Last week, we discussed the tension between forces pushing the dollar up and down (measured in gold—you cannot measure the dollar in terms of its derivatives such as euro, pound, yen, and yuan). And we gave short shrift to the forces pushing the dollar down. We said only that to own a dollar is to be a creditor. And if the debtors seem in imminent danger of default, then creditors should want to escape this risk. The dollar is not redeemable so there is no way to be paid in full for the debt represented by the dollars. The only way to opt out of credit risk entirely is to trade one’s credit paper for gold. That is to buy gold. We said that Federal Reserve insolvency is not imminent.

And then we went on to the case for a rising dollar. It was good timing, as the dollar went up from 25.7 milligrams of gold to 26.5 by Thursday (that’s a drop from $1,210 to $1,175 for those of you who insist on measuring steel meter sticks with rubber bands, lighthouses from the decks of ships that are slowly sinking in stormy seas, and gold in dollars).

Traders’ Consensus

This week, Keith sat at a table with a hedge fund trader. The trader does not think of gold as money, is not into gold other than as a trade along with all other asset classes, and probably would not describe himself even as a libertarian or Austrian. He is, however, very smart and very good at what he does.

He shared that he had recently been with a group of his peers and they were all discussing the monetary system. As he presented the consensus of that group of traders, a thought struck Keith. We will get to that in a moment.

After the crisis of 2008, the central banks lowered interest rates enabling governments and everyone else to go deeper into debt. However, that debt is now a problem. These traders’ view is that gold is going down now, and it will continue to go down, and then we are headed into a repeat of 2008, except this time will be worse. The next crisis will be a debt crisis including sovereign debt. Like in 2008, every asset will go down. Gold will go down with all other assets, though less. Afterward, gold will rocket up 10 or 50 times.

These are not goldbugs talking about a $12,000 to $60,000 gold price, but conventional finance guys. They are positioning themselves now for this kind of move already, as they don’t know the timing.

This thesis mostly makes sense to us (last week we argued for pressures pushing the dollar up in the intermediate term, at least against other irredeemable currencies if not gold). And we believe that this really is the mainstream consensus. Outside the gold community, people extrapolate recent price trends and they see commodities like copper falling. And they think “right, this will continue for all commodities including gold”. Plus if there’s another crisis, precipitated by rising rates, the easy thing is to expect a repeat of last time.

If Everyone Moves to the Starboard Side of the Boat

Keith’s thought is that in markets, when everyone expects a certain outcome—then the opposite outcome is likely to occur. So let’s spend more than four paragraphs discussing how it might not work out the same way this time.

Caveat: no one knows what any price is going to be in the future—especially during and after a highly non-linear event. Traders are good at spotting a pattern and profiting from it. They are not necessarily expert at predicting a discontinuity that leads to a new pattern. We don’t claim to know the timing of the next crisis (though lots of things point to it coming sooner than later), nor the path of the price action.