THE GOLD CHRONICLES
with James Rickards and Alex Stanczyk
The West is waking up to Gold
Gold inflows have exceeded $13 Billion so far in 2016
Paul Singer, Stanley Druckenmiller, Jeffrey Gundlach, George Soros all recommending gold
Gold is the best performing asset for both 2016, as well as the last 16 years since 2000
There has been a change in the conversation and narrative about gold in the West
Investors are losing confidence in Central Banks which is fueling the awareness about gold
As we have discussed previously on The Gold Chronicles, the technical set up for gold to rise has been in place for some time, and was only awaiting a shift in Western sentiment
PIMCO economist suggesting an official re-pricing of gold to defeat current deflation and reach Fed inflation targets
Discussion of how open market operations by the Fed to raise the official price of gold would work
Kenneth Rogoff is recommending developing economy countries to increase their gold reserves to 10% to diversify reserves composition
Chief Economist BIS indicates the world monetary system is lacking an anchor – why we think this anchor could be gold
Why a gold linked SDR could make sense as an international monetary system anchor
Any attempts to re-anchor the monetary system to gold would require a non-deflationary USD gold price of $10,000 per troy ounce
Feasability of using gold as an international unit of account today – even if all goods were measured in gold, it would likely require some kind of digital token to facilitate transactions
No expectations of a Fed rate hike in June
Detailing a scenario under which the gold price could go down significantly, and the probability of such an event
Commentary on China’s gold reserves
Jon: Hello. I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to the latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.
Jim Rickards is a New York Times bestselling author and the chief global strategist for West Shore Funds. He’s the former general counsel of Long-Term Capital Management. He’s a consultant to the US Intelligence Community and to the Department of Defense. He’s also an advisory board member of Physical Gold Fund.
Hello, Jim, and welcome.
Jim: Hi, Jon. It’s great to be with you.
Jon: We also have with us Alex Stanczyk, managing director of Physical Gold Fund.
Alex: Hi, Jon. I’m glad to be here. We have some very exciting topics to discuss today, so I’m looking forward to getting into it.
Jon: We certainly do. Alex will be looking out for questions that come from you, our listeners. Let me say that your questions for Jim Rickards today are more than welcome. You may post them at any point during the interview. You’ll see a box on your screen for typing in your question, and as time allows, we’ll do our best to respond to you.
Just a word about Q&A: We want to emphasize that we really value the questions you send us, and we decided to increase the portion of time each month to your questions. Today we will begin with an interview covering some very significant market developments we’ve been seeing since our last webinar.
It seems like the West is finally waking up to gold. Let me quickly list off some of the factors. We’ve seen a roughly 20% rise in the dollar price of gold since the beginning of the year, and we’ve seen a less-reported but dramatic increase in gold buying by institutional investors. From reports I’ve seen, it’s over $13 billion in net inflows this year compared with $2.5 billion net outflows in the last quarter of 2015.
Not only that, there’s been a change in the conversation. We’re seeing big names in the financial world coming out with positive statements about gold including people like former IMF chief economist Kenneth Rogoff and billionaire fund managers such as Paul Singer, Stanley Druckenmiller, Jeffrey Gundlach, and institutions like J.P. Morgan Private Bank and the massive investment firm PIMCO.
We’ll talk about some of their particular pronouncements later in this interview, but to begin with, Jim, stepping back to look at the big picture, what’s driving this turn in the market? I wondered if everyone has started reading your latest book, The New Case for Gold?
Jim: Jon, thank you for the kind words about the book. We’ve discussed that books don’t come out of thin air, unlike money. Money does come out of thin air – at least central bank money does – but books don’t. They have a very long lead time. We’ve all been working on this book for over a year. There was no way to know a year ago that we would have a publication date in the strongest performing quarter for gold in over 20 years. I cannot take credit for that; it was fortuitous or serendipitous, but certainly the timing has been good, and the book has had a very good reception.
You’re right. There’s definitely been a change in the conversation, a change in the environment, and it’s not just the price. The price action has been good. Gold is up over 20% so far this year and is the best-performing asset class. If you look across stocks, bonds, other commodities, various currencies, etc., gold beats them all this year.
That is not only true this year; it’s true for this century. If you go back to January 1st, 2000, gold has outperformed all the other asset categories I mentioned. Investors are only too aware of the gold drawdown from August 2011 to November 2015 – not a lot of fun – but if you take longer-horizon action, gold has done what it always does. Gold preserves wealth and holds up very well compared to other asset classes.
It’s not just the price; there’s definitely a change in the conversation, as you put it. This goes back to something I wrote a little while ago when I said gold is a chameleon. I think of gold as money, but I said there are times when gold trades like a commodity. It’s in the commodity indices, it’s part of the commodity complex, it looks like a commodity because you dig it up out of the ground in the same way you do copper, iron ore, etc. Although I don’t really think of gold as a commodity, there are certainly times when it trades that way.
Gold is also sometimes considered an investment. It competes in institutional portfolios for an allocation side by side with stocks and bonds and some of the asset categories we mentioned. But sometimes gold is money. I trace this to late 2014, but it really gathered steam recently.
Investors in general are losing confidence in central bank money. If you think of it as a competition, there are many forms of money. The dollar is money, the euro is money, bitcoin is money, gold is certainly money, silver can be money, and at times in the past, feathers and clamshells have been money. Money can take many different forms based on shared values and the confidence that other people will take it as a unit of exchange.
What’s happening right now is that investors are looking at central banks and saying that almost eight years on from the financial collapse, growth is still well below potential. Debt is still rising faster than growth, and debt-to-GDP ratios are increasing.
It’s true; we have not seen that spectacular collapse in the international monetary system which I do expect. I’m certainly not taking that off the table, and I’ve been writing and thinking about it for a long time. It hasn’t happened yet, but the signs are that the system is under more and more stress.
The central bank policies are not only failing to get economies back to trend growth, but they’re increasingly seen as futile. It’s like the joke about “more cowbell” from that old Saturday Night Live skit; doing more isn’t working. If you’re an investor and say, “We don’t have much confidence in the Fed and their dollars or the European Central Bank and their euros or the Bank of Japan and their yen. Is there another form of money out there?” the answer, of course, is gold.
I think gold is winning the horse race, if you will, among various competing forms of money, and that’s getting some attention and commentary. We’ll spend a little more time in the interview on specifics from some of the names you mentioned.
You had a pretty good list, Jon. Stan Druckenmiller is one of the most successful long-term investors of all time, one of the great hedge fund managers, and protégé of George Soros. He went out on his own with Duquesne Capital management and now runs it as a family office with one of the best-selling track records out there. It’s the same thing with Paul Singer who runs Elliott Capital Management and a few of the other names you mentioned.
But you left out the biggest one of all, which is understandable because it occurred only in the last 24 hours. George Soros didn’t actually make a public statement, but what happens for large institutions is they have to file a form called a 13F. It’s a SEC form that comes out quarterly a certain number of days after the end of the calendar quarter, and if you’re above a certain size, you have to actually disclose what you’re holding.
The Soros 13F came out, analysts had a look, and what they saw was that he had decreased his stock market bets 37% and increased his gold bets very significantly. In particular, he bought a very large stake in Barrick Gold, which is the first or second largest gold mining operation in the world – a Canadian company.
Interestingly, the chairman of Barrick Gold is Jon Thornton, former co-CEO of Goldman-Sachs. He’s very well connected in China, very close to the Chinese, and spends a lot of time in Beijing. Thornton’s an interesting figure. Again, a top guy at Goldman-Sachs, one of the most connected Westerners in China, the chairman of Barrick Gold. That’s the company George Soros is buying into.
When you talk about Druckenmiller, Singer, and Soros, you’re talking about the best. They’re not “flash in the pan” guys. They’ve been doing this for 20, 30 years, and in Soros’ case, more like 40 years. I do think it’s a very, very significant development and a change in sentiment.
We’re also seeing a change in gold mining stocks. I’m not a stock picker, but there are fabulous opportunities for those who can do the analysis and find the right companies. I think sentiment has changed and fundamentals have changed.
On this podcast, going back over a year, we said the technical setup was there. We were seeing physical shortages based on our conversations with people on the physical side of the business. By physical, I mean refiners, vault operators, secure logistics operators, dealers, and entities like Physical Gold Fund where they handle the real stuff. When you deal with Physical Gold Fund, you’re talking about physical gold kept in a vault, not paper gold. From that end of the business, we’ve seen the tightness in supply for a long time.
We’ve also seen the voracious demand coming from China and Russia notably, but also Iran, Kazakhstan, and Mexico. There are many countries around the world acquiring gold, and there are no central banks selling any significant amount of gold. People made a big to-do about the Canadians dumping their gold, which is too bad for Canada. It wasn’t as if they were dumping 30 tons or 300 tons because they only had about three tons left, but they did dump it.
There is no significant selling, a lot of significant buying, and physical shortages cropping up. The paper gold to physical gold ratio is near all-time highs, COMEX warehouse is being stripped practically bare, and open interests relative to physical gold are close to all-time highs. So the setup was there for a big price increase – that’s not surprising – but combine the technical setup with a fundamental setup, which is lost confidence in central bank money, and then smart people coming out with a kind word to say about gold. It’s been a good run.
This is just beginning. Gold could come up or down on any given day. It’s down a couple of bucks today, but I’m not a day trader; that’s not how I think about it. I think about it as a store of wealth, as a way to protect against the storm and coming collapse in confidence in central bank money. It’s not too late to get in as this thing has a very long way to run.
Jon: Thanks, Jim. Drilling down a bit into what’s being said by some of these smart minds, I mentioned PIMCO in that last question. This is something you’ve written about recently, so let’s take a look at an article they just published.
The article’s a bit coy in tone to my mind, but it floats an idea you’ve mentioned several times in our conversations for fighting deflation, or if you like, encouraging inflation, which of course, we know the central banks want or the Fed wants, anyway.
Here’s the idea: Very simply, the Fed could jack up the price of gold, which would have an immediate inflationary impact without the downsides of the familiar gambits like quantitative easing and negative interest rates. Of course, to do this, the Fed would be treating gold as money, so I guess they’d have to eat a rather large helping of humble pie. Is this move even remotely possible?
Jim: I think it is likely, but not only is it likely, it has happened before. Now it’s getting a second life at least in terms of public commentary on this. The specific article you’re referring to had a title referencing Rumpelstiltskin, the old nursery tale or fable. “Rapunzel, Rapunzel, let down your hair that I may climb the golden stair.”
The author was Harley Bassman, one of the top economists at PIMCO. Yes, he was a little bit coy but with good reason. He had reason to be coy because think about what PIMCO is. PIMCO is the largest, most sophisticated bond investment fund in the world. It’s owned by a company called Allianz, one of the largest insurance companies in the world. You can’t get much more institutional than PIMCO and Allianz.
It’s one thing for an author or an analyst – someone like myself – to say these things as I have many times, but when PIMCO comes out and puts their name on it, I consider that a very big deal. As you know, anyone with a kind word to say about gold is inviting ridicule, but here’s an establishment figure saying the same thing.
Bassman was specifically addressing the issue of deflation. Deflation is the central bank’s worst nightmare and the thing they fear most. They actually don’t fear inflation. They want a little bit of inflation, but they’re not getting what they want.
I call this Jaggernomics in honor of Mick Jagger and the Rolling Stones’ song, “You Can’t Always Get What You Want.” The Fed wants inflation and can’t get it although they’ve been trying for eight years. They’ve tried everything under the sun – QE1, QE2, QE3, forward guidance, currency wars, Operation Twist, zero interest rates, and negative interest rates in the case of Europe. They’ve tried everything and it hasn’t worked.
Deflation is their worst nightmare because it decreases the real value of the debt. The US debt burden is already non-sustainable. That’s beginning to sink in. We haven’t seen a debt panic yet, but we’ve seen the elements of non-sustainability, namely that the debt is growing faster than the economy.
If your economy is growing faster than your debt burden, the debt is manageable. People just shrug and say, “The debt is going up, but the economy is going up more, so they can afford to pay it,” so that’s satisfactory. But we have the opposite situation with the debt burden going up faster than the economy. The debt-to-GDP ratio is growing and we’re on the path of Greece. Maybe we’re working that path a little more slowly than Greece, but we’re heading in the same direction. It would be nice if you could grow your way out of it, but the structural setup for growth is not there.
One way to solve that problem is to inflate your way out of it. That’s the American way. That’s the real reason central banks want inflation and want to avoid deflation, because deflation actually increases the real value of the debt. It makes everything I just said even worse, and if we’re already non-sustainable, then deflation would make it even more non-sustainable and hasten the day of collapse of some kind or another. The central banks have to get inflation, but they haven’t been able to get it.
I’ve said on this podcast and written in the past that you can have inflation in 15 minutes. All the Federal Reserve has to do is go into the boardroom down on Constitution Avenue, close the door, take a vote, walk out 15 minutes later, and have Janet Yellen announce in front of the microphone, “Ladies and gentlemen, as of this minute, the price of gold is $5000 an ounce. If you think that’s cheap, come and get it. You can buy all the gold; the doors of Fort Knox are open. If you think that’s expensive, sell it to us; we’ll take it off your hands.”
Well, if you have enough gold – which they do at 8000 tons – and you have a printing press and you make a two-way market, you say, “Our target price is $5000 an ounce. We’re buyers at $4995, and we’re sellers at $5050. If you think it’s cheap, come and get it. If you think it’s dear, we’ll buy it from you.” If they do that, which they’re capable of doing, then the price is $5000 by diktat, if you will. They conduct open market operations and make a two-way market to make it stick.
The purpose would not be to enrich holders of gold. I think a lot of listeners on the call, the clients of Physical Gold Fund, and some of us personally would do fine in terms of the price of gold going up, but that is not the reason to do it. Nothing happens in a vacuum. If you take the price of gold to $5000 an ounce, you’re going to take the price of gasoline to $10 a gallon at the pump. Silver would be $100 an ounce, groceries would go up, coal, wheat, corn, steel and every commodity would go up along with gold.
Using round numbers, going from $1000 an ounce to $5000 an ounce is not a 400% increase in the price of gold; think of it as an 80% decline in the value of the dollar. If you hold an ounce of gold constant as a unit of weight and increase the dollar price 400%, you haven’t changed the value of gold; you’ve destroyed the value of the dollar. That’s almost the textbook definition of inflation. As I said, that’s the way for the Fed to get inflation in 15 minutes. They don’t have to wait through seven years of all these crazy policies when they could do it by order.
By the way, that’s happened before. For those who think that’s highly improbable, it’s exactly what happened in 1933. The longest period of sustained deflation in US history was between 1929 and 1933. The government, desperate to break out of deflation, did it by increasing the price of gold 75%, from $20 an ounce to $35 an ounce. Why did the price of gold go up 75% in a deflationary environment? The answer is that the government wanted to cause inflation, and the easiest way to do that was to devalue the dollar and raise the dollar price of gold. That’s the analysis.
Two things struck me about Bassman’s article. When I read it, I thought to myself, “Gee, that sounds familiar.” I opened to page 244 of my book Currency Wars, which came out in 2011, where I had laid out exactly the same scenario. Slightly different numbers since 2011, but I have written and spoken about that many times.
I don’t know if Harley is going to send me a royalty check, but I just say, “Welcome to the conversation.” When I see ideas like that being copied almost verbatim, I don’t get upset. I think it’s actually good; we’ve added one more important voice to a very important conversation.
Be that as it may, many people could come up with the same idea on their own. What struck me was not the idea, which I’d written about before, but the voice. It was coming from PIMCO, the establishment. This wasn’t Zero Hedge or some fringe player; this was PIMCO talking.
The other article you pointed out was by Ken Rogoff. As you mentioned, Ken was the former chief economist of the IMF (International Monetary Fund). He’s a full professor at Harvard University and the author of one of the bestselling economics books of the last ten years with his coauthor Carmen Reinhart, This Time It’s Different. Ken also happens to be a chess Grandmaster and seriously considered a career as a professional chess player before going into economics. Needless to say, he’s a big brain and also a very nice guy. The reason I’m reciting his resume is to make a point that you can’t get any more establishment than Ken Rogoff.
Word is that he’s on the shortlist to fill one of the vacancies on the Board of Governors to the Federal Reserve. There are seven seats on the Board of Governors, but two of them are vacant right now and have been for a long time. The White House has been very slow to fill those seats, to make those appointments, but there’s some talk that Ken Rogoff might be on the shortlist to fill one of those seats.
The point being you can’t get more establishment and more mainstream than Ken Rogoff. He wrote an article about a week ago recommending that emerging market central banks allocate 10% of their assets to gold.
I almost fell off my chair. I said, “Wait a second. Harvard, IMF? This guy’s saying go out and buy gold?” That’s exactly what he was saying. Of course, the 10% number resonated with me, because I’ve said many times on this podcast that 10% is my recommended allocation. Again, I’m sure Ken thought of that on his own, but it’s interesting how there’s some convergence of ideas here.
The article was even more interesting because he gave some reasons. He said, “You have too many dollars. You need to diversify away from dollars.” He was thinking about gold as money. He wasn’t saying, “Go buy euros, go buy Japanese yen or go buy Swiss francs.” You can buy all those currencies or invest in securities in those currencies. He was saying, “Go buy gold for 10% as the diversification of your reserves, because emerging markets have too many dollars.”
He was referring specifically to the whole very dangerous risk-on, risk-off, hot money dynamic. This happened this afternoon, as a matter of fact. The Fed says, “Maybe we’re more likely to raise rates,” and all of a sudden everyone sells emerging markets like Malaysia, Indonesia, Turkey, and South Africa. They dump all those stocks, dumps those currencies, buys dollars, and get back into US money markets, because they think the rate is going to go up. Then the Fed decides, “Just kidding. We’re not going to raise rates after all,” so everybody shorts dollars, borrows dollars, and goes back into emerging markets. You get these huge swings.
I travel around the world a lot including Malaysia, South Africa, and Turkey. I’ve been to all these countries recently, and this is all they talk about. Their markets skyrocket when it’s risk-on and they crash when it’s risk-off, and their currencies likewise. They say, “Wait a second. We’re not doing anything. We didn’t change policy or our tax rate or central bank policy. The Fed raising or lowering expectations about rate hikes is causing all these crazy hot money inflows and outflows.”
Rogoff’s saying if you had gold, you wouldn’t have to worry about that. People wouldn’t be dumping gold just because the Fed is going to do one thing or the other. It’s a way to diversify your reserves and insulate yourself to some extent from this dangerous risk-on, risk-off dynamic. I agree 100%, but I was just shocked to see a Harvard professor coming over to our side of the debate.
Rogoff said something else that was even more fascinating. This is his advice to emerging markets: “Don’t worry too much if there’s scarcity of supply, because the price will go up.” That’s exactly what you should expect if you have increasing demand, because emerging markets want to have more gold and you have tight supply conditions. The classic market solution is for the price to go up.
What Rogoff was saying is you’re going to start out with a target. Let’s say you have $1 billion of reserves and you want $100 million in gold. You’ll go out and start buying gold, trying to get it at a certain price, trying to get to that target. You might find that you can’t get any gold, but Rogoff said, “Don’t worry, because the price will go up.”
There are two ways to get to $100 million. One is to buy larger quantities at a fixed price. The other is to not be able to buy it at all but watch the price go up because of the tightness in supply and demand, which is also exactly right. In my book, The New Case for Gold, I said that you never have to worry about running out of gold, because the price will go up. You can support any amount of asset allocation or any amount of money supply or any amount of trader finance with a fixed quantity of gold simply by increasing the price.
Now here’s the recommendation for emerging markets to buy gold because the dollar is dangerous, and don’t worry about scarcity of supply, because the price will go up. That’s the trifecta for gold investors and exactly what we’ve been talking about for a couple of years on this podcast.
Not to belabor the point, but these are familiar arguments to our audience. When Druckenmiller, Soros, Singer, Rogoff, PIMCO, and others come out and say the same thing, you know something is going on.
Jon: There’s one other voice, but this one’s really demure, and I don’t know quite how to interpret it. Alex pointed this out from a speech just published by the chief economist for the Bank of International Settlements. While addressing the issue of diversification away from the dollar, he basically says that merely diversifying currencies doesn’t work. Then he goes into analysis of the structural problems in the world’s monetary and financial system.
He goes on to say that the system lacks what he calls an effective anchor, but he doesn’t describe what that anchor might be. Is that speech possibly clearing the way for introducing gold as a more central and overt player in the organization of the international monetary system?
Jim: There’s no doubt about it. You’re referring to Claudio Borio, head of monetary economic research at the Bank for International Settlements or the BIS. For listeners who may not know, the BIS is the central bankers’ central bank. I’ve often referred to the IMF, the International Monetary Fund, as the central bank of the world because they have this money printing function, but the BIS is even older than the IMF. It was created in 1930 and is based in Basel, Switzerland
I call it a tree house for central bankers. Much like a little child wants a tree house to get away from their parents or get away from scrutiny, this is where the top central bankers, the G10 economies, go once a month. They have a nice lunch overlooking a river there in Switzerland. They close the doors. There are no minutes, no records, no statements, no press conferences, and no accountability. Nobody knows what goes on inside that room unless you’re in the room or speak to someone who was.
One of my former partners, David Mullins, Jr., was the vice chairman of the Federal Reserve. He said Greenspan didn’t like to travel that much, and often David was the one who had to go to Switzerland and sit in on these meetings as a representative of the US. At the time, David was the youngest professor in the history of Harvard, so certainly, a very well-regarded figure and monetary economist. That’s how close you have to be to the situation to have any idea of what’s going on there.
Claudio Borio is their chief monetary economist. Just last week he gave a speech in Zurich, Switzerland, and said exactly what you said, Jon; the international monetary system is rudderless and has no anchor. There’s no gold standard and there’s no dollar standard. From 1980 to 2010, the reason things were not more chaotic was because we had a dollar standard. That may not be a strong anchor, but it’s something. The US was committed to a strong dollar before President Obama launched into the currency wars in 2010. Now there’s no anchor at all.
I’ll relate two other conversations I may have mentioned on the podcast before, so I’ll be brief. I spoke to Ben Bernanke, former chairman of the Federal Reserve, in Korea not long ago. Shortly thereafter, I spoke to John Lipski. John is an interesting figure. He was the only American ever to head the IMF, which is odd because the deal at Bretton Woods stated that an American would head the World Bank and a European or non-American would head the IMF. How on earth do you get an American head of the IMF? It’s never happened.
The answer is it happened once when Dominique Strauss-Kahn got arrested and had to resign under dubious circumstances, to say the least. They weren’t ready with a successor, so John stepped in. He was the first deputy managing director, so in effect he became acting head of the IMF.
I spoke to both of them, head of the Fed and head of the IMF, 9000 miles apart, in two separate conversations. They both used the same word to describe the international monetary system. They said it’s “incoherent.” I knew they didn’t rehearse that for my benefit. I knew that that was in the air. Incoherent just means no anchor, no rules to the game, and that’s exactly what Claudio Borio said last week.
Basically, the whole world wakes up and every day is jump ball. We don’t know what currencies are worth. We don’t know who’s up or who’s down. Part of the reason there’s a flight to gold is because at least with gold you have a little bit more confidence in it. They’re not printing any more of it and mining output is only about 1.6% a year, so the physical supply doesn’t go up that much under the best of circumstances.
Borio also said effectively that the international monetary system is incoherent, there’s no anchor. He referred to the SDR (Special Drawing Rights) which is the world money issued by the IMF. This was an all-day monetary conference with other speakers including William Dudley, president of the Federal Reserve back in New York.
Borio made reference to the fact that some of the speakers were referring to SDRs. He said, “Why is the SDR any more of an anchor than anything else? What is the anchor for the SDR?” I think it’s a very good question. He just raised it rhetorically and didn’t answer it, but of course, there is no anchor. Left hanging in the air is gold. Gold has been an anchor.
Special Drawing Rights is a misleading name. Just think of it as world money and it’s really easy to understand. SDR is world money printed by the IMF. The IMF has a printing press and can print these SDRs and hand them out, so don’t let the funny name or the initials SDR throw you off. It’s world money printed by the IMF out of thin air, is handed out to the members, and gets used like any other kind of money. It’s not that hard to figure out.
Interestingly, when the SDR was invented in 1969, it was convertible into gold. The definition of an SDR was a fixed weight in gold, and they actually called it paper gold. It was meant to expand reserves at a time when the US was still on the gold standard. Well, they got rid of that within two years. When the US abandoned gold in 1971, the IMF abandoned the gold linked to SDRs very shortly thereafter sometime around 1972 or so. Now the SDR is just another fiat currency.
I’ve hypothesized this in my books and in particular chapter 11 of The Death of Money. You could have a gold-linked SDR with some reference to gold. That would address Borio’s argument, and obviously, once you do that, if you want to avoid deflation, you’re talking about much, much higher prices for gold.
I’ve said publicly that I expect gold to go to $10,000 an ounce, which I do. When I say that, it’s not a number I pull out of the air just to attract attention or to be provocative. It’s actually the implied non-deflationary price and the lowest price gold would have to be in a gold standard to avoid deflation. Any lower dollar price for gold would be deflationary and a blunder. It would throw the world into a recession if not a full-blown global depression that you couldn’t get out of. I’m not saying you have to have a gold standard; I am saying that if you have a gold standard, you have to get the price to at least $10,000 an ounce.
Going through all these hedge fund mavens, professors like Ken Rogoff, economists like Claudio Borio, and others, this is very much front and center in the elite conversation today.
Jon: Thanks, Jim. Now over to you, Alex. What questions do you have today from our listeners?
Alex: Thanks a lot, Jon. We thank everybody for sending their questions in. There are a lot of very good questions here, so it’s hard to choose from them with the time we have allotted, but we’re going to do our best to get some of these answered.
As a brief comment, in my time in the physical gold industry, which has been almost a decade now, the whole idea of using gold to back the currency or to talk about gold in any legitimate fashion as money has been pretty much laughed at and ridiculed by leading economists and central bankers, etc. Not only is this happening now, but the sea change that’s currently occurring and is still underway that’s being discussed in some of the highest circles is also starting to filter down into other people’s consciousness. I’m talking about people who don’t make monetary policy, but just the typical person who’s concerned about their savings and protecting their wealth.
For example, as you know, Jim, you met with the governor of Texas and talked to them about a gold vault they’re going to be building soon. Tennessee has just introduced a new bill to build a similar gold vault there. It’s also been mentioned in the recent presidential race by several of the candidates, so it’s leading to where people who didn’t necessarily think about these kinds of things in the past are starting to maybe wake up a little bit.
This leads me to our first question coming from Michael W. I’ll read some of his introduction where he says, “Jim, I enjoy your blogs, interviews, and books.” He likes the simplicity of your explanations. “After reading Currency Wars, my first reaction was what at the time seemed obvious, and that was to simply eliminate competitive devaluation by requiring the pricing of all goods and services everywhere to be quoted in one currency internationally: ounces or grams of gold. In other words, eliminate country names such as marks, yens, pounds, dollars, etc., and make it some kind of internationally mandatory system.”
I’m paraphrasing a little bit, but essentially Michael wants to know your view of that, and is it something that is realistic?
Jim: I think it is possible to denominate every good or service in the world in units of gold. I don’t think that would be that difficult, but then it begs the question, “What are we going to do? Are we going to walk around with bags of gold in our pockets? How are we going to get paid on payday? How are we going to pay our rent or mortgage or buy a new car, etc.?” The reason for paper money, which is really just bank notes or promises, was partly convenience just as the reason for digital money is partly convenience.
We always say that the Federal Reserve is printing money. That statement conjures up a printing press with ink and paper. That’s the way they used to do it, and there is still paper money in circulation, but not much in relation to the total money. Your money is mainly digital now.
If you think about it, you may have a few bucks in your wallet. I stopped at the ATM on my way over to do this podcast, so I have a couple of $20s in my wallet, but basically, you get paid digitally. You pay your bills online, you use your debit card, your credit card, you check your bank account online, etc. It’s all digital. That leads to other issues, such as your digital wealth, being wiped out by hackers, but let’s leave that aside.
Even if you denominate everything in gold, you’ll still have some kind of token to pay for things whether it’s a digital token or paper money. At that point, we must ask, “What’s the relationship between my token and the gold? Do I still have a dollar bill? Does it take me 5000 of those dollar bills to get one ounce of gold?” Or you could have a banking system where you combine a digital system and a gold numéraire. You would look at your bank account and instead of so many dollars, you would have so many ounces of gold. If you wanted to go buy a new car, it would cost ‘X’ ounces of gold, and you’d just use your debit card. That is possible.
The thing it confronts is this: Think of central bankers as having a monopoly on central bank money, which they do. If you had a monopoly on anything and you had all the power, what’s more powerful than printing money? If you control money, you control price levels, wealth, whether people have jobs or not, politics. You control pretty much everything if you control money.
Right now that’s in the hands of a bunch of PhDs from Harvard, Yale, MIT, Chicago, Stanford, Oxford, and a few other schools around the world, but not many. It’s a pretty short list of schools. As an interesting exercise, go look at the resumes of the heads of the top ten central banks around the world. It’s not hard to find online. You’ll see that they all went to three or four schools, mostly MIT.
It’s a club. They’re in control, so why would they give up that control? Who voluntarily gives up power? The idea of saying, “Okay, now we’re going to price things by weight. That’s the universal benchmark. That’s the universal numéraire. We can use 21st century digital technology to hold our accounts. There’s some gold somewhere behind the system, maybe in a vault or something, but my share of it is represented by gold units in my account, and that’s how I pay for things.” That’s a feasible system, but you’re never going to get buy-in from any central bank in the world. When you own gold, you’re fighting every central bank in the world.
What could cause the system to move in that direction? Two things. A political earthquake, and maybe we’re seeing one right now with the rise of Bernie Sanders, the rise of Donald Trump, and the Brexit vote in the UK backed by some flamboyant and charismatic politicians like Nigel Farage and Boris Johnson. Maybe we’re seeing something like that, so let’s watch that space.
The other thing – and I think the more likely path – would be collapse with a panic much worse than 2008. A massive destruction of wealth, a completely dysfunctional system, an emergency response, borderline neofascism, money riots, and state power designed to suppress the money riots. In that world, maybe the leaders of the international monetary system would realize they’ve completely lost credibility and be pushed into something that restores confidence, and that could very well be gold.
Alex: I’m glad you mentioned the part about digital money, because we’ve actually had a lot of questions coming in regarding some form of digital currency backed by gold. I think your comments answered some of those, as well.
Moving on, we have a number of different questions about the Fed and potential rate hikes for June. One in particular from Jim L. says, “Is there any reason, with the exception of a purely political move to support Clinton, for a rate hike in June? Most reliable sources point to a failed recovery.”
Jim: I don’t think the Fed is unaware of politics, but if you want to help Hillary Clinton, you would not hike rates in June, and that is what I expect. I know there’s a lot of buzz today because the minutes of the April FOMC meeting were released. Those minutes included comments by some of the regional reserve bank presidents to the effect that if data were stronger, growth were higher, and inflation were a little higher, the Fed should raise rates in June. We saw an immediate reaction. Gold and stocks went down a little bit.
I don’t get too excited one way or the other about developments like that, but I certainly pay attention to them. I’m not saying to ignore it. I’m enough of a geek, I read those minutes and the speeches and a lot else besides, but I don’t think you necessarily should react day to day. The Fed doesn’t.
We talked about the conference in Switzerland where Claudio Borio gave a speech concerning the anchor. Bill Dudley gave an interview to the New York Times and was talking about the difference between an FOMC meeting with a press conference and a meeting without a press conference and whether the non-press conference meetings were live in terms of raising rates and changing policy, etc.
He was trying to make the point that they were. Markets should not completely discount the possibility that they could raise rates at a meeting where there was no press conference. But in the same breath he said, “On the other hand, what difference does a month make?” He was being completely relaxed about it: “If you’re going to do something in June, July, or September, does it really matter?” He said, “No, not that much. It matters in the aggregate, but one meeting versus another doesn’t matter that much.”
There was all this talk and a couple of data points recently that look a little hotter. The Atlanta Fed GDPNow tracker is showing some strength. One of the inflation readings was a little bit hotter. You’re going to have to see more than that to get the Fed to move.
Going to the political aspect of the question, about a month ago, the President summoned Janet Yellen to the White House. I use the word “summoned” by design. It’s not unusual for a Fed Chairman and a president to chat. They’ll have breakfast or lunch periodically. Alan Greenspan and George W. Bush used to meet once or twice a month for breakfast. The fact that they talk is not unusual.
What is unusual is that this was very short notice and very public. They invited in the press and also had Vice President Biden in the room. A lot of people wondered what they talked about. I got a lot of calls from the press asking if I knew what they talked about. I said, “It doesn’t matter what they talked about. It was all in the body language. It was the sight of the President sitting next to Janet Yellen in the Oval Office. In effect, the body language said, ‘Don’t you dare raise interest rates.’”
They did raise interest rates in December – that was the famous liftoff – and what happened? The US stock market almost collapsed. It fell over 11% in five weeks from January 1st to February 11th. It was a meltdown that scared them to death. That’s why they backed off all the rate hikes and the four hikes per year every other meeting. All that stuff they laid out in December was completely blown up by the end of February, but they put the final nail in the coffin with Janet Yellen’s speech before the New York Economic Club on March 29th, 2016. That completely went by the board.
The reason was that the US economy was fundamentally weak. Raising rates would be enough to tip it into a recession that could destroy the Democrats’ chances of winning the White House. Generally speaking, it doesn’t matter what party is in and what party is out; if you have a recession in an election year, the out party wins. It’s as simple as that.
With the Democrats being the in party and the Republicans being the out party, if you have a recession in 2016, that’s really going to help the Republicans and give them a significant boost on the way to the White House. The last thing the White House wants is for the Fed to raise rates, so that’s what that was about. It was just a little bit of an intimidation, a body language kind of exercise.
I think the hurdle is quite high for a rate hike this year. Last December, I was one of the ones who made the mistake of believing the Fed. I actually believed what the Fed said, and I was expecting a rate hike in June, but it was very clear to me by February that that was not happening.
Now I don’t see enough signs the other way to suggest that they will raise rates in June. You’d have to see some off-the-charts data by then. It is possible, but I think it’s very unlikely.
One more reason they won’t raise in June is because the meeting is six days before the Brexit vote. This is the referendum in the UK to leave the European Union. All the elites are lined up on the side of staying. Everyday people and some politicians – Boris Johnson and Nigel Farage are two I mentioned, but a lot of others including some former cabinet ministers in the UK – are in favor of leaving the EU.
The polls right now are very close. I don’t know which way it’s going to go, but I do know it’s extremely close. I think we’re sadly maybe one terrorist attack away from a leave vote. In a 50/50 contest where it is right now, it wouldn’t take much to tip that into leaving.
The markets have not priced that in. The markets expect on balance that they’ll stay. If they leave, what does that mean? I think if the UK leaves the EU, you’ll see Scotland leave the UK. Scotland, at that point, will need some kind of money, so they’ll probably join the euro, and the euro could actually get stronger.
The UK has a conditional, one-step-removed call option on the Eurozone’s gold, which is 10,000 tons of gold. The UK could join the euro, and once you’re in the euro, in theory, you share in that 10,000 ton gold reserve. If you leave the EU, then you have no chance. You give up your option to join the euro and are on your own. The UK doesn’t have that much gold, so they’d be completely cut off.
There’s already a bidding contest for replacing London as a financial center. Dublin, Monaco, Paris, and Frankfurt are getting their real estate agents ready to move all these bankers to some other financial capital. Maybe it goes to Glasgow or Edinburgh in Scotland. We’ll have to see.
The point being, that’s an earthquake the market hasn’t priced, and we don’t know how that’s going to come out. Do you really think the Fed is going to raise interest rates, which is a mini shock, six days ahead of what could be a mega shock that the markets haven’t priced? Now you’re back to the January scenario. Worse yet, you’re back to the August 2015 scenario when China did a Pearl Harbor with that shock overnight 3% devaluation of the Chinese yuan.
I ask investors, “Where were you on August 31st?” Maybe you were taking your kids back to school or on a nice vacation, but if you weren’t at the Grand Canyon, you probably thought you were staring into the Grand Canyon as far as the stock market is concerned. US stocks were crashing at the end of August, but that was all because of the Chinese devaluation.
That’s how fragile the global economy is. You can’t throw too many shocks at it without the whole thing breaking down, and they know that because they’ve had it twice, once last August that I just referred to, and again in January. They don’t want to do that again. I can’t rule it out completely, but I give it a very, very low probability.
Also, the politics come in. Janet Yellen is a liberal Democrat. That’s not casting aspersions; it’s just a fact. She wouldn’t mind probably being reappointed by a Democratic president. What President Obama was saying to her was, “You need to do your part here for the party and not raise rates.”
Forget September. I don’t expect they’ll raise rates in September because now you’re talking literally five or six weeks before the election, so it would be way too close, and the Fed’s in the political crosshairs to begin with. They certainly don’t want any political trouble. What if they cut rates, for example, and the Republicans somehow win? They’d probably go burn down the Fed.
They might not raise rates at all until December at the earliest. I don’t read too much into those minutes that came out today.
Alex: We still have a number of very good questions in the queue and a limited amount of time left, so we’re going to try to get through some of these quickly if we can.
Before we go to the next question, we’ve had some inquiries regarding if people will be able to access these webinars after the fact. The answer is yes; we record these and post them at PhysicalGoldFund.com/podcasts. We will send out a notification to everybody who’s here on the webinar to let you know when that’s available. In addition to that, it’s also available on iTunes.
The next question is taking the other side of the analysis of gold. Peter W. from Germany asks, “Can you outline the most likely scenario in which the gold price would go down substantially in most currencies, and what probability would you assign to such a scenario?”
Jim: The likely scenario is obviously a deflationary scenario, but when you talk about it going down, you have to distinguish between nominal dollar prices and real dollar prices. Right now, gold is about $1270 an ounce although it obviously fluctuates daily. Let’s say gold went down to $800 an ounce. That would be a 35% or slightly higher decline from where we are today, which would be a major drawdown.
What does that mean? Nothing happens in isolation. If the nominal price of gold were to go from $1270 to $800, that means the price of everything else is going down more which is a hyper-deflationary scenario.
I once said to one of my clients, “I might like $500 gold better than $5000 gold.” That puzzles people, but I say, “The world of $500 gold is the world of 500 on the S&P and 2000 on the Dow, and a complete destruction of financial wealth, and 10% unemployment, and a collapse of the economy worse than 2008.” In other words, gold doesn’t just go to $800 or $600 on its own; it goes there because you’re in a hyper-deflationary, depressionary, panicked environment. In that world, I might want my gold even more than I do today.
It’s a little simplistic to talk about the dollar price going up or down. First of all, I don’t even think of it that way; I think of the dollar price of gold as just a cross rate. You can say the euro is worth $1.09 or there’s 105 yen to the dollar, whatever it is. Those are all cross exchange rates. I just think of the dollar price of gold as another cross rate between two kinds of money – dollars and gold.
When someone says gold went up or down, I think, “No, the dollar went up or down.” A higher dollar price for gold means the dollar is going down, and a lower dollar price for gold means the dollar is going up. In other words, the value of the dollar is going up, which is the definition of deflation. You get more stuff for your dollar. In a hyper-deflationary world, there’s probably so much disruption and so much wealth has been wiped out that you might want your gold even more.
Gold is not a stock; it’s money. Yes, an individual stock can go down. You can have a situation where the stock market is going up and an individual stock is going down, because it’s Lending Club or Tesla or something happened to a company. Stocks are idiosyncratic, but gold isn’t. Gold is a form of money, and if one form of money is going down relative to another form of money, that’s just a form of deflation.
It’s important to understand that nothing happens in isolation. Distinguish between nominal and real. Don’t get too euphoric if gold goes up a lot because it means that your dollar is worth less, and don’t get too depressed if gold goes down a lot because that means that everything else is probably going down, too.
This is a debate you hear from people like Harry Dent and Michael Armstrong. They’re out there with their blogs and speeches and newsletters talking about $800 gold. I completely disagree, but if it were to happen, there would be so many other bad things happening at the same time that you’d be glad you had the gold.
Alex: Our last question is coming from Anthony K. “Now that China has acquired some 2000 tons of gold, are they now on par with the United States?”
Jim: China is officially approaching 2000 tons of gold. I don’t know if the latest monthly update came out today or recently so it’s possible they hit that level. The last time I looked, it was around 1800 tons, but that’s close enough for government work, as they say. They’re certainly closing in on 2000 tons officially, but that’s a lie. They have a lot more gold, and you can demonstrate why they have a lot more gold.
I talk about this in my books The New Case for Gold and also The Death of Money. Those gold figures come from the central bank, but they have another sovereign wealth fund called the State Administration of Foreign Exchange (SAFE) where they keep most of the gold.
They acquire gold through SAFE but don’t reveal it. Periodically, they move the gold over from SAFE to the People’s Bank of China. It’s just like taking gold out of one pocket and sticking it in the other pocket. Then the People’s Bank of China publishes the new number and everybody says, “Oh, China got some more gold.” No, they didn’t. They had the gold all along. They were just keeping it in a place you couldn’t see and chose for political and market manipulation reasons to be transparent about how much more gold they added to the People’s Bank of China.
That said, the actual Chinese number is closer to 4000 tons. No one has the exact number because we have to use estimates from various sources, but they’re probably around 4000 tons, perhaps a little bit more.
In terms of closing in on the United States, there are two ways to think about that. One is absolute tonnage. If that’s your measure, they’re only halfway there since the United States has about 8000 tons. My estimate is that China has approximately 4000 tons, so they have about half the amount of gold as the United States has.
The other way to think about it is a gold-to-GDP ratio, and I think this is useful. Take your gold at the market and divide it by your GDP. The reason for that is if GDP is the size of your economy and gold is real money, then you’re asking yourself, “How much gold do we have to back up the economy? How much gold do we have to support a certain quantity of goods and services, a certain quantity of output? What’s the real money supply relative to the size of the economy?”
By that measure, China has caught up to the United States. They have about half as much gold as we do, but their economy is about half the size. On a gold-to-GDP ratio, those numbers are around 2%. They fluctuate because economies grow and the amount of gold changes, at least in the case of China. The numbers bounce around a little bit, but they’ve caught up to the US at about 2% of GDP.
Remember, the Chinese economy is growing a lot faster than the US economy, so it’s a moving target. Even if you caught up, you have to keep buying. If you stand still, you’re going to fall behind because your economy is growing faster, which means you have to buy more and more gold just to maintain the ratio.
Certainly if you want to catch up in tonnage and get to 8000 tons, which they probably do because they expect their economy will overtake the US in the not-too-distant future, they have to keep going and buy another 4000 tons, maybe more.
This is part of the scarcity dynamic we talked about earlier. There’s only so much total mining output in the world at about 2000 tons a year, give or take. With the Chinese out to buy 2000 tons a year, that’s 100% of the mining output in the world. There are a lot of other buyers out there not to mention jewelry, Indian brides, wedding rings, watches, and a lot of other things, so I think that tightness will continue.
The short answer is that China has caught up in gold-to-GDP but they have not caught up in absolute tons. It’s a moving target because their economy is growing faster, so they have to keep buying.
Alex: From your experience and our experience in talking to and having conversations with the refineries over in Switzerland, we already know the huge amounts of gold that have been going over to China in recent years. In a yes-or-no answer, do you think the pace at which they’ve been buying is going to keep up?
Alex: Very good. Jim, thanks so much for your time. We always appreciate it. Thank you to everyone who has participated in the webinar. We thank you for your questions and apologize that we couldn’t get to the rest of them. We encourage you to send questions in to info@PhysicalGoldFund.com. We’ll put them in the queue and hopefully get them answered in the next webinar. With that, I will turn it back over to Jon.
Jon: Thank you, Alex, and thanks to you, Jim Rickards. I have to acknowledge the shortest ever Jim Rickards answer there! But we love your long answers – it’s always a pleasure and an education having you with us.
Most of all, thank you to our listeners for spending time with us today. Let me encourage you to follow Jim on Twitter. His handle is @jamesgrickards. Goodbye for now, and we look forward to joining you again soon.
Physical Gold Fund presents The Gold Chronicles with Jim Rickards and Alex Stanczyk offering insights and analysis about economics, geopolitics, global finance, and gold.
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