Hey SocGen, gold is a currency and not a commodity

Eric Sprott pushed back on the Société Générale's report that gold was in a bubble and would slide to$1375/oz by year's end.

The authors of the report, David Franklin and David Baker, say SocGen is mistaking gold by viewing it as a commodity rather than a currency, and ". . . gold doesn’t really work as a commodity because it doesn’t get consumed like one."

The two argue that the slow growing supply of gold make it a great currency.

"Total gold supply can only grow marginally, while fiat money supply can grow exponentially through printing programs," writes Franklin and Baker.

"This is why gold’s monetary value is so important – it’s the only 'currency' in play that is immune to government devaluation. "

As government's have grown the money supply to fight the global slowdown, the authors say that gold has grown lockstep with monetary easing. The author's note that for every US$1 trillion increase in the collective central banks’ balance sheets, the price of gold has generally appreciated by an average of US$210/oz.

Somewhat surprisingly, it turns out that the collective central bank balance sheets have actually shrunk over the past three months – by approximately US$415 billion. The biggest drop was seen in the ECB’s balance sheet, which shrunk by the equivalent of US$370 billion, while other central banks also experienced small declines. Based on our simple model above, a decrease of US$415 billion should produce a gold price decline of roughly US$87/oz. And as it turns out, gold fell by US$76/oz over the first quarter of 2013. Does this sound like a bubble to you? It certainly doesn’t appear to be. Gold is performing almost exactly as it should – by acting as a currency barometer for the amount of money being injected into or withdrawn from the economy

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Image by mustapha_ennaimi