I have so many bets on the go with gold bugs like Porter Stansberry of Stansberry Research and Jeff Clark at Casey Research - and I just keep winning 'em. That's something to be happy about, right?
But I'm more pained than happy because when I debate these guys (including Peter Schiff), we all agree that we're in an unprecedented debt and financial bubble, with QE adding kerosene to the fire. We all agree that things are about to end very badly. But we disagree on the outcome of this bubble burst: They see the dollar collapsing and gold going to $5,000-plus; I see the dollar strengthening and gold going to as low as $250 an ounce. This leaves worried investors like you throwing your arms in the air. Do you buy gold or sell it?
My research says to stay away from gold until at least 2023 or $250-$400, whichever comes first. And today, I wanted to share just one of my reasons.
What sets my research apart from those gold bugs I battle is that I study longer-term cycles, from where I can see clear oscillations between inflation and deflation - like the extreme deflation of the 1930s and the extreme inflation of the 1970s.
Both extremes, along with demographic downturns in spending, create financial crises and long-term downturns in the economy. Gold bugs think gold responds, in kind, to each. They're wrong - it responds differently.
The two great illusions in the gold camp are that:
- Gold is a crisis hedge, and
- Gold is the only true currency.
The real truth is that gold is the very best inflation hedge.
Look at this chart:
As you can see, gold correlates more than anything else with inflation. It was one of the very best investments during the inflationary crisis of the 1970s, when gold exploded nearly 10 times in value.
And gold bugs think we're heading for more inflation.
That's where we differ. I don't see inflation on the horizon - I see more deflation, where we'll see the deleveraging of massive debt and financial bubbles. This follows the pattern of every debt bubble in history.
Their gold forecasts are based on the assumption that, after unprecedented money creation to stimulate the economy, we would see massive inflation, or even hyperinflation. In such a world, gold would take off again. Maybe I'm senile, but it's been seven years and counting, and inflation is nowhere in sight.
There are a couple of reasons why: For one, our economy had already over-expanded, with debt growing 2.6 times GDP for 26 years in the great boom. Consumers and businesses both over-expanded and over-borrowed, and our government ran up unprecedented deficits in a boom period.
Secondly, all this new money the Fed threw at us didn't go much into lending and expanding the money supply - which would have caused inflation. Instead, it went into financial speculation in asset bubbles at zero short-term and long-term interest rates (adjusted for inflation).
In short, inflation is not the threat - deflation is. With the largest global financial asset and debt bubble in recorded history, when this goes belly-up, trillions of dollars will disappear overnight, like magic: Now you see it, now you don't! That's not only going to strengthen the dollar, it's going to create a massive wave of deflation - and the destruction of gold.
Still, the bugs cling to their gold: "But, Harry, look at all the crises through history. Gold has soared during each one!"
True, but one little detail they're conveniently ignoring is that almost all the crises we've witnessed over the last century have been inflationary. World War I. World War II. Vietnam. The Cold War. The OPEC embargoes and the inflation crisis of the 1970s.
Only the 1930s were deflationary - and back then, gold was fixed in price and confiscated! So we can't judge its real performance during that time. But we can judge its real performance during the first short deflationary crisis in late 2008, when the banking and financial system melted down.
And what did gold do? It went running to mommy! Between June and November 2008, the greatest deflationary financial crisis we have seen in a long time, gold dropped by 33% and silver 50%! And the dollar that was supposed to collapse? It rose 27% in that crisis. We're in for more of the same ahead, only worse.
Earlier, I mentioned there were two myths gold bugs relied on. I've debunked the first today. Sure, gold may well get as high as $5,000 one day - in the next great 30-year commodity cycle. But you may be dead before that day comes. Don't let gold be the anchor that drowns your retirement.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.