3 Minute Gold News
A Quick Read for Busy People
Gold as a Tier 1 Asset
The Next Crisis
Full Interview Link
Reality has caught up with the Fed.
The economy is not as strong as the cheerleaders say, and not as strong as the White House says.
Jim has been saying for over two years that the Fed was tightening into weakness.
Monetary policy works with a lag of 12 – 18 months so the Fed always follows the economy instead of leading.
In a normal business cycle when inflation kicks up a little the Fed says they’re watching. They watch. And they watch. Then they say they better do something about it so they tighten by raising interest rates.
Then inflation keeps going up so they raise more. They’re chasing inflation.
Eventually they tighten too much and the economy weakens, so unemployment goes up and the inflation goes down and turns into disinflation.
The Fed then says they’re watching. And they watch. Then they say they need to ease, so they cut interest rates and the whole cycle repeats itself.
That cycle has been going on 20 times or more since the end of World War II.
This time is different.
The Fed isn’t tightening because of inflation; inflation has been low. The best estimates for Q1 2019 is inflation at .5%, not the 2% they want.
The economy is borderline negative growth. Borderline recession.
They weren’t tightening because of inflation. Instead they were tightening to get ready for the next recession.
Economic history shows that you need to cut interest rates between 4 – 5% to get out of a recession.
The U.S. is only at an interest rate of 2.5%. How do you cut 4%?
The Fed is trying to get to an interest rate of 4% so they can cut 4% to get out of the next recession. But the problem has been how to raise rates to 4% without causing the recession they’re trying to get ready for.
So, they didn’t get it right.
They tightened so much they slowed the economy down.
Because of the lag of 12 – 18 months the slowing down we’re seeing right now is because of interest rate hikes in 2017 and early 2018.
The results of hikes done at the end of 2018 as well as the QT they were doing won’t be seen until later this year and early next year.
Last December they “paused” hiking rates, then “paused” again in March, and no one expects them to raise them again in June.
But that won’t get the economy out of its funk because it won’t have any effect until maybe early next year.
On top of that they’re doing Quantitative Tightening (QT).
QT is where they take money out of circulation.
Between 2008 – 2014 they did QE, Quantitative Easing, and increased the money supply from $800 billion to $4.5 trillion.
So then they wanted to “normalize” back down to about $2.5 trillion.
Jay Powell, Fed Chair, has been burning money – $50 billion each month. That’s $600 billion a year of QT.
Until last month they were double tightening – raising interest rates and doing QT.
Now the Fed says that in May they’re going to cut in half the amount they’re getting rid of each month. Then in September they’ll check out where they are.
So they’re going to pause the rate hikes, then pause the QT in September.
Jim doesn’t think that will be enough to save the economy.
The Fed will be under pressure to cut rates but they won’t until they stop QT and see how things are.
This problem is because of Ben Bernanke.
The kind of QE we saw after 2008 had never been done since the creation of the Fed in 1913. It was a kind of science experiment, which Bernanke admitted to Jim in a conversation they had.
And now QT is another science experiment to try to get out of what they got into.
They printed money for seven years and inflated asset values.
Now they’re burning money, but they don’t think those asset values are going to decline? Of course they will.
Jay Powell is in a tough spot.
Bernanke painted the Fed into a corner and they can’t get out. There’s no escape from the room.
Every time they try to get out of it they sink the stock market, they sink the housing market, they raise the probability of a recession and slow economic growth.
They don’t want that.
So they paused the interest rate hikes and they’ll maybe tip a toe back in later.
But they really can’t get out of it.
This headwind for growth is continuing and we’re starting to see disinflation.
GOLD AS A TIER 1 ASSET
Gold being valued as a Tier 1 asset is symbolically important and a step in the right direction. But U.S. banks aren’t going to use it so it won’t have a big impact on the price of gold.
The only place in the world where they have gold on the bank balance sheets, and they’re using it, is Turkey.
The nations’ central banks, or at least their finance ministries or Treasuries, all have physical gold, but they’re not using it in everyday banking.
When you look around the world, 60% of global reserves are in U.S. dollars and 80% of global payments are in U.S. dollars.
Almost 100% of the oil market is in U.S. dollars.
The U.S. banks are denominated in U.S. dollars and they run the international monetary system alongside the Fed.
They’re not going to actually use gold in banking.
But they will. Whether it’s two years, five years or ten years from now is difficult to say.
Best to get gold now at a good price before the panic.
By the time U.S. banks get around to acquiring gold and holding it as a Tier 1 asset the horse will be out of the barn.
Gold will be going up about $100 per ounce a day and a $1,000 a week.
Gold will have skyrocketed before then, and there’ll be some kind of financial panic going on. There’ll be a loss of confidence in the U.S. dollar and everyone will say, “Get me some gold.”
But what you’ll discover in that situation is that you won’t be able to get gold.
Dealers will be backordered.
The COMEX will probably be shut down because people with long futures contracts in gold will be demanding delivery in physical gold, and they don’t have anywhere near enough bullion in the warehouse.
The last figures Jim saw were that the open interest outstanding long contracts in gold were 250 times the amount of gold in the warehouse.
The COMEX will just terminate the contracts and give the people cash at yesterday’s closing price instead of the physical gold.
The COMEX rule book, as well as all the major futures contracts, says “We are not a source of supply.”
Mining output seems to have flatlined.
Global gold production by mines hasn’t increased significantly for ten years.
Gold is going out of the banks and going into private vaults.
Jim talked to the head of precious metals at one of the largest private vault operators in the world in Zurich Switzerland. He told Jim that they can’t build new vault space fast enough.
When Jim asked where the gold is coming from, he answered that it’s coming from the banks.
So it’s not new gold from mines. People are moving gold out of Deutche Bank, Credit Swiss, UBS and the big banks, and moving it into private vaults.
The amount of gold is the same, but people are realizing that if they have their gold stored in a bank it’s subject to government confiscation with a phone call. That’s not true with a private vault.
Some people are ready for what is happening, but Jim believes the time for people to get gold is now while the price is reasonable relative to the history of gold prices. When a panic starts it’s won’t be just a question of price. You won’t be able to get it at any price.
Jim believes gold will reset to about $10,000 per ounce. He believes it could be higher but can’t see a reason for it to be lower.
If you take the amount of base money, called M0, for all the major economies, and if you want it 40% backed by gold, you divide it by the amount of official gold in the world, 33,000 tons, and the price is $10,000 U.S. per ounce.
The price goes up if you want it backed 60% or 100% by gold.
No central bank in the world wants a gold standard. But what if they had to?
What if there was no choice because there was a loss of confidence.
What if there was a panic?
What if the IMF’s Special Drawing Rights didn’t calm people down, so you had to go back to a gold standard?
The biggest mistake you could make is to get the price wrong.
In 1925, the U.K., France, Belgium and others were going back to the gold standard after World War I.
The U.K. went back to the pre-World War I price even though they had more than doubled the money supply for the war.
They could have doubled the price of gold or else cut the money supply back in half, but instead they kept the money at double and price of gold the same.
They went into a depression three years before the rest of the world.
Some people say there isn’t enough gold to support commerce, trade and the money supply.
There is always enough gold.
It just needs to be at the right price.
The current price of about $1,300 U.S. per ounce does not support the global money supply. The price that does is $10,000 per ounce.
If you used a larger money supply, M1 or M2, or a larger backing of 60% or 100% then you would need a higher price. You can get to $40,000 per ounce easily.
If you wanted to go to a gold standard today without causing deflation, given the amount of gold and the amount of money, what would the price have to be?
A conservative price with only 40% backing would be $10,000 per ounce.
The financial elite are signalling each other to get ready for a global financial reset.
There are lots of different kinds of resets.
Jim doesn’t expect t any central bank in the world or the IMF to proactively pursue gold as part of the reset. At least not now, not until things get a lot worse.
A reset could go to the IMF’s world money called Special Drawing Rights (SDRs). The IMF can print as much as they want and hand it out to their members.
If there’s another financial crisis and it’s worse than 2008, which Jim expects, everyone is going to look to the Fed to fix it. But the Fed hasn’t normalized and brought their balance sheet back down since 2008.
They’ve tried but they’re nowhere near where they need to be to bail out the world a second time.
In 1998 with the Long Term Capital Management crisis, which Jim was a part of, Wall Street banks bailed out the hedge fund.
In 2008 the U.S. central bank, the Federal Reserve, bailed out the Wall Street banks.
In the next crisis, who’s going to bail out the central banks?
The next panic is not going to be Wall Street banks because they’re too big to fail. The next panic is going to be the central banks themselves. Or the credit worthiness of the United States itself.
If you’re the one who’s in distress that people are losing confidence in then how good is your guarantee?
People say they have insurance. But how good is the insurance company? Is it like AIG?
Guarantees may not work to calm a panic because the one giving the guarantee may be in distress.
Then they will turn to the IMF.
Jim thinks that SDRs may not work, and at the end of the day they’ll have to return to gold.
It’s the only asset, the only form of money that will restore confidence and doesn’t rely on someone else.
If there’s no gold standard then at that time the market will get the price right, and it’ll be $10,000, $20,000 or $30,000 an ounce.
If they create a gold standard they’ll have to start at $10,000 and maybe higher.
Silver’s price will tag along with gold but Jim doesn’t think it will be “gold on steroids” as some believe.
You can’t look at the COMEX reports and know how much silver someone, like JPMorgan, has. There are non-transparent elements like shorts, swaps or derivatives for instance, that make it hard to project a price for the future.
Plus silver is an industrial commodity and gold has very few uses except as money. And gold is the best form of money.
Gold jewelry is no different than gold bullion. Gold jewelry is wearable wealth.
There are as many reasons to be bullish on silver as gold, but it won’t perform at some multiple of gold in percentage terms.
In a financial panic silver Eagles (or Maples for us Canadians – elaine~) are good to have because an ounce of gold will buy a year’s worth of groceries, so it’s too much to use for everyday needs.
As well as a flashlight and other emergency supplies, you should have Eagles on hand because when the electricity goes out the ATMs and digital payment systems will go down, and banks will be closed.
An Eagle will be recognizable in an extreme crisis at a store or market to buy smaller purchases to feed your family.
THE NEXT CRISIS
We’re not helpless. There are things you can do today that will not only perform well, but will preserve wealth when the crisis comes. Jim’s next book, Afternath, will be released July 23, 2019. It talks about these things and about what the world will be like after the crisis.
Jim has been very generous with his views and advice on mainstream media, alternative media and in monthly podcasts called The Gold Chronicles.
Jim’s financial “quartet” is his group of books that cover monetary history, through the crisis of 1998 and 2008, and bring you into what will happen in the next crisis, and what things will look like afterwards. These are: Currency Wars, The Death of Money, The Road to Ruin, Aftermath. The first three are New York Times bestsellers, and Aftermath is already #1 on Amazon’s bestseller list for “Money & Monetary Policy”.
Jim also wrote The New Case for Gold (which he very kindly mentions me in), where he covers the monetary use of gold, and why it’s a good idea to own some.
The Road to Ruin is available at Amazon.
Jim Rickards can be found on Twitter and at James Rickards Project.
Gold is $1,292 U.S. per ounce via Kitco
World Without an Anchor
words and music | Elaine Diane Taylor
©2019 Elaine Art & Media
Single available on iTunes.
Not Much of a Holiday
words and music Elaine Diane Taylor
© 2015 Intelligentsia Media, Inc. All rights reserved.
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.
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.
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 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.
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.
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.