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Sun 8 Dec 2019 04:10 PM

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Gold-to-oil ratio may half in 2020, says Saxo Bank in 'outrageous' prediction

Gold fizzling and oil prices rising would be beneficial to Gulf economies, according to Saxo Bank chief economist Steen Jakobsen

Gold-to-oil ratio may half in 2020, says Saxo Bank in 'outrageous' prediction

Published every year, Saxo’s “outrageous” predictions are a collection of 10 potentially market moving events that could take place.


In 2020, gold’s rally may fizzle and oil prices may go up, cutting the gold-to-oil ratio in half from 2019 highs, according to an “outrageous” prediction from Denmark-based Saxo Bank.

Published every year, Saxo’s “outrageous” predictions are a collection of 10 potentially market moving events that could take place.

While the predictions do not constitute Saxo’s official market forecasts for 2020, they represent possible – albeit unlikely and unappreciated – events that could send shockwaves across financial markets.

Among the 2020 predictions is that the gold market fizzles as central banks turn away from policies designed to support weakening economies and have driven yields lower and in 2019 drove some nominal yields into negative territory, sending the price of precious metals higher.

“As bond investors smell a general policy shift towards MMT [modern monetary theory]-inspired fiscal stimulus, long bond yields rise steeply,” Saxo said in a statement.

“The shift reduces interest in holding non-yielding assets like gold, as investors scramble to invest in companies with pricing power and any asset set to absorb fiscal outlays,” the statement added. “Overextended gold longs are ill-prepared for the narrative shift and gold prices are crushed back into the price limo below $1,300.”

Saxo also noted a possibility that Opec and Russia announce significant additional oil production cuts after sensing a slowdown in US shale oil production.

“The market [would be] caught off guard and the scramble to cover shorts while adding fresh longs eventually sees WTI crude oil return to $85 per barrel,” the Saxo statement added. “The gold ratio is halved from its 2019 high of 30 down to 15.”

Good for the Gulf

Responding to questions from Arabian Business, Saxo Bank chief economist Steen Jakobsen said that the reversal of the gold-to-oil ratio would ultimately prove beneficial to the Gulf, at least for several years.

“[They] would get lucky. They’d get another couple of years of higher revenue, at a time in which – particularly in Saudi – there is pressure on the fiscal side,” he said. “Call it luck, good fortune, practical planning, whatever, but it’s going to buy one or two more years.”

“[But] show me the handover to the SMEs. Show me the handover to non-fossil, non-tourism [sectors], and I’ll be the biggest fans,” he said.

At the moment, Jakobsen added that he believes GCC bonds are the most attractive investment in the region.

“I like your bonds the most. For this region, the excess return that you can have on the government bonds to me looks like the most attractive investment,” he said. “Buying companies here is a risk, as it always in emerging markets. But I love the bands. I think they’ll have a higher allocation globally….in a world of still relatively low interest rates, this region has a spread that is backed by a tangible asset that has fundamental value [oil].”

Other ‘outrageous’ Saxo Bank predictions include the European Central Bank folding and hiking rates, the clean energy industry struggling to take off, President Donald Trump announcing an ‘America First Tax’ to reduce the trade deficit, the Democrats sweeping the US election and Hungary leaving the EU.