3 Minute Gold News
A Quick Read for Busy People
A synopsis of a presentation by Jim Rickards, New York Times bestselling author of The Death of Money and Currency Wars, at Johns Hopkins School of Advanced International Studies.
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.
This YouTube video was sent to me by a reader, Mr. G.H., who called it a hidden gem. It’s a great overview of gold and the geopolitical situation surrounding the US dollar as the world reserve currency.
Topics:
Nixon: Gold Standard
Financial War: Games and Reality
China
Collapse of the International Monetary System
Petrodollar
Russia
Inflation vs. Deflation
SDRs
Gold
Collapse
Jim Rickards
May 2, 2014 presentation – please visit YouTube to view the hour and twenty minute video.
NIXON: GOLD STANDARD
In 1971 Nixon ‘temporarily’ stopped the redemption of gold for US dollars.
This meant that foreign countries could no longer cash in their US dollars and get gold from the US. From the signing of the Bretton Woods Agreement in 1944 until 1971 countries could redeem their US dollars for gold, which was the base reserve currency, Nixon stopped that “temporarily” — although 40 years is a long “temporary” — saying they would link the US dollar to the price of gold.
That unilateral act by the US wasn’t on its own the end of gold in the monetary system.
The system is regulated by the IMF (International Monetary Fund). The IMF formally ended gold as part of the monetary system in 1975, when they stopped the practice of countries giving them gold to buy membership in the IMF.
Economic schools stopped teaching about gold at that time, and Jim attended Johns Hopkins in 1975 when the last class on gold as money was formally taught.
Now you need to learn about gold as part of a mining education.
Gold may be coming full circle and about to become part of the monetary system again.
FINANCIAL WAR: GAMES AND REALITY
Financial warfare is the future of warfare.
We’re living in an age of mutually assured financial destruction.
In 2009, Jim was a participant and facilitator in the first ever financial war game conducted by the US Pentagon.
The Pentagon had done many war games but this was the first without kinetic weapons. Nothing that blows up — no submarines or cruise missiles or drones.
The weapons were stocks and bonds, currencies, derivatives and commodities.
The participants were from universities and think tanks, uniformed military, the intelligence community, the Treasury, the Federal Reserve, and Wall Street money managers and portfolio managers.
They were divided into teams: Russia, the US, China, banks and hedge funds.
It took months to design the rules of the game — like RISK for adults — and they played it out over two days.
When Jim went home after it was over he told his wife he had good news and bad news.
Good news — his team won.
Bad news — his team played China.
Jim had developed a scenario where China and Russia would pool their gold reserves, put them in a vault in Switzerland, and create a new London bank.
The new London bank would issue a currency backed by the gold in the Swiss vault.
The kicker was that going forward Russia’s natural resource exports and China’s manufactured export goods would be priced only in this new currency. They would no longer accept US dollars. The US could buy some of the currency by trading with China and Russia or by depositing their own gold in the Swiss vault.
This would undermine the US dollar and weaken US national security.
At first the referee deemed Jim’s move illegal because gold isn’t seen as money anymore, but after a discussion the ref then decided it was legal… but it was dumb.
Then over the two days that the financial war game played out Jim’s team won.
Since 2009, Russia has increased its gold reserves by 70% and China has increased theirs by several hundred percent — no one know for certain how much gold China has.
China has their official gold numbers, and then covert ways of accumulating the metal that is being seen but China isn’t transparent about.
CHINA
China lies about their gold position. They officially say they have 1.054 tonnes but there’s every reason to believe the actual number is 3,000 and perhaps 4,000 tonnes.
What is China doing? They’re hedging their paper position.
They’re getting ready for the day when the international monetary system collapses.
The monetary system has collapsed three times in the past hundred years — 1914, 1939 and then in stages between 1971 and 1975.
It seems to happen every 30 – 40 years and it’s been 40 years since the last one.
It’s not like clockwork, but we should expect it based on history and the last hundred years of collapses.
COLLAPSE OF THE INTERNATIONAL MONETARY SYSTEM
It’s not the end of the world when it happens.
We don’t live in caves and eat canned goods.
What it means is the major financial and trading powers sit down at a table and rewrite the rules of the game.
Is there a gold standard? Not a gold standard? Hybrid standard? Who’s in charge? These are the kinds of rules they write.
Think of it as a game of Texas Hold ‘Em. You want a big pile of poker chips to play with — and gold are going to be your chips.
It doesn’t mean we will automatically have a gold standard. We may or may not. But gold will absolutely determine your voice at the table.
Gold is the one asset that everyone can agree on, everyone has to some extent, everyone can value, and everyone trusts.
China is acquiring gold by the thousands of tonnes.
There are only about 34,000 tonnes of official gold in the world — jewelry and private gold not included.
So you can think of it as China having acquired 10% of all the official gold in the world in the last four years.
With stealth and non-transparency.
Jim believes that China sees something coming that a lot of people do not.
Jim sees a world coming where the US may have to pay for fuel for their military with SDRs, (Special Drawing Rights), a world currency printed by the IMF, which the US doesn’t own and doesn’t print.
The only way you confront the US in a geo-strategic context is with asymmetric warfare also known as unrestricted warfare.
Financial war is a branch of asymmetric warfare.
PETRODOLLAR
Jim went to the White House in 1974 when he attended Johns Hopkins.
It was at the height of the energy crisis and the oil embargo. Oil was in the process of quadrupling in price. Gold was in the process of going up 2,000% or more. The stock market had crashed in 1974.
The 70s had three back-to-back recessions, and there was talk in the air of the US deploying the military, invading Saudi Arabia, capturing the oil fields and creating a secure perimeter, pumping the oil at a price the US dictated, and giving the money to the Saudis.
It was given serious consideration because the US was pretty desperate.
At that time they didn’t invade Saudi Arabia. Why?
Henry Kissinger worked out the “Petro Dollar Deal”.
The Saudis and OPEC agreed to price oil in US dollars instead of other currencies or gold, and in exchange the US would protect the House of Saud and the national security of Saudi Arabia.
That deal has been true ever since.
Everyone needs oil and if oil is priced in US dollars then you need dollars. It forces countries to get dollars and hold them in reserve, even if they don’t want them.
It’s been an important prop in the US role as the reserve currency ever since.
In December 2013 the US basically reneged on the deal when they anointed Iran as the regional hegemonic power. The US is withdrawing from that region of the world so they need a ‘cop’ to keep order while they’re gone — and they said the cop is going to be Iran.
Saudi Arabia has begun growing alliances with Israel, Russia and China.
There’s no reason going forward that the Saudis would continue having oil priced in US dollars. In the next few years look for oil priced in euros or priced in yuan or traded in bi-lateral deals. (This has now happened).
RUSSIA
We have a financial war going on right now.
US has responded to Russia’s invasion of Crimea with economic sanctions.
There has been a financial war with Iran going on since 2012. The US kicked Iran out of the US dollar system, then had them kicked out of the euro system called SWIFT. So Iran was no longer able to be paid for their oil in dollars or euros or yen.
Iran started doing barter deals, gold-for-oil, bi-lateral deals like selling to India for rupees. But how many rupees do you need?
Iran suffered from the sanctions but didn’t have the power to fight back.
Russia can fight back.
Russia could dump their US Treasuries and could do cyber warfare by having their hackers close the New York stock exchange.
In the game context and historical cold war context you need to look at “Mutual Assured Destruction”.
In the Cold War both Russia and the US each had enough missiles to wipe out the other. That was unstable because the temptation is to want to shoot first and wipe out the other guy and win.
They entered an arms race to build up more missiles so that they would have a second strike capability.
This means that if you shoot first then the other guy has enough missiles to shoot back and you’ll both be destroyed.
We are now in a time of mutually assured financial destruction.
The tension is increasing like the Cuban missile crisis and the US has more to lose financially than Russia.
INFLATION VS. DEFLATION
It is currently an unstable situation.
It’s like standing on the San Andreas fault line in California on a day that nothing is happening.
There are huge forces under the earth and just because the ground isn’t shaking at the moment no one thinks it’s stable. And when the tension is released no one knows which way it’s going to go.
This is the situation with inflation vs. deflation.
From 1975 – 2008 the US was growing in a stable way.
Between 2008 and today the Fed has printed over $3 trillion, and at the same time the velocity of the money, how fast it is being spent and moved, is collapsing.
The Fed can control the money printing but they cannot control the velocity. Velocity is psychological.
If you don’t have velocity then you don’t have an economy.
So the Fed has been trying to get inflation, which would make people spend their money before is becomes worth less and less.
Janet Yellen is brilliant and has an IQ in the 170s but she is a model driven academic.
Jim believes her models are flawed.
Central banks use equilibrium models but the economy and capital markets are not equilibrium systems.
They are complex systems.
The paradigm is wrong and the evidence is piling up.
They are trying to tweak it instead of looking at the evidence and throwing the model out.
A complex system has diversity, connectedness, interaction and adaptability.
In 2007 Ben Bernanke said the mortgage crisis would be fine and would blow over.
A student of complexity theory could see the crisis of 2008 coming but Bernanke could not because the Fed is using the wrong model.
When AIG failed no one cared about AIG’s net transactions, they cared about gross transactions, the density, and the risk that they were not going to be paid.
With complexity theory tiny changes in initial conditions produce catastrophically different outcomes at the end of the day.
Right now the US is a fragile complex system that is very dense and in a critical state. There is now also financial warfare going on and three major players walking away from the US dollar as the reserve currency.
It’s a recipe for collapse.
SDRs
The new rules of the game will be either multiple currencies as reserve, gold as reserve, the SDR world money as reserve, or collapse.
The financial elites want to use the SDR.
The IMF has a printing press and can print SDRs, which is a fiat currency backed by nothing, just like the US dollars are fiat currency backed by nothing.
The SDRs are not backed by a basket of currencies but instead its value is based on a basket of currencies.
GOLD
We may not go on a gold standard but gold will certainly be part of the discussion.
One reason Jim is bullish on the euro is because the eighteen euro countries combined have the most gold.
The Eurosystem has about 10,000 tonnes of gold, the US about 8,000 tonnes and the IMF itself has about 3,000 tonnes. China says they have 1,000 but it’s believed they have somewhere around 4,000 tonnes.
Russia has about 1,000 tonnes but their economy is smaller and they, like China, are purchasing gold.
If the world decides to be on a gold standard then the price for each ounce will have to rise to match the amount of money out there. You don’t want to decrease the money supply because that would be deflationary and depressionary. That’s the mistake Churchill made.
In order to have an M2 global money supply of the US, ECB and China 100% backed by gold, each ounce would have to be priced at about $44,000.
Jim’s not predicting $44,000 per ounce gold but if gold plays a role then it will rise, and these numbers aren’t used to get a headline, they’re the numbers you get to by using eighth grade math.
COLLAPSE
Jim actually expects that a collapse and a possible neo-facist response is the most likely outcome.
He bases that on the statistical properties of risk — denial, delay and wishful thinking.
Jim Rickards can be found on Twitter and at James Rickards Project.
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News from the Gold Rush Trail
It’s gorgeous out there. I have a private meadow and waterfront I found where I write each day. The cherries are almost ripe and the apples are coming along.
So many birds and butterflies.
The water is still too high to gold pan but that’s changing. Each day there’s yoga and jazz technique and guitar practice. The free weights come out tomorrow. I took 4 inches off my hair a few days ago.
There’s a time to build and a time to expand. The rod and the ring. This weekend I’ll be at a bluegrass festival on Vancouver Island doing some jamming with friends who are performing.
Thank you to Mr. G.M. for emailing the link and the kind words.
Thank you to everyone who writes and enjoys the music and gold news and blogs. I love hearing from you.
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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.
Have a listen.
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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
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Nothing on this site is intended as individual investment advice. We’re all watching which way the wind is blowing.
Elaine Diane Taylor 