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SocGen’s Ultra Bearish Gold & Silver Outlook

March 25, 2015

Analysts at the French Bank Societe Generale (SocGen) in their latest research report have forecast that the gold price, having given away all its early year gains, was headed sharply lower, as it saw the dollar continue its gain in strength. They thus expected the bear market in gold to continue further and saw the price as falling to average only $925 an ounce between 2016 and 2019. The timing of this report was perhaps unfortunate in that the forecast for a virtually immediate downturn in gold, together with dollar strength, predated the events of the past few days, which has seen the reverse occur. Gold bulls will be fervently hoping that the bank’s analysts are equally incorrect in their forecast of gold’s longer-term prospects.

While the bank actually raised its average forecast for the current year to $1,130/oz from its earlier $1,025/oz because of the higher than expected gold price performance during Q1, it expects the price to only average $1,150 during Q2, falling gradually to $1,050 by Q4. The report suggested that the U.S. Fed would raise interest rates by 25 basis points as early as June, and then sees it raising rates more aggressively in 2016 and peaking at a 4% rate by 2017, with the gold price continuing to fall as interest rates rise. Current thinking after the Fed’s recent statement, though, suggests any rise in U.S. interest rates may be further delayed.

But SocGen’s forecasts would seem to be predicated on what we feel are some other basic misinterpretations of what is happening with gold. It says that Chinese and Indian demand has not appeared to pick up. On our reading of statistics from the Shanghai Gold Exchange, Chinese demand has never really gone away whatever the World Gold Council (WGC) may say. Withdrawals from the exchange in 2014 were 2,102 tonnes as compared with 2,197 tonnes a year earlier – fall of only 4.4% year on year. True the WGC says gold consumption in China fell by 30% plus in 2014, but it only uses a very limited definition of what comprises consumption. This may indeed have fallen by as much as the WGC says but actual gold flows are very obviously far higher as shown by recorded gold exports to mainland China from Hong Kong, Switzerland and elsewhere and production from China’s own mines. Maybe these gold flows are going into the banking sector rather than being consumed by individuals, but they do represent physical gold being absorbed by China. (See: Dollar falls, gold rises as HSBC sees end to dollar Bull Run.)  As the linked article notes, Chinese gold flows as represented by SGE withdrawals will see a new record in Q1 this year – hardly a sign of weak Chinese demand.

India’s statistics too have been totally distorted by government policy and expectations of change. Ahead of that nation’s recent budget it was widely assumed that gold import duties would be cut sharply, thus gold flows will have been far lower in the run-up to the budget in expectation of the import duty cuts. These cuts did not materialise and now a report out yesterday suggests that Indian gold imports have since surged enormously, probably as a result of consequent pent up demand, with 130 tonnes of gold imported in the first three weeks of March. That is a huge amount and suggests that the total could be as high as 170 tonnes this month if the rate of imports continues at the same level for the final week of the month. And all this has happened with Indian gold premiums remaining at a high level at around 12.5%: See Koos Jansen’s latest posting on this: Indian Gold Imports Exploding in March for more detail here.

If we take into account a sharp drop in liquidations from the main gold ETFs – or even a possible inflow – which seems likely on performance so far, together with SocGen’s own assumption that global gold mine supply may fall by 9% in 2015 (although we’re not so sure about this suspecting that actual mine production may be flat, or down by a smaller amount than the SocGen analysts suggest) then SocGen’s analysis looks increasingly suspect. Thus, based on fundamentals, we feel SocGen is way too pessimistic on the gold price – not that real fundamentals mean that much in these days of futures market-controlled gold prices. Maybe as a direct participant in the new LBMA gold price benchmarking process, SocGen is aware of factors which we are not privy to – it certainly should have access to far more data than we have on which to make its assessments. But even so, we feel its pessimistic analysis is just too downbeat with respect to likely gold flows and price performance

The SocGen analysts give silver pretty short shrift too. The analysts see the silver price trending downwards to around $14/ounce by the end of the current year and with the metal price slipping further, down to around $13 by 2019. They see global mine production increasing by 3.8% this year with demand falling by 2.74%. But silver supply/demand statistics are increasingly hard to predict. In our view, where gold goes, silver will follow with rather more volatility. If gold does fall back below $1,000 as the SocGen analysts predict then silver could indeed be in for a torrid time and we suspect the SocGen price estimate in the case of such an occurrence, could even be an optimistic one! But if the gold price rises, silver would likely rise even more in percentage terms, regardless of the supply/demand data.

It’s not that the SocGen predictions couldn’t happen. Anything is possible with what we see as a gold price dominated by the futures markets and thus by the financial elite (which includes SocGen).

However the more we look at physical gold flows, and the rise in Asian-located precious metals exchange participation and volumes, we just feel that the current dominance of New York and London in gold and silver price setting could be drawing to a close. It would be replaced by pricing on the new Asian precious metals exchanges where there will likely be a different ultimate agenda. Whether that will involve allowing precious metals prices to rise, and rise fast, is anyone’s guess, but the current West to East physical gold flows suggest that this could well be on the cards.


Courtesy of

Lawrence (Lawrie) Williams has been involved with both the technical and the financial end of the mining sector for over 40 years, formerly CEO of top mining industry business publisher, Mining Journal Limited, he was Mineweb's General Manager and Editorial Director up until October 2012 and is now Consultant Editor. He has worked as a mining engineer on gold, platinum, uranium and copper mining operations.

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