Another Gold Bearish Factor

Last week, we said that the consensus is that gold must go down (as measured in terms of the unstable dollar) and then will rocket higher. We suggested that if everyone expects an outcome in the market, the outcome is likely not to turn out that way. We also said that this time, there is likely less leverage employed to buy gold and that gold is less leveraged as well. And this, combined with a contrarian perspective on the consensus view, means that this time gold won’t go down before going up.

Million Ton Rock, Meet Million Ton Force

The bottom line is that we have several forces pushing gold up, and several pushing it down. On the up side (not upside, sorry we couldn’t resist) these include creditors rightly fearing dreadful losses when debtors default, speculators wrongly thinking that an increase in the quantity of dollars causes gold to go up, and even the possible path to remonetizing gold if we are successful in help Nevada to issue a gold bond. On the downside, we have speculators who front-run the consensus that gold must go down first in a crisis, and we have forced selling by leveraged gold holders in the first and third worlds.

Think of the plight of those poor third-world people. No one in his right mind would keep his wealth in rupees, lira, bolivars, or whatevars. So they buy gold for savings. Also because these currencies fall so much, they like to borrow them, and count on the currency going down, so they can repay in cheaper units. Except in a credit crunch. Even if their local whatevar is falling, that does not necessarily help a borrower earn some whatevars to repay his loan. It is possible for the whatevar to fall against the dollar, but at the same time rise against the internal markets for real estate and food.

In the first world, the currency has been made irredeemable. That is, to own what’s called money, you are actually a creditor. The currency is targeted for 2% losses per year, so people are forced to seek whatever asset is going up. They engage in a process of conversion of one’s wealth to another’s income.

Deprived of interest, they each seek to increase their own purchasing power. That is, they seek to get something for nothing. But there is a problem. This is only possible, if someone else gets nothing for something (it will not remain the first world if the perverse incentives that cause this perverse outcome remains in force).