Saturday , 18 August 2018

Harry Dent’s Claim That Gold Will Drop To Its Pre-bubble Price Of $400/ozt Is Preposterous – Here’s Why

Harry Dent says gold is heading for $650-$750, but that is just the first target. Dent then says, “Ultimately for gold to erase its bubble and get back to its bubble origin, it would be $400-$450″.  Once gold hits $400 or $450, then Dent would be a buyer.

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…Dent bases a low gold price upon what he calls “The end of the Commodity Super-Cycle.”  Dent sees nothing but massive deflation ahead…[which] will cause the gold price to fall along with all commodities. However, Harry Dent’s gold price forecast is quite faulty because he fails to consider the most crucial component – ENERGY…

I imagine Dent arrives at his $400 gold price forecast from using the Elliott Wave Theory of technical analysis.  While technical analysis is an excellent tool to forecast price, it doesn’t incorporate the changing energy dynamic that controls the price of most goods, commodities, metals, energy, and services…

For example, doesn’t Dent realize the cost of gold production has skyrocketed since 2004?  The following chart shows the top four gold miners estimated total cost versus the gold market price:

In 2004, the top four gold miners (Barrick, Newmont, AngloGold & Goldcorp) average estimated total production cost was $340 an ounce based on an average $396 realized price.  I calculate the estimated total production cost by using the net income or adjusted income as a percentage of total revenues.  Thus, the average profit margin for the top gold miners in 2004 was 16%.

Now, compare that to an estimated production cost of $1,146 in 2017 while the group received $1,260 an ounce for selling their gold.  The top four gold miners average margin of profit in 2017 was approximately 10% so the gold miners aren’t getting rich producing the King Monetary metal.

Again, how can Dent forecast a pre-bubble $400 gold price if the average total production cost is nearly three times higher?

Dent’s failure to understand how energy is impacting the gold price (and everything else) will come back to bite him hard in the future.  If the gold price fell back to $400, that would utterly destroy the gold mining industry.  I haven’t seen one gold mine profitable at a price anywhere near $400-$450…

Now, if we take a very conservative approach at the gold mining industry’s basic cost of production, the price is still more than double than…Dent’s $400 price:

The gold mining companies now put out a new financial metric called the AISC – “All-In-Sustaining Cost.”  However, this does not include all costs and is not a realistic figure for the gold mining industry to survive for long.  Regardless, the average $890 All-In-Sustaining Cost that the top four gold miners reported is still 122% more than Dent’s $400 low price.

Furthermore, the gold mining industry’s costs are rising a great deal more in percentage terms than the oil price.  For example, let’s take a look at the change in oil price and the top four gold miners total production cost:

2004 oil price = $38.26

2017 oil price = $54.13

2004-2017 oil increase = 41%

2004 gold cost = $340

2017 gold cost =$1,146

2004-2017 gold cost increase = 237%

How can the gold price be in a bubble if it costs 237% more to produce it today than it did in 2004??  Does Dent…really believe that the Elliott Wave Theory or supply and demand forces are the only indicators of the price??

The next chart shows the total production cost from Barrick and Newmont versus the gold market price:

As we can see, the gold market price was never below Barrick and Newmont’s total production cost.  If gold was ever in a small bubble, then it may have been a bit frothy in 2012 when the average spot price was $1,669 versus a $1,272 average cost for Barrick and Newmont.

If we are going to utilize “supply & demand” forces in determining price, then more demand in 2012 pushed the gold price nearly $400 above Barrick and Newmont’s total production cost.  Analysts need to realize that supply and demand move the price of goods, commodities, metals, and energy above or below their cost of production trend line.  However, the gold mining industry continues to sell gold for more than its total cost – and I believe this has been true for quite some time.

Now, if we want to spot a real bubble, let’s compare the Gold Chart with the Dow Jones Chart:

If we take the most conservative technical analysis for gold using the 200 Month Moving Average (MMA), it’s $975 versus (red line).  Thus, the current gold price is 33% above its 200 MMA.  However, the Dow Jones Index is 90% above its 200 MMA:

Now, I am not saying that the gold price will fall to its 200 MMA of $975, but to claim that gold is going to its pre-bubble price of $400 in 2004 is preposterous when we understand the tremendous production cost increase to produce the shiny yellow metal…

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Related Articles From the munKNEE Vault:

1. Harry Dent: $250 – $400 Gold Coming! Really??

I must take Harry Dent to task regarding his adamant call of $250-$400 gold…In my mind he is dangerously “DELUSIONAL” because following his advice will place you in grave danger. Here’s why.

2. Since Harry Dent is Calling for Catastrophe, Maybe It’s Time to Buy! Here’s Why

Now marketing himself as a “rogue economist,” Harry Dent is forecasting “gold down to $750 an ounce, housing down 35%, oil down to $10 a barrel, the Dow down to 6,000, [and] a war between inflation and deflation” this year. His swami-like predictions in the past have been truly dreadful but, unlike most of his ilk, Dent has perhaps offered something actionable, if not in the way he intended. Let me explain.

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