3 Minute Gold News – Jim Rickards – Keiser Report – Aug 9, 2016

3 Minute Gold News

A Quick Read for Busy People

A synopsis of an interview with Jim Rickards, New York Times bestselling author of The New Case for Gold, The Death of Money and Currency Wars, by Max Keiser and Stacy Herbert of Keiser Report.

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

by: Elaine Diane Taylor

 

Topics:

Risk
Saudi Arabia
Axis of Gold
Buying Gold

 

Part 2

Jim Rickards

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Interview Link

Part 2

RISK

Jim was invited by the Treasury to give a closed door briefing by two agencies within the Treasury created by Dodd-Frank. — the Financial Stability Oversight Committee and the Office of Financial Research.

Jim gave them a 2 hour briefing on risk. In the middle he interupted himself and turned to a Senior Treasury official and said, “You know, I don’t envy your job because the banks own this town.”

Jim thought he official was going to jump out of his seat and yell at him and say, “What are you talking about?”

He didn’t. He said to Jim, “You’re right. We can’t do anything. When it comes to risk we defer to the Fed.”

Jim replied, “That’s the scariest thing I’ve ever heard.”

Jim said he knows the Fed doesn’t know what they’re doing, and for the Treasury to tell him they defer to the Fed means that nobody knows what they’re doing.

QUANTUM PHYSICS OF MONEY

Max says The Option Pricing Volitility Formula separated risk from reward at the beginning of the modern derivatives era.

Max says that means you could extract the reward and strip out the risk, and effectively dump the risk onto the public domain.

BLACK-SHOLES

Jim says Max is talking about the Black-Sholes options pricing formula.

(The Black Scholes Model is a mathematical formula developed in 1973. It’s regarded as one of the best ways for determining fair prices of options.)

Jim shared an office with Myron Scholes for six years. Sholes was very generous with his time and would go into Jim’s office on a slow day and give him a two hour private tutorial.

Jim says he’s a good guy but there are things wrong with his formula.

1. It’s based on a risk-free rate.

A short term treasury is deemed to be risk-free but it’s not risk free.

2. It assumes the future resembles the past.

It assumes we can use past time series to extrapolate the future.

By assuming those two thing and adding fancy calculus on top of it they believe they can price options.

But it’s wrong on three points:

1. Risk is not normally distributed — it’s distributed according to the Power law.

2. The future does not resemble the past — power laws apply to extreme events.

3. There is no risk-free rate.

The Black-Sholes formula falls down for those reasons.

Taking it a step further, Max notes that Greenspan said derivatives were good because there’s a bundle of risk. You have credit risk, operational risk, foreign currency risk, and interest rate risk all bundled.

Greenspan said that it would be great to break that bundle of risk into pieces and sell each part to the strong hands, those best able to deal with that kind of risk, at a lower price because they’re strong hands. Wouldn’t that make a more efficient system?

That was always the argument in favour of derivatives.

But it ignored one thing.

It could be a good thing if the amount of derivatives equaled the amount of instruments, but you can have 20 derivatives for every $1 of instruments.

That’s what was missed in the mortgage crisis.

When the mortgage crisis started there were about $1 trillion of sub-prime and alt-A loans.

Everyone said that a high normal default rate is 5%. So they got crazy and assumed 20% of the loans would default and create losses.

That would factor in $200 billion in losses from the $1 trillion in loans. In real terms that would be less than the losses from the Savings and Loan crisis.

Everyone was relaxed because they figured they could absorb $200 billion in losses.

What they missed was that there were $6 trillion in derivatives on top of the $1 trillion in mortgages.

So you actually had a $1.2 trillion loss and that was enough to take down the system.

The flaw in Alan Greenspan’s thinking was that if you had a 1 to 1 ratio of derivative notional value to underlying instruments then that would be a better system. But it’s more like 10 to 1 and that’s destablizing.

Jim’s solution would be to ban derivatives.

SOLUTIONS

Jim’s technical solutions from Part 1 of this interview were:

1. Re-instate Glass-Steagall

2. Break up the banks.

3. Ban derivatives

But the odds of that happening are zero, and because the odds are zero we’re going to have a financial catastrophe and you have to protect yourself.

The solution is to buy gold.

Not all in. Jim recommends 10% of your investible assets. (I call it the Rickard’s Ratio).

If you put 10% of your assets in physical gold then when the system collapses you may suffer some losses with your other investments but the gold will preserve your wealth.

Stacy recommends Jim’s monthly newsletter “Strategic Intelligence, as a way for  people to educate themselves.

It shines a light on things most people don’t want to talk about.

Jim points out that people are self-medicating when it comes to finance. Your doctor doesn’t want you to get sick and your lawyer doesn’t want you behind bars, but your broker does want your money so you have to defensively educate yourself.

SAUDI ARABIA

Saudi Arabia threatened to sell $750 billion in U.S. treasuries in response to the release of information about Saudi involvement in the 9/11 attack.

Jim points out that they couldn’t sell the treasuries for the same reason that the Chinese can’t dump their U.S. treasuries.

The talk about dumping treasuries is nonsense.

What people miss in all these threats is that the United States controls the payment system.

The Federal Reserve and the U.S. Treasury would just freeze them. They would tell the Saudis that they’re going to make good on all the other treasuries, but their $750 billion?…we’ll get back to you on that.

Stacy jokes that they’d tell the Saudiis the payments were lost in SWIFT or that they were hacked.

Jim says that on a serious note the United States is very good at freezing and seizing and not saying please.

So anyone who tried to use treasuries in a malicious way would find their accounts frozen. They wouldn’t be able to dump their treasuries so why would they even go there.

QE

Stacy says that in 2015 Saudi Arabia sold $138 billion in U.S. treasuries and assets because their economy collapsed by 10% — their GDP fell by 10%.

And yet because of Quantitative Easing (QE money printing) there were huge buyers out there so it made no dent.

Jim says that there were no bankers who went to jail, no banks shut down, they all kept their phony-baloney jobs and they’re all making $20 million a year. But what they don’t understand is that those bankers are working for the government.

When others don’t want to buy treasuries the banks will be the forced buyer of last resort.

So when the Federal Reserve balance sheet is stretched and foreigners don’t want to buy U.S. treasury bonds, then the banks will be forced to buy them.

In the 1950s the treasuries represented about 50% of the bank assets. Banks are very conservative — they bought more treasuries and made a small amount of loans.

Today they only have about 10% in treasuries. So there’s ample room on bank balance sheets to buy them.

There will never be a panic in the treasuries because the banks will be forced to buy them.

There are two deterents to countries dumping their U.S. treasuries:

1. They’ll freeze your account.

2. Even if you want to sell them out a little at a time the U.S. banks will buy them.

So you won’t be able to cause a panic in the treasury market.

The panic is going to come in the U.S. dollar.

U.S. DOLLAR

Max points out there’s a de-dollarization going on around the world.

Russia is now going to price oil in something other than the U.S. dollar. That was tried by Saddam Hussein and tried by Gaddafi and it didn’t work out well for those guys.

Jim says neither of them had nuclear missiles and the Russians do.

And the Iranians are working on it.

AXIS OF GOLD

There’s an emerging axis of gold — China, Russia and Iran.

There are only approx. 35,000 tonnes of official gold in the world.

China has bought an estimated 3,000 – 4,000 tonnes of gold in the last seven years. Russia has bought 1,000 tonnes.

Iran has been buying massive amounts but there isn’t a good handle on the amount. They say the most dangerous flight in the world is from Dubai to Iran because the smuggled gold falls out of the overhead bins. Haha.

A lot of the gold they are buying is being flown into Iran from Turkey. The U.S. Treasury finally had to shut down the Turkish gold trade and use a little muscle on Turkey.

Why are the Iranians getting gold?

They want to be out of the U.S. dollar payment system and to get away from dollar hegemony.

BUYING GOLD

Stacy points out that people can buy as little as 1/10th of an ounce of gold and they don’t have to buy a whole ounce at a time.

(I’ve bought gold in 1/20th ounce Canadian gold maples and you can also buy it as little as a gram at a time.)

Jim says you can buy a 1 gram bar from a reputable mint for about $50 U.S.

The New Case for Gold is available at Amazon.

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

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Gold is $1,342.10 U.S. per ounce

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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

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 international waves. More dealing to come. More standing in line for those who owe. Who owes? 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 live boutique album 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 the gold standard and sound money, and borrows to go to war, then 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 wisdom we need. The sayings that were copied are the truths, the gods, of our world. All the empires who followed the gods of the marketplace instead have fallen, and there’s terror and slaughter when the gods of the copybook headings return. The lyrics are by Rudyard Kipling. 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. Naked short selling is like betting that your neighbour’s house will burn down. But in this scenario it happens to burn down. If the bankers win then 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 and 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.

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