Why $3000 Gold Is Possible In 2023

Saxo Bank, a financial institution famous for its original forecasts, has predicted that the gold price could reach $3000 per ounce. It does seem weird, given the fact the current price per ounce is lingering around the $1800 mark. I am not sure if the gold prices would reach this mark in 2023 since price guessing is often a silly game to play. At the same time, there are some fundamentals given by Saxo Bank’s economists that make me totally agree with their overall message. Let me explain them below.

Saxo Bank’s forecasts

Overall, we can say Saxo Bank expects the world to come to a war economy in 2023. The analysts find that in 2023, countries would prioritize sovereign economic gains and self-reliance over globalization. In my view, the forecasts are too far-fetched and the bank itself calls them “outrageous” but I agree with the message there might be major economic and geopolitical challenges. But here is a summary of the predictions and my comments (in italics) on them:

• There will be a political crisis in Europe. The bank predicts French President Macron’s resignation. The recent elections have shown the rise in the popularity of Marie Le Pen, whilst many people in France are unhappy with the energy deficits and soaring inflation. Then, Saxo Bank expects the UK to rejoin the EU. The EU itself would create its own unionized army.

All is possible, of course. But in my opinion, these forecasts are very bold. And yet, the economic crisis in Europe seems to be quite serious. This is true both of the UK and the EU as inflation rates are at multi-decade highs. This could translate into major political shifts. We all know that gold mostly reacts to the following factors: low interest rates, currency depreciation and geopolitical shocks. But if political and economic factors, most notably uncontrollable inflation, come together, then gold prices should rise substantially.

• A trillion-dollar R&D energy project would be created by the world’s richest people due to fossil fuel deficits.

Again, this seems to be far-fetched. But fossil fuel deficits would probably cause officials to ensure energy self-sufficiency. In order to achieve this, they would highly likely enable more exploration and drilling as well as other energy projects. If the energy deficit problem does not get solved, there will be inflationary pressures. In the short run, inflation should make central banks tighten their monetary policies. But if central banks do not manage to get inflation under control in the near future, gold prices should rise.

• Price controls will be actively used to decrease official inflation numbers. Political and economic crises make governments introduce price controls. According to Saxo Bank, this time is no different. This could lead to unpleasant consequences.

Price caps have been common government measures during wartime and even during economic crises since high inflation has dangerous social consequences. Something similar might happen now although it’s not my base-case scenario. Yet, price caps tend to lead to undersupply and “grey” markets. It is uncertain how price caps would affect gold. But generally speaking, economic problems are bullish for gold.

• The OECD countries would ban offshore tax havens.

Developed countries, including the US, have been facing years of budget deficits. In other words, many governments’ tax revenues were sufficiently lower than their expenditures. Yet, there has been no total offshore tax ban until now. However, the situation might change if there is a very serious economic crisis. But I think in real life it would be hard to ban tax havens in other countries altogether. Stricter tax rules should increase the demand for physical gold since it is a good way to store and hide capital. After all, it is quite hard to monitor physical gold stored by private individuals.

• The Japanese yen would be fixed to the US dollar at 200 to ensure stability since Japan’s financial system would be struggling

This is hard to imagine but not impossible. The Japanese yen just like the country’s economy has been struggling for a while. But the Yen is hovering near the 130 mark as of the time of writing. So, again, this is hard to imagine but not entirely impossible. When the financial system of a major country suffers, it is highly bullish for gold since it is a safe haven for investors and a very good alternative to unstable fiat currencies.

• OPEC+ & China and India would walk out of the IMF and agree to a new medium of exchange, not the USD According to the bank, sanctions against Russia have made many countries doubt the USD’s reliability. This is particularly true of nations that do not consider the US to be an ally. To avoid this risk, they would leave the IMF and create a new reserve currency.

The latter is the forecast I made earlier on when I wrote an article about gold. At the time, I mentioned sanctions against Russian citizens and businesses would force nations to move away from the USD since this currency is used as a political tool. A good alternative to foreign currency reserves is gold. If that happens, the precious metal’s prices would soar.

And the final forecast is $3000 per ounce of gold. It looks logical based on the predictions I mentioned above.

In spite of the fact inflation rallied to 40-year highs in 2022, gold did not finish trading on a positive note. That is probably because the market thought inflation would be transitory and so did the central banks. In fact, these financial institutions expected inflation would fall back to the target of 2% within just a couple of years. These were also the high treasury yields and the strong dollar that mattered here as well. At some point, you can get over 4% on a 5-year US treasury bond, whilst 5-year forward inflation rates are predicted to get under 2.5%.

According to Saxo Bank, in 2023 the market participants will understand that inflation could be here to stay. It sounds paradoxical but the Federal Reserve’s quantitative tightening would be problematic for US treasury markets and would mean new quantitative easing. The situation would get only worse as China is recovering from its zero-Covid policy. Although it looks good that the country seems to be on course to develop a new vaccine or effective treatment, this would cause a new surge in commodity prices around the world. Obviously, this would make inflation soar, especially given the fact the Fed would start softening its monetary stance. The lower interest rates and the yellow metal’s undervaluation could eventually make gold prices soar.

So in 2023, gold would possibly receive growth stimuli from several factors. First, geopolitical uncertainty, unwillingness to rely on the USD, and the “war economy mentality” would make central bankers decrease their foreign currency reserves, whilst buying more gold. As I wrote earlier on, many central banks have already started increasing their gold holdings. The situation would get even more complicated, given the fact many countries would be forced to ensure their energy security. Last but not least, global liquidity would rise as policymakers would try to avoid a crash in debt markets. Saxo Bank’s analysts also predict a mild “real growth recession”. Earlier on I also predicted there might be a recession in 2023. So, Saxo Bank predicts the gold prices might total “at least USD 3,000 next year”.

In short, I agree with Saxo Bank’s rationale. Let me also comment on the bank’s arguments but also explain my own pro-gold position.

Why gold, why now

So, why gold, why now? First, a lot of money has been printed by major central banks. At the same time, the gold prices have not reacted strongly enough. I will talk about gold’s undervaluation later on. There is highly likely more easing ahead, whilst the inflation rate is at multi-decade highs. Bear in mind that fiat money’s supply is unlimited, whilst gold’s supply is limited. So, gold should rise in money terms.

What is more, I agree with Saxo Bank that there are plenty of geopolitical challenges ahead. It is not just the economic crisis in Europe. As we all know, sanctions were levied against Russia. The conflict could get even bigger. There is also a sophisticated situation in Taiwan. The relations between China and the US are generally worrying. Many analysts predict a recession will happen in 2023. Although many market participants would likely sell all their assets, including gold, after the initial shock the Fed would probably soften its monetary stance and make the prices of the yellow metal soar. Besides, I think gold is undervalued.

Valuation

The valuations are quite low. Unlike stocks and bonds, gold is one of the least popular assets in investors’ portfolios. Gold is not even 2% of an average investor’s portfolio.

But the story does not end here. Please have a look at the gold valuation graphs I prepared below:

Inflation-adjusted gold price

The diagram above shows the inflation-adjusted gold price is not at its all-time high but is not particularly low at all. So, it does not suggest gold is cheap but other graphs do.

S&P 500 to Gold ratio

In spite of the S&P 500’s recent correction, the index is still trading very high compared to gold. It was only in 2000 during the Dot.com bubble when gold was so cheap compared to the US stock market. This suggests the precious metal’s obvious undervaluation.

Gold to Monetary Base ratio

Even more striking is the last diagram showing gold to the total fiat money in the US economy. The price of the yellow metal is extremely low compared to the monetary mass in circulation.

Risks

The key risks are simple.

• There could be further monetary tightening by the Fed. It would most probably provoke a recession. Paradoxically, this would eventually force the Federal Reserve to soften the monetary policies, thus driving the prices of gold upwards.
• There could be a “soft landing” for the US economy effectively coordinated by the Fed. Although it is possible, it is not my base-case scenario. Even if that happens, the Fed would have to get dovish, which means the money printing would continue, thus making the gold prices grow.
• There are high-scale gold market manipulations to artificially hold gold prices down. This is the only valid downside risk I personally see.

Conclusion

In no way do I see myself as being able to accurately predict the gold price in 2023. It might well be $3000 or above. Possibly the price would not reach that mark. Many of Saxo Bank’s forecasts seem to be far-fetched. Yet, some of Saxo Bank’s predictions seem to be spot on. I particularly agree that the geopolitical and economic situation in 2023 could be tough, whilst there are many bullish catalysts for gold.