“Widely considered the crowning achievement in the history of international monetary relations, the classical gold standard *1880-1914) has long been treated like a holy relic.”

—Giulio M. Gallorotti,

The Anatomy of an International Monetary Regime (Oxford University Press, 1995)

Every now and then a viewpoint so convincing and inherently logical captures the crowd, it becomes near impossible—psychologically, at least—to counter its premise. At such times, a seeming arrogance born of a zombie-like consensus assumes its position to be beyond reproach … in fact, beyond truth itself. When that happens, the analytical brain-cells can be cowed into self-doubt.

What we are talking about here is the fate of the U.S. dollar and gold bullion. The “gold fever” hype is hitting the mainstream … i.e. “Dump the dollar! Buy gold,” a headline from Fortune Magazine recently blazes. Would it be foolish to consider countering the consensus on these topics right now? “Fools rush in where angels dare tread.”

However, isn’t it true that absolutely everyone knows that gold bullion must soar in price because central banks around the world are reflating as never before? Everyone also seems sure that the U.S. dollar is likely to collapse in the very near future. We are to believe, then, that these two outcomes are absolutely ineluctable … born of unassailable logic … as good as already happened.

Some readers may be tempted to think that only fools can’t see that gold is heading to $2500 per ounce and that the U.S. dollar is finished. Fools we may be.

Perhaps not so foolishly, we have been “structural” dollar-bears for a long, long time and, frankly, still have no sufficient reasons to change our long-term perspective here. Also, we have held significant “above-weight” exposures to gold and gold equities for a number of years … and, by and large, have held them to this point. Alone the low correlation of this asset class has had a lustrous effect upon portfolio performance at times. We surely are not about to recant our beliefs that central banks in a clinch will always inflate. Fiat money will continue to be the servant ofcorrupt governments and political demagoguery.

However, all that said, we want to turn our attention to gold. The facts simply do not add up to support a hyperinflationary phase … at least not for some time. Therefore, before we risk getting swept up into a possible “manic phase” for gold, it would be wise to test the apparently “self-evident” rationale of the current “gold consensus.” Are the reasons luster or bluster?

From Market Lore To Gold Lore

All we are wanting to accomplish here is to remind of several recurring lessons of free markets; the actions of human crowds; and to identify what is different today from previous periods of dollar weakness and surging gold prices.

To start, let’s take the following points as a given:

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