3 Min. Gold News – Part 2 – Jim Rickards – Gold Chronicles – March 15, 2015

3 Minute Gold News

A Quick Read for Busy People

Part 2 of a synopsis of a webinar interview with Jim Rickards,  New York Times bestselling author of The Death of Money and Currency Wars, by John Ward and Alex Stanczyk from The Gold Chronicles.

Jim is the Chief Global Strategist for West Shore Funds, former general counsel for Long Term Capital Management, and a consultant to the US Intelligence community and the Department of Defense.

A recording of the hour long webinar and full transcript will become available at Physical Gold Fund.

Topics:

Money Market Funds
Negative Interest Rates
Bonds
Bullion Banks
Physical Gold
Euro
Strong US Dollar

 

Jim Rickards

March 12, 2015 interview – please visit the website where the full webinar and transcript will be posted at a future date

 

MONEY MARKET FUNDS

People think money market funds are like cash.

They were invented in the 1970s when a lot of usury laws were still on the books. Most of those laws have been repealed since then.

Around 1980 – 1981 interest rates were 20%. The usury laws said that banks could only pay you maybe 10 – 12% so Meryl Lynch invented the money market fund so they could pay you whatever they wanted because they weren’t a bank.

They were invented as a cash substituted and later became a cash equivalent.

If you call any investor in America, or in Canada if you’re in a US money market fund, and ask if their fund is cashable they will say, “Absolutely. I could call my broker today and the money will be in my bank account tomorrow.”

So, other than a one day lag they believe it’s cashable.

Well, last summer the FCC finalized a rule that says that money market funds can suspend redemption.

“Suspend redemption” means “I’m not giving you your money back.”

Hedge funds could always suspend redemption — Jim was a hedge fund lawyer for many years and they all have suspension clauses.

It means that when you really, really don’t need your money you’ll be able to get it.

But when you really, really want your money — like when the world is collapsing around you — you won’t be able to get it.

So if the emerging market collapse that was talked about in Part 1 happens, or there’s a replay of 2008 and banks are failing, that’s when the suspension clause will be put in place.

So what can you do?

Jim’s a fan of short term treasury bills owned directly — they should be liquid.

NEGATIVE INTEREST RATES

“How low can you go?”

Negative interest rates are a big psychological and policy threshold. Going from zero to a negative 1 basis point isn’t a big deal but it opens the question, “How low can you go?”

What the central banks are trying to do is get to negative real rates.

“Negative real rates” means that the interest rate they pay you is lower than inflation. A negative real rate steals money from savers and gives it to borrowers.

For example, if inflation is 3% and interest rates are 2% then if I’m an investor I’m losing money in real terms.

I’m losing 1% per year because while I’m getting 2% on my money, my money is worth 3% less — I’m losing 1% in real terms.

Central banks want that because it’s a great incentive to borrow.

But how do they get to negative real rates if there’s no inflation and they actually have deflation?

Deflation of 1% with an interest rate of 2% is a actually a real rate of plus 3%, because if you subtract a negative you are actually adding, so  2 minus negative 1 equals positive 3, meaning 2 – (- 1) = 3, which is 2 + 1 = 3.

That means that the real rate is actually quite high.

So nominal rates are really, really low but real rates are really high because of deflation.

BONDS

The way to understand the bond market is that it is chasing deflation down a rabbit hole.

The more deflation you have, the lower the nominal interest rates you need, thinking of zero not as the boundary going from + 1 to – 1, but instead as going – 2. The more deflation declines the lower the interest rate has to go until you get to a negative rate.

That’s because the rate has to be lower than the deflation.

In theory, you have to have something like 2% deflation and – 3% interest rates.

There’s no limit to how low rates can go, except that on the way to trying to get nominal rates below deflation through financial repression central banks are going to print too much money and destroy confidence.

If you mess with the interest rates too much you’re going to break the exchange rates and that’s what the currency wars are all about.

For now, nominal rates are going lower, there’s no theoretical limit to how low. Nominal rates are chasing deflation down and something’s going to break.

That’s another reason to have some cash, some treasury bills, and some gold that’s outside the banking system — it’s your insurance against all these bad outcomes.

BULLION BANKS

Having your gold in a bullion banks is not the same as having it outside the banking system.

It’s probably the worst place to put your gold.

1. Anything in a bank vault is at risk of a regulatory shut down.

2. You don’t own the gold, you only own a paper claim.

When you buy gold from a bullion bank, the LBMA, they sell it on an unallocated basis. They sell you gold, but you don’t actually have physical serial numbered gold bars that belong to you.

What you have is an unsecured claim on some gold.

If you ask for your gold then you have to give them notice, you have to pay more, and then you have to wait. Jim has heard horror stories of people waiting months, which means the bank is out of gold and is trying to get some on the market.

There is easily one hundred times the amount of claims on gold as there is gold being held.

If everyone with a claim asked for their gold then the price of gold would skyrocket over night and they would shut down all the contracts. They’d send you a cheque for yesterday’s closing price and you would not get today’s higher closing price. It would be a nightmare.

PHYSICAL GOLD

Another option for owning gold is vaulted physical gold. There are a few of them.

Jim is familiar with one called Physical Gold Fund, which hosted this interview. Jim has visited their vaults in Switzerland with auditors and lawyers.

(I was tweeting and emailing with Jim about his official visit to the vaults, and a photo of Jim holding gold is part of the music video “Bitcoin Barbarians.” I don’t have a personal affiliation with the Physical Gold Fund.)

There are crates that hold the gold bars. Each bar has a serial number that corresponds with lists of serial numbers. Jim watched the auditors, who checked every number on a bar with every number on a list, and it checked out 100%.

That’s when you know you’ve actually got the gold.

After viewing the vaults Jim was told in a meeting with the head of logistics that the business is growing so fast they can’t build the vaults fast enough. Smart money is getting out of the banks and into physical gold.

Jim is a fan of gold but does not believe you should go all in — 10% is fine.

Own gold in physical form.

EURO

The euro started at $1.16 US and has traded as high as $1.60 and as low as $.80.

It could go lower but that means the US dollar is going higher. It’s a zero sum game so if something is down then something else is up.

What does it mean if the US dollar is stronger?

It means more deflation in the US and that the US is getting further away from their inflation goal of 2%.

That means a lower likelihood of the Fed raising interest rates.

The euro is at the low end of where it’s going to go but that’s not a specific prediction. It could go lower but that would be bad news for Janet Yellen and US stocks.

STRONG US DOLLAR

A stronger US dollar is the same as a US interest rate increase.

The way to understand exchange rates and interest rates is that they’re two sides of the same coin.

Generally speaking, higher interest rates means a stronger currency.

If you’re at zero rates you can still ease (print money) but you cheapen your currency. That’s what the currency wars are all about.

When you want to increase rates you can tighten (stop printing money). In effect the Fed is getting a rate increase without raising interest rates by having a strong dollar.

The question is whether they want to raise rates too.

That would be doubling down.

 

Please visit this link for Part 1 of the webinar synopsis.

 

Jim Rickards can be found on Twitter and at James Rickards Project.

 

 

……………………………………….

 

 

 

Artists see patterns using visual and musical ratios and fractals, and know all things in a closed system goes through the four seasons.

We’re coming into a global economic winter to be followed by a bright spring with new technologies and opportunities.

 

 

……………………………………….

 

Preparing for the Fall is a boutique live solo album available on iTunes — featuring the singles Wag the Dog, Black Swan Dive,  American Pie and Gods of the Copybook Headings.

 

……………………………………….

 

Bitcoin Barbarians
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.
SOCAN/ASCAP
from the album Preparing for the Fall available on iTunes

 

Wag the Dog (Drums of War and Backroom Banker Passes)
words and music Elaine Diane Taylor
© 2014 Intelligentsia Media Inc. All rights reserved.
SOCAN/ASCAP
from the album Preparing for the Fall available on iTunes

 

Coins and Crowns
words and music Elaine Diane Taylor
© Intelligentsia Media Inc. All rights reserved.
SOCAN/ASCAP
from the album Coins and Crowns available on iTunes

Single featured in Episode 1 of Mike Maloney’s documentary series Hidden Secrets of Money.

 

The Gods of the Copybook Headings
words by Rudyard Kipling and music by Elaine Diane Taylor
©2014 Intelligentsia Media Inc.
SOCAN/ASCAP
from the album Preparing for the Fall available on iTunes

 

 

Another Week on Wall Street (Naked Short Selling and Fiat Currency)
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.
SOCAN/ASCAP
from the album Coins and Crowns available on iTunes

 

……………………………………….

This site is for art and research purposes, and nothing is intended as individual investment advice.