3 Minute Gold News
A Quick Read for Busy People
3 minute synopsis of a recent interview with Jim Rickards, author of Currency Wars, and Senior Managing Director at Tangent Management Partners, by Erik Schatzker and Carol Massar from Bloomberg Television.
Inflation and Deflation
Gold to $7,000
The problem is that we don’t have markets. We have indices and we have prices, but there are no more markets left.
Markets are places for parties to engage in price discovery and exchange, but when you manipulate the dollar (which is what the FED is doing), then you manipulate, directly or indirectly, every market in the world.
We’re looking to markets for price signals and guidance but what we’re getting is sort of a false signal because they’re all being manipulated by the FED.
The FED, Ben Bernanke and Janet Yellen and the rest of them, have all said in papers and speeches that QE is unprecedented. If you read between the lines they don’t know what they’re doing – QE is an experiment.
This is not the first taper. QE 1 was 100% taper and QE 2 in July 2011 was 100% taper. So they’ve tapered twice before, and it failed twice before when they came back and started asset purchases again.
There were different quantities and different approaches to it, but QE 3 is “3” for a reason – it failed two times before. It may fail again. Jim thinks they are tapering into weakness.
Jim manages a hedge fund and it was up 19% for the year. He says that one day when the market is down you want your hedge fund to be up then.
INFLATION AND DEFLATION
It’s an unstable situation.
The problem is that you have inflation and deflation at the same time. The deflation is natural and is a product of this depression, and the inflation is induced by policy. The two are fighting each other to a standstill.
When you see a price index of 1 – 2% then it’s like standing on the San Andreas fault but it’s not shaking. It doesn’t mean it’s all good – there are enormous forces underneath and it’s going to break one way or the other.
It’s hard to know which way it will break, but we can be fairly certain of more volatility in 2014.
The fundamentals have not changed.
GOLD TO $7,000
Based on the fundamentals, Jim predicts that gold will go to $7,000. He says that there is a lot of manipulation in the gold market. Why invest if the gold market is manipulated? Because the manipulation is unstable.
The floating supply is disappearing. It’s going into vaults in China. Five hundred times out of GLD into China. Mining output going straight to China. They’re putting it away and it will never see the light of day again.
The gold supply is declining while the paper shorts are decreasing.
It could be one year, two years, three years – Jim doesn’t care. He owns gold and does it without leverage. He owns physical gold in secure storage.
Jim says he’s happy to sit on that because when you want gold in the future you’re not going to be able to find it.
He likes gold as 10% of his holdings. Not 50% or all in. You shouldn’t be all in anything.
Jim is not a gold bug, he is an analyst.
Gold moves inversely to the US dollar. Jim sees gold as constant while the dollar moves.
So when gold rises to $7,000 per ounce, which he expects, then what it really means is that the US dollar has lost 80% of its value, which it did in the 1970s.
A gold rally is really a dollar collapse, and you should expect a dollar collapse.
This is an unstable balance. If we get back to 3 – 4% growth, if unemployment gets down to 5%, if inflation levels off around 2%, and if the FED withdraws policy, then Jim would consider his analysis to be very wrong and that it would be a good outcome for the FED.
Could it happen? Yes. But Jim believes it is very unlikely.
The FED has painted itself into the corner. They are insolvent on a mark to market basis. They are still buying assets. Tapering is like slamming on the brakes on ice. They’re still going to buy $400 billion before they come to a halt, even if they do $10 billion a month. which they may not. If they are tapering into weakness and we get a recession in 2014 then Yellen will increase asset purchases.
So the FED has got your back which creates bubbles. The FED shouldn’t have your back – why is the FED micromanaging the global economy?
Jim believes stocks will go up and that with European stocks you should adjust for the currency, and give it a little top spin on the exchange rate. You can’t just look at the indices, you have to look at the currency because the Euro is stronger, which Jim also predicted.
So stocks are going to go up for a while.
Jim predicts that by mid 2015 the FED is not going to be raising interest rates. If they do then it’s only because we’ve reached the tipping point and inflation has taken off.
What they want are negative real rates. They want inflation, but the problem is that they think they can dial it up to 2 – 2 1/2% but it goes 2% to 3% and then jumps to 9%.
They can make the money supply whatever they want but the key is velocity which is behavioral and psychological. When you change the psychology you can’t change it back again, and then it gets out of control.
Gold is the insurance policy.
Jim says he likes 10% gold. He believes stocks will go up, but he doesn’t like them personally because he believes they are in a bubble.
If Jim was to invest in stocks he would do what Warren Buffet does. Buffet disparages gold at every opportunity but he bought a railroad and an oil pipeline which are hard assets. So Buffet is dumping dollars and getting into hard assets. Jim suggests we watch what they do and not what they say.
Another Week on Wall Street
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.
from the album Coins and Crowns