May 2015
Gold’s Dead Cat Bounce
— Harry Dent, Editor
L
ISTEN up: I expect gold to have a dead cat bounce this summer. But that doesn’t change my forecast
that gold will slide to near its next support level, between $700 and $740 an ounce, likely by early 2017.
That’s right! I believe gold will likely still lose nearly half of its current value (that’s after it’s already lost
nearly 40% from its top in late 2011), and I’m even more convinced now than ever before thanks to all the
gold bugs challenging me on my call.
The likes of Porter Stansberry and Jeff Clark have made me put my money and gold (so to speak) where my
mouth is. It’s been three years since Porter and I agreed to our 10-year, $1 gold bet, and I’m leading that race.
And Jeff recently bet me a one-ounce Gold Eagle that the precious metal wouldn’t reach my target by early
2017. I’m confident they’ll both lose, but it reminded me that gold bugs are still telling investors to make a bet
that’s going to cost them dearly.
Don’t get me wrong. I respect most gold bugs. They clearly realize that runaway debt and money printing
has never worked out well. They, like us, see a financial crisis coming.
Where we differ is that history clearly shows that deflation follows major debt and financial bubbles, not
inflation. That is the only thing we disagree on, but it’s a critical point! If you bet on inflation, you’ll be right
about the crisis but wrong about the outcome... and that could cost you dearly.
So today I want to counter those gold bugs arguments that you should be betting on inflation and gold and
put this issue to rest. Gold will melt down further, and here’s why…
“Gold Is an Inflation Hedge”
Gold bugs love to explain how the precious metal is an
inflation hedge. In fact, their fear of hyperinflation was
one of the corner stones of the call for $5,000 an ounce!
Well, inflation hedges are only useful when you have
inflation. And there hasn’t been a whole lot of that lately.
It’s been six years since unprecedented quantitative
easing and monetary stimulus began, and even with
trillions of extra dollars floating around, we’ve only
managed to eke out a paltry 1% to 2% inflation each
year. So much for Chicken Little’s cry that the greenback
would crash and burn!
Inside This Issue:
Higher Inflation… Not Yet.................................4
The Wrong Currency Crisis................................7
Only Miners Care About This.............................9
What Adjusting for Inflation Does to Gold......10
Editors:
Harry Dent, Rodney Johnson and Adam O’Dell
www.dentresearch.com
The truth is, since the gold price has been
allowed to float freely (after 1971), there has been
an indisputable correlation between the precious
metal and inflation rates. During inflationary times,
the price of gold is inclined to rise. And during
mid-2008, when we had the only brief deflationary
period since gold was decoupled from the dollar, the
price of gold declined.
The Obvious Correlation Between
Inflation and Gold
–– CPI Annual Change, left
–– Gold Annual Change on Monthly Spot, right
20%
200%
160%
15%
120%
10%
80%
5%
40%
0%
0%
-5%
1970 -40%
1980 1990 2000 2010 2013
-80%
SOURCE: St. Louis Fed
As Rodney wrote in last month’s issue of Boom
& Bust, we’re still a long way from seeing sustained
inflation again. With five to eight more years left of
this Economic Winter Season, deflationary forces
remain a far bigger threat and we’re likely to get
another taste of them when we see the markets
collapse later this year.
It’s important to remember that dollars can be
destroyed as quickly as they can be printed thanks to
asset bubble bursts and debt defaults.
But more than being an inflation or deflation
play, gold has a bigger problem. It’s NOT the
crisis hedge that gold bugs make it out to be. Gold
dropped by 33% between June and October 2008,
when the financial system started melting down.
That was when there was the most fear and chaos
and everyone was wondering whether Bernanke and
the wizards of Goldman Sachs could stop a total
financial meltdown. As this was all happening, gold
cried like a baby and ran for mommy. Instead of
being the “insurance” gold bugs thought it would
be, it became deadweight.
2 Boom & Bust
Think of it this way: Those holding gold as an
insurance policy suddenly found their house had
burned down and the “insurance” company wasn’t
going to pony up.
Bottom line: Gold’s supposed value as a crisis
hedge is more myth than truth. The reason the myth
exists is that most crises in modern history have
been inflationary — all wars, oil embargos, droughts
and plagues. Only once-in-a-lifetime, debt-bubble
deleveraging periods are deflationary. And ahead, it
will prove this again.
Governments around the world will fail to keep
the bubble going with endless money printing.
There simply is no other possible result. I expect the
shoe to finally drop between now and 2020. The
powers that be are running out of tricks and the
fundamental forces of declining demographics and
rising debt ratios are growing rapidly against them.
Gold bugs have a moralistic ideology that
says that money-printing governments should
be punished with runaway inflation. I compare
them to the hellfire and brimstone preachers I saw
growing up in South Carolina. Money printing
by a government is viewed about as favorably as a
drunk in church… and the inflation that follows is
punishment from the Almighty. Well, I understand
where they’re coming from, and punishment for
past monetary sins is definitely coming. But history
would say the punishment coming for them is
deflation, not inflation. Can I get an “Amen”?
An important thing to remember is that the
deflationary 1930s’ crisis was much worse than the
1970s’ inflation crisis. Inflation tends to make for
a better story, and we tend to remember the stories
from history of little old ladies taking wheelbarrows
of cash to the market to buy their groceries for the
week.
But hyperinflation has never occurred globally,
only in isolated countries like Zimbabwe or
Germany after WWI. Germany was bankrupt after
losing the war, and then the Allies added huge
reparations. The Germans had no option but to
print massive amounts of money to repay their
debts. That is not what is occurring today.
www.dentresearch.com
And that brings me to one particular point
that annoys me to no end. The gold bug camp is
constantly telling us that governments are debasing
our currency, especially the almighty U.S. dollar, and
destroying the value so that the dollar is not a good
store of value.
Really? That’s an ideological statement, not a
factual one. Here’s an analogy to explain…
The Microchip of the
Currency World
Since its invention in 1958 (Intel introduced its
first 4-bit processor in 1971), the microchip has
been multiplied by the trillions, creating a revolution
in human communications. Its evolution is a crystal
clear sign of progress and of a higher standard of
living.
Translating that back to the dollar argument, if
the exponential multiplication of the microchip was
(is) a good thing, why would the multiplication of
dollars not also be a sign of progress?
Every gold bug likes to pull out one chart to show
how government is destroying the dollar by printing
more and more of it. To me, this is “the greatest BS
chart in history!”
The Value of a Dollar
From 1900 to 2014
$.75
$.50
$.25
1920 1940 1960 1980 2000 2010
SOURCE: Federal Reserve Bank of Minneapolis, Dent Research
It means the opposite of what it’s used to convey.
And it scares people into thinking that the U.S.
dollar is going to hell in a handbasket… that their
www.dentresearch.com
If we follow that logic, people should be much
poorer today than they were in 1900... but they’re
not! The indisputable fact is that our standard of
living since 1900 has gone up seven or eight times,
when we adjust for inflation, despite the moronic
and apparent “fall of the value of a dollar.” For proof,
just compare living standards today to how people
lived back in the “good old days.”
You see, inflation, over the long term, correlates
with growth, innovation and a rising standard of
living. In particular, it’s higher during times when
a population is growing, urbanization is rising,
empires are being built and the most powerful new
technologies are advancing mainstream.
Just think about what the typical household
looked like in 1900? It was a little house on the
prairie! Life was much simpler, but also less affluent
and more difficult. One bad-weather season was
life-threatening. So were random raids from outlaws
or an attack by wild animals. Families back then
didn’t need bags full of cash. They were largely selfsufficient.
Today the situation is completely different. I very
much doubt many gold bugs have changed a wagon
wheel recently, or stitched up a nasty gunshot wound
courtesy of a fight with a raiding outlaw.
Compared with a family from roughly 115 years
ago, the typical household today has a much higher
income and outsources a massive number of tasks.
Almost no one hunts or grows their own food
(except as a recreational hobby) or educates their
own kids (excluding the home-schooling parents
here).
$1.00
$0
1900 wealth is being taken away by the government and
by never-ending inflationary policies.
Of course, all of today’s demands require cash
(credit or otherwise) and so we’ve slowly but surely
increased the number of dollars doing the rounds.
This hasn’t devalued the dollar. It’s not leading us
to a world where we revert back to a system of
bartering…
Instead, it has increased our standard of living just
like the rapid multiplication of semiconductor chips
and computing power since the 1970s.
Boom & Bust 3
“True Deflation Will Lead To
Higher Inflation” Really?!
crashing down on us. And, as I said earlier, when it
does, gold will run crying to mommy again, just like
it did in 2013.
When Jeff Clark challenged me in March, he
said: “Ultimately, true deflation will lead to higher
inflation!” His assumption is that when we have the
next global meltdown and deflation, governments
will rev up the printing presses again.
Most didn’t believe us when we said that would
happen. That’s their loss. The chart below shows the
story (note, the numbers and letters point out the
Elliot Wave progressions):
They might very well do that… but they’ll not
come close to the numbers we need to save the
world this time or to create substantial inflation in
today’s environment of unprecedented debt and
financial leverage.
Gold: 1998 - 2020
There are $247 trillion dollars of financial assets
globally, including loans. I predict at least $100
trillion or more of those assets will disappear before
this Economic Winter Season ends. Something
similar actually happened in the last deflationary
bubble burst in the 1930s and many others before it,
so there’s precedence here.
That’s what the gold bugs get and don’t get about
debt and money printing. On the one hand it is like
magic: You get something for nothing. On the other
it’s also like magic: Now you see it, now you don’t!
Are governments going to print more than that
$100 trillion in a short period of time after a mere
$11 trillion in the last six years? Will they have the
credibility to ramp up QE massively higher when
the current unprecedented, “something for nothing”
program fails miserably? I don’t think so.
Historically, the bursting of debt and financial
asset bubbles always leads to deflation, not inflation,
when they burst. When money in the form of debt
and financial assets disappears, then there are less
dollars chasing the same goods, and that’s the classic
definition of deflation. Those remaining dollars are
worth more, not less! How could the gold bugs miss
this simple and historically obvious fact?
Unprecedented money printing has been required
to simply offset deflation and hold off another Great
Depression, because no politician or central banker
wants to be in charge when this great deleveraging
of wealth takes place. The Fed can do no more and
the ocean it’s been holding back is about to come
4 Boom & Bust
$2,200
$1,950
$1,700
$1,450
In our newsletter
we gave a major sell
signal for gold and
silver on April 25, 2011
$1,200
$950
$700
$450
B
A
C
$200
1998 200220062010 20142018
2020
SOURCE: Bloomberg
Gold bubbled up along with most commodities
during the bubble boom of the Roaring 2000s.
However, it didn’t protect investors when the
financial meltdown accelerated in the second half of
2008. It fell 33% (which you can see between point
3 and 4) and silver dropped 50%, while the U.S.
dollar surged up 27%. As we predicted, the dollar,
not gold, was the safe haven.
Gold was one of the few commodities to
surge to new highs in September of 2011 (up to
point 5 in the chart), as central banks went nuts
printing money to save financial institutions and
rekindle the bubble. Investors naturally thought
such unprecedented money printing would create
inflation and even hyperinflation on a lag.
Guess what? It didn’t… even after six years!
Note that we gave a major sell signal for gold and
silver the day that silver peaked at $48 on April 25,
2011 and gold peaked a bit higher in September of
2011.
Gold collapsed in early 2013 out of a three-year
trading range that should have broken out to the
www.dentresearch.com
upside after rising so strongly into a peak of $1,934.
Such surges followed by sideways-trading almost
always continue up in the same direction to a final
bubble peak before they collapse.
But the big surprise instead was that inflation fell
in most developed countries during 2013, even after
the U.S. accelerated with QE3 and Japan went off
the reservation with its own stimulus.
Central banks may print trillion of dollars or
euros or yen, but they only add a minor amount of
the money in the economy. Money and wealth are
created by fractional reserve through bank loans (at
10% reserves against deposits) and by appreciation
of financial assets, which is higher when central
bankers make money free and push interest rates
down to zero short-term, and long-term when
adjusted for inflation.
If most of the money created went into the real
economy via bank loans as planned and hoped,
then inflation would be a real threat, but that’s not
what happened. The $11 trillion produced through
massive global quantitative easing since late 2008
has substituted for the lack of lending and instead
fed a final speculative bubble in financial assets… no
inflation, just greater bubbles in financial assets…
that’s where the inflation occurred from money
printing.
But the gold price was built on the expectation of
consumer price inflation, so it collapsed dramatically
from $1,800 to $1,180 into late 2013. It then traded
sideways in 2014 and made slight new lows of
around $1,150 in early November.
Now, like I said at the beginning of this issue, I
expect a substantial bounce for several months into
this summer. But the trend is still down because if
inflation is gold’s elixir, deflation is its poison.
During the last major and rapid disinflationary
environment, gold lost 66% of its value, dropping
from a peak of $850 in January 1980 to a low of
$284 just five years later. In today’s gold prices, that’s
the equivalent of a drop to around $420.
And that is exactly why I continue to sound the
warning sirens. Gold can be a good hedge against
high inflation when the economy is running hot and
www.dentresearch.com
showing no signs of stopping. But this is the last
thing we’ll have to worry about over the next five
years. Instead, debt deleveraging and global deflation
will push the prices of all assets and commodities
(even GOLD) much lower during the Economic
Winter Season.
This brings me to another one of the gold bugs’
assertions that really gets me riled up…
The Dollar’s Days Are
NOT Numbered
Gold bugs make two claims on the currency
front. Firstly, that the dollar’s days are numbered and
secondly, that when the dollar collapses gold will be
the only safe currency to hold.
Seriously? I challenge every gold bug to take a
sliver of gold or a Krugerrand to Walmart or Target
next time they’re buying groceries and see if they’ll
accept that as payment for the goods in the shopping
cart!
Simply put: Gold is NOT a currency.
Then there’s the fact that most transactions
conducted around the world today are in dollars.
All commodities are priced in dollars. Everything
(practically) is priced in dollars!
It’s not that the dollar is a fantastic currency.
It’s simply that we’re the best house in a bad
neighborhood.
The bigger question to ask someone who claims
the dollar’s days are numbered is this: If not the
dollar, where else would people go?
The euro? That’s doubtful considering the euro
zone is an absolute disaster area at the moment,
and with Germany — the region’s strong man —
facing the worst demographic trends ahead (like
we predicted for Japan in the 1990s), there’s little
chance that the situation will improve across the
pond any time this decade.
The yen? No! It’s simply too small a piece of
the foreign exchange puzzle. Besides, the Bank of
Japan is doing everything in its power to weaken
its currency in a desperate attempt to revive a dead
Boom & Bust 5
patient. It is printing money at three times the
rate the U.S. was in QE3, relative to the size of its
economy.
The franc? Not likely. Again, too few of them in
the greater scheme of things.
The yuan? Please be serious! Yes, the Chinese
are pushing hard to dethrone the dollar. They even
recently requested to be added to the International
Monetary Fund’s reserve currency basket.
And they’ve started the Asian Infrastructure
Investment Bank to compete against the U.S.led World Bank. They’ve even signed up 40-odd
countries to join it as founding members (including
the U.K. and Germany).
But that — or any serious threat to the dollar
— would require the yuan to float freely in the
market… something the Chinese government is not
willing to allow yet.
The truth is that most major countries, from
China to Japan to Germany, export a much larger
portion of their economy than we do and becoming
the reserve currency would raise their currency and
kill their exports.
Look, I’m not saying that the dollar will remain
king of the world forever. A time will come when
we lose our seat as the reserve currency… or that
we become part of a basket of currencies… or an
international currency for foreign trade. But that’s
not likely to take place in the next five years (or
even 10 for that matter). Changing every global
transaction from dollars to another currency can’t
happen overnight… or even over half a decade.
There are simply too many moving parts.
Besides, the dollar stands to only gain strength
as we head into the next great crash and endure the
resultant financial crisis. The buck will experience a
brief, near-term correction, but my target forecast
is 120 on DXY by early 2017, 20% higher than
recently.
When we finally experience global deleveraging
and deflation, suddenly there will be fewer dollars in
the world… and fewer dollars means each one will
be worth more.
6 Boom & Bust
Actually, that’s the one thing gold bugs are right
about. There is a currency crisis ahead. They’re just
wrong about one crucial detail…
No Currency Could Ever Return
to the Gold Standard
Since our economy is no longer commoditiesbased, as it was largely up until the last century,
gold is no longer the best standard for money. Not
enough gold exists in the world to make this happen
at any rate. The total gold stock would fit into an
Olympic-size swimming pool. How do you base
global currencies on that?
Also, the supply of gold is not growing as fast as
that of the higher-value-added goods and services
that now drive our economy, like health care,
education, financial services and even homes and
autos.
If you think deflation is a problem today, you
can’t possibly imagine how bad it would be under a
true gold standard with too-little gold to chase the
same goods. In fact, the gold bugs prove this point
themselves when they pull out their charts showing
that almost everything is falling versus gold… that’s
deflation!
Another bugbear for me is the insistence by gold
bugs of the metal’s timeless value. That’s just simply
not true. Today, mining output can’t keep pace with
the needs of a modern economy, so a gold standard
means severe deflation. But in the 1500s, the gold
standard actually led to massive inflation in Europe.
The discovery of gold in Mexico and Peru by the
Spanish conquistadors caused the supply of gold
circulating in Europe to explode almost overnight.
With vastly more gold chasing a relatively fixed
amount of goods and services in the renaissance
economy, a surge of inflation was the result.
Now obviously I don’t expect anything like that
to happen today. Short of discovering a real way to
fulfill the alchemist dream of turning lead into gold,
we won’t be seeing a huge surge in the supply of
gold. But my point stands: Gold is not a stable store
of value. Its value fluctuates just like every other
www.dentresearch.com
traded commodity and it’s more volatile than stocks.
Would we want to peg our dollar to the Nasdaq? Of
course not. Then why would it be any better to peg
it to gold?
It’s Not Going to Be the Currency
Crisis They Expect
Yes, the Fed has printed nearly $3.5 trillion in QE
out of thin air. But the Fed’s QE is finished for the
time being while the ECB has printed more than $3
trillion, with another trillion-plus promised. That’s
why the dollar has gone up 35% in value versus the
euro since the crisis set-in in early 2008, and more
so since we tapered off our QE and the ECB cranked
QE up strongly again.
And Japan has created the equivalent of over
$7 trillion in QE over a longer period of time,
adjusted for the smaller size of its economy. As
of early 2013, Japan began doubling down, with
money creation beyond anything the U.S. or Europe
has done thus far.
Overall, when most nations are all printing
money together, currencies don’t just go down to
zero; they appreciate or depreciate relative to each
country’s money printing, trade imbalances, debt
and economic progress.
In fact, measured against the currencies of
six major U.S. trading partners, the U.S. dollar
index actually has appreciated 41% since the
U.S. Dollar Index (DXY): 1978 - 2016
180
160
-58%
140
+70%
120
100
80
60
1978
1988
1998
20082016
SOURCE: Bloomberg
www.dentresearch.com
economic crisis began in early 2008, but only after
depreciating 58% from its high in 1985 during the
early stages of the great boom!
Note that even I think the dollar is due for a short
term correction of 5% to 10% before it heads up to
120 on the dollar index (DXY).
So why did the U.S. dollar depreciate 58% versus
other currencies from 1985 through early 2008?
Because we created $42 trillion in private debt and
$15 trillion in government (and foreign) debt at the
peak of the debt bubble in 2008! The great secret is
that the private banking system, not the Fed, creates
most of the money and debt.
There are two ways to create money:
1. The government creates or prints money through currency or digitally (QE); and
2. Banks loan money out of thin air against deposits that aren’t really theirs and typically at a 10% reserve ratio.
When corporations or governments issue bonds
to fund their debt, that is not creating money.
Investors have to take money out of savings or
other investments. However, it still creates financial
leverage and future obligations that can threaten
their existence in tough times.
Although the Fed has printed substantial amounts
of money in the recent financial crisis through QE,
this is not typical. There was only $800 billion in
created money and currency before 2008.
The point is that bank borrowing at the private
or public level creates money out of thin air and
that is what (along with massive bond issuances
by corporations and the government) created the
debt bubble that first peaked in 2008. QE has only
been a desperate emergency response to keep that
debt and financial asset bubble from bursting and
deleveraging.
The U.S. led the debt bubble globally. The dollar
devalued in the bubble boom largely because of
private debt creation as a result of aggressive lending
policies and government-led low interest rates and
home-borrowing policies. The government did help
initiate and accelerate the private debt bubble, but
Boom & Bust 7
private banking and the shadow banking system
took debt levels to unprecedented heights.
Today there is $69.2 trillion in U.S. dollar
denominated debt globally versus $49.6 trillion in
euro denominated debt versus $25.1 trillion in yen
(Japanese) denominated debt. This is the sum of total
domestic debt, government and private, plus foreign
debt.
The chart below shows how the U.S. dollar has
dominated foreign debt since 2005. It has grown from
40% of foreign debt to 55%, while euro-based foreign
debt has fallen from 35% to 25%, and Japanese or
yen debt from 8% to near 3%. All other foreign debt
amounts to nearly 17%.
Growth in Foreign Debt:
U.S. Dollar, Euro and Yen 2000 - 2013
–– U.S. Dollar
–– Euro
–– Yen
60%
$6.8 T
50%
40%
30%
$3.1 T
20%
10%
0%
2000 $432 B
2005 2010 2013
SOURCE: The International Role of the Euro, July 2014, European Central Bank
So when the great global deleveraging comes, more
U.S. dollars will be destroyed through debt failure
than any other leading currency — 40% more than
for the euro and 176% more than for Japan.
The more a currency is destroyed by debt
deleveraging, the fewer dollars there are and the
more scarce and valuable that currency becomes
relative to other currencies… simple supply and
demand — Duh! That makes the dollar more
valuable versus other currencies.
This represents a huge miscalculation by the gold
bugs as they see inflation versus deflation (from the
destruction of all currencies) and a falling dollar
versus a rising one against most other currencies. The
U.S. is still the best house in a bad neighborhood,
8 Boom & Bust
especially in a global financial crisis as in 2008 to
2009. It has been the best house in the artificiallystimulated recovery as well.
We have been forecasting for years, especially
since the euro was at 1.60 dollars, that the dollar
would approach parity with the euro and even below
that. It is already close in early 2015 and we would
forecast that it could go to as low as 0.85 dollars in
the next two years or so… a 47% devaluation of
the euro. Who’s going to propose that such a falling
currency become the new reserve currency?
The dollar has already appreciated against the euro
and most major currencies since the crisis began in
early 2008. It will appreciate further when the next
financial crisis forces massive restructuring of debt
around the world, and much more so in U.S. dollars
than in euros or other major currencies.
Deleveraging debt is the secret to restoring the
value of the U.S. dollar and to rebalancing the
economy. Lowering debt levels will take a huge
burden off private sector households and businesses.
A lot of the money created out of thin air and
speculative bubbles will simply disappear. In the
natural, free-market systems of the 1930s, this
happened violently; total debt levels fell from a high
of 190% of GDP in 1929 to 50%!
This time the Fed is actively preventing such a
rebalancing by printing money, as are most central
banks. The government could more actively force
banks to write down debts and free up cash flow
for the private sector. Instead, it is giving banks
free handouts to keep them from restructuring and
writing down debt that would greatly relieve the
burdens of the private sector that can rekindle our
economy again.
The truth is that we debased the U.S. dollar
during the boom by creating debt at 2.5 times the
rate of GDP growth for 25 years. This is again where
I applaud the gold bugs for recognizing this. They
are way more astute than the mainstream “clueless”
economists. But debt deleveraging in the downturn
and financial crisis destroys such debt and thereby
destroys dollars and makes them more valuable.
We will restore the dollar only by allowing a massive
www.dentresearch.com
restructuring of private debt — and the government is
fighting that rather than facilitating it thus far.
In addition to debt restructuring and write-offs,
$25 trillion or more in financial assets and household
net worth will disappear when all the bubbles from
stocks to bonds to real estate to commodities burst.
Once unprecedented QE finally fails, there will
likely not be support or capability to reflate the
bubbles one more time, at least not for long. Hence,
financial markets and assets will not go screaming
up to new highs again. In fact, I predict that stocks
adjusted for inflation will not exceed the highs of
2015 for at least two decades and possibly not for
the rest of our lifetimes.
As I said earlier, money creation is like magic…
now you see it, now you don’t. It’s not real or
productive long term — it just creates speculation
and overinvestment. When money disappears from
deleveraging and default of debt and financial assets,
we get a period of deflation to reset the money
supply and value of assets back to normal so the
economy can grow again from a healthier base
and financial structure. We clearly don’t have that
after the greatest debt bubble in history from 1983
through 2008 and then six years of massive QE and
even higher debt and financial bubbles.
Then there’s this…
Gold Is Only a Commodity
The particular fact that most gold bugs prefer
to ignore is that gold is still largely an ordinary
commodity, not much different than oil, corn and
pork bellies… only it’s a lot less consumable, except
for jewelry and some industrial applications. Only
the extravagantly wealthy — or perhaps criminally
insane — use it for much more than that.
The Inca emperors of Peru used to paint their
bodies in gold and proclaim themselves to be gods,
and the James Bond villain Goldfinger used to paint
his victims in gold. But for the rest of us, it’s really
just not that useful.
To go back to facts, rather than relying on
ideology, the majority of gold — some 51% of it
www.dentresearch.com
to be precise — is used for the simple purpose of
jewelry making. Another 12% is used pragmatically
to make technological hardware.
But despite the fact that roughly two-thirds of
gold is used for commercial applications, its price is
often driven by other factors due to our emotional
attachment to it for its past monetary role.
Sure, gold is capable of producing returns through
capital appreciation. Buy it at $1,200… sell it at
$1,250… and you certainly 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
longer-term. The only money to be made in gold
is when today’s buyer is willing to pay more than
yesterday’s buyer.
This makes it a very tenuous “safe asset” to hold.
You’re betting your money on what someone will
value your gold from one day to the next.
And Only the Miners Care That
Gold Is Now at Production Cost
Another argument gold bugs throw around is
that, at current prices, gold is now at production
cost. “There’s no way it can go lower from here,”
they say. Quite honestly, only a miner could say that
with a straight face.
When there's deleveraging, financial assets and
goods don’t fall back to fair value. They fall way
below in a crash and financial crisis. Stocks were
overvalued in late 1929 and undervalued in late
1932. Gold got way above its cost of production and
it will go well below. That will restrict supply again
and make it rise in value down the road — just like
all commodities and financial assets.
Isn’t fracked oil way below its cost of production?
That hasn’t stopped oil from sliding inexorably
down. Nor will it stop oil from falling to as low as
$10 or $20 a barrel, which I’ve been forecasting it
will for years. I’ve won some bets on that as well!
When the real estate bubble burst, didn’t the price
of homes drop substantially below what it cost to
build them? Of course they did and that collapse
Boom & Bust 9
decimated the industry while it destroyed people’s
lives. I have a friend who has a house that is below
its cost of production and is still falling!
all types of new features and appliances. He adjusted
home prices for the size of the average house and the
improved features — and that took some work.
Then there’s this important point to consider…
Unlike stocks that have averaged 7% adjusted
for inflation since the late 1800s, housing did not
appreciate long-term when adjusted for inflation.
Most people still don’t get that. Housing did
depreciate temporarily with the mass manufacturing
revolution after World War I and the Great
Depression. It saw its only true bubble adjusted for
inflation from early 2000 to early 2006. But that
bubble burst 34% as Shiller and I both forecast.
Almost no one saw that coming.
Adjusted For Inflation, Gold
Isn’t All That Shiny
Once adjusted for inflation, the price of gold
really hasn’t gone anywhere for the last 225 years.
See for yourself…
The Real and Nominal Price of Gold
–– Gold
But there’s a redeeming quality to real estate. You
can live in it, and avoid paying rent, or rent it out
to someone else to collect the income. So, it’s really
more like a high-yield bond. I have been telling
investors that they should buy real estate for the
income and/or the rent savings, especially if rents are
higher than mortgage costs, which they more often
are — but not for appreciation with a major bubble
burst underway. Gold offers none of that.
–– Gold Adjusted for Inflation
$2,000
$1,600
$1,200
$800
And then there’s the commodity cycle that has
been in play since 2008.
$400
$0
1790
1890
1990
2010
SOURCE: Bloomberg, St. Louis Fed
This shows that gold is basically a nonappreciating asset. Even worse, you can’t rent it
out for income like you can with property, and it
costs money to store in any sizeable quantity as it
is heavy and valuable. This makes gold and most
commodities possibly the worst investment to make
long-term of any asset class, including sovereign,
corporate and high-yield bonds, stocks, residential,
industrial and corporate real estate.
I like to point to Robert Shiller’s research in real
estate as a way of illustrating this inflation-adjusted
weakness in gold.
Shiller proved that real estate doesn’t have the
appreciation value everyone thinks it does. He
recognized that most of the appreciation in housing
over time comes because we have moved from selfbuilt tiny log cabins to massive McMansions with
10 Boom & Bust
The Commodity Cycle Is Still
Moving Against Gold
I have found many years ago that commodities
follow a very clear 30-year cycle. Over the last
century there were clear and major peaks in 1920,
1949 to 1951, 1980 and 2008 to 2011. How’s that
for a regular cycle? This cycle points down into
around 2020 to 2023 or so and this does not bode
well for commodities including gold.
The two peaks and bubbles in gold since it started
trading freely in the 1970s were exactly at the top of
the commodity cycle in 1980 and near the secondary
top in 2011, where many agricultural and industrial
metals peaked (the primary top was with oil in mid2008).
In short, I expect gold to bounce in the middle
of 2015, but the overall trend will continue down,
likely into the early 2020s.
www.dentresearch.com
2023, when the 30-year commodity cycle is likely to
bottom.
30-Year Commodity Cycle
CRB Index (PPI before 1947) 1913 - 2040
2010
500
400
2040
1980
300
Peak
200 1920
1950
100
0
1913 1920
1950 1980 2010 2040
SOURCE: Bloomberg
I get it. It’s easy to fall in love with gold. It glitters
and conjures up the sense of wealth and power. In
some cultures, it’s a status symbol; in others, it’s a
store of rainy day value.
To the Egyptians, it was the flesh of the gods.
From the Greeks to the Romans to the Aztecs and
the Spanish, almost every civilization has revered
gold. In fact, gold is so desirable that wars have been
fought, empires have been plundered and entire
civilizations have been destroyed in search of the
yellow metal.
And yes, gold will see its day in the sun again,
from around 2020/2023 to 2038/2040. It’s during
that time frame that we’ll see the next inflation and
commodity cycle accelerate upward again, driven by
emerging countries who are much more commodity
intensive than the wealthier but aging developed
countries. Gold may even see something like $5,000,
as the gold bugs forecast…
But only after seeing at least $700 to $740 in
the next few years. Gold could even retest its prebubble lows between $250 and $400 by 2020 to
www.dentresearch.com
When the largest debt and financial asset bubble
in modern history bursts ahead, between 2015 and
2020, a high percentage of global financial assets,
including loans, will vanish. When as much as $100
trillion or more of the money created vanishes like
some cheap magic trick, there will be less money
chasing goods, and that again is the classic definition
of deflation.
We will not see inflation of any magnitude for a
good while. We haven’t seen any worth noting after
$11 trillion in quantitative easing worldwide. In
fact, we’ve only seen less. That’s because the money
printing has been all about saving the banks and
financial institutions. It has merely staved off a
massive deflation and reset of our monetary system,
debt and financial assets.
But this can’t go on much longer. When this
unprecedented and unbelievably irresponsible global
bubble comes to an end, there will be deflation.
When that happens, gold will continue its
meltdown.
So wait for our signal and then pull the trigger on
Adam’s recommendation, which is…
Action to Take: Get ready to sell short shares of
the SPDR Gold Trust (NYSE:GLD).
But for now, hang tight. Adam will keep you
posted over the next several Boom & Bust issues and
in your Monday 5 Day Forecast issues.
Yours,
Harry
Boom & Bust 11
Boom & Bust Portfolio
Investment Ticker Entry Added Buy Price Current Price Stop
Total Total
Loss Dividends Returns SNH/NYSE
1/30/15
$23.29
$21.69
$19.00 —
-6.87%
Buy up to $25
GRPN/Nasdaq
9/26/14
$6.66
$7.25
$4.66 —
8.86%
Buy up to $9
Call
BOOM PORTFOLIO
Senior Housing Properties Trust
Groupon, Inc.
SPY/NYSEArca 9/15/14
$198.80$209.49
SPY/NYSEArca 9/15/14
$198.80$209.49
TTFS/NYSEArca
7/28/14
$51.49
$57.77
$0.34
12.86%
Hold
Diageo plc
DEO/NYSE
1/24/14
$127.78
$114.62 $89.50 $4.65
-6.66%
Buy up to $133
Thor Industries
THO/NYSE
5/23/13
$41.10
$62.23
$48 $2.91
58.49%
Buy up to $64
Brookfield Infrastructure Partners
BIP/NYSE
11/21/12
$33.98
$44.62
$25 $4.55
44.69%
Hold
The Dow Chemical Company
DOW/NYSE
9/21/12
$30.26
$48.83
$37 $3.87
74.16%
Buy up to $50
The Dow Chemical Company (2nd Entry)
DOW/NYSE
7/24/13
$34.37
$48.83
$37 $2.59
49.61%
Buy up to $50
Omega Healthcare Investors
OHI/NYSE
5/24/12
$20.93
$38.47
$29 $5.63
110.70%
Buy up to $42
Omega Healthcare Investors (2nd Entry)
OHI/NYSE
8/28/13
$28.59
$38.47
$29 $3.39
46.41%
Buy up to $42
PowerShares DB USD Index Bullish ETF
UUP/NYSEArca
10/25/11
$21.51
$26.01
$16 —
20.92%
Hold
Associated Estate Realty Group
AEC/NYSE
6/20/11
$16.14
$24.13
$20 $3.00
68.09%
Hold
Associated Estate Realty Group (2nd Entry)
AEC/NYSE
5/30/14
$17.29
$24.13
$20 $0.81
44.25%
Hold
SCCO/NYSE
5/1/13
$33.01
$29.36
$44 $1.00
8.03%
Sell Short down to $22
ProShares UltraShort Yen
YCS/NYSEArca
7/27/12
$41.96
$88.17
$60 —
110.13%
Hold
iShares MSCI Canada Index Fund
EWC/NYSEArca
2/28/12
$29.10
$28.47
$35 $1.90
-4.38% Sell Short down to $26
iShares MSCI Canada Index Fund (2nd Entry) EWC/NYSEArca
3/31/15
$27.18
$28.47
$35 —
-4.75% Sell Short down to $26
SPDR Barclays Capital High Yield Bond ETF
7/28/11
$40.25
$39.47
$48 $9.78
-22.36% Sell Short down to $37
Long SPY/ Short EEM
Long SPY/ Short FXI
TrimTabs Float Shrink ETF
7.38%Hold
EEM/NYSEArca 9/15/14 $43.57$42.82
-20.67%Hold
FXI/NYSEArca 9/15/14 $40.37$50.99
$40 BUST PORTFOLIO
Southern Copper Corp
JNK/NYSEArca
NOTES: The Boom & Bust Portfolio is an equally-weighted strategy and does not include dealing charges to purchase or sell securities, if any. Taxes are not included in total return
calculations. “Total return” includes gains from price appreciation, dividend payments, interest payments, and stock splits. Securities listed on non-U.S. exchanges; total return
also includes any change in the value of the underlying currency versus the U.S. dollar. For transparency sake, we want you to know that we have an advertising relationship
with EverBank. As such, we may receive fees if you choose to invest in their products. Stop-losses: The Boom & Bust Portfolio maintains stop-losses on every stock, ETF and bond
recommendation; stop-losses are not exercised for mutual funds unless otherwise noted. Sources for price data: Yahoo! Finance (finance.yahoo.com), Financial Times Portfolio
Service (www.ft.com), TradeNet (www.trade-net.ch/EN), and websites maintained by securities issuers.
Senior Editor............................................................ Harry S. Dent
Senior Editor............................................................ Rodney Johnson
Portfolio Manager................................................. Adam O’Dell
Publisher................................................................... Shannon Sands
Managing Editor.................................................... Teresa van den Barselaar
Boom & Bust is published 12 times per year for US$99/year by Delray Publishing, 55 NE 5th Ave., Suite 200, Delray Beach, FL 33483 USA. For information about your membership,
contact Member Services at 888-272-1858 or fax 561-272-5427. Contact us at www.dentresearch.com/contact-us. All Rights Reserved.
Protected by copyright laws of the United States and international treaties. This Newsletter may only be used pursuant to the subscription agreement and any reproduction,
copying, or redistribution (electronic or otherwise, including on the worldwide web), in whole or in part, is strictly prohibited without the express written permission of Delray
Publishing.
LEGAL NOTICE: This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you
shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. The information herein is not intended to be personal legal
or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should
be sought. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after
on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation.
12 Boom & Bust
www.dentresearch.com
