The Top 7 Cases Against Gold... Debunked!

Harry Dent is one of the best economic researches out there. His website www.economyandmarkets.com has a wealth of analysis on the coming economic crisis that I strongly recommend you follow (along with my work, of course). Interestingly, Harry's position on gold is bearish. My view, as outlined in my book The Economics of the Economy is the opposite. When a guy of Harry's caliber fundamentally disagrees with you, it's probably a good idea to sit up and take notice.

Recently (14 June 2017) Harry published an article entitled "The Top 7 Cases Against Gold". I've now read all 7 cases a dozen times or more and I'm still not convinced. Here are Harry's 7 cases and my view on each one... let me know what you think?

Case #7 Gold is not a safe haven during deflation - Gold bubbled up along with most commodities during the bubble boom of the 2000s. But, during the financial meltdown in the 2nd half of 2008, it fell 33%, while the US dollar surged up 27%. The Dollar, NOT GOLD was the safe haven.

This point confused me more than anything... Harry states that gold is not a safe haven during deflation, and then points to it falling in the 2nd half 2008 while the dollar increased, as evidence that the dollar and not gold was the safe haven.

The problem is that there was no deflation in 2008. Deflation kicked in the following year, and persisted for almost 3 quarters before inflation returned. During the actual period of deflation, from March to October 2009, gold went up and the dollar went down. Gold then continued its rise for the best part of the next 3 years...

Case #6 Gold is NOT a currency – While, it may have been a currency during the Roman Empire, in today’s world it has NO currency value. How could it? There isn’t enough to go around. You can’t even use it to buy or pay for anything. And since the economy is no longer commodities based, gold is no longer the standard of money.

The long answer to this is contained in the first 2 chapters of my book which you can download FREE right here.

In short, Harry's right, gold isn't a currency, it's money. Unlike currency, money is a store of value: a century ago an ounce of gold was $26, which would have bought you a nice suit in those days. Today, an ounce of gold will still buy you a nice suit, a very nice suit in fact, but you'll only get a sandwich for $26.

Case #5 The Value of the Dollar is Strong – Much like it did in 2008, when the next deflationary crisis sets in the dollar will rise even higher, leaving gold to FALL FURTHER!

This point isn't fundamentally any different to Case #7. The reason the Dollar went up in 2008 is because European banks lost billions as the sub-prime mortgage crisis unfolded, and the ensuing government bailouts caused a sovereign debt crisis. Falling confidence in the Euro drove investors to the Dollar, not because it was "strong", but because it was less weak.

By the end of 2008, investors began to realize the Dollar was no safe haven either, and Gold went from around $700 an ounce to almost $2,000 an ounce over the next three years. Only after the markets were comfortable that the worst of the crisis was behind it (around 2012) did the Dollar again appreciate against gold.

The Dollar's 'strength' today is largely fabricated by China and Japan's enormous holdings of U.S. Treasuries (together they own over US$2 trillion of securities). How the Dollar performs in the next crisis will largely depend on where the crisis originates - a debt crisis in China or Europe may again cause investors to flock to the Dollar, whereas another debt crisis in the U.S. will likely cause the dollar to tank.

Either way, another financial crisis will raise serious questions about the integrity of the international currency system, and investors will more likely flock to the other asset held by every central bank in the world, including the IMF and ECB: Gold.

Case #4 Gold is just a commodity – Ultimately, gold is just a commodity. While gold garnishes headlines as a major financial asset class, ONLY 18% of the world’s gold is used for investment purposes. And while at least half of Americans own stocks, it’s estimated that LESS THAN 5% own gold as an investment…. Sure, the metal’s capable of producing returns through capital appreciation. Buy it at $1,200… sell it at $1,250… and you make a profit of $50 an ounce. But gold – unlike many stocks, bonds, and investment trusts – produces NO INCOME for its investors and NO REAL RETURNS adjusted for inflation long term.

A commodity it may be, but what separates gold from other commodities such as oil, corn or pork bellies is that central banks don't hold the latter in reserve.

The point about gold producing no income is a strange one; money isn't meant to produce income, it's purpose by definition is to store value and act as a medium of exchange. Dollars don't produce income either, you only earn income by investing it.

Although it ceased being an official medium of exchange since 1971, gold has remained a remarkable store of value: In 1917, gold was $26 an ounce. $26 adjusted for inflation over the last century would be less than $670 today. The current gold price is almost DOUBLE that amount, so the idea that it offers "NO REAL RETURNS adjusted for inflation long term" is puzzling.

Case #3 Gold’s uses are limited – it’s less useful than oil, corn or pork bellies. 51% of gold is used to make jewelry. Only 12% is used to make technological hardware. Realistically, the only people who care that gold is at cost of production are the miners and gold bugs. While gold’s value can’t go up, it can definitely go lower and IT WILL…. For reference… oil is way below its cost of production, and that hasn’t stopped it from continuing to slide further. Nor will it. Oil has the very real potential of falling to as low as $10 to $20 a barrel. Take a look at real estate… it fell well below cost of production when that bubble burst.

"Gold's uses are limited"... that's what makes it the ideal form of money - it's not good for anything else! If gold had any use in the production of consumer products, its role as a monetary instrument would be compromised. Gold used in jewelry simply represents wearable wealth - you can always sell it to buy food, clothing or medicine.

Case #2 Gold is getting overbought – any bounce, no matter how high, is a good place to GET RID OF gold you’re still holding. Right now, it’s pretty overbought. So it’s a perfect time to unload and even make a bet against gold. If gold can break above its current trend line soon, it’ll likely head for its next major downside target of around $700 in the next year or so. If it can’t break above $1,300 then it’ll likely hit a new high above the bear-market-rally level of $1,373. This would chart as a broader bear market rally rather than a sign of a new bull market as many gold bugs are claiming.

What I love about Case #2, aside from the fear it tries to evoke, is the graph that came with it (above). Here we can clearly see gold's ascent during the financial crisis, and it's decline since the financial system began to stabilize. There are all sorts of lines, circles and voodoo technical analysis that somehow predict a downward trend in price as shown by the dotted grey line. I'm no expert in technical analysis, but it seems like fun, so I decided to draw some lines of my own:

Case #1 Gold is NOT a crisis hedge – If the financial system ever blew up, we’d all be fighting over canned goods, ammo and gasoline. Gold really isn’t going to get you very far. Back in 2008 when the bottom fell out and the market crashed, the price of gold crashed right along with it. The ONLY things that held their value were the US Dollar and US Treasuries.

This point is again quite similar to Case #5 and #7 so perhaps there aren't 7 distinct and compelling reasons against gold after all. What happened in the 2nd half of 2008 was more of an aberration in market rationality than a reflection of true market sentiment. The crisis didn't begin and end in 2008, it lasted years, and over the lifespan of the crisis, gold was the go-to hedge against failure of the Dollar.