Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles July 2017

Jim Rickards and Alex Stanczyk, The Gold Chronicles July 2017


Topics Include:

*US war with North Korea still on the table
*Commentary on physical gold
*Why gold stores value over long periods of time
*Institutional Money Mangers views are shifting towards concerns over insuring portfolio assets will have liquidity under market stress
*The critical mistake in due diligence when investing in gold funds
*3 Factors which would cause the Fed to pause its rate hiking schedule
*Inflation vs Disinflation
*Slowing Economy and Fed Policy

To download the original audio visit here:

The Gold Chronicles: July 2017 Interview with Jim Rickards and Alex Stanczyk

Physical Gold Fund presents The Gold Chronicles with Jim Rickards and Alex Stanczyk offering insights and analysis about economics, geopolitics, global finance, and gold.


Alex:  Hello, this is Alex Stanczyk. Welcome back to another podcast of The Gold Chronicles. I have with me today Mr. Jim Rickards. Hello, Jim.

Jim:  Alex, how are you?

Alex:  Excellent, thank you very much. We covered quite a few topics on our last podcast including the risk in cryptocurrencies. We also talked a little bit about the G20, Syria, and North Korea.

On the topic of North Korea, you’ve been saying for several months now that at some point, the U.S. will go to war with North Korea to eliminate the risk that Kim Jong-un might actually nuke a U.S. city. You even mentioned it live on Bloomberg at one point in the last few weeks. The staff there was skeptical of the idea; however, an hour later, North Korea test-fired its first ICBM.

Jim:  That was one of those amazing coincidences. I wouldn’t have said one thing differently if I had known about the test in advance (which of course I didn’t). Whether it was happening or not, I wouldn’t have said one thing differently.

They say it’s good to be smart and better to be lucky, and sometimes things converge in a way that that plays out. Yes, it’s a serious subject. Literally, I was on the air live with Bloomberg Asia, interestingly.

Bloomberg has a 24-hour cycle. They don’t have separate networks for their different regions. They just keep going, so it was 7:00 at night where I was in Montreal, 7:00 AM in Hong Kong and Singapore. We were live on the air, and with two billion people in Asia, it was potentially a big audience.

That’s exactly what I said. It was with a great interviewer and a cohost. I always say it’s not the anchor’s job to make me look good; that’s my job. They’re there to hold your feet to the fire, and there was a fair amount of skepticism.

I was very categorical about the march to war. Then literally minutes later, the news broke that they had just fired an ICBM. People weren’t sure it was an ICBM when it went off although it looked like one. Subsequently, that was verified by a number of sources. It was certainly not a good development.

When I do these interviews including our podcasts, I’ll put them out on Twitter to try and expand the audience a little bit. I can see some but not all of the clicks while Bloomberg will obviously see more than I do.

That interview got more clicks than anything I’ve ever done outside of a couple things that just went super viral. Normally, if you get 1,000 or so views, that’s pretty good interest. This one went off the charts at over 6,000 views in 24 hours, which is a lot for a TV interview. That definitely got a lot of attention.

What was interesting was that my cohost, a very well-established, reputable money manager, was sort of disparaging gold, and I was taking the pro-gold side.

Then I went into the thing about North Korea to which he said, “Well, if we’re going to war with North Korea, you would definitely want to own gold,” as if we weren’t going to war. Again, not an amusing exchange, not an amusing topic, unfortunately, but my point was, “We’re going to war.”

It was a really good example of the cognitive dissonance or denial and complacency of professional money managers. It’s like, “Oh, yeah, if we’re going to go to war with North Korea, I’d load up on gold.”

Well, we are. It’s happening in front of your eyes. You can see it with a six-months to one-year lead time, so why don’t you get some gold now at an attractive entry point? What are you waiting for?”

The answer is they always wait until the first shot is fired. Gold will be, who knows what, $500 or $1,000 an ounce higher. Then they’ll run out and buy some at $1,375 – $1,400 an ounce when you can back up the truck right now and buy it for $1,240. I never understand it, but it is what it is.

Alex:  Yes, that’s pretty typical. For our listeners, if you haven’t heard our previous two podcasts when we talked about the North Korea situation in depth, I recommend you go check them out as well as the last one we just did when we talked quite a bit about the risks in cryptocurrencies, which I think people are starting to explore further.


For today’s topics, we’re going to begin with a few thoughts on physical gold. We’re also going to discuss the U.S. economy, what the Fed is watching in terms of its metrics, Fed policies in terms of easing or tightening, and we’re going to wrap up with some discussion on a little-known problem in the Chinese financial markets.

Beginning with physical gold, I recently returned from a family vacation where we spent some time panning for gold in the Black Hills of South Dakota. Jim, as you well know, panning for gold is a labor-intensive process. Our little group of seven people spent about four hours moving earth.

We would dig buckets of earth out of these massive tailings piles left over from the gold excavation operations in the Gold Rush back in the 1870s. A tailings pile is leftover dirt that they sifted through looking for gold. The thing was, the screens they used to find the gold had huge holes in them. Back then, they expected to find gold nuggets of much larger size than we find today.

Our tailings pile made up the entire side of the riverbed we were on. Even with all of the time and energy we expended – again, there were seven of us working for four hours doing this – we ended up with less than a gram of gold.

Some of this reflects the concept of what’s called high grading, which means that all of the super-high ore deposits in history have mostly already been discovered. In everything we’re doing in mining operations today – I’m talking large-scale mining – it’s not uncommon for a large-scale operation to move a ton of earth to find just 1 – 1.5 grams of gold.

The point I’m trying to make is that gold is actually stored energy. The energy cost of extracting gold from the earth is now, and has always been, considerable. I contend that, along with physics, these are the two primary reasons gold retains its purchasing power over thousands of years.

Jim, you do a bit of panning yourself in your top-secret personal location. I’m not going to ask you to divulge where that’s at, but tell me a little bit about your experiences there and why gold’s physical properties make it ideal for storing value over millennia.

Jim:  I should make it clear that I do it for fun and to teach my grandchildren a little bit about where gold actually comes from and how scarce it is. We do it as a recreational thing. I’m not trying to pay my property taxes with my gold output.

You, at least, had the benefit of tailings where there was some reason to believe there was gold around. I pan in an area where there is gold, but certainly not in commercially viable qualities. It’s also a very environmentally sensitive place, a very green place, which is a good thing. It’s unimaginable to me that anyone could ever get a permit to open a mine.

There are old mines from the 1850s in my vicinity. There is gold in them thar hills, as they like to say. In fact, this area was affected by Hurricane Irene in 2011, and there was a bit of a gold rush. People were buying gold pans from the local stores and, believe it or not, running down to parking lots of shopping centers where the earth had literally been stripped off the face of the surrounding area, and it drained into these lower-lying areas. There were mud piles and water caches and so forth. People were panning for gold in these parking lots and finding some.

There is gold there, and I find it. A gram would be a lot to me, but if we found a couple flakes, that would be good. We do it for fun. It does underscore the point you were making, which is that this is a known goldmining area, at least back in the 19th century, and it is extremely scarce.

I recently visited commercial goldmining operations up in Northern Quebec where they have real goldmines with real development. There’s a lot of drilling going on and equipment moving in, but even there, you’re exactly right. It takes a ton of ore – rock and earth and so forth – to get maybe a gram if you’re lucky. That would actually be quite high, because it’s usually measured in fractions of a gram. That’s how scarce it is.

It would be one thing if you could just say, “I’ll get a gram of gold per ton of ore,” in any place you dug up, but you can’t. What I’m talking about, as you said, is a high-grade location. Those locations are few and far between and seem to be getting scarcer.

The other point I would make about goldmining output is that we’re talking about very long lead times.

Gold had a magnificent run in one of the great bull markets in history from 1999-2011. I’ll use round numbers and say it went up from about $200 an ounce, maybe $199 an ounce at the low, to almost $1,900 an ounce. That was 1,000% gains, ten times your money, in a relatively short period of time. Then it had a measured correct. It came down about 50%, which is interesting.

I think I’ve mentioned my conversations with Jim Rogers in past podcasts. He’s one of the great traders, period, but particularly one of the great commodity traders of all time. He was cofounder of the Quantum Fund along with his partner at the time, George Soros.

Jim told me he’s bullish on gold. He owns gold, he holds gold, but he’s never seen a long-term bull market that didn’t have a 50% correction along the way. He said that’s just the way it is. You get to $1,900, and gold’s back down. The interim low or cycle low was $1,050. That was just over a 50% correction if you use $200 as your baseline or starting point. It’s been going up over 20% since then. It looks like that is behind us and we’re on to bigger and better things.

Here’s my point. You can only imagine the gold rush fever that was going on in 2010/2011 not just in Canada but around the world. People were investing, capital was easy to raise, a lot of mines were opening up, etc., but a lot of that was priced at $1,300-1,400 an ounce, or not really feasible when gold went down below $1,100.

You can well imagine the gold fever that was going on when gold was soaring up to $1,900 an ounce. If your production costs were $1,100, $1,200, $1,300 an ounce, you could get financing, you could bring marginal properties back into production, etc.

When gold went down to $1,300 by April 2013, then even lower by 2015, those mines were suddenly not economic. There were a lot of bankruptcies, a lot of projects were called off or halted in midstream, other projects went bankrupt, and so forth. There was no – or at least very little – exploration mining going on in 2013, 2014, and 2015 as the price was treading water.

What’s happened now, with the price back up at $1,250 and a good upward trend, is that mining fever is picking up again. But you can’t just pick up where you left off.

If you’re talking about a greenfield, which is you have an attractive opportunity (you get the mining rights or you lease it, you start exploring, you start drilling, you do your feasibility studies, you get your financing and stuff), that takes 5 – 7 years before you can bring ounces onto the market. With some opportunities, the time horizon is shorter than that, because you’re maybe stepping into the shoes of somebody who went bankrupt at a much lower price point and you pick up where they left off or there are some mines that were never shut down.

As far as new production, we’re in a trough right now. It’s going to take years to get production up close to where it was in terms of capacity if you even could. We all know that demand is sky high as we see in Russia, China, India, and elsewhere, and supply is tight.

Alex, you and I have been around the world. Whether it’s meeting refiners, miners, vault operators or dealers, we hear the same story everywhere. It’s amazing. It’s really, really hard to fulfill orders or get your hands on gold.

The technical setup on the physical side could not be better. Of course, we have our old friend, the COMEX. Anyone can sell 60 tons of paper gold with a phone call to a broker with no actual gold involved. That’s happened occasionally, but that will fade in time.

Alex:  Yes, I totally agree.

To wrap up our gold commentary, I’d like to make a quick observation. I’ve noted a continual shift in the views of institutional money managers when it comes to what they’re allocating to. When they’re evaluating the risk in the ability to get liquidity on their assets, it’s starting to become a big concern. This makes sense, considering the fact that very little has been learned from the past couple of crises.

I was recently looking at your latest book, Jim, where you were talking about this concept that Wall Street is basically still clinging to the notion that net exposure is what matters, when gross exposure is where the risk really lies. Wall Street hasn’t come around to this view yet.

For any financial professionals and money managers listening to this podcast, if you’re conducting due diligence on gold funds, one area I would encourage you to look into specifically is how those funds are buying and selling their gold. That’s the Achilles heel. I think you’re going to find that they all do it through banks, which is, in our opinion, a big mistake.

Jim:  They are either doing it through banks, which leaves you very vulnerable, or they’re buying paper gold and expecting to be able to convert it to physical gold. The big gold banks are the members of the London Bullion Market Association (LBMA). There aren’t that many. I don’t know the exact number, seven or eight, but they’re familiar names such as Goldman Sachs, HSBC, and a few others.

When they sell gold – and again, you must read the contracts carefully – they do it on what’s called an unallocated basis, which means all you really have is paper price exposure. They don’t have the actual gold. They might have 1 ton of gold and sell it 20 times over. They’re short 20 tons of paper gold backed up by 1 ton of physical gold.

What happens if the longs – the holders of the 20 tons of physical gold – all show up on the same day and say, “I’d like to convert my unallocated to allocated, and I’d like to take physical delivery. I’m sending my Brinks truck, and they’ll be there in 15 minutes”?

There’s no way they can satisfy those deliveries, no way. What they would do is essentially terminate those contracts and send you a check for the price differential. You would get your paper profit up to that point.

This is the conditional correlation Wall Street does not seem to understand or at least does not want to understand. The world in which the holders of the 20 tons of paper gold all call up on the same day to take physical delivery is a world where gold’s going up $200 – $500 an ounce per day, stocks and other paper assets are crashing, and there’s blood in the streets as they say. There’s a panic.

When you most want your gold is when you will least be able to get it if you don’t already have it. That’s why I’ve always encouraged those who want exposure to gold to have physical gold in safe, non-bank storage. You won’t have to worry about delivery or fine print and contracts. You’ve got your gold.

Obviously, make sure you’re dealing with a reputable fund or provider or a fund that’s backed up 100% by physical gold with no delay. I’m not saying there’s anything dishonest about any of this. What I’m saying is that people don’t read the contracts or, if they do, they assume that they can convert when the time comes. They’ll find out the hard way that they can’t.

With some of ETFs, you buy a share of an ETF, and that’s a secondary market transaction. You’re not buying gold; you’re buying the GLD share on the New York Stock Exchange. When the seller sells to a buyer, that has no impact on the amount of gold in the ETF itself. That only happens when one of the authorized dealers chooses to issue new shares. They have to buy gold, deliver it, and then they get some new shares so they can expand the floating supply of shares, if you will. But there are leads and lags in that process. They can issue the shares, and then it can take up to 28 days or so to deliver the physical gold.

The point is, whether it’s the ability to terminate a contract on other force majeure clause or a mature adverse change clause, the ability to delay acquisition of physical gold, the possibility of closing banks, the possibility of futures exchanges order and trading for liquidation only, there’s just a whole long list of things that can go wrong. None of them are a substitute for physical gold.

Alex, we talked earlier about my Bloomberg interview when I was on with a money manager. It was supposed to be a pro-gold/anti-gold debate with him against gold and me for it, but it turned out that when we talked it through, he said, “We’re not totally anti-gold. We allocate from time to time. We’re in and out of it the way we’re in and out of other things. We’ll occasionally take up to a 5% allocation.”

I said, “That’s interesting, because I’ve never recommended more than a 10% allocation.” I’ve said put 10% of your investable assets in physical gold, not 50% or 100%, but 10%. I said, “If you’re occasionally a 5% guy and I’m a 10% guy, we’re actually not that far apart. This is a bit of a phony debate, because we both see a role for gold in portfolios.”

Institutional exposure is 1%. Whether you’re with this money manager, who occasionally does 5%, or whether you’re with me and I recommend 10%, they’re both a far cry from 1%. If the world of institutional investing even moved from 1% to 2% or 3% –  forget 5% – 10% – there’s not enough gold in the world, at these prices, to satisfy that demand.

Alex:  Again, I totally agree.

Circling back around to the risk part of clearing gold through banks, my perspective as a manager of a physical gold fund is that if I’m a gold fund that has gold assets and there are investors needing liquidity so they want to sell gold assets, to me the biggest risk is if their prime broker is a bank. That’s no different to me than what just happened in China recently with their stock markets melting down or what happened in the 2008 global financial crisis.

If I was a hedge fund and my primary dealer was a bank and that bank was frozen up or locked up or unable to trade for whatever reason, I’m basically frozen out of the market. In my view, that’s a very bad place to be.

Jim:  That’s exactly what we’ve seen. Lehman Brothers was the most famous example to file for bankruptcy on September 15, 2008. There were billions of dollars of frozen accounts where the accounts were fully paid up, fully margined. Those securities, instruments, physical gold, whatever it was, were owned by the client and simply in safekeeping at the broker. But all the accounts were frozen. We saw that with MF Global as well. These things do happen in the real world.

Alex:  Our next topic is the slowing economy. Contrary to optimistic thoughts, there’s still a strong concern that the economy – I’m talking globally – isn’t getting better overall.

The average person and sovereign governments are continually going further into debt right now in order to make ends meet. The U.S. national debt is approaching the $20 trillion mark. Who would have ever thought that would happen? Other countries are continuing to pile on the debt, as well. The compound annual growth rate in global debt over the last 15 years is around 6%.

Jim, what are your thoughts about whether the economy is slowing or strengthening in the short to medium term?

Jim:  The evidence is very good that the economy is slowing. The best thing you can say about the economy is that it’s weak. The worst thing you can say is that we’re on the edge of a recession and may actually be in a recession before the end of the year.

This was a completely predictable consequence of the Fed’s blunders by raising interest rates in a weak environment. The Fed is always in the process of making a mistake. It’s just that they keep making different mistakes at different times.

Let me unpack that a little bit and talk about what’s going on. In past podcasts, we’ve talked about my basic Fed model and my modal forecast for Fed activity. I won’t go into that in great detail, because we have done it before, but here’s the short version of it.

The Fed is on track to raise interest rates four times a year from now until the middle of 2019. It will be 25 basis points each time in March, June, September, and December. That times four, 1% a year through the middle of 2019, will get interest rates up to around 3.25%, which they would consider normalized. That would be a normal interest rate environment for this late in the business cycle.

However, that path is subject to three pause factors. Yes, they’re set to raise four times a year, but there are three reasons why they wouldn’t raise, three very specific pause factors.

One is if you see job creation dry up so it’s below 75,000 a month – not 150,000 or 100,000 or even 90,000, but below 75,000 a month. That might cause them to pause. The second factor is strong disinflation, moving away from the Fed’s 2% inflation target. The third factor would be a disorderly stock market decline.

I emphasize the word ‘disorderly.’ If the stock market went down 10% over six months – 2,000 Dow points or 200 points in the S&P – the Fed could care less. If it went down 10% in two weeks, they would care, and that would cause them to pause. That’s the difference between disorderly and orderly. It happens in a very compressed period of time.

If you see job creation dry up, strong disinflation or a disorderly stock market decline, the Fed will not raise the rates; they will pause. If you don’t see any of those three things, they’re going to raise rates.

This is the easiest Fed I’ve ever seen to forecast. It’s actually very straightforward. Why more people don’t get it, I don’t understand. Why Wall Street doesn’t get it and they get all spun up over some recent Reserve bank president like Jim Buller making a speech or something – I know Buller. He’s a nice guy, but his speech is irrelevant to monetary policy. I just gave you the model to forecast Fed policy.

I said this a few months ago, but I’ll repeat it for the listeners: The Fed is not going to raise rates in September. There’s a July meeting coming up, but they’re certainly not going to raise in July. There was never any significant chance of that.

They’re not going raise rates in September, and they’re not going to raise rates on November 1st at their next meeting. For December, I would put it way below 50%, so if I had to call it right now, I would say they’re not going to raise rates in December. They’re done raising rates for the year. I’ll update my December forecast as we go along, but right now it’s very clear that they’re not going to raise rates in September.

I just said they were going to raise them in March, June, September, and December. Now I’m saying they’re not going to raise in December. Why is that? Which one of the pause factors applies? The answer is disinflation.

It’s not job creation, because job creation is still strong. Over the past year and a half, it’s trended down from way over 200,000 to the low 100,000 range with a lot of volatility in there, but that’s still good enough. The stock market is reaching new highs every day. That’s not a reason for the Fed to pause.

The reason is disinflation, the second of the three pause factors. Where do we see that? I said that the Fed has a 2% inflation target, but there are dozens of inflation measures such as CPI, PPI, PCE, deflator core, non-core, and trim mean. Without getting too technical on all those, there are many ways to measure inflation.

The one the Fed uses – and this is the one you need to watch if you’re trying to forecast policy – is core PCE (Personal Consumption Expenditure) deflator year-over-year. It’s not month-over-month, quarter-over-quarter, non-core, etc. but core PCE deflator year-over-year. That’s the one they watch, and they want it to be 2%.

Note the time series of the data. In February, it was 1.8%. The Fed’s looked at that and said, “See, we told you it’s going to 2%.” In March, it came down to 1.6%. In April, it came down to 1.5%. In May, it was 1.4%. We don’t have the June data yet, because it won’t be out until the first week of August.

Based on data from other inflation metrics – not the ones the Fed bases policy on, but important ones nonetheless including PPI and CPI that both show downward trends – they’re at higher levels. They’re running hotter than PCE core year-over-year, but they are showing a downward trend.

Based on that data, there’s every reason to think that the PCE core year-over-year will be at best 1.4%, maybe even 1.3%, and maybe lower. That’s a big deal. That is moving in the wrong direction from the Fed’s 2% goal, and it’s moving very strongly. Most important of all, it’s moving persistently.

What was Janet Yellen saying about that in March, April, and May? I always remind readers that I don’t have secret data. We’re all looking at the same data. The only thing that separates us are our models and analytical tools and maybe different ways of looking at things.

Yellen is looking at the same data, but what was she saying in March, April, and even May, when this was coming down? She was using the word ‘transitory.’ “Well, yes, I see it, but I don’t really believe it. It’s not going to persist. They’re temporary factors,” etc.

One time it’s oil. Well, oil is not part of the core. It’s part of the overall index but not part of the core index. If oil is going down, it does have ripple effects in other parts of the economy, so there might be reason to believe that. If you think prices are going back up, which I don’t, that might be the reason to call it transitory, but that has persisted.

There’s a price war in telecommunications carriers, your cell phone carriers like T-Mobile, Sprint or AT&T. There’s a price war going on there. They actually referred to that as transitory, but I don’t know if it’s transitory or not.

I think she has the Gilda Radner problem. Remember her character Roseanne Roseannadanna from Saturday Night Live? Her punchline was, “It’s always something.” That’s Yellen’s problem. She can look at one factor and say it’s transitory, but it’s always something. There’s always something coming along. It could be healthcare, etc.

This is persistent. She threw in the towel recently in her Humphrey-Hawkins testimony to the House of Representatives a week ago Wednesday when she acknowledged and said words to the effect that it might not be transitory. She didn’t quite come out and go full Monty and say, “Oh, no, it’s moving in the wrong direction. We have a problem.” She didn’t say that in so many words, but she was as explicit as she ever gets about the fact that this is now a problem. They hit the pause button to see what happens.

Interestingly, the Fed doesn’t move on a dime. I just gave you four data points (February, March, April, and May PCE core) that would be very bad for the Fed. You say, “The June number is going to come out in early August. What if it goes up? What if it goes up to 1.6%?” That will not be enough to get them to raise rates in September.

The reason is it takes a long time to get Yellen to turn, but it takes just as long to get her to turn back. In other words, she’s now flicked the switch. She’s in “Disinflation is a problem. We need to pause” mode. She won’t reverse that based on one data point.

Again, if she sees June, July, August and it’s trending, then maybe she’s back on track for a December rate hike, but we’ll see. As of now, September is completely off the table. By the way, I said that a while ago. We told our listeners that even in the last podcast a month ago, and now I see a lot of economic analyses have come around to that conclusion.

This is a reaction to the fact that they had four rate hikes. They raised them in December 2015, December 2016, March 2017, and June 2017. They put four rate hikes on the table, and I would argue strongly that they began the tightening in May 2013.

The so-called liftoff or first rate hike was December 2015. “Jim, what are you talking about? What do you mean they started in May 2013? That was two years before the liftoff.” The answer is there are a lot of ways to tighten. You can do it with forward guidance or with tapering.

That’s what they did in May 2013 when Bernanke gave the famous taper talk. We practically had an emerging markets currency and stock market meltdown. Then in December 2013, they started the taper that persisted through November 2014.

In March 2015, Janet Yellen removed the last bit of forward guidance. They had been including the word ‘patient’ in their statement meaning, “We’re going to be patient about raising rates,” which means, “We’re not going to raise rates until we give you a heads-up.” They took that out, and that was the heads-up. Then they didn’t actually raise them until December 2015.

That whole sequence of warning about taper, starting the taper, staying through the taper, and moving forward guidance were all tightening moves. I remember people saying, “Tapering is not tightening because you’re still printing money.”

Yes, but if you’re printing less money than you were the month before, that’s a form of tightening. It’s not extreme tightening, but at the margin, if I’m printing $80 billion a month and I go down to $40 billion a month, which is what they did in stages, that’s a form of tightening. You can’t say that expanding QE is ease but somehow contracting QE is not tightening. That’s just illogical and also not empirically correct.

Here’s the key, Alex. Our friend, Milton Friedman, reminds us that monetary policy operates with a lag that can be 18 months to two years. If you start tightening in small ways in 2013 and aggressively in 2015 and 2016, you should expect the economy to perhaps go into a recession in late 2017. Here we are, right on time.

The Fed is always the last to know. They’re going to try to undo the damage by pausing, but that will probably not be enough. If we go into a recession, they’ll have to throw the whole show in reverse, which means actual rate cuts and getting back down to zero then QE 4.

This is extremely bullish for gold. I know we talked about gold earlier in the podcast before we switched to the Fed, but when people talk about gold going up or down, what they’re really talking about is the dollar price of gold.

I think of gold by weight. That’s the right way to think about gold, because I think gold is money. For those who think of gold in terms of a dollar price, well, the dollar price of gold is just the reciprocal of the strength of the dollar. A strong dollar means a lower dollar price for gold as we saw in 2012/2013. A weak dollar means a higher dollar price for gold, and that’s what we’re starting to see now.

The dollar has come off the top, but when the Fed switches to ease along the lines I just described, when we get to September, they don’t hike, and perhaps they offer some forward guidance and say, “We’re not going to hike in December,” this will weaken the dollar. That’s very bullish for gold.

My advice to gold investors is that you’ve got a great entry point here. Don’t wait until it’s back up over $1,300. You might still want to buy then, because it’ll go even higher in the long run, but it’s a great entry point right now and a very good reason to buy gold based on this Fed forecast.

I’ll mention Lael Brainard who’s also a member of the Board of Governors and voting member of the FOMC. He gave a speech before Yellen’s testimony. Yellen testified on July 13th, but Brainard gave a speech on July 11th. It’s a little bit technical but absolutely fascinating and indicates that the Fed still doesn’t get it.

Alex:  Speaking of policy lag and how that affects the value of the U.S. dollar, you just mentioned that the U.S. dollar and the U.S. dollar gold price is basically an expression of U.S. dollar buying power.

There’s a common point of confusion here considering that central banks have injected something like $15 trillion U.S. dollars of currency into the economy over the last decade, but it really hasn’t shown up in price inflation. The area where we’re seeing inflation is in financial assets.

If you talk to Austrian economists, for example, they will tell you that asset price inflation is actually the precursor to consumer price inflation. That could still be in the cards. If we see that, it will definitely be an expression of the loss of buying power in the U.S. dollar.

Jim:  I study Austrian economics and think it has a lot to offer. I don’t consider myself an Austrian economist. I consider myself a complexity theorist and a few other branches of science that I bring to capital markets. That’s how I understand capital markets.

The Austrians have a lot to offer. Asset price inflation certainly can be a precursor to consumer price inflation. I wouldn’t rule that out. If they keep going, eventually it will be, but asset price inflation results in bubbles. If bubbles burst, you have financial panics. You could have deflation in nominal space, but a financial panic would mean a major run to gold as a safe-haven asset.

Maybe other things would be collapsing. Maybe even consumer prices would be coming down in a recession or a financial panic, which they would, but gold and treasuries would be going up as safe havens.

I remind people that the greatest period of sustained deflation in American history was the Great Depression from 1929-1933. Yet in the Great Depression, gold went up 75% from $20 an ounce to $35 an ounce. The best-performing stock on the New York Stock Exchange was Homestake Mining. It rallied when the market was going down from top to bottom over 80%.

Gold is a funny thing. Because it is money, it can perform very well even in environments when everything else is falling apart, because people want money.

Alex:  Exactly. We are out of time. We did have on the agenda for today a certain disturbing trend that’s going on in China, but we’re going to have to leave that for our next podcast.

As always, I appreciate you being on with me. It’s been a great discussion that I think our listeners are going to enjoy very much.

Jim:  Thank you, Alex. It’s great to be with you.


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