by Steve St. Angelo, SRSRocco Report:
Harry Dent has been making the rounds suggesting that for gold to get back to its pre-bubble price, it would need to fall to $400 or $450. If we were to believe Mr. Dent, then it would be bad news for gold investors. However, Harry Dent’s gold price forecast is quite faulty because he fails to consider the most critical factor.
Harry Dent has become well-known on the internet for his $750 gold price forecast. He bases a low gold price upon what he calls “The end of the Commodity Super-Cycle.” Dent sees nothing but massive deflation ahead. Thus this will cause the gold price to fall along with all commodities.
Unfortunately for Dent, his gold price forecast is incorrect because he fails to incorporate the Falling EROI (Energy Returned On Investment) and energy into his analysis. Dent, like many in the financial industry, believes in the “Energy Tooth Fairy” (a term coined by Louis Arnoux). What I mean by the Energy Tooth Fairy is the notion that economy will continue to grow forever because plenty of cheap energy will always be available. Thus, economic and business cycles, forecasted by Dent, will also continue forever.
Before I explain in detail why Dent is totally wrong on his $400 gold price forecast, here he is in a recent interview on Kitco:
Dent makes several forecasts in the interview, but his price target for gold is the most startling for precious metals investors. He 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.
I gather Dent is suggesting that gold became a bubble in 2004 when it went above $400 an ounce:
As we can see in the chart above, the gold price never fell below $1,050 since the 2008 Financial Meltdown. Is Harry Dent suggesting that the gold price will drop another $600 from its low of $1,050 in 2015??
I imagine Dent arrives at his $400 gold price forecast from using the Eliot 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. Which means, Harry Dent is forecasting in a vacuum, or without the most crucial component… ENERGY.
For example, does 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.