Before getting to my main topic, Harry Dent’s monetary delusion, we have been barraged with information over the last two weeks. Normally this time of year we do not see much in the way of news whether it be financial or geopolitical, not so this year! In just the last two weeks we experienced some very strange combinations of news and actions. It was just last Monday when I connected many dots for you. China changed collateral rules, crashing oil has impaired low credit shale debt which is spreading to other high yield credits, Congress snuck $303 trillion worth of derivatives on to taxpayer’s shoulders, Russia began testing their alternative SWIFT system and CME/COMEX announced wide collars beginning Dec. 22 for metals trading.
Here we are a whopping 5 business days later and a whole new set of data points are available to chew on. First, the IMF seems to be targeting the dollar in their gun sights. Will there be a try at supplanting the dollar with SDR’s? Another new set of sanctions has been placed on Russia which are a cut and dry declaration of war (Congress). Also, very quietly two more things happened last week. The Volcker rules which would have mandated higher capital ratios at banks were postponed, again, why do you suppose this was? Why can’t the U.S. “allow” marking held assets to market? Why can’t we agree to capital ratios similar to those the rest of the world already agreed to …4 years ago? Why can’t we play the game like the rest of the world wants to?
We also learned Australia would like to have their 80 tons of gold, purportedly held in London, audited. How odd is this? Australia does not trust London? What a turn of events, as I understand it, the Brits look at the Australians as “criminals” based on how (and “who”) the country was originally born. Sorry, but I view this piece of news as quite humorous, were Australia to join other recent European nations and ask for repatriation of their gold … hilarious would be more like it!
…Moving along, 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. Harry did an interview with Greg Hunter last Tuesday, please watch this from about minutes 7-20. The first seven minutes I was thinking to myself, “He sounds logical”. Beginning at about the seven minute mark, he totally lost it in the logic department. Greg asked him 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”. He 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. If you recall, 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 THE best investment of that time period were mining shares because of the leverage they had to gold itself but is a story for another day.
This is the core flaw (among many) to Harry Dent’s logic, 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, a bankrupt government! 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, if we were not the issuer of the reserve currency these two facts would have already relegated us to “banana republic” status! So, two very material facts differ now from the last time we experienced deflation, we were on much more solid footing in both trade and finance …AND gold was what backed our money and gave it value!
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.
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 a global bankruptcy… and in it, many currencies will also “go broke”.
For further proof of Harry 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. Next, what sort of “cash” investments is Harry 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!
I for one just do not get it. Harry Dent says “history proves that gold does poorly during deflation” but only uses 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 …what is different now is for the first time in history, no money issued by any government on the planet has metals backing it. This has been the case since 1971 and as I said, the very first time in human history where no currency, anywhere, had gold backing.
Let me finish with this, it is clear to me Harry Dent does not understand what “money” really is. He is confusing money and currency which many times do act similarly but NOT during times where confidence breaks. He is also very dangerously suggesting to move to brokers in lieu of banks with cash balances, does he not believe broker after broker will fail in the scenario he is suggesting? He says he uses Scott Trade as his broker, does he really believe they will stay solvent ALONG with all of his “cash” investments? Does he not understand that when you deposit money with a bank or broker you will have risk the “end borrower” will default? Even if he is correct and the dollar does strengthen versus foreign currencies (I do not believe so), this still does not guarantee the “borrower of your funds” will be able to pay. Does he not understand what “money markets” actually are and what they are comprised of? Please remember this and never forget it, when you “deposit” into a bank or broker and place it into a CD or a money market, you ARE LENDING the money to “someone”. If you put it into Treasuries, you are lending to the government. If you hold gold in your hand, it is yours. It does not matter who in the world goes broke which includes individuals, corporations or governments. Gold has value because it is no one else’s liability and cannot default. It is THIS very truth as the reason why gold does better than all other currencies during a time of default and currency crisis. Under Harry Dent’s scenario of deflation, confidence will be at its lowest level. Capital will seek the safest money available in stampede fashion. Dollars have absolutely no traits of being money, they are a currency and a failing one at that!
So, that about does it for news from me until after the first of the year. Next week I plan to pen a piece which so many of you have asked me for. I will try to write a fictional account of “The Day After” and what types of hardships and events I believe might happen after the markets seize up. If nothing else, it will be entertaining to me while writing it. Hopefully for you the reader, something, anything you may have forgotten in your preparations may get jarred loose in your mind and acted on. By no means will this missive be all encompassing as a full book is necessary but hopefully you get more out of it than pure fantasy!
Wishing you all the best in this coming year!