3 Minute Gold News
A Quick Read for Busy People
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 US Department of Defense.
Jim Rickards’ History
Gold Price Manipulation
European Central Bank
Gold’s Long Game
This long interview is a Gold Master Class.
JIM RICKARDS’ HISTORY
The major points of Jim’s background are that he is a lawyer, and before attending law school Jim received a graduate degree in International Economics from the School of Advanced International Studies.
Timothy Geithner, as well as many people who work at the International Monetary Fund (IMF), attended the same school. The IMF is just around the corner and many of their officials speak and teach there.
Jim’s graduating class of 1974 was the last class to be taught about gold as money.
Nixon said in August 1971 that the US was temporarily stopping trading partners from exchanging their US dollars for gold. In December 1971 the Smithsonian Agreement was signed and the price of gold was raised from $35 US per ounce to $42 US per ounce.
That was a 20% devaluation of the US dollar against gold.
The US was still on the gold standard then but they still wouldn’t redeem trading partners’ dollars for gold.
In 1975 the IMF officially broke the link to gold and demonetized it.
Jim was taught by the people who ran the Bretton Woods system in the 1950s and 1960s, and part of what he’s trying to do with his books is to reintroduce some of the history of gold as money.
He went to law school, worked for Citibank for ten years, worked for a primary dealer in US government securities, and worked at the hedge fund Long Term Capital Managment where he was lead council negotiating the bailout during the emerging markets financial crisis in 1998.
Jim became an author after 9/11, and also became an adviser to the US Intelligence Community on financial threats and financial warfare.
Jim predicted that China would update their official gold holdings in 2015, which they now have done.
The Chinese are trying to play nice with the IMF because they want the yuan included in the basket of currencies that’s used to determine the value of the world money, which is the SDR, the special drawing right, which is printed by the IMF.
China wants to be in that club. The IMF club says you have to be a bit more transparent, so China may not wait another six years to give an update on their gold.
But China’s 604-ton update was going from 1054 tons, which was a lie, to 1658 tons, which was another lie.
So China has updated their lie.
By “lie” it means they’re not being transparent. China has three government portfolios, which are their sovereign wealth funds or government entities.
One is the People’s Bank of China (PBOC). The other ones are China Investment Corporation (CIC), which is a sovereign wealth fund, and the third is State Administration on Foreign Exchange (SAFE), which is the biggest and most mysterious of all.
SAFE buys the gold and every now and then flips it over via bookkeeping into the PBOC, and then the PBOC updates their reserves.
The PBOC isn’t lying about their gold, that’s what the PBOC has, but should the amount of gold at SAFE be ignored? Jim believes SAFE has at least 3,000 tons, and maybe more.
Gold has recently gone down when measured in US dollars. But that just means the US dollar has gone up. Gold isn’t the only thing that’s gone down. Commodities like copper, wheat, corn, steel, lumber and iron have all gone down. So have currencies like the Australian dollar, Canadian dollar and Japanese yen.
So it’s not that gold is down, it’s that the US dollar is up. It’s King Dollar.
That’s the definition of deflation — you get more for your dollar and goods cost less in dollar terms.
But the US Central Bank wants inflation. Janet Yellen wants inflation but is getting deflation. She’s talking about raising interest rates. How does that work? The answer is that it doesn’t.
Jim said last year that they wouldn’t raise rates in 2015 and now he thinks we’ll get to 2016 and they still won’t be able to raise interest rates because of the power of deflation.
The strong dollar story is not sustainable because it’s killing the US economy.
GOLD PRICE MANIPULATION
You can call it manipulation, and in a way it is, but it’s also policy.
Countries are very powerful. They have interest rate policies, foreign exchange policies, tax policies and they have a view on gold. They don’t talk about it and you can say it’s manipulation, but it’s really just the countries implementing their individual policies.
China’s view of gold is fairly straightforward.
China has the equivalent of $4 trillion US dollars in reserves. Some is in gold, some in euros and some in other things, but the vast majority of it is in US dollars.
The vast majority of those US dollars are in US government securities. So when people say China wants to get rid of the US dollar as the global reserve currency that’s nonsense. The dollar has no greater friend.
China wants a strong dollar because they own so many of them. If you had $4 trillion you’d want a strong dollar too.
But the US government doesn’t want a strong dollar — they want inflation.
China fears that the US will eventually get the inflation they want. That’s going to reduce the value of their $4 trillion. If you inflate the dollar by 2% for five years then that’s 10%. That would mean moving $400 billion of wealth from China to the US because the US would pay the debt back in dollars that are worth less.
China is worried about that and they’re vulnerable.
China is not going to dump US Treasuries. That’s nonsense. They couldn’t. First of all, the market is not that big. The US Treasury market is deep and liquid but not that deep and not that liquid.
If China tried to dump US Treasuries the US President could see it as a form of financial threat and stop it by executive order. But China wouldn’t try to do it because it would devalue their number one asset. It’s like setting your own house on fire — they wouldn’t do it.
They’ve got a big pile of dollars and they’re worried it’s going to be devalued if the Fed gets their inflation. So what China’s doing is acquiring a big pile of gold.
When you have both dollars and gold you have a hedge position.
If the dollar stays strong then the gold doesn’t do very much. But if the US gets inflation and devalues the dollar then China’s going to gain on the gold because gold goes up with inflation.
The Chinese are not stupid and they’re not speculators. They’re hedging the dollar. Gold and the US dollar — one of them is always going to win.
So they need to buy more gold.
China is not going to bash the dollar and come out with a gold-backed currency, sending gold to the moon. Also nonsense. China doesn’t want that.
They want a strong dollar for now because they’re still buying gold.
There are a lot of forces in the world. China is not out to help you or me, and they’re not out to help gold. They’re out to help themselves. That means they have to acquire a lot of physical gold.
When the system breaks down (which Jim expects) and the price of gold begins to skyrocket, people will say, “Oh, I’ll go out and get my gold then.” Guess what. You may not be able to find it. The time to get your gold is now.
The dollar, Bitcoin and all other forms of paper money or digital money are only backed by one thing — confidence. If people believe it’s money then it’s money.
But confidence is fragile. It can be lost quickly and it’s difficult to regain.
There’s confidence now but it’s a complex dynamic system, which means it can run well for a long time but if you push one wrong button the whole thing melts down catastrophically.
Like a nuclear reactor, you can create a chain reaction and it melts down out of control.
The dollar system is already unstable — highly unstable.
Confidence can be lost very quickly. It can be something we perceive or something we don’t see coming. Often it’s the thing you don’t see that gets you. It could trigger a chain reaction and the system is already unstable.
That’s when gold all of a sudden goes “boom” and is up $200 in one day. Boom, the next day, another $200 an ounce.
Then people will be saying it’s a bubble, and it just starts to really go hyperbolic. That’s when the panic sets in. That’s when confidence in paper money is being lost as reflected in a higher dollar price for gold.
At that point the talk on TV will still say it has no intrinsic value. But it will take on a life of its own and go much higher. At that point you might not be able to get it.
Big guys who deal in tons maybe able to get some of it but may not. The LBMA contracts are unallocated gold, and the banks aren’t going to redeem in physical gold, they’ll send a check for the price difference and terminate the contract.
People are going to find that the paper claims are just paper. Jim’s advice is, again, what are you waiting for?
EUROPEAN CENTRAL BANK
Tekoa Da Silva interviewed Mario Draghi, the European Central Bank Chief, and Jim quotes Draghi in his book The Death of Money:
“I never thought it wise to sell gold, because for central banks, this is a reserve of safety. It is viewed by the country as such.”
I’m going to quote Jim here:
“I would start by saying truth has sort of a ring of absolute moral and scientific certainty to it. So I try to do the best I can. I work hard. I do the analysis. I read a lot. I travel a lot. I talk to a lot of people. I give people the best analysis I can and I believe in it. I wouldn’t publicly say anything that I didn’t personally believe in. So it’s the truth as far as I know, but I don’t want to claim moral certitude.”
Jim has spoken to members of the board of governors of the Fed, reserve bank presidents, senior officials of the IMF, heads of state and Nobel Prize winning economists. He’s also spoken one-on-one with Ben Bernanke.
Jim finds that people sometimes say things privately that they won’t say publicly, partly due to institutional constraints. They know that if they say something pretty candid about gold that it could start a panic and they are aware of their institutional responsibilities. Other times you’re in a club where you say things in the club that you might not say elsewhere.
“I’m a writer, analyst, portfolio manager and public speaker. I’ve got to call it like I see it, but that doesn’t mean I have a perfect analysis or a perfect track record. But it does mean I’m working hard and trying to convey to people exactly what I see.
…I don’t have some of those responsibilities to avoid panicking people. What I’m trying to do is warn people about some of the threats out there…
…there are a lot of dangers out there but I’ve never said be 100% in gold… I’ve said 10% and I still say 10%…
…If you have 10% of your investible assets in gold, and gold goes down 20% it’s only a 2% portfolio loss… but if I’m right and gold goes up by multiples that could be your insurance against losses if everything else is melting down.
…if you don’t have gold in your portfolio, it’s like not having fire insurance on your house. You better hope your house doesn’t burn down.
GOLD’S LONG GAME
Jim Rickards spoke to commodities specialist Jim Rogers recently. Rogers said nothing goes through a full up-cycle without a 50% retracement somewhere along the way. If gold is going from $200 per oz. to $10,000 per oz., as Jim Rickards believes, then somewhere along the way it will go down 50%.
If you look at the August 2011 high of $1,900 then right now we’re down about 50% from there.
Rogers said that’s the way commodities behave. He’s not selling the gold he has and he’s buying more around the $1,000 level. Rogers also believes it will go much, much higher from there, so there’s no reason to be discouraged.
It’s a long game.
Jim Rickards can be found on Twitter and at James Rickards Project.
From the Cariboo Gold Rush Trail
Gold is $1,108 US per ounce today.
I’m on the ferry from Vancouver to Vancouver Island for the weekend. It’s gorgeous and you can see a view of the city and the University of B.C. from where I’m sitting. Apparently there were whales off the port side a few minutes ago.
I had the pleasure of meeting Takoa earlier this summer at the Sprott-Stansberry gold symposium event in Vancouver. He’s very kind and asked me a question in his lyrical “interviewer” voice.
Last weekend was another private music event in the Vancouver area, with a lot of jamming and meeting new people. I feel very fortunate.
Here’s my office in Seton where I spent time writing a new song this week:
I have the music without lyrics this time. Very unusual. If you have a topic you’d like me to get into for a song please send me a note at firstname.lastname@example.org or send me a tweet at @elainedtaylor and I’ll see what I can do.
Not Much of a Holiday
words and music Elaine Diane Taylor
© 2015 Intelligentsia Media, Inc. All rights reserved.
Single available on iTunes
About the Greek bank holiday and long lines to get a few euros for the day. Debt deals behind closed doors. The media telling us what opinions to have. China building islands in the South China Sea and claiming the waves. More dealing to come. More standing in line for those who owe. Who’s next? There’s a long line of nations in debt and this is far from done.
Preparing for the Fall album is available on iTunes — featuring Wag the Dog, Black Swan Dive, American Pie and Gods of the Copybook Headings.
Coins and Crowns
words and music Elaine Diane Taylor
© Intelligentsia Media Inc. All rights reserved.
from the album Coins and Crowns available on iTunes
When a nation leaves a gold standard or sound money and borrows to go to war hunger goes up, hope goes down, anger goes up, then it all goes down.
The Gods of the Copybook Headings
words by Rudyard Kipling and music by Elaine Diane Taylor
©2014 Intelligentsia Media Inc.
from the album Preparing for the Fall available on iTunes
The copybooks of the early 1900s gave us all the words of wisdom we need. All the empires who followed the gods of the marketplace instead of the copybooks have fallen, and there’s terror and slaughter when the gods of the copybook headings return. The words are Rudyard Kipling’s. One of my gurus.
Another Week on Wall Street
words and music Elaine Diane Taylor
© 2013 Intelligentsia Media Inc. All rights reserved.
from the album Coins and Crowns available on iTunes
See the bankers wave their Wall Street wands and conjure piles of paper green. They’re making bets that the market will lose. Naked short selling is like betting that your neighbour’s house will burn down, and then it happens to burn down. If they win we lose the whole world as we know it. I wrote this in 2009, with a lyric “A little grease (Greece) is floating out to sea and little pigs (Portugal, Italy, Greece and Spain) are bobbing up and down, they’ll send a storm then we’ll see, when the tide goes out who’s naked on the beach“, and it’s coming on now. The world is changing as we know it.
Nothing on this site is intended as individual investment advice. We’re all watching which way the wind is blowing.