I apologize ahead of time for the length of this post. The extreme length is a function of Harry Dent’s most recent diatribe on why you should not own gold and why should “sell it short when he tells you to”. Mr. Dent has so many incorrect thoughts and what he calls “facts”, you might want to grab some popcorn for this one as we will correct the misstated facts and bogus logic. The best way to prove his logic faulty is to use his own words and charts as proof. We would like provide a link for you but reproduction is prohibited by copyright law. Since we cannot use his charts, I will describe and try to duplicate his charts. As I see it, Harry Dent is one of THE most dangerous writers out there …dangerous to the financial survival of anyone who reads his work.
His premise is simple, gold is a commodity rather than “money”, this is the very core of his miscalculation. He says gold will drop to $700 when the coming crisis hits and will possibly bottom in the $250 area. This drop will be caused by “deflation” as dollars will be destroyed via default and bankruptcies. This in turn will mean there are less dollars outstanding which means fewer dollars chasing the same amount of goods. Fewer dollars outstanding will make the remaining dollars “more valuable” because of the scarcity factor. Simple right?
Let’s start at the beginning with his first chapter titled “gold is an inflation hedge”. Here he says there are $247 trillion outstanding and predicts $100 trillion will be destroyed in the coming crisis. He says what gold bugs (a disparaging term) don’t get about debt and money printing is that it is like magic, on one hand you get something for nothing, on the other, dollars will disappear in a now you see it now you don’t fashion. His bottom line is this, if $100 trillion disappear, the Fed has no way to replace them via printing or channel stuffing the banks. The various QE efforts have only stalled the onset of deflation which will overwhelm the financial markets, the banks and ultimately the Fed’s ability to reflate.
In my opinion he is correct to this point but is conveniently forgetting something at the very foundation of his argument. Today’s dollar IS debt in and of itself! Today’s dollar is not your grandfather’s dollar. Back in the early 1930’s, dollars and gold were interchangeable. $20.67 equaled one ounce of gold and one ounce of gold equaled $20.67. You could walk into any bank and make this exchange. In effect, “dollars were gold”. The reality of course was that dollars were “receipts” for gold, technically speaking, dollars were the derivatives of gold. It is this “minor detail”, so crucial to the thought process which entirely eludes Harry Dent.
In this first chapter, he says gold bugs are wrong because we have not had “inflation” after all of the global money printing. His “proof” is the CPI index running under 2% for the last six years. I would ask, has anyone’s “cost” of living gone up less than 10% in the last five years? I don’t know about you but I know my taxes have gone up substantially, my health insurance has doubled in only four years and a $100 bill at the grocery store is a joke! I would also ask him why “inflating” financial assets doesn’t fit his definition of inflation? Stocks and bonds have been inflated to ridiculous levels. Harry Dent says so himself, why is this not “inflation”? In reality, it is massive inflation but considered “good” inflation.
In the next chapter he says the dollar’s days are NOT numbered. Really? Then why has the entire world (including long time U.S. financial and military allies) been making trade deals, setting up currency hubs, alternative clearing systems and banks to the exclusion of both the U.S. and her dollar? Even the World Bank and IMF see the writing on the wall, they have both endorsed the new Asian Infrastructure Investment Bank. Harry goes on to poke fun at gold bugs by stating gold is not a currency. He challenges anyone to go into a WalMart or Target with a sliver of gold and see if they accept it? I would simply ask him this, if he is correct (I believe he is) and $100 trillion gets smoked and “disappears”, will there even be a WalMart or a Target store open? Would not distribution of everything completely stop dead in its tracks if credit gets shut down? Does he really believe we can have a complete and total financial collapse and “dollars” (which are the “credit” of a bankrupt United States) will be the only thing to hold value? Where would you “store” these dollars? In a bank? Will the banks survive? Will the FDIC who has less than one quarter of one penny for every dollar they insure …be able to protect your deposit? More “minor details” I guess?
Then he goes on to say practically everything trades in and is priced in dollars all over the world and asks the question “what could possibly replace the dollar?” and supports his question by listing all of the various currencies. None are big enough he says to supplant the dollar and the Chinese are unwilling to allow the yuan to float so that couldn’t work either. I would suggest “gold” can and will replace the dollar which leads into his next chapter where we will inflict a direct head wound to Harry Dent’s fantasy logic!
The next chapter, “no currency could ever return to the gold standard” is his coup de grace!. He actually said “there is not enough gold in the world, it would all fit into an Olympic sized swimming pool, how do you base currencies on that?”. He also says that new gold supply is simply not growing fast enough to support or drive our economy. Gold he says is no longer the best standard for money since we are not a commodity based society. Top this off with “if you think deflation is bad today, you can’t possibly imagine how bad deflation would be under a true gold standard with too little gold to chase the same goods”. Before commenting on this, now would be a good time for an intermission, please refill your popcorn and re read this paragraph at least once and think for yourself what exactly Harry Dent just said …what he REALLY said!???
In a nutshell, Harry Dent just admitted to gold’s “rarity”! There’s just not enough gold to go around and the mines cannot produce it fast enough to provide growth. “Deflation” would be out of control! Broken down in even simpler language, Harry Dent is admitting the price of gold is too low! To say “there is not enough gold” is just plain ignorant, what he should have said is “there is not enough gold AT CURRENT PRICES”! Would there be enough gold to support a monetary system if it were priced at $1 trillion per ounce? And there is not enough production to provide for economic growth? What if the price of gold was revalued to some higher number (so there would be “enough” of it) and then the price is ratcheted higher each year by 1% or 2%? Add this together with a 1%-2% growth of stock via mine supply and we have a 2%-4% inflation rate. Why would we even need an “inflation rate”? In this one chapter alone, Harry Dent exposed the most serious flaws to his logic and argues for higher gold prices, NOT crashing prices!
Moving along to his next chapter, “it’s not going to be the currency crisis they expect” speaks mainly to currency cross valuations. Here he talks about how the dollar rose during the 2008 crisis, is rising now and will probably rise another 20% after a minor correction. The chapter is a yeah rah rah session for how well the dollar has done since 2008. I would remind you, gold peaked in 2008 at $1,000 per ounce. If the dollar is king and has done so well, why is gold in dollar terms now 20% higher than the 2008 peak …and AFTER a concerted effort to depress its price via paper derivatives? He comically ends this chapter by reminding readers that gold does not pay any interest or dividends. Gold he says is a very “tenuous safe asset” as you rely from day to day on how others value your asset. My question would be this, does anything in today’s upside down, zero and negative interest rate world pay much of any dividend or interest? Is there any asset or investment in the world that does not rely on “pricing” by others to create a market price? Yes, if you have a one of a kind painting or gem or whatever, you can simply not sell and ask a higher price, but in order for a trade to occur doesn’t someone have to make a bid? Don’t all assets get “re priced” with each trade? His logic here is ridiculous, gold is “dangerous” because it pays no interest and “goes up and down”. Does he not understand that gold pays no interest because it IS MONEY IN ITS PUREST FORM and doesn’t have to? Fiat currencies must pay interest to compensate for risk to attract “buyers”, gold “attracts” buyers because it is the ultimate, safest monetary asset there is because it is no one’s liability! Does he not understand the reality, gold is not priced in dollars, dollars are priced in gold? It is not the ounce of gold that “changes”, it is the perceived value and the supply of dollars that changes!
The next three chapters, “gold is only a commodity …only the miners care that gold is at production cost …and adjusted for inflation, gold is not all that shiny” are chocked full of broken logic. Dent says “gold is not really all that useful” with the exception of jewelry and some industrial applications. He even went so far as to say “only the extravagantly wealthy or perhaps the criminally insane use it for much more than that”. So I guess 2 billion plus Indians and Chinese are criminally insane? Maybe he is calling the world’s central bankers “criminally insane” (I would agree here) because they hold reserves of gold?
As for production costs, he points to shale oil still being produced and housing busts where distressed sales take place below replacement cost. If he could put 2+2 together, he would understand that current production is and will be vital to satisfy demand that’s been running double or more than current production. Where does he think the supply has come from? The answer of course is Western vaults …and they are not an unlimited supply. In fact, a case can be made these vaults are already running on fumes, how can he explain current backwardation in London? Supply and demand DOES matter!
Now for one of his charts:
Harry posted a similar chart to this one displaying the purchasing power of the dollar since 1900, he calls it the “greatest BS chart in history”. It doesn’t matter if the dollar has shrunk he explains, living standards are far greater today than they were 100 years ago, this is proof that “inflation, over the long term, correlates with growth, innovation and a rising standard of living”. Never mind technology! The inventions of light bulbs, telegraph, cars, jet planes, the internet, radio and television, and all the rest have nothing to do with us no longer living life like as he says “Little house on the prairie” …it was all made possible by “inflation”!
Time to wrap this marathon up as even my head is spinning. First and foremost, it needs to be said that what Harry Dent is professing is beyond dangerous. Gold is in fact money in its purest, simplest and direct form, everything else is “credit” and is someone else’s liability. Dent is recommending you “buy insurance” for the upcoming financial collapse from the very “insurance company” that has caused the crisis in the first place, the United States. Never mind the U.S. is flat broke no matter what spin angle you look at it from. Not only does he recommend selling your true, natural and historically proven insurance policy, gold, he recommends you also become an insurance company yourself and insure others by selling gold “short”. This is a sure recipe to not only lose all your purchasing power, you stand to “owe” what you cannot deliver! Harry Dent in my opinion is an ignorant man who refuses to look at history or even use logic, yet he runs around like the pied piper encouraging people to sell their only insurance just prior to the largest financial hurricane in history making landfall! As I’ve written previously, I would love to debate Mr. Dent on this very topic in any forum of his choosing. This however will never happen, because real history and real logic versus dangerous fairy tales make it unfair.