Societe Generale is “enthusiastic on gold” — so much so that in their latest cross-asset strategy report, they call “buy gold ahead of QE3” their number one strategy, saying it’s “the perfect asset to benefit” from additional loose monetary policy.
In the report, SocGen discusses the historical relationship between the price of gold and the U.S. monetary base. The SocGen team writes that “if gold catches up with the increase in the monetary base since 1920 (as it did in the early 80s), its price would rise to USD 8500/Oz,” adding that just “to close the gap with the monetary base increase since July 2007, gold would have to rise to $1,900/oz, assuming full transmission from the monetary base increase to the gold price.”
Here is the chart showing the relationship between the price of gold and the monetary base:
Photo: Société Générale
SocGen also notes that gold appreciated 36 per cent as a result of QE1 and 21 per cent as a result of QE2. The report doesn’t note the diminishing returns, however, saying the outlook for gold in the wake of a third round of quantitative easing would be “very positive.”
SocGen’s gold call:
Buy gold, while hedging the implicit USD exposure. Gold is back to the lower band of the trading range of the past year. It is also the commodity that benefits most from the Fed’s unconventional monetary policies. As a result, we are strong overweight gold ahead of QE3 and expect its price to challenge $1,800 before the end of the year. Timeline of the call: 3-6 months.