A Dent in the Forecast - Will Gold Really Sink to $400?

Harry Dent

If you don’t know who Harry Dent is, then you haven’t been reading enough pop financial literature. Perhaps that’s a good thing.

He founded HS Dent Investment Management, an investment firm, created the Dent Strategic Portfolio Fund, and is now president and founder of Dent Research and H.S. Dent Publishing.

Dent’s 2009 book, The Great Depression Ahead, became a New York Times Bestseller. But as Gene Epstein of Barron’s Magazine puts it, "Harry S. Dent Jr. knows how to sell books. But whether his stock-market strategies make sense—or money for investors—is another question."

Dent: Gold to Reach $400 or $450!

There’s a big and sometimes brutal distinction between theory and reality, especially when a theory goes awry.

No matter how sound a theory may be, it can never predict the future with any degree of certainty. Hence, the best theories are adaptable to changing circumstances, allowing for multiple potential outcomes.

But people who are in the business of selling a theory or a fixed solution sometimes may often find themselves stuck to their forecasts. It’s worse for prognosticators, who occupy a space only a few degrees away from soothsayers and fortune-tellers.

Any forecaster who has to stick to an ill-founded prediction might find himself cast further away from a situation’s reality and toward the reality of an imaginary present and future.

Harry Dent is known for his $750 (then) and now $400 to $450 gold price forecast. For gold investors who believe in Dent’s powers of prediction, such an announcement can be rather frightening.

Dent’s believes that “the end of the Commodity Super-Cycle” is near. All commodity prices, according to Dent, will undergo a massive price deflation, taking gold down with it.

But his position is based on the misguided notion that the economy will perpetually expand because cheap energy will always be available as if an “Energy Tooth Fairy” will continue to replenish the world’s energy sources.

Even if we were to develop technological means to improve renewable energy sources, the idea of an energy utopia is absurd.

And for a professional financial advisor to base a theory off this notion as if it were a certainty is just plain irresponsible.

Even if energy-without-end were possible, which is doubtful, why would you, as a professional advisor, encourage clients to take certain risks for which you remain unaccountable should your thesis end up being wrong (and your clients losing money due to loss or opportunity cost)?

Perhaps Dent is taking an Elliott Wave theory approach to his forecast on gold, as that would best match his price prediction.

While technical analysis can sometimes serve as a good indicator, markets are ultimately moved by supply and demand.

This means that Harry Dent’s gold forecast is based not only on a geometrically-derived theory on market waves, but it’s missing an important economic component: energy, or more specifically Energy Returned On Investment (EROI).

In other words, it takes a certain amount of energy and cost to produce energy. In the case of gold, it costs a certain amount to produce gold.

In 2004, the four top miners (Barrick, Newmont, AngloGold, and Goldcorp) spent an average $340 per ounce to produce gold whose price averaged $396. This amounted to a 16% profit margin.

In 2017, the estimated production cost was $1,146, sold at a cost of $1,260--a 10% average profit margin.

How is it possible for Dent’s $400 price to materialize when the cost of production is nearly 300% above his projected price?

If gold prices were to sink to $400, that would spell the end of the gold mining industry.

Perhaps Dent is predicting an apocalyptic end to the gold mining industry. But does he even know it?

Taken as a whole, Dent seems to be promoting an economic theory that lacks a critical component to substantiate it: reasonable economics.

There’s this new financial metric that mining companies use called “All-In-Sustaining Cost, “ or AISC. Despite its name, it doesn’t include very single cost that goes into producing gold.

According to the four biggest gold miners, $890 (per ounce) is the AISC figure. Despite its slight inaccuracy in excluding some production costs, this figure alone is already 122% more than Dent’s price of $400.

In addition to this, the cost of gold production is rising even faster than the price of oil:

Whereas in 2004 when oil was at $38.26 and gold production cost (per ounce) was at $340, 2017 sees oil at $54.13 and the gold cost at  $1,146.

Between 2004 and 2017, oil prices increased by 41% while the top four miners’ production cost increased by 237%!

Contrary to Dent’s thesis, it’s hard to imagine that gold is in a bubble when the costs of production are 237% higher than it was in 2004 when gold was trading around $400 per ounce.

When it comes to advising gold investors with regard to the economic landscape, outrageous technical theories just don’t cut it. For some reason, Dent fails to understand this very fundamental point.

How Production Costs Affect Gold Prices (based on data from Kitco.com)

Producers have to make a profit. Hence gold prices hardly ever fall below production costs.

In 2012, one can argue that perhaps there was a small bubble. But that’s stretching it a bit. Dent is saying that gold is in a bubble (anything above $450, according to Dent, is bubble territory).

Looking at production costs alone, do you really think that gold is still in a bubble? Let’s say that there’s a slight possibility it is in one. Would you bet on it?

Dent urges investors to seek safe haven in cash and US Treasuries, as he expects a great deflation to cause the next big financial meltdown.

A little cash on hand is always good, mainly because you can strategically deploy it into other investments.

But in light of  everything taking place in the global economy right now--fears of a global slowdown, the US-China trade war unresolved, the ballooning US national debt, de-dollarization, and the possibility that the Fed may once again slash interest rates--don’t you think that over-concentrating your portfolio to cash and Treasuries might leave you dangerously exposed to potential loss and opportunity cost?

Gold will hold its value more robustly than most other assets.

And other assets, held in addition to gold, may keep you somewhat diversified against a downturn while keeping you in the game to benefit from sector and category rotations.

That is unless you believe geometrical drawings can somehow predict real-life supply and demand.