Demographics. Geopolitics. Innovation.
The following article was published privately for clients before 2018 after Harry Dent predicted gold would hit $700 in 2018. The public release date was set for January 31, 2019.
Harry Dent recently predicted that gold will head to $700 an ounce during 2018. With the shiny metal hovering near $1270 at the time of this writing and a year high slightly above $1300, a $700-$800 price would be an approximate 40% drop in price. Dent sees this as a possibility due to returning deflation, countries being forced to sell due to covering for debt, and higher prices squeezing the demand for gold by limiting available funds to purchase gold. At the current time of this article, there are approximately 189,000 metric tonnes of gold according to the United States Geological Survey in the world and this rate appears to grow at about 1.5-2% a year. The United States of America (4), China (1) and Russia (3) are three of the five largest producers of gold in the world.
Gold will not fall to the price of $700 in 2018 for many reasons. The below three reasons show why gold will not fall to $700, though it may see its price drop for 2018 relative to some of the below factors.
1. China is set to release oil futures in Chinese Renminbi. Harry Dent assumes that countries will rush to sell gold because they’ll need assets for debt in another currency (Euros and US Dollar) and will be forced to sell gold. This may be true and this may contribute to a declining price of gold for 2018, but the powers that have the most gold are increasingly becoming China and Russia, neither of which need to sell gold for any other currency. Russia has access to over $120 trillion in commodities (per our calculation) and China will be releasing oil futures in their own currency during 2018, giving them the ability to buy oil with the Chinese Renminbi. This means China will be able to print its own currency for the most important commodity it needs. In addition, China and Russia have grown closer together economically – the most important geopolitical development of the 21rst century, especially if this continues. There isn’t a single commodity that China or Russia need that the other partner doesn’t have. Therefore, we don’t see either of these countries selling gold, but they may both buy a lot of gold. Any country selling gold may be offset by China or Russia buying gold and the lower the price of gold, the more gold China and Russia obtain (at low prices too).
2. As Russia buys gold, so will Eastern European countries. Russia has been on a gold buying spree since 2014 while the Russian gold industry is booming. While people in Europe or in the United States may not see the importance of this, people in Eastern European countries do: as Russia has more gold, they will also need gold. Some of these countries rely on Russia for energy and other commodities and Russia’s demand for gold may be foreshadowing what they require from their customers in the future. We expect that Eastern European countries will not be sellers of gold, but possibly buyers. India is another country that we may see buy gold as well: India maintains a strong and positive relationship with Russia.
3. Commercial hedgers may take a long position in gold during 2018. We started with Chinese and Russian demand because if we see this demand, commercial hedgers must also be seeing this. Commercial hedgers tend to be the first part of any industry aware of shifts – the patterns we’ve seen emerge since 2014 has been much more cautious at lower extremes. While commercial hedgers have no problem taking a short position against gold if it rises too fast, they also tend to cut their shorts quickly if it falls too quickly or too low. At the current time of our research, we don’t see any indication of gold below $1000 for 2018 based on commercial hedging activity in 2017, though it’s always possible they take an extreme short position during 2018. However, the risk here is that countries like China or Russia may seize on the low price, so the lower-bound short risk may be more shallow than expected. A gold producer is concerned about too low of a gold price, as if the producer sells to low and a country picks up cheap gold, the producer loses while the country can sit on the gold.
A gold producer (such as a miner) can always mine the gold and sit on it, especially if it has little debt or if all its debt is accounted for, such as is the case for some in the industry. This is only a reminder that a “long” position does not have to involve paper or electronic contracts, relative to the gold producer.
Outside of an extreme situation, gold will not fall to $700 an ounce in 2018.