THE GOLD CHRONICLES
with James Rickards and Alex Stanczyk
The New Case for Gold has hit #1 in Business for Amazon Hard Cover, Soft Cover, and Audio – has hit #6 On the Wall Street Journal National Best Seller list
What specifically makes gold best suited to be money from a physical and chemical perspective
All forms of money are subject to the laws of physics, when measured side by side gold is superior
Federal Reserve Bank of New York had $100M stolen from its accounts by cyber theft
Details of the Shanghai Accord and its impact on Currency Wars and gold
Deutsche Bank settling silver rigging charges will have little impact on prices
Should citizens of countries with little or no gold reserves be concerned, and how should they factor this into personal wealth protection
China is about to launch their Yuan denominated gold fix, this is a positive development and provides another venue to help China float the Yuan, and may have some impact on the physical market in the conversion of standard good delivery bars into the new kilo bar 999.9 fine standard
Jon: Hello, I’m Jon Ward on behalf of the 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 Timesbestselling author and the Chief Global Strategist for West Shore Funds. He’s the former general counsel of Long-Term Capital Management and is currently a consultant to the U.S. Intelligence Community and Department of Defense. He’s also an Advisory Board Member of Physical Gold Fund. Hello, Jim, and welcome.
Jim: Hi, Jon. How are you? It’s great to be with you.
Jon: It’s good to be with you, too. We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Hello, Alex.
Alex: Hello, Jon. I’m glad to be here. These are exciting times we’ve got going on right now.
Jon: Indeed! Alex will be looking out for questions coming from you, our listeners, so 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.
By the way, I’ll be announcing a special Q & A webinar with Jim at the end of this broadcast, so stay tuned for that.
Jim, your book, The New Case for Gold, has just been published, and you’re already garnering great reviews. What’s more, you’ve hit the number one spot of the money category on Amazon for all three formats: hardback, Kindle and audio. Congratulations! And I believe you have some breaking news about the book for us.
Jim: First of all, Jon, thank you very much for these kind words. As an author, I hope most of all that people read the book. I write it and hope it gets out there, and that seems to be exactly what’s happening. We’re getting good traction, good uptake. Amazon is about half the market.
Independent booksellers are still a big part of the market, and we have really good relations with them in terms of distribution, but Amazon is the 500-pound gorilla. They break the books down by topic, fiction, non-fiction, and then many subcategories. There are a number of subcategories, specifically one called commodities, one called economic policy, another one called money and monetary policy, etc., and we hit number one in every one of those categories.
You can see those lists by going to the home page for The New Case for Gold on Amazon and scrolling down a little bit to see these rankings we’re talking about. Click on them if you’re interested, but we’re up against very heavyweight competition with other books out there in the categories I mentioned. For example, Mervyn King, for many years the governor of the Bank of England, has a new book. George Gilder, a brilliant thinker, a veteran of the Reagan revolution, and a very forward-leaning writer and analyst, has a new book on the current malaise in the international monetary system. Another heavyweight is Thomas Piketty with Capital in the Twenty-First Century. These are great authors and great books we’re up against, so to see The New Case for Gold ranked number one not just on the hardcover but for Kindle and the audiobook is very gratifying.
For fans of audiobooks – and I’m one of them since I do a lot driving – it’s nice to pop an audiobook on the Bluetooth and listen to it on the drive.
This is the first one of my books where I’ve actually read the book myself. The other books, Currency Wars and The Death of Money, are available in audio versions, but they were read by professional voice actors. One of the things I’ve learned in this process is that these voice actors have their own fans and following, and people like certain readers over others, but this book is in my own voice
Reading this book myself was a very interesting experience. I spent two days in a studio with a really talented voice director – I call him the Stanley Kubrick of voice directors. He stopped me probably a thousand times and said things like, “Jim, I’m not hearing the ‘d’ in ‘started.’” He’s very big on enunciation, so I learned a thing or two in that process. I know that when I buy audiobooks, I like ones that are read by the author.
Assuming they are able get through the recording process, I think only the author can get all the inflection and nuances just right, so that’s a nice plus.
Having said all that, yes, we do have some breaking news. I just learned an hour ago from my publisher that we have debuted on the Wall Street Journal business bestsellers list, and we’re number six for our first week, which is very gratifying. There’s a whole art or culture in the publishing industry. A lot of people throw the word “bestseller” around loosely, so it could simply mean they made one of the little subcategories on Amazon. That’s a great accomplishment for any author, but when you talk to the big publishers, as far as they’re concerned, there are only a couple of lists that matter. The Wall Street Journal is the largest circulation newspaper in the United States, possibly the world, and they’re very rigorous about how they monitor these things. This is not a subcategory; this is all the hardcover non-fiction in the world. To come out number six on the business list is very satisfying and makes us a national bestseller in addition to all the Amazon kudos.
I’m very pleased that Amazon allows peer review as well, so anybody can log on and say, “I liked the book,” or “I don’t like the book,” or whatever. They have a five star scale, and we have 4.7 stars. If that doesn’t sound like an A report card, trust me, it is, because nobody gets five stars. It only takes one negative voice to knock you off of a perfect 5.0. If you look at a lot of really well-known authors, celebrities, and others, many of them are in the two- to three-star category, which is good, but we’ve got 4.7 stars and a lot of five-star reviews on Amazon. This is coming from the voice of the everyday reader, not the book reviewer of the New York Times or the Wall Street Journal. It’s the people who actually buy the book, read it, and take the time to express their views, so we’re very happy with that.
Good traction, good sales of over 40,000 copies already sold in all editions – hardcover, Kindle, and audiobook – which is extraordinary. And we’re just getting started. The book has only been out a little over a week. April 5thwas our launch date, so we’re just getting results from the first week of sales. That’s why all these announcements we’re talking about are coming in right now.
As an author, I’m very happy to see it, and I hope the readers enjoy The New Case for Gold. I know they are because of the feedback we’re getting. Again, I can’t thank you, Alex, and the Physical Gold Fund team enough, because this was a team effort. The book started from the podcasts like we’re doing now. Earlier episodes were the origin of the book, and we’ve put some new material in, because we always want to make it really fresh for the readers. There’s some new writing and new material in it, but it has its roots in this Physical Gold Fund podcast series, so I’m very happy with that as well. I could just say if it wasn’t for you, Alex, and the Physical Gold Fund team, this book wouldn’t exist, so thank you. I hope the readers enjoy it.
Jon: Thanks, Jim, and congratulations again. The latest news from the Wall Street Journal is really fantastic. Those of you listening probably have your copy by now, but in case you don’t, go ahead and enjoy the book. It is very readable. We want your honest review, so add your voice to Amazon. It’s good to have that community there.
Jim, I’d like to ask you about one of the fundamentals you discuss in The New Case for Gold. It’s something you’ve talked about here several times, and that is your strongly held view that gold is not a commodity, not an investment; that gold is money.
For a moment, I’d like to take that principle as understood. My question is this: There are lots of valuable commodities in the world we could use as a store of wealth and token of exchange and presumably as a unit of measurement. What is it about gold in particular that makes it suitable to serve as money, not just today, but indeed for the past several thousand years?
Jim: It’s a great question, Jon, one of my favorites, and I get that question in many versions. I was a guest on CNBC’s Squawk Box one time on the set with Joe Kernen and Becky Quick. There’s nothing like live TV, because you’re really out there on the high wire! The anchors get a teleprompter, but I don’t, so I just have to sort of go with the flow.
I think Joe Kernen is a really good guy, a smart guy, but he has a reputation as a bit of a curmudgeon or someone who likes to play devil’s advocate. That’s probably good journalism, and it certainly makes for good TV. On this occasion I was talking about gold, and he said to me, “My wife collects ceramics.” I guess she is a potter who makes pottery and has a pottery collection. He said, “Why can’t we have a pottery standard? Why can’t my wife’s pottery be the monetary standard of the world?” In other words, a variation of the question you’re asking. I thought to myself, “Well, I hope you don’t drop it because then it breaks, and I hope it doesn’t rain because then it dissolves, and it wears out over time!”
There are lots of reasons why I think gold is money. To put a finer point on it, many people disparage reference to gold as a monetary standard almost because of it attractions. Gold is pretty attractive, it is a nice color. An interesting chemical fact I learned is that there is no substitute for gold if you want a true gold color, meaning if you want to gild or decorate something and you want it to look gold, you actually have to use some real gold because there’s no substitute. The logo on a Lexus automobile looks gold, but it’s really just anodized aluminum, and a lot of things that purport to be gold are really kind of a mustard color.
You cannot imitate the true color of gold without using a little bit of gold. It says something there that we find it attractive. That’s a plus to me, but that’s not the reason gold is the best form of money. To go back to the beginning of the question, why I say gold is not an investment: gold is money, it’s as simple as that. My view happens to be the same as Pierpont Morgan’s who testified before Congress around 1908 and said, “Money is gold and nothing else, period.” To him, money was gold – or gold was money if you apply a transitive law – and he didn’t want to hear anymore about it. Everything else was sort of a token or a substitute, but gold was the only form of money, and I agree with that.
It’s one thing to have a view, but we have to live in the real world and make our investment decisions and portfolio allocations based on the reality we face. The truth is a lot of people think about gold as a commodity. It trades on commodity exchanges. When you hear about gold on Bloomberg, CNBC or Fox Business, they’re reporting from the commodity pits right next to sugar, cocoa, iron ore, copper, and other kinds of commodities, no question about that.
Gold is also frequently referred to as an investment. Although most investment advisors don’t like it, some do like it. Our friend, Warren Buffet, one of the most successful investors of all time, never has a good word to say about gold. He doesn’t like it because it doesn’t have a yield. As I have explained, it’s not supposed to have a yield, because money doesn’t have a yield. If you want yield, you have to take risk. If I have an ounce of gold, I put it in a drawer, I go away for a year, I come back and open the drawer, I still have an ounce of gold. It didn’t go up, it didn’t go down, it didn’t shrink, it didn’t expand; it’s just there.
Take a dollar bill out of your wallet or purse and hold it out in front of you. What’s the yield? It’s zero. In other words, you’re holding a form of money. A dollar is money, certainly, and it has no yield. Bitcoin is a form of money and it has no yield. So Bitcoin, dollar bills, and gold have no yield. They’re not supposed to have a yield because they’re money. If you want a yield, you have to convert it into something else such as a bank deposit. People say, “I have money in the bank,” to which I reply, “You don’t have money in the bank. What you have is a bank deposit, which is an unsecured liability of an occasionally insolvent financial institution, so it’s not really money.”
I’m not saying pull all your money out of the bank, and I’m not saying don’t trust the system. What I am saying is don’t fool yourself. Anything other than physical possession is not money. Gold is money; that explains why it has no yield. Your question is, “Why gold? Why not copper, iron ore, other precious metals or other things that could possibly be money?”
I talk about this in chapter two of The New Case for Gold, and I quote the word of Professor Sella from the UK who did a fascinating interview. He’s a chemist who went through the periodic table of elements. I’m sure we all remember from our high school chemistry classes that the periodic table of the elements is a list and a chart that has every known element in the universe.
You might be outside, you might be at your desk, you might be at work, you might be home or you might be having a cup of coffee or looking up in the sky. Everything you see is composed of an element from the periodic table of the elements. They sometimes combine into molecules, the molecules take different forms and so forth, but it all comes down to the periodic table of the elements. There is nothing in the material world that’s not on that chart.
Professor Sella went through the chart and said, “Let’s just ask ourselves, could any of these things be money?” He said, “There are a bunch of gases like argon, oxygen, and hydrogen. Those are all elements, but they also float up in the sky.” Do you want money in the form of gas? Not very practical.
He then found another cluster including sodium and other elements that dissolve on contact with water. It’s bad enough that the central banks dissolve our currency, but we certainly don’t want our currency to disappear when it rains, so he said that whole category is not really suitable for money. Joe Kernen’s wife’s clay pots would fall into this category. Then Sella found a large category of elements that were radioactive including uranium, plutonium, radium and other elements. Well, we certainly don’t want money that has radioactivity and is going to give us cancer. The point is he systematically went through the entire periodic table of the elements.
I think there’s a new element they just discovered, by the way. When I was ready to send The New Case for Goldto the publisher, you have what’s called author’s page pass. It’s a last call like, “Okay, if you want to change anything, if there are any facts wrong, fix it now because this thing is going to the printers. Last call.” You can’t do big rewriting in that circumstance; you can only really do a little fact checking, change a word here and there. Literally a couple of days before I was doing the author’s page pass on The New Case for Gold, I saw some physics announcements that they had discovered new elements, so I had to go back to that page. I think there were 109 or so, and all of a sudden it was 118, so the book is completely up to date. When you get the book, you’re going to learn about the 118th element that was just discovered. A lot of them are super rare and can only be created in the colliders. The point being, you like your money to be rare, but not that rare. You don’t want the kind of money that only exists one time in the history of the universe and inside a Super Collider, so that’s no good.
It’s the same with base metals; copper corrodes, iron rusts – again, you don’t want money that’s going to rust, corrode, turn funny colors, or is exceedingly rare. Arsenic is another one that’s my favorite. Arsenic is poisonous, so for money, you don’t want things that are poisonous, radioactive, gaseous, or can only be found in Super Colliders. Through a process of elimination, he said there are just four elements that are really suitable for money given the fact that you don’t want it to rust or corrode, etc. They’re are called the noble metals: gold, silver, platinum, and palladium. Those are the only four that don’t have all the disabilities we just mentioned.
Silver is a precious metal, but it does corrode a little bit on contact with air. You have to polish it every now and then, because it does corrode some. Gold does not. Gold is actually really hard to destroy. You can blow it up with dynamite, but all you do is scatter the gold molecules all over. They fall to the ground and eventually come back in the form of flakes or nuggets. You can’t get rid of gold, it’s literally impossible to destroy.
Gold is the only noble metal that’s golden in color. Silver, platinum, and palladium are kind of silverish or grayish depending on your pick.
Platinum and palladium are almost too scarce. Again, you want it to be scarce, but not so scarce that you wouldn’t have a fairly steady increase.
Although silver has a corrosive element to it, I’m not a silver-basher. I do have some silver although obviously I’m an advocate for gold. To me a box of 500 one-ounce American silver coins is like having flashlight batteries for a hurricane. If the power grid goes out and you can’t get to ATMs, gas station pumps don’t work, and credit card readers don’t work, etc., in that event, having a bunch of silver dollars in your pocket – pure silver, not the kind of fake silver dollars the U.S. government circulates, but real silver one-ounce coins from the mint – is a good type of emergency money to have.
Having said that, Professor Sella basically disqualified every single element except gold. The reason I am spending so much time on this is to make the point that gold-bashers like to disparage gold. They like to say, “Joe Weisenthal and Bloomberg say that gold is a shiny pile of rocks.” It’s not rocks, it’s metal, so you ought to get that right. You hear phrases like that all the time. They’re probably meant half in jest, but they’re very ill-informed, and I thought this survey of the periodic table shows why.
Basically, everything in the universe is not suitable for money, except for gold. It’s no coincidence that gold was money beginning 5,000 years ago in civilization. Beginning 2,500 years ago, rulers in the Middle East and present day Turkey (the Hittite Kingdom at the time) began to mint gold coins and put them into circulation. Even further back, in pre-history during a stage where humans existed in communities, we find gold ornaments. So it has always been valued, it has always been money, and it’s not a coincidence. There are very good reasons for it.
One last footnote: People say, “Okay, fine, Jim. I hear you, but we used to drive around on horses and buggies, we used to travel on foot, we used to travel by sail, and today we have motorized ships, the Internet, automobiles, and airplanes, so maybe something was useful once upon a time, but get with it, this is the modern age. Things change and gold is really not suitable as money. We have central bank money, what’s wrong with that?”
I point out that that’s an interesting rhetorical flourish, but we still live in the material world, so what is your money in the bank? What is the money market fund? What is a share of stock traded on the New York stock exchange? It’s electrons. It’s essentially electrical charges stored on silicon chips. By the way, silicon is one of the elements in the periodic table of elements, so you haven’t escaped the material world.
Going digital or electronic does not mean ethereal; it just means you’re actually in a physical form on a server. You’re in the physical form of electronically charged particles stored on silicon chips and processed on silicon chips. Your so-called money, your money in the bank, your money market fund exists in physical form as electrons on silicon chips. Those can be hacked, erased, degraded, wiped out in power surges, and can be inaccessible in power outages. In other words, maybe in your imagination you think this is money, but you have not escaped the laws of physics.
On the other hand, gold cannot be hacked, erased or wiped out by North Korean, Russian, Iranian, Syrian, and Chinese cyber brigades, which do exist.
When I say things like this, people say, “Oh that will never happen.” Well, it was only a couple of weeks ago that the country of Bangladesh saw $100 million of its reserves disappear. Bangladesh is one of the poorest countries in the world, but they do have some reserves that are principally the country’s savings from some trade surpluses. Where did they put this money? It was on deposit with the Federal Reserve Bank of New York. It wasn’t some off-the-run, cheesy bank in Sri Lanka, Bangladesh, or India that we’ve never heard of. It was on deposit at the Federal Reserve Bank of New York, arguably the safest bank in the world.
The board of governors in Washington is just a board. There is no bank in Washington. The Federal Reserve System is organized as 12 privately owned regional reserve banks, and the Federal Reserve Bank of New York is the biggest and the strongest. I’ve been there many times, and their offices are in a renaissance-style fortress. If you go to the Federal Reserve Bank of New York between Maiden Lane and Liberty Street in Lower Manhattan, it’s a fortress that looks like something out of the Medici era. It’s the strongest, richest bank in the Federal Reserve System, which arguably is the most powerful central bank in the world. That’s where Bangladesh had their money, and $100 million disappeared. If Bangladesh had had gold, it would still have the money.
I get it when people say, “Hey Jim, what’s wrong with you? Are you a technophobic? Aren’t you with the modern age?” but I also understand the fact that no matter what you say, you cannot escape the material world. When you look at the material world – as I explain in chapter two of The New Case for Gold – gold still looks like the best form of money.
Jon: Thanks, Jim. Let me turn our attention for a moment to the currency wars. You have written recently about the so-called Shanghai Accord. As I understand, it’s a deal put together on the sidelines by the G20 at the end of February this year. It seems that this was an attempt to help China devalue the yuan without panicking the world’s stock markets. Would you tell us about the Shanghai Accord and what it means for the currency wars?
Jim: I’d be glad to. It’s one of my favorite topics, and I’ve been writing and speaking quite a bit about it. I’ll be speaking to an investor conference here in Carlsbad, California, in a couple of hours on this.
The G20 operates at several levels. They have what they call the Leaders’ Summit where President Obama, President Xi of China, Angela Merkel as Chancellor of Germany, and actual heads of state or leaders, as the case may be, would show up. That’s taking place in Hangzhou, China, on September 4th. They also have meetings throughout the year for central bankers, finance ministers, and what they call sherpas who are technical experts who brief the central bankers, etc.
The G20 central bank and finance ministers’ meetings were held on February 26th in Shanghai, China. They have a formal agenda and a final communiqué that are publicly available, but the real action at these meetings is on the sidelines – private dinners, private conferences, maybe a chat in the back seat of a limo, etc. I’m in California now, but I just arrived here last night from Washington DC where I attended the IMF (International Monetary Fund) spring meetings. The IMF have two big meetings in the year, one in the fall and one in the spring, and this was their spring meeting. The G20 meet on the sidelines of the IMF, so the IMF is almost a clubhouse or a platform for the G20.
For those who don’t know, the G stands for ‘group,’ so G20 is a group of 20 nations including the major developed economies such as the United States, Germany, France, Italy, UK, Australia, Canada, and some others. It also consists of the major emerging markets or developing economies including all the BRICS: Brazil, Russia, India, China, South Africa, Argentina, and some others. The funny thing is it’s not quite the G20. I call it “the G20 and friends,” because they usually invite a couple of other nations to join them, so it’s kind of like a floating G23 or G24, but they call it the G20.
They’re really running the world right now as the board of directors of the international monetary system, but they don’t have any permanent secretariat or staff, so they use the IMF as their platform. The G20 meets, but then they turn to the IMF and say, “Look, we need you to do this research, we need you to do this policy, we need you to do this program,” etc. They work together hand-in-glove. The IMF spring meeting this week that I just left includes G20 meetings on the sidelines. There’s going to be a G20 press conference tomorrow, Saturday, that’s probably worth a look.
The February 26th meeting in Shanghai was central banks and finance ministers only, and they cooked up what I call the Shanghai Accord. That’s a reference back to the Plaza Accord. For aficionados of the currency wars and international monetary system, the Plaza Accord was a 1985 meeting that took place at the Plaza Hotel in New York (hence the name) designed to weaken the dollar.
Back in 1977, the dollar was so weak that nobody wanted it, so weak that the United States Treasury – believe it or not – issued treasury bonds denominated in Swiss francs. Can you imagine that? Nobody wanted dollars, so the Treasury had to borrow money in Swiss francs, because people said, “Yes, I’ll trust the Swiss franc. I don’t want your cheesy dollars.” That’s how bad things were in ’77.
By 1981, things had completely reversed. This was the era of King Dollar orchestrated by Paul Volcker and Ronald Reagan. Volcker said, “We’re going to defend the dollar, whatever it takes,” and he took interest rates to 20%. He said, “You don’t want dollars at 10%? How about 11%? How about 12%? How about 13%? How about 15%? How about 16%? 18%?” He kept going until he got to an interest rate where people said, “Yes, I’ll take some dollars at 20%. Bring it on.” In 1980, you could buy 30-year treasury bonds that yielded 15%. Can you imagine if you had gone out and bought a 30-year treasury bond in1980? From 1980 to 2010 (30 years), you would have had a 15% annual return on a treasury bond. We’re not talking about junk bonds here. Some smart people did that.
That’s how bad things were, but Volcker turned it around. And then Reagan cut taxes, cut regulation, and the U.S. economy took off like a rocket. Well, mission accomplished. The dollar completely turned around from the lows of 1977 to an all-time high. The all-time high for the dollar on major indices was 1985. By then James Baker was the Secretary of the Treasury and the dollar was too strong. It was killing exports, killing corporate earnings, etc.
At that time it was the G7. In 1985, emerging markets were not on the radar screen. China had potential, but Russia was still under communism that didn’t end until 1990. And so it was the G7 – really the European countries, Canada, the U.S. and Japan. They orchestrated a decline in the dollar, and it worked. It was a coordinated, foreign currency market intervention by the major central banks to weaken the dollar because they felt the dollar was too strong, and it worked. Flash-forward to 2016 to when something very similar happened in Shanghai, so I call it the Shanghai Accord. Again, a reference back to the Plaza Accord.
I’ll get to the solution in a minute, but first I want to describe the problem. What problem were they trying to solve? The evidence is everywhere that the Chinese economy is coming in for a hard landing. I don’t want to turn this into a presentation on China economics, and I think you have seen that their GDP continues to decline, but it’s worse than that. For the first time they have a serious unemployment problem, so GDP is not the main event. The main event is jobs, jobs, jobs, because they’re communists. What legitimacy do they have? The answer is none, but if they can create jobs, then people will go along with the system. The minute the job machine starts to stall, people become discontent. They lose what’s called the Mandate of Heaven, a thousands-year-old Chinese concept. Even communists can lose the Mandate of Heaven, consequently things are pretty bad over there. They’re the second largest economy in the world, so if China goes down, they take the world with it.
That was already happening, so China needed some relief in the currency wars by cheapening the currency. Now the last two times China tried to cheapen the currency, they sank the U.S. stock markets. We came very close to a global financial panic and meltdown of the order of 2008. What were these incidents? On August 11, 2015, China did a shock devaluation – 3% overnight. What happened between August 11th and August 31st last summer? The U.S. stock market sank like a stone. It crashed. Just ask yourself where you were on August 31, 2015. Maybe you were on vacation or taking the kids back to college. You could have been doing a lot of things, but we were staring into the abyss. Remember how scary it was? That was the reaction of the U.S. stock market to the Chinese devaluation.
Although the Fed had originally hoped to raise rates in September, they came out and decided not to raise rates in September. They started the happy talk and the dovish talk, and they were turning things around, so the market said, “Okay, they’re not raising after all.” The markets rallied and came back, but that was a very scary episode.
The next time China tried to devalue, they didn’t do the overnight 3% thing, they did it in baby steps in December 2015 and early January 2016. What happened? The U.S. stock market crashed again. From January 1 to February 11, 2016, we had a full-blown correction, down 10%. Again, it looked like we were staring into the abyss and again the Fed came to the rescue with happy talk. When Dudley gave a speech, the Fed made it clear they weren’t going to raise rates in March even though the market had expected it to. The market came back, but we had two death-defying plunges of the stock market rollercoaster in response to two Chinese efforts at devaluation. China needed to devalue to boost their economy, but every time they devalued, the U.S. stock market sank. So how could China devalue without sinking the U.S. stock markets? That was the problem.
What they came up with is a very clever finesse and it turns on the fact that there are more currencies in the world than the Chinese yuan and the U.S. dollar. Everyone focuses obsessively on the cross-rate between the Chinese yuan and the US dollar – the trading symbol CNY/USD – that’s Chinese yuan/US dollar. When the yuan goes down against the dollar, U.S. stock markets crash, so what they said was, “Let’s do the following: Instead of the Chinese doing anything, let’s have the Chinese do nothing and let’s strengthen the euro, strengthen the yen, and weaken the dollar but keep the yuan/dollar cross-rate unchanged. That way, nobody will notice.”
Europe and Japan together have a larger trading relationship with China than the U.S. In other words, if you could cheapen the yuan against the euro and the yen, arguably you would get more relief than cheapening it against the dollar. Furthermore, if you could cheapen the dollar and maintain the peg, China would go along for the ride. You would get a weaker yuan without changing the cross-rate, because the dollar itself is getting weaker. The playbook was to strengthen the euro, strengthen the yen, cheapen the dollar, China does nothing, no one notices, the cross-rate’s unchanged, but China gets a major devaluation. That is exactly what happened.
I mentioned this meeting was February 26th, so what was the timeline or sequence of events? Literally a matter of days. On March 10th Draghi tightened European policy. People say, “Wait a second. He pushed interest rates 10 basis points further into negative territory and did 10 billion more of euro QE. How is that tightening?” The answer is, that’s exactly what the market expected. In fact, that was the low end of what the market expected. The market was expecting 10 and 10 or 10 billion of more QE and 10 basis points of more negative rates. That was already priced in, but then Draghi shocked the markets by saying, “I’m done,” i.e., “I’m doing 10 and 10, but I’m not doing any more.” That was not expected. The way central banks manipulate behavior these days is not by changing rates or QE but by changing policy relative to expectations. In other words, if expectations are for more ease and you say, “No more ease,” then that’s tightening relative to expectations, and that’s what Draghi did.
Four days later, Kuroda (Governor of the Bank of Japan) comes out. People expected more easing and didn’t get it because he didn’t tighten. It’s not like he reduced the money supply, but they were expecting him to increase the money supply and he said no. That’s tightening relative to expectations. So we had a tighter European policy, the euro went up, tighter Japanese policy, the yen went up, then March 16th was Yellen’s turn.
The Fed did not raise rates, but the markets expected that. Then she gave a very dovish press conference, and the market said, “It looks like you’re not going to raise rates for a long time, and that’s called forward guidance.”
Come ahead to March 29th when Yellen gave a full dove speech to the Economic Club of New York. I mean she sprouted wings and was flying around the room like a dove. She completely reversed her position from 2015 where she had fought with Charlie Evans, the President of the Federal Reserve Bank of Chicago. Evans is the author of the asymmetric theory that said, “Look, we don’t really know what we’re doing,” which is a pretty honest evaluation. I’ve spoken to a lot of Fed insiders, and privately they say, “We don’t know what we’re doing with this, it’s just an experiment.” Evans said, “We don’t know what we’re doing, but the risks are asymmetric.”
To put it another way, if we don’t raise rates and we’re wrong, it’s easy to raise them in the future. He was saying that if we get a little inflation, we know how to snuff out inflation, but if we do raise rates and we’re wrong and we create deflation, we don’t know how to cure that. We know how to fix inflation, but don’t know how to fix deflation; therefore, if we do nothing and we’re wrong, we can fix it, but if we raise rates and we’re wrong, we can’t fix it. The risks are asymmetric in favor of doing nothing.
Yellen fought him intellectually all of 2015. Her position was, “No, I’m looking at the Phillips Curve. When labor markets get tight, inflation’s right around the corner. Monetary policy acts with a lag. We have to look over the horizon. We don’t want to be behind the curve. I want to raise rates.”
There’s another concept called NAIRU – the non-accelerating inflation rate of unemployment. She was using her models to say you’re supposed to raise rates, while Evans was using a very sophisticated but easy to understand risk model that said you shouldn’t raise rates, and they fought all year.
All of a sudden on March 29th Yellen adopts Evans’ position and actually used the word “asymmetric” in the speech and gave him a footnote. (At least she gave him some intellectual credit!) So Yellen goes full dove, full Evans, and the dollar just crashed, and the yen is screaming, the yen’s going up, the euro’s going up, the dollar’s going down.
This whole time China maintained the peg to the dollar, but with the dollar going down and the euro going up and the yen going up, what’s happening to the yuan? It’s devaluing, it’s depreciating a lot. This was a great finesse. China got the devaluation, nobody noticed, and U.S. stock markets did not crash. This is the Shanghai Accord.
The significance of it is that this is going to continue. This is a major shift in the currency wars. When these things happen, they’re not day trades; they go on for two or three years. We had the weak yen from December 2012 when they announced Abenomics, and a weak yen was one of the arrows of Abenomics, that lasted until March 2016. That was not quite three and a half years of weak yen. The weak euro started in June 2014 with negative interest rates and then got a boost in January 2015 with euro QE, so that’s almost two years of weak euro.
That’s now turned around. We’re going to the strong euro and the strong yen. This is what currency wars are all about. They don’t have any logical conclusion, they just go back and forth and back and forth. It’s like two kids on a seesaw – one’s up and one’s down. They push and the one that was down goes up and the one that was up goes down, but they can’t go anywhere, they can only go up and down. That’s the thing with currencies, they don’t go to zero until you end up like Zimbabwe, which we’re probably heading for but we’re not there yet. Meanwhile, they just go back and forth and back and forth. We can see the yen going to 100, we can see the euro going to 1.20, and we’re in for a period of weak dollars. The weak dollar phase is going to persist.
What does that have to do with gold? It has a lot to do with gold. The all-time high for gold was August 2011 at $1,900 an ounce. August 2011 was also the all-time low for the dollar. I said that early 1985 was the all-time high and that gave rise to the Plaza Accord, but August 2011 was the all-time low. It’s no coincidence that gold hit an all-time high in dollar terms the same month that the dollar hit an all-time low on the index. After all, the dollar price of gold is just the reciprocal of the dollar. If you have a weak dollar, you have a high dollar price for gold and if you have a strong dollar, you have a low dollar price for gold .
If we’re at a stage where the dollar has peaked, which we are, and the dollar is going to get weaker, which it is as I just explained because of the Shanghai Accord, then that means the dollar price of gold is going to go way up. This is an excellent technical set-up for gold. There are some physical shortages as well. My advice to investors is to get your gold now. Don’t wait until it starts to scream, because you may go out at that point to get gold and realize that you can’t find it.
Jon: Thanks, Jim, for a very full answer to that question. Now over to you, Alex. What questions do you have today from our listeners?
Alex: Thanks a lot, Jon. I’d like to make a couple of quick comments. First of all, Jim, regarding the discussion we had just a moment ago about physics and chemistry reasons as to why gold makes sense as money. I’ve been in this industry, and when I say “this industry” I mean the physical gold industry, for approaching a decade now, and that is perhaps the best explanation on the issue that I have ever heard. Thank you for that.
Secondly, we have someone asking about the audiobook version. As you have already mentioned, it’s available on Amazon. I ordered that myself and am looking forward to listening to that on the plane while going over to New York next week for the book launch celebration.
Third, there’s a question coming in from C.M. about Physical Gold Fund’s version of the book. “Will Physical Gold Fund’s version be the same as the Strategic Intelligence version?” The answer is no. The Physical Gold Fund version is going to be unique in that it contains an exclusive entry from Jim and material from myself.
For those of you who are submitting questions, we’re always very thankful for your questions. You may send them by e-mail to email@example.com, you can ask them directly live on the webinar if you like, and you can also use Twitter with the hashtag #askJimRickards. If you’re going to send them by e-mail, try to send them a couple of days early so we can properly sort through these.
Our first question is coming in live from Elizabeth M. who asks, “As you may know or have heard, Deutsche Bank has agreed to settle the lawsuit against them for rigging the silver benchmark along with a couple of other banks. Do you have any comment on this bank silver rigging settlement, and what impact do you think this might have on prices in the short and long term?”
Jim: It’s really newsworthy and is an important admission. I don’t think by itself it’s going to have a big impact on prices, and let me explain why.
First of all, there’s no doubt that the gold and silver markets are being manipulated. I talk about this in the book The New Case for Gold and explain how and why it’s done, who’s behind it, etc. There is absolute manipulation going on, but this particular manipulation that Deutsche Bank admitted to is not the same manipulation I describe in the book. What I’m focused on are sovereign nations like China and the United States occasionally slamming the market and manipulating the price lower for geostrategic reasons. China is out to acquire 3,000 more tons of gold.
That’s a huge amount, almost 10% of all the official gold in the world. Anyone who’s been involved at all with the physical side of the gold market, as you have, Alex, knows how it is. Good luck buying 100 lbs of gold let alone 3,000 tons, which is what we’re talking about.
China has a big interest in keeping the gold price low because they’re still buying. If you were buying, you would want a low price also.
Ultimately, the price would go much higher, but in the short run they want to keep it under control so they can keep buying up behind the scenes. The kind of manipulation Deutsche Bank did was really just frontrunning or good old-fashioned stealing from customers, which banks are very good at as we know. If I’m sitting there on the phone fixing the price of gold or silver – it was silver in this particular case – and I know what my customer order book is and what the wholesale market is, and I buy some for myself, bid up the price, then fill all my customer orders at the higher price, and then I dump my own silver at a higher price and make a quick garbage trash profit, this is not about stockpiling gold and cornering the market or other kinds of things that a lot of commentators dwell on ad nauseam.
I’m not saying that doesn’t go on with silver, but it’s much less important than what goes on in the gold market. I’m glad that justice was done and that Duetsche Bank paid a fine. I think it’s illuminating about the lack of ethics by banks which is one more reason to have physical gold and not rely on the banking system. It is a good development, but it was kind of known a year ago and it takes a year to settle these cases. Of course, they always settle them on Fridays because they figure everyone’s getting away early for vacation or whatever, so I don’t think it’s that big of a deal. It’s not as if it’s the end of some big conspiracy. The conspiracy still lives, and as I say, this is more of a frontrunning case, kind of small potatoes. I’m glad this happened, but I don’t think it’s going to have that big of an impact on the price.
Alex: I happen to agree with you from our view. While they may be able to impact the price on a short-term basis, the overall forces in the market that we’re looking at moving forward are absolutely tremendous. I don’t think any bank is going to be able to stand in the way of that. It’s going to be like trying to stand on a railroad track stopping a freight train if they attempt to.
The next question is coming in by e-mail from Chris S. This person is Canadian, so they’re asking from a Canadian perspective, but the question may also apply to citizens of any country that has very little gold. It is a two-part question: “How exposed are Canadians to the future of the monetary reset considering the Bank of Canada has no more gold? And in light of this, should Canadians consider allocating more than 10% of gold in their portfolio?”
Jim: I would separate the status of countries relative to official gold from the investment or allocation decisions of individuals with regard to their specific portfolios.
I stick to the 10% but want to make it clear, that’s a judgement. I write about this and talk about this all the time, and I take my responsibility seriously. If I say something or recommend something and people follow it, I may not know who they are, but I really take it to heart. I would not be able to sleep at night if I thought I was proposing something and somebody was hurt or disadvantaged by it. We all know that gold can go up and down. I could give you some scenarios where it could go down a lot, but that’s the origin of the 10% allocation. If you have 10% of your portfolio in gold and it goes down 20%, which I don’t expect, but just say it does, the portfolio impact is 2%. In other words, it’s 20% of 10%, which is 2% of your entire portfolio. With a 10% allocation and a 20% crash, you’re going to take a 2% hit on your portfolio. At two percent, no one is going to get hurt by that, because it also probably means that other things are going up so your portfolio is just fine. If you put 100% in gold and it goes down 20%, now you’ve lost 20% of your wealth. That’s what happened to people who were in stocks in 2008, they lost 50% of their wealth because that’s how much the markets went down.
A lot of commentators and bloggers and, candidly, trolls, love to put words in your mouth. They say things like, “Jim Rickards says sell everything and buy gold and look what happens and all that.” I’ve never said that and I don’t recommend that. That’s why I stick with my 10% because if I’m wrong, nobody is going to get hurt badly and if I’m right, it’s going to go up two, three, four, times and you’re going to make a significant amount of money. That is your insurance on what else is happening in your portfolio which may not be good depending on your allocation. That’s where I get the 10%.
Having said that, it’s a judgement that’s subjective. There’s no iron law of allocation. I have clients who have 50% of their assets in gold. I tease them and say, “Look, you didn’t get that from me, but it’s a free country. If that’s your comfort level, then good for you.” Some of these clients are very wealthy, so it’s not as if they’re hardship cases, so to speak.
I leave it to each individual. I respect individuals’ allocations, but to the extent I’m going to recommend anything, I stick with the 10% because that’s the level where I know investors will do well when the price skyrockets and I know they won’t get hurt if it goes the other way. I would stick with that whether you live in Canada, Switzerland, the U.S. or Singapore.
As far as Canada is concerned, it’s an interesting case. It’s kind of a little nutty, because officially they have no gold. By one report they were down to 77 ounces. I know lots of people who keep that much in a desk drawer. It’s $100,000 at current prices, so it’s not pin money, but it’s not as if we’re talking about billions of dollars here. Canada essentially has no gold officially, but they are one of the five largest gold producers in the world. The private sector in Canada produces approximately 200 tons a year, which is a significant amount of all the gold that’s produced in the year which is a little over 2,000 tons. And they have a lot of gold reserves in the ground, so I guess the government of Canada could always expropriate that. They could always seize it if they ever needed the gold.
To me, the real impact of it is considering when the international monetary system collapses. I do expect that, and it’s not some out-of-the-blue dire forecast. It has collapsed three times in the last 100 years. These collapses do happen every 30 to 40 years, so the major powers have to sit down around a table and reform the system. Canada is not going to have a seat. It’s going to be like one of those board rooms where the powerful directors sit at the table and the minions sit against the wall in little chairs. Canada is going to be against the wall. The people at the table are going to be the United States with 8000 tons, Europe led by Germany with 10,000 tons, Russia with now approaching 2000 tons, France and Italy at 2000 tons each included in the European 10,000 tons, and China with some number we have to estimate but probably 4000 tons, maybe a lot higher when all is said and done. They’re going to have the seats at the table while countries like the UK, Canada, Australia, Brazil, and many others are going to be sitting against the wall.
It just means that Canada will be tagged along with the U.S. They’re going to have to rely on the U.S. to cut a good deal. Of course the U.S. will cut a good deal for the U.S. and it may or may not be a good deal for Canada, but Canada’s just not going to have a seat at the table. Canada’s official weakness doesn’t change my view as to what individuals should do.
Alex: I think a lot of people are going to appreciate that answer, Jim. Our next comment is coming in from Chris M.: “Just to let you know, Mr. Rickards, I just ordered your book from Amazon.” So thanks, Chris.
Jim: Thank you very much!
Alex: Next we have another question that is going to be the last one because we’re running out of time. This comes in from HBK Bangalore, and the question is, “China is about to launch a yuan-denominated gold fix. What impact do you think this is going to have on the physical supply/demand scenario?”
Jim: I think it’s a very big deal. By itself, is that the end of the U.S. dollar? No. That story has some ways to run. There are many, many developments around the world and this is one of them. It’s not the only one when I look at Russia’s acquisition of gold, China’s acquisition of gold, and even the physical gold standard. Alex, you know this very well as we have been to Switzerland in the vaults and hefted those 400 ounce gold bars in our hands. They’re beautiful to look at, but they’re heavy. It’s like lifting a 35 lb. free weight.
China has changed the standard for what physical gold is. Prior to China’s emergence, it was a 400-ounce good delivery bar of 99.9% purity. The new Chinese standard is a 1-kilo bar of four nines quality – that’s 99.99% pure – so smaller at 2.2 lbs. instead of 35 lbs. In that sense it’s more mobile and maybe more practical. A lot of the refining in Switzerland today consists of taking these old 400-ounce bars of two-nine quality, melting them down, and turning them into 1-kilo bars of four-nine quality. That’s the new gold standard.
China’s taken that several steps further with a physical gold exchange, a gold futures exchange, and are now going all the way to nominating it in yuan. So where does that go? The next step would be for the yuan and the SDR to become benchmark currencies for gold and not the dollar. If you want to manipulate the gold market, where do you go? Do you go to New York? Do you go to Shanghai? Do you go to London? It just gets more and more difficult to use the dollar and to use a single market, namely the COMEX closing price, every day to manipulate markets.
The more exchanges, the more venues, the more currencies, the more standards you have, it gets to be like herding cats. The cats run in all different directions and they don’t listen to you. It’s all part of China’s understanding that gold is money, which is where we started the podcast, gold is money. If you want to control money, you need to control gold. They’re taking very large steps in that direction, so I think it’s a very important development. By itself, is it the end of the dollar? No, but it’s a big step in that direction.
Alex: Outstanding. Thanks a lot, Jim. That wraps up our time for today. We want to thank everybody for their questions. We’re going to be doing an all Q & A webinar the next time around coming up in May, and Jon has some more details for you. With that, I’m going to turn it back over to Jon Ward.
Jon: Thank you, Alex. We’ve heard from you listeners that you’d like to do more Q & A with Jim, so we’ve set aside our next podcast on the 18th of May to do that. We’d love to have your questions. To make the most of this, we ask you to send your questions in advance. As Alex mentioned, you may e-mail us at firstname.lastname@example.org. We’d like to give the session a bit of a focus, so we’re especially looking for your questions that arise from Jim’s latest book, The New Case for Gold, so grab a copy and send us your questions at email@example.com.
Now let me say thank you to Jim Rickards. It has been another really extraordinary conversation with you. It’s always a pleasure and an education having you with us. And 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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