Société Générale Calls The End Of The Gold Bull Market … Again

Gold stabilized today in global trading in Asia, Europe and the US. It has been trading near $1,550 an ounce / €1,250 an ounce. After two successive days of what seemed to be a mechanical sell off in both gold and silver, a very significant support level has been reached. Time will tell if this support area for gold (between $1,515 and $1,550 an ounce) will hold. As for now, enough buyers have appeared to pick up the yellow metal at these prices.

In the midst of this gold price drop, Société Générale published a “special report” titled “The End Of The Gold Era.” The bank’s bearish case is documented in 26 pages. The analysis resulted in a gold price prediction of $1500/oz  over 2013, and $1375/oz by the end of the year. It is worth taking the time to read through the document mainly to understand how a big financial institution looks at gold. That’s why we have added it to our public library and embedded it at the bottom of this article.

Interestingly, gold is literally on fire today in Japan (click to see the yen gold chart). Yen gold is up 3.3% after the announcement of the Bank of Japan to stimulate their economy with $ 1.4 trillion in the next 24 months. The operation is unprecedented in scale, surpassing the US Fed’s monetary bazooka. As a result, the Yen was hit hard; the euro and US dollar have strengthened against the Yen.

Yen gold today clearly showed that gold is a monetary asset. Gold simply reflects the value of a currency. It is not the gold price that is going up or down (as the mainstream thinking goes and as most commentators in the media tell); it is the value of a currency that fluctuates and the gold price that changes accordingly.

It remains astonishing how this monetary aspect of gold remains underexposed and misunderstood (at least, in our opinion). Société Générale is no exception to that. Their underlying vision is that gold is a tradable commodity. Nothing more, nothing less.

It should not come as a surprise that the words “monetary policy”, “debt monetization” and “deficit spending” do not appear in their report. The document mentions only twice the words “debt crisis,” once pointing to Europe and once confirming that the US debt is under control. In that respect, the following quote should refelect the most important assumption: “After the sequester debt will stabilize at around 75% of GDP.”

It is a fact that the US debt ceiling and the dollar gold price are almost perfectly correlated. That’s why we the expectations related to debt are critical, at least in our opinion. Société Générale believes the debt crisis is contained and that the worst is over:

The inflection point may already be behind us. While more needs to be done to put the US on a sustainable fiscal path, the policies already enacted from the spending cuts legislated in 2011 to the tax increases legislated in early 2013 have significantly improved the debt trajectory relative to their worst projections.

To be sure, more work needs to be done to put public debt on a sustainable trajectory. Current projections still show a debt ‚explosion‛ during the 2020-2050 period on the back of an ageing population.

The French bank considers neither debt nor the monetary aspect of gold as drivers for the gold price. Rather the document focuses on inflation. It clearly says that inflation should not be expected in the US. Furthermore, the researchers point to a stronger than expected economic recovery. Lastly, the bank’s belief in higher interest rates appears to be an important argument for gold’s bearish case.

The aim of our article is not to go against the arguments of the French bank. After all, we are not positioned to conduct extensive research, nor do we have access to the same amount of (economic) data in order to make our case. Instead, we thought it would be valuable to look at the track record of the bank when it comes to gold price predictions. A simple online search yielded several forecasts since 2008 and an easy-to-read chart.


We checked the validity of the sources. They appear to be correct. The chart refers to the following articles:

From a Reuters article on 31 Oct 08: “The most likely scenario for gold is it goes down a lot, especially if it is trading at historically high levels,” said Jesper Dannesboe, senior commodity strategist at Societe Generale. Because the fears of inflation will be replaced by fears of disinflation and that is a killer for gold. I think gold is going below $600 in this cycle.”

From a Reuters article on 18 Nov 08: “The bullish story on gold based on fears of inflation is dead.”

From a Bloomberg article on 6 Jan 09: “Societe Generale predicted gold will average $650 an ounce this year. Gold futures averaged about $874 last year.”

Readers are recommended to go through the document prepared by Société Générale to understand how the bank looks at gold, and to understand the underlying assumptions. It is up to reader to decide the assumptions and expectations that are described in the report. We have added the document to our public library and embedded it below.

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