a better end to next year than I am seeing an end to this year.”