3 Min. Gold News – Jim Rickards – December 11, 2015

3 Minute Gold News

A Quick Read for Busy People

A synopsis of an interview with Jim RickardsNew York Times bestselling author of The Death of Money and Currency Wars, by Ticky Fullerton at ABC TV in Australia.

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.

Topics:

Yuan to Join the SDR Basket
Impact on Currencies
Economic Reform in China
Gold
Fed Increase in December?
Impact on Emerging Markets

 

Rickards - Brisbane

Jim Rickards

Interview Link

Extended (12 min) interview.

YUAN TO JOIN THE SDR BASKET

Part of the yuan entering the basket of currencies making up the IMF’s SDR is prestige, part of it is political, and part of it is very substative.

China doesn’t really meet all of the criteria but there’s a political aspect to this. China is too big to ignore and too much a part of the global economy.

The IMF has something called the Cofer Report which is an update on Foreign Exchange reserves.

In that report they include the Australian dollar and the Canadian dollar as being about as significant as the Chinese yuan. But the SDR is its own club and they had to include the yuan.

In the long term this will be significant.

The world is searching for a new reserve currency to replace the U.S. dollar. The Chinese yuan is not ready for that and is at least ten years away.

The SDR is a viable alternative as the new world reserve currency, and China wanted to be in that club in case the SDR is the vehicle used in the next financial meltdown or panic.

IMPACT ON CURRENCIES

The yuan will not be officially part of the basket until October 2016. There’s a reason for that.

There are very large portfolios in the world, like the Norwegian Sovereign Wealth Fund and the Abu Dhabi Investment Authority, which are trillion dollar equivilent portfolios.

They don’t like to be part of the currency wars.

There aren’t a lot of SDR bonds you can invest in. It’s hard to own an SDR bond in pure form, but even a portfolio of stocks and bonds can balance their currencies according to the weights of the SDR.

Now that the yuan is entering, they’ll have to sell some yen and sterling assets, and sell a lot of euro assets, and buy some yuan denominated assets, in order to balance their portfolio to match the SDR.

They want to have time to rebalance. Normally it happens on December 31st, but the IMF said they’d announce it early and give the large funds time to do that.

At the margin this will add a little bit of strength of the yuan and take away a little bit of strength from the euro.

China informally pegs to the U.S. dollar right now (and has now said they will link to the SDR basket instead of the U.S. dollar). In the short term the market wants to take the yuan lower against the U.S. dollar, and the Peoples Bank of China (PBOC) also wants it lower because their economy is slowing down so dramatically that they need a little bit of a lift.

But if you want to join the SDR club you have to play by the rules and that means not disrupting markets.

Jim expects the Chinese to devalue the yuan in the near term because their economy desperately needs the help.

Pegging to the U.S. dollar is kind of a manipulation. China doesn’t have an open capital account really. and pegging to the U.S. dollar is not following the IMF rules of floating exchange, so for those reasons they don’t fully qualify for the club. But the IMF is hoping to push them in that direction.

ECONOMIC REFORM IN CHINA

China does what’s best for China and they probably don’t really care what the U.S. thinks. China is still a communist run country. What they care about most is the survival of the communist party.

What that means day-to-day is creating a growing economy and creating the prospect of jobs, which means that people will tend to support the party.

The minute that job creation and the economic growth machine start to slow down or go in reverse then the legitimacy of the party comes under threat.

Jim expects China to do whatever they need to do to maintain growth. If that means playing nice with the rest of the world then that’s fine. But their reserves are slipping away. They’ve lost over $500 billion in reserves in the last six months and growth is slowing down.

Their nominal growth as actually much worse than their real growth because they’re using deflation to increase real growth, even though nominal growth is actually a lot lower than people realize.

That’s the problem when you have debt. You need nominal growth to pay nominal debt.

So, they have a lot of problems there.

The U.S. and the IMF hope that China will evolve into a deeper and more liquid market, but we’ll see. China will do what they need to survive.

The richest, smartest and most connected people in China are getting their money out and buying up the more expensive properties all around the world — Brisbane, Vancouver, New York, London, Istanbul. What does that say about what’s going on inside China?

If you expect more devaluations, which Jim does, then you want to get your yuan assets out and into Canada, Australia, the U.K. or the U.S. as fast as you can before they devalue again.

The capital flight is going to continue.

$4 trillion sounds like a lot of money if everything is stable. But once your reserves start to drain out then there’s never enough.

GOLD

China has been acquiring thousands of tonnes of gold. No one knows the exact amount.

Jim estimates that it’s 4,000 tonnes in the last six years.

China is not transparent about it. The PBOC reports a little over 1,600 tonnes but there are thousands of tonnes on the books of SAFE, State Administration of Foreign Exchange, which is non-transparent.

China doesn’t qualify to be in the SDR club by the stated criteria but they have joined the gold club.

At this time they have enough gold to be in the club.

China still wants more gold, but when you look at who is in the club, the eurozone as a whole has 10,000 tonnes, the United States has 8,000 tonnes, China has approximately 4,000 – 5,000 tonnes, and Japan has a little less as they have a smaller economy. This is a gold club, with the exception of the U.K., which is now more of a legacy member.

Australia and Canada have a lot of gold in the ground but they don’t have a lot in their reserve positions.

China has been working for ten years to get as much gold as they have. Gold is an important part of the reserve position.

FED INTEREST RATE INCREASE IN DECEMBER?

The market thinks a rate increase is coming, and odds are the Fed will raise rates, but Jim doesn’t think it’s a done deal yet.

The Fed has been tightening in its talk for two and half years now. Ben Bernanke first started talking about tapering, meaning reducing long term asset purchases, in May 2013. They started the taper in December 2013 and finished it in November 2014. In March 2015 they removed Forward Guidance, which is another one of their easing tools.

So without doing anything to rates, they’re at zero, they’ve been tightening by reducing the taper, finishing the taper, taking away the forward guidance, and talking tough on rates. They’ve been tightening for two and half years.

You see it in the U.S. dollar. The dollar is at a ten year high and it’s killing the economy.

The Fed’s assumption was that they could tighten and have a strong dollar, and that the economy was strong enough to bear it. It’s turning out that that’s not true.

They’ve been tightening verbally, the dollar is strong, and it’s killing the U.S. economy.

If they raise rates in December, which they probably will, it will probably put the U.S. in a recession.

It will be looked at in hindsight as one of those great Fed blunders.

EMERGING MARKETS

Raising U.S. rates is going to hurt emerging markets. Capital outflows from emerging markets are huge.

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

 

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From the Cariboo Gold Rush Trail

Gold is $1,074.20 US per ounce today.

Screen Shot 2015-12-11 at 3.15.36 PM

Austria has repatriated 15 tonnes of its gold reserves as part of a plan to hold half its stock of the precious metal within the country’s borders, the Austrian National Bank (OeNB) said on Friday. via Reuters

Hundreds of thousands of dollars worth of gold has been exported from Israel to North Korea despite a UN ban, an Israeli parliamentary committee said Thursday. via Yahoo! News

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I’m set up to record. Old nursery rhymes were simple little tunes about the royals, the political figures and the events of the day. Perhaps it’s time for a bit of that today.

Janet, Mario and Christine should be included in those little tunes I think.

The road near my house this week:

IMG_1747

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Not Much of a Holiday
words and music Elaine Diane Taylor
© 2015 Intelligentsia Media, Inc. All rights reserved.
SOCAN/ASCAP
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 all 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.

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AlbumCover.PreparingfortheFall

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

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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.

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.
SOCAN/ASCAP
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.
SOCAN/ASCAP
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.

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Nothing on this site is intended as individual investment advice. We’re all watching which way the wind is blowing.

 

2 thoughts on “3 Min. Gold News – Jim Rickards – December 11, 2015

  1. Pingback: 3 Min. Gold News – Jim Rickards – December 11, 2015 | Elaine Diane Taylor | S.E.Thomson's Blog

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