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Sprott bets on gold, and against bearish French megabank

Despite investors balking at falling prices, one gold manager see a long-term bull market. A worker places ingots of 99.99 percent pure gold at the Krastsvetmet nonferrous metals plant in Russia's Siberian city of Krasnoyarsk April 12, 2012. Krastsvetmet is one of the world's largest players in the precious metals industry.  

ILYA NAYMUSHIN/REUTERS

French megabank Société Générale certainly isn't a friend of the gold bugs. Earlier this month, it released a report proclaiming the end of gold's long bull market and predicting the yellow metal could crash to only $1,375 (U.S.) an ounce by the end of the year.

Now, Toronto's Sprott Asset Management has weighed in, and to nobody's surprise, is denouncing the analysts at SocGen as not knowing what they're talking about.

Here's Sprott's take in a nutshell: Gold is money, so it doesn't behave like a typical commodity, and therefore SocGen is just wrong.

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In today's action, it looks like the market, the final arbiter of any price argument, is taking SocGen's side. Gold is losing another $10 an ounce to trade at $1,573 in early afternoon action. Of course, one day doesn't make a trend, so Sprott may yet be proven right.

SocGen figured gold is in a bubble that's about to blow, driven by oversupply and excessive valuations. That's why it believes prices will skid further.

But Sprott believes gold isn't a commodity, and shouldn't be analyzed as one, because bullion doesn't get consumed like wheat, oil, or corn. Most gold is hoarded in a massive stockpile to which the small amount of annual mine supply is added, making it an ideal type of money.

"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," according to Sprott.

Sprott believes the best predictor of gold's moves is the growth in major central bank balance sheets as they create more money. With the amount of dollars or yen or euros increasing, the price of gold in terms of them should rise. "It's really a very simple and intuitive relationship, as it should be," Sprott says.

According to Sprott's analysis, every $1-trillion in new central bank money on average drives gold up by about $210 an ounce.

Japan has recently joined the money printing binge, and Sprott is expecting good things to happen to the gold price.

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"Japan's recent QE announcement is a thing of wonder. It represents an absolutely massive injection of yen relative to the size of the Japanese economy. The Bank of Japan's $75-billion (U.S.) equivalent per month of yen printing, coupled with the U.S. Federal Reserve's $85-billion per month (through its current QE program) will add $1.97-trillion to the collective central bank balance sheets over the next 12 months.

"Given Japan's considerable contribution, we seriously question how SocGen believes gold can drop to $1,375/oz by the end of the year. For that to happen, we would need to see a collective balance sheet decline of roughly 15 per cent. Does SocGen seriously believe the U.S. Fed (or any other central bank for that matter) is going to reverse its QE accumulation and then start aggressively selling balance sheet assets over the next year?"

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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