The Phaserl


A Retort to SocGen’s Latest Gold Report

by David Franklin and David Baker, Sprott Group:

Société Générale (“SocGen”) recently published a special report entitled “The end of the gold era” that garnered far more attention than we think it deserved. The majority of the report focused on SocGen’s “crash scenario” for gold wherein they suggest that gold could fall well below their 2013 target of US$1,375/oz. It also included a classic criticism that we’ve heard so many times before: that the gold price is in “bubble territory”. We have problems with both suggestions.

To begin, the report’s authors appear to view gold as a commodity, rather than as a currency. This is a common misconception that continues to plague most gold market analysis. Gold doesn’t really work as a commodity because it doesn’t get consumed like one. The vast majority of gold mined throughout history remains in existence today, and the total global gold stockpile grows in small increments every year through additional mine supply. This is also precisely why gold works so well as a currency. Total gold supply can only grow marginally, while fiat money supply can grow exponentially through printing programs. This is why gold’s monetary value is so important – it’s the only “currency” in play that is immune to government devaluation.

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1 comment to A Retort to SocGen’s Latest Gold Report

  • rich

    Saturday, April 6, 2013
    “As long as bankers live in a world free of consequence, our finance system is doomed to fail”

    In a must read Guardian column, Joris Luyendijk looks at the implications for our financial system of bankers being free of both market discipline and legal liability. When greed is not checked by the consequences of failure, you get a dysfunctional system where bankers privatize the gains and socialize the losses.

    The first step in subjecting the bankers to market discipline is requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

    It is this disclosure that bankers fear most.

    For anyone not working for JPMorgan, this is known as market discipline and linking consequences to actions.

    This is how a former top banker in treasury described his time in a bank that failed: “Risk produces profits, profits lead to a higher share price, and executive pay was linked to that. It was so f#$%ing easy to manipulate the share price; simply take some more risk.

    “I was having a great time – travelled around the world, feted by people. I used to be invited to every major sporting event in the world … Everyone is nice to you because you represent a chance for them to make money. It becomes very tempting to think that actually all these people like you for who you are. I stressed internally the risk we were taking. But you have to understand, nobody likes a prophet of doom.”

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