I must take Harry “Mr. Deflation” Dent to task regarding his adamant call of $250-$400 gold. Normally I try not to call names or disparage people for their views but what he is doing is scaring people away from their only avenue of safety. The only word I can think of which describes him in my mind is “DELUSIONAL”. I would also add “dangerously” before the word delusional because following his advice in my opinion will place you personally in grave danger. [Here’s why.]
By Bill Holter (BlogMilesFranklin.com) in an article* originally entitled Harry Dent Is Dangerously Delusional! going on to say:
Harry did an interview with Greg Hunter last…[week in which he sounded] logical in the first 7 minutes but [in the 13 minutes thereafter] he totally lost it in the logic department. Greg asked Dent about his prediction of gold going to $700 and Harry said yes, “at a minimum”. He then went on to forecast $250-$400 as a hard bottom over the next several years because of “deflation”.
Dent Says: Gold Can ONLY Do Well In An Inflationary Environment – Not True!
Dent contends gold can ONLY do well in an inflationary environment and uses the crash of 2008 as his example when gold went from north of $1,000 down to $690. I am here to tell you “deflation” is THE BEST environment to hold gold – the classic example, of course, being from 1929-1939. Back then (until 1933), gold and the dollar were interchangeable. You could go into a bank with dollars and leave with gold or vice versa. Dollars were simply receipts for gold…Gold was actually revalued higher by 69.33% in 1933 after it was “called in” (confiscated). The public was paid $20.67 per ounce …and presto, gold was revalued to $35 so in the greatest “deflation” in U.S. history, gold outperformed dollars and dollars outperformed everything else. Dollars were considered “as good as gold” until they were devalued, the unequivocal “king” of money was gold, NOT dollars. It is also interesting [that] THE best investment of that time period were mining shares because of the leverage they had to gold itself but [that] is a story for another day.
Dent Says: Dollars Will “Disappear” Through Defaults & Bankruptcies – Sort Of!
The core flaw (among many) to Dent’s logic is that he says dollars will “disappear” through defaults and bankruptcies. Yes, this is correct but these dollars are issued BY a bankrupt entity! The dollar is not only no longer a “gold receipt”, they are the OPPOSITE of gold. Gold has value because “it is”. Dollars on the other hand have value because the government says they do – and a bankrupt government [at that]! Gold is no one’s liability, dollars are the liability of a bankrupt issuer. I would also like to point out, the U.S. was not “broke” in 1929, we were a surplus nation. The U.S. carries a habitual trade deficit and has funded debt greater than 100% of GDP [but] if we were not the issuer of the reserve currency these two facts would have already relegated us to “banana republic” status! [As such,] two very material facts differ now from the last time we experienced deflation: 1) we were on much more solid footing in both trade and finance AND 2) gold was what backed our money and gave it value!
Dent Says: Russia & China Are the Only Only Ones Buying – WRONG!
Dent also went on to say “Russia and China are dumb money” and they are the only ones buying gold …everyone else is selling it. Really? He is missing a huge point, there is physical gold and then there is paper gold. No Harry, “everyone else is not selling gold”. The physical market is showing all the signs of being very tight. GOFO is negative, we see backwardation in Asia and refiners have been running flat out to meet demand. From what I see at Miles Franklin, we are getting 200 purchases for every sale request. The only place “selling” is taking place is on the paper exchanges …where you do not need physical metal in order to sell it, all you need is collateral. (As a side note, China sold over $100 billion worth of U.S. Treasuries last month)!
One huge error Dent is making is not distinguishing between real metal and paper contracts. He very well may be correct, COMEX gold could possibly go to $250 per ounce …or even zero for that matter, but, this will be accompanied by the real metal approaching “priceless”. If he is correct about a financial collapse (I believe he is), he is very dangerously (to the public) telling people to sell THE ONLY insurance policy with the ability to actually “pay out” when it will be needed! How can dollars which are issued by a mathematically bankrupt entity and at the epicenter of the coming leveraged panic become worth more? History has shown time after time going back to the days of Rome, early China and before, when a government goes too far into debt they print or debase their currency in order to make the debt cheaper. Governments cannot debase gold and gold cannot default, these are two reasons (among others) that gold IS money and why governments detest it.
Dent Says: Move Money Balances From Banks To Brokers – Really!
As further proof of Dent’s delusion, he suggests people move money balances to brokers and out of the banks. Really? Do you really believe the brokers will stay open if the banks are closed? I haven’t checked recently but SIPC had even less reserves to coverage than FDIC and they do not have a direct line of funding to the Treasury.
Dent Says: Get Into Cash
I am sure you have heard the old saying “cash is king” when it comes to financial collapses, this is very true. The important thing for you to understand is what “cash” actually is. Cash is money, “money” which cannot default. Cash during normal times (when confidence is high) can include “currency” but we are not talking about normal times here. We are talking about a global margin call leading to global bankruptcy and in…[such an occurrence,] many currencies will also “go broke”.
Next, what sort of “cash” investments is Dent talking about – money markets, commercial paper? Unless he is speaking about T-bills and only direct obligations of the Treasury he is pointing investors in front of another oncoming train!
Dent Says: Gold Does Poorly During Deflation – Not So!
I for one just do not get it. Dent says “history proves that gold does poorly during deflation” but only uses the most recent history as proof. He says “look at all the panics we’ve been through and yet the dollar always went higher”. I would suggest that “control” was not lost which it certainly will during a global and systemic margin call! All I can say is history is full of examples where gold was revalued higher during deflationary panics. The difference now is that for the first time in history, no money issued by any government on the planet has metals backing it (since 1971)…
*http://blog.milesfranklin.com/harry-dent-is-dangerously-delusional (Copyright © 2014 – A Trusted Resource For Gold, Silver, Platinum, and Bullion News – All rights reserved )
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