Harry S. Dent | Tuesday, May 21, 2013 >>
It’s been one year since Porter Stansberry and I laid down our dollar wager.
As a guest on his radio program on April 25, we got into quite a heated debate about the future of gold. (If you missed it back then, you can listen again here.)
He said gold prices would be higher by the end of this decade.
I absolutely disagreed.
I see gold dissolving to at least $750 an ounce over the next few years. In fact, I now believe the price of gold could drop as low as $280 an ounce.
So how are we faring in our respective corners at the end of year one?
I think the answer’s pretty obvious, considering gold’s recent fall from favor. I’m ahead. And, quite frankly, that’s where I’ll stay. This will be the easiest dollar I’ve ever made.
You see, we see deflation as inevitable. Stimulus policies will ultimately fail and when they do, we’ll go into another crisis like the one we experienced in late 2008.
We certainly saw deflation back then, when Lehman Brothers went under and the financial crisis mushroomed. We also saw gold drop 33%, silver sink 50% and oil slide 80%… all while the U.S. dollar went up 27%.
Gold bugs are betting on the U.S. dollar falling… be it from inflation or hyperinflation from irresponsible money printing. We’ve certainly had more than our fair share of the latter, yet the U.S. dollar has risen about 16% since the recession began in early 2008.
We have a mere 1% to 2% inflation after $3 trillion in money printing and $6.5 trillion in deficits and higher government debt…
And I’m not in the least bit surprised.
History is crystal clear on this matter. Every major debt and financial asset bubble in modern history has been followed by deflation in prices – NOT inflation – as debt deleveraging destroys the money created by that debt… and fewer dollars chasing the same goods is the very definition of deflation.
And fewer dollars mean each one is worth more, not less! So the value of the dollar rises.
We have the massive monetary stimulus – which is central banks’ attempt to fight deflation – to thank for the present situation of mild inflation. If governments are actively fighting deflation, which is exactly what they’re doing, then deflation is the trend, not inflation. But we only see the deflation when such artificial stimulus fails to create growth.
I will concede that Porter was right about one thing: governments are only stimulating more and they’re encountering little resistance. I thought there would be more objections by now, that people would have begun to voice their displeasure at the pain they’re being forced to endure at the hands of those in charge. That may still come, in time, but for now people seem to accept their lot in stony silence.
Yes, the Fed is finally talking about tapering off its quantitative easing (QE) activities later this year. I won’t hold my breath on that.
But, without a shadow of a doubt, central banks will fail in the fight against deflation. We WILL see another downturn in the next two years. It’s not a matter of “if” but “what.”
What could cause the next downturn, despite continued stimulus?
We’re certainly not short of candidates…
There’s Spain’s real estate bubble, which continues to deflate. At some point it will overwhelm the banks and Germany and the European Union will lose faith in bailouts.
There’s France, whose economy continues to slow and whose population continues to sour on the euro and bail out plans for weaker nations.
There’s the fact that the demographics in the strongest countries in Europe, like Germany, Switzerland and Austria, will peak in spending and go off the demographic cliff in 2014… just like the U.S. did in 2008.
There’s the problem of commodity prices, which keep falling in a vicious circle that hurts exports and growth for emerging countries, who then they buy less from China, hurting its exports and growth, so commodity prices go down further…
There’s Japan. If it succeeds at raising its growth and inflation rates, it’ll see bond rates rise and the government will faces a massive rise in its interest expenses. The bond markets will lose faith in Japan.
And there’s the little problem of our wealthiest 10% – 20%, who control about 50% of consumer spending in the U.S. economy, finally slowing their spending as their kids leave the nest and they begin to feel the sting of ever-rising taxes on them.
Yeah. There’s trouble ahead.
Gold will suffer, although I have a scenario where gold could temporarily surge to one new high in the next several months, but the odds of that are fading.
The dollar will thrive.
And I’m more certain than ever that Porter will be paying me a dollar in 2022. Even better, that dollar will be worth more than it is today.
Ahead of the Curve with Adam O’Dell
About a month ago I wrote on gold’s next likely move. Basically, I said that we’d see a short-term bounce off support at $1,350 before the precious metal rolled over and fell further.
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