Is Societe Generale Right About The Gold Price?

Wednesday, March 2, 2016

Gold has seen a tremendous start to the year as market conditions and economic concerns have supported massive price growth in the commodity. While many believe that the growth is likely to continue throughout the year, investment bank Societe Generale thinks that now is the time for investors to sell the precious metal. Today, we'll talk about why Societe Generale thinks that now is the time to sell and whether or not they are correct.

Why Societe Generale Believes That Now Is The Time To Sell Gold

In a recent research note, Societe Generale said that it believes that price growth in the price of gold is unsustainable. In the research note, the investment bank cited two primary reasons for their opinion with regard to where gold is headed. Here's what they had to say...

  • Overblown Recession Fears – First and foremost, Societe Generale explained that gold is a safe haven investment. Therefore, when economic conditions are expected to decline, investors flock to the commodity, pushing demand upward and the value of the metal follows. However, the investment bank believes that these fears are overblown. With regard to recession fears, the investment bank pointed to solid job growth in the United States as a sign of US economic strength. Also, recent manufacturing data was better than expected, underscoring the strength seen in jobs growth.
  • Underestimated Interest Rates – The investment bank also pointed to the idea that strong economic data will likely lead to rate hikes in the United States. Because gold is priced in the USD and rate hikes cause currencies to gain value, it is expected that this will lead to lower demand for the precious metal and ultimately a declining value. In a statement, the investment bank wrote... “Our economists remain confident that the recent financial market turmoil and slowdown in emerging markets are unlikely to cause a recession in the US. If they are right, then the market should gradually start pricing in a high probability of one rate hike this year followed by more next year as the US labour market is becoming tight...”

Is Societe Generale Right In Their Gold Predictions?

Well, the truth is that no one has a crystal ball that allows them to peek into the future. So, there's no way to tell if the predictions are right or wrong until the time comes. However, I believe that the investment bank is way off here. To address their two main points...

  • Recession Fears Are Not Overblown – While US jobs growth was strong in February, the figure was very weak in January, showing that this metric is shoddy at best. Also, considering that the USD remains strong while the world deals with economic struggles, exports are likely to continue on the downward trend. This in combination with low, stagnant oil prices, poor US home sales, and lackluster consumer spending shows that the US is at risk of a recession.
  • Rate Hike – I mentioned in a previous post that I believe a rate hike is on the way. However I also outlined the fact that it's not likely that the rate hike would negatively affect the price of gold. While rate hikes generally lead to stronger currency values, they also lead to heavy volatility in the market. Given current market conditions, the last thing we need to see is more resistance. Therefore, when the rate is increased and the market declines, safe haven investors are going to be more likely to flock to gold, leading to increasing values.

Final Thoughts

As mentioned above, there's no one on the planet that has a crystal ball allowing them to look into the future. However, my analysis of the gold market, global economy, US economy and global market conditions lead me to believe that we can expect to see further gains in the gold price

Joshua Rodriguez

Joshua Rodriguez is an avid financial professional. He is the owner and founder of CNA Finance, a partner at Modest Money, and a writer for US News & World Report, Investing.com, and more! Joshua takes a strong fundamental approach to market analysis and enjoys offering his take on what we can expect moving forward. You can reach Joshua at cnafinancehelp@gmail.com.