We were recently asked to comment on Harry Dent’s predictions for the gold market and we thought that our reply might benefit other gold investors as well. To be precise, we were asked about Harry Dent’s 30-year cycle that supposedly peaked in 2011, and we supposedly could expect gold to peak again somewhere between 2038 and 2040. The indirect implication is that gold is not likely to soar sooner and that it’s likely to decline for a relatively long time.
Dent is referring to gold as a premier commodity and he claims that it moves up and down with the commodity cycle, which, in his opinion, is 30 years. If the above is really the case, then the previous prediction may be well founded. But is it really so?
We respectfully disagree for two reasons.
The first reason is fundamental. Gold’s price reacts more to flows of gold than to mining supply and demand and thus it behaves more like a currency than a commodity. So, from the fundamental point of view, it may not be justified to view gold simply as a commodity (even a premier one).
The second reason is… simply checking the facts and the facts confirm our thesis from the above paragraph, invalidating Dent’s claim that gold moves in a 30-year cycle.
The price of gold was fixed for most of history, so it’s impossible to analyze this cycle directly. No, that’s not our case against the theory. Our case is that we can use the best proxy that we have for the price of gold. The price of gold was fixed, but the prices of gold stocks were not and since the major tops and bottoms in both asset classes correspond to each other, gold miners could be used to check what gold could have done. The gold stocks ratio to the general stock market is even better because by using it we are taking out the part of the mining stocks’ price movement that depends on the stock market volatility.
Let’s check if this is indeed the case with the HUI to S&P 500 ratio.
The above charts show the same ratio over the same time-span and they differ only in terms of scale. Since the link between the HUI to S&P 500 ratio and gold is clearly visible in both linear and logarithmic terms, we can safely assume that our earlier assumption of using gold miners and their ratio as a proxy for gold was correct.
Unfortunately, we can’t use the HUI Index and its ratio in the case of the very long-term analysis as it wasn’t trading just a few decades ago. The gold stock that was trading and that we will use as a proxy for the entire sector (in light of lack of other alternatives) is Homestake Mining.