Jim Rickards and Alex Stanczyk, The Gold Chronicles July 2018
*USD/Gold and SDR/Gold were highly correlated up until Oct 1st 2016
*Oct 1st 2016 Chinese Yuan added to the SDR basket
*Since Oct 1st 2016 SDR/Gold trading tightly in a range of 875 to 925
*Why market operations by a central bank would explain SDR/Gold staying in such a tight band
*Possible actors conducting open market operations to maintain SDR/Gold
*Reasons actors may be interested in maintaining SDR/Gold
*Expansion required in SDR may be aided by a sovereign or supra-sovereign controlled distributed ledger / blockchain
*Timetables and implications for gold investors
Listen to the original audio of the podcast here
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, and welcome to another edition of The Gold Chronicles.
Today is July 26, 2018. I have with me again my friend and colleague, Mr. Jim Rickards.
Jim: Thanks, Alex. It’s great to be with you.
Alex: We have a very thought-provoking topic for our listeners today, but before we begin, I’d
like to do a quick recap of our last podcast. We talked about things ranging from the new axis of
gold, why Russia has been accumulating gold for 38 consecutive months, financial warfare, and
we also covered a really interesting game theory scenario in which Russia and China collaborate
on a permissioned, distributed ledger that would be used to settle payments between
sovereigns. That generated quite a bit of discussion on our channel.
If you want to access any of our past podcasts, you can do so at
PhysicalGoldFund.com/Podcasts. We also have a YouTube channel. If you’re watching this on
YouTube and like this content or material, please take a moment to Subscribe and Like as well
as feel welcome to comment in the area below.
Diving into today’s podcast, Jim, you recently mentioned you have accumulated some evidence
that there is already an existing gold standard pegged to SDR 900 per ounce. Talk about how
you came to this evidence and why you think this.
Jim: The evidence was interesting, Alex. I look at the U.S. dollar price of gold continually. I buy
and hold gold, but I’m not an active buyer and seller. I’m not looking to make quick profits; I
consider it part of my permanent portfolio. I buy it, put it away, and that’s that. Sometimes the
price goes up, sometimes it goes down, but that’s not most relevant to me.
What’s relevant is getting a percentage of my portfolio into physical gold. I cap it at about 10%
leaving 90% for everything else such as alternatives, fine art, private equity, real estate, stocks,
bonds, cash, whatever.
Having said that, I look at the dollar price of gold multiple times a day, because I talk about it
and write about it a lot. I obviously like to know what it is, see what the trend is, and see what
we have to say about it.
I’m enough of a geek that I look at the dollar price of the SDR. It’s not a secret; the IMF
publishes it once a day. It’s not actively traded. If you want to buy or sell large blocks of SDR-
denominated notes, you do that through the IMF. They have what I’ll call a secret trading desk.
It’s secret in the sense that the results are not known, but it’s there and people use it, and SDRs
do move around.
We only know that because we can look at the reserve position of countries that publish their
reserve positions – which is most countries; not all but most – and we can see the SDR line. It’s
usually small in relation to total reserves, but it’s there.
We know what they’ve been allocated by the IMF, because there has only been half a dozen or
so allocations. That’s over 50 years, so it’s a very long period of time, and most of those
happened in the early days, late 1960s, early 1970s, with the last one in 1980. It’s been radio
silent ever since, all the way to 2009, so almost 30 years at that point.
Then they came up with a recent allocation. We have that information as well. The recent
allocation was quite large compared to the older ones, but inflation more or less accounts for
We have those allocations, and we know what they are by country. We can look at the actual
SDRs that you have and see situations where you might have a lot fewer SDRs than you were
allocated. That makes sense, because if you got a bailout or a loan from the IMF, they gave it to
you in SDRs. Now you can take those SDRs, call the IMF, and say, “Thank you, but I need
dollars.” They’re like, “Okay. Hold the phone while we call around and see who wants to swap
dollars for SDRs. We’ll do that, you’ll get the dollars, they’ll get the SDRs, and everyone will be
happy.” That’s what goes on.
Most interestingly to me is seeing countries that have more SDRs than they were allocated by
the IMF. That means they bought them in a secondary market either directly from the IMF or
one way or another. They’re moving around and getting reallocated.
There are secondary market transactions, but it’s just not a robust or typical or transparent
market. It’s a little bit more like the gold market at the BIS (Bank for International Settlements)
in Basel, Switzerland, that acts as an intermediary by trading gold on behalf of its central bank
members. We don’t know when or how; we just know the gold shows up someplace else. So,
that’s going on, and I look at the dollar value of the SDR as a frame of reference.
There’s a third number that comes out of that, which I hadn’t looked at because there’s not
much of a market, and that is the SDR price of gold. What is it? Where is it going? How does it
trend, etc.? Because the dollar is almost 60% of the SDR – makes sense – 60% of global reserves
are in SDRs, it follows that if the dollar price of gold is moving around, the SDR price of gold
should move around, which it does.
Unexpectedly, a researcher in Switzerland – the name is D.H. Bauer, Zurich, Switzerland, but I
don’t know much about this person – sent me an unsolicited manuscript via a third party. It kind
of arrived through the back door, but there it was. I looked at it, and it was so striking that at
first I actually didn’t believe it.
I said, “This is interesting if it’s true, but somehow I doubt it’s true.” Then I duplicated the
research and found out that it was true. It shows the correlation between the dollar/gold
exchange rate and the SDR/gold exchange rate – the SDR price of gold.
As I expected, the dollar/gold exchange rate and the SDR/gold exchange rate were, in fact,
highly correlated up until October 1, 2016. Then there was a big change; the dollar price of gold
continued to go higher. (Recently it has leveled off and gone down, but overall, it’s up. It’s kind
of jumpy and volatile and all the things we experienced first-hand.) But the SDR-gold exchange
rate flattened out right around 900.
The range above and below is quite small, smaller than the dollar/gold exchange rate. The
trend is not higher; it’s flat. If you run a straight line through the trend, the trendline is flat.
This obviously happened on October 1, 2016. What happened on that date? That’s the day the
Chinese yuan became a member of the SDR.
I’m dealing in facts. We’ll talk a little bit more about speculation, but the facts are that starting
the same day the yuan became part of the SDR, the SDR suddenly pegged to the dollar. It was
pegged at 900 SDRs exactly. A little bit higher, a little bit lower, but that range gets narrower. It
starts out 850 to 950 but stays in the range unlike the dollar price of gold, which continues to
go higher. That’s just a result of the dollar weakening against the SDR, so you need more dollars
but fewer SDRs to buy the same quantity of gold.
Then that range gets narrower. Today, I’d put it at 875 to 925. That’s an even narrower range,
as I mentioned, but it’s pretty tight, about 2.5% above or below. Not higher than that, and it
stays very tightly within that range. It went out recently just a tiny bit. If you say 875 is the low,
it hit 873, but it moved back up towards the 875 level and is getting back inside the range.
The first thing you notice is that it’s in a range. Why is it in a range? It looks like an auto-
regression. In other words, you say, “It goes up, it goes back down, it goes down and up, but it
stays in the range.” It doesn’t drift higher or lower like the dollar/gold exchange rate has.
What’s up with that? There’s no explanation.
There could be an explanation of manipulation by a major central bank, but there’s no
explanation other than manipulation. In other words, there’s no functionality, no causal factor,
there’s nothing in that relationship. The dollar/gold price trades freely, and the dollar/SDR price
at least appears to trade freely although maybe it doesn’t when you look at foreign exchange
rates. It doesn’t look like there’s any reason why the SDR price should be pegged to gold at 900,
but it is.
Who’s behind that? Through a process of elimination, you start with four potential powers. We
know who they are. The United States Treasury certainly has the wherewithal to do that.
There’s something called State Administration of Foreign Exchange (SAFE), which is a Chinese-
controlled foreign corporation or sovereign wealth fund. There’s the IMF itself with the ability
to print SDRs. And then there’s the European Central Bank (ECB) acting on behalf of its
The thing about ECB gold is that they have the most gold under one roof, but it’s spread around
a little bit among the members. A total of 10,000 tons, which is more than the U.S., but it’s here
and there. There are 3000 tons in Germany, 2000 tons in Italy, 2000 tons in France, Netherlands
has maybe 600 tons, and a few others, but that’s that.
There really aren’t any other players who have enough clout. You need a lot of things. You need
some SDRs, gold, cash, dollars, foreign exchange, euros. China has a lot of yen, but you don’t
necessarily need a lot of yen since it’s actually a very small part of the SDR.
To mess around with the SDR, I would do it through the euro/dollar exchange rate. The dollar is
about 58%, and the euro is over 38%. One way would be to sell dollars and buy euros. It’s
doable, but you need a lot of foreign exchange, cash, gold, SDRs, and you need some reason to
do it. China sort of fits in all those categories as do the others if they felt like it, but they don’t.
The U.S. and the ECB are pretty transparent about gold holdings. I’m not saying they couldn’t
trade gold without some ability to keep it quiet, but it would show up. You’d see it in gold of
the U.S. or ECB going up or down. You don’t see those movements – at least not today – so take
those two off the table.
The IMF have their secrets, but they’re pretty transparent about gold. They report, publish, and
make known their position on gold. We haven’t seen any changes in their gold position since
2010. There were changes in 2010 worth noting, but nothing more recently, so let’s take them
off the table.
That leaves SAFE. SAFE is completely non-transparent, unlike the People’s Bank of China. I
would say the People’s Bank of China is transparent, but they’re a little bit of a front, meaning
they report what they want to report and don’t report what they don’t want to report. If they
don’t want to report it, they keep it in SAFE, which does not report publicly. SAFE is run by a
very sophisticated former PIMCO guy.
Through that process of elimination, I would put SAFE at the top of the list. I can’t prove that
SAFE is doing this, but I can say based on all the facts that they are the most likely candidate.
Their reason is a desire to get out from under the dollar hegemony, and they share that desire
with Russia, Turkey, Iran, and others that form what I call the new axis of gold.
We’ve spoken about the new axis of gold before. Now, what we’re doing is expanding it and
saying, “It’s not just the new axis of gold; they’re starting to act on that and produce results.”
Everything I just gave you is a fact. How likely is it that SAFE is the transacting party? I can’t
prove it, but it seems highly likely. They have the wherewithal, the reserves, a reason for doing
so, reasons for non-transparency, and they’re not advertising it. In all those respects, they look
like a very likely candidate even though we can’t quite prove it.
Now we’re into speculation, but I think it’s reasonable speculation, so let’s just say they are the
transacting party. If SAFE is doing this, you might say, “Interesting. Why 900 SDR?” It’s the
target, the ideal price, because 900 is the middle of the peg. “Where did that number come
from?” If you look at the total SDRs issued by the IMF, it’s just over 204 billion SDRs – not U.S.
dollars. The SDR today is about $1.40, so that would come to $285 billion, but let’s stick to
SDRs, so 204 billion SDRs.
I don’t think the IMF is behind this, but if they were, how much gold does the IMF have? There’s
no evidence that they’re doing it, but they have 2814 metric tons. If you multiply that by 2200
troy ounces per metric ton, that comes to about 90,472,000 ounces.
Let’s do a little bit of math. Take those troy ounces and turn them into regular ounces that you
and I know. It comes to about 6,190,000 pounds. At 16 ounces per pound, divide by 90 million
troy ounces times 0.911458. That’s just the conversion factor to get from troy ounces to regular
ounces, so we make the troy ounces go away. That comes to about 1200 SDRs.
We could say, “That would give 100% cover, but we don’t need that. Let’s assume 40% cover.”
That’s how much the United States had, by the way, from 1913 when the Fed was started to
1945. With 40% cover, you come to 480 SDRs per ounce.
Let’s take the 40% cover, which is the extreme amount of gold, and the 100% cover, which no
one really thinks you need, and just take the midpoint. The midpoint is 840.6 SDRs per ounce.
Pretty close to 900.
Using 40% cover, that was the U.S. official gold standard from 1913 to 1945. After 1945, we
lowered it. After 1968 – give or take a year – we lowered it again to zero. In 1971, we stopped
redeeming, and ever since then, it’s been no gold standard; floating exchange rates.
The gold standard has gone away in stages beginning in 1933, but from at least 1913 to 1945,
the law was you needed 40% gold to back up your currency. Most people thought that was
more than sufficient. So, using that as one extreme and 100% as the other extreme, the
midpoint is 840.6. Interesting that it’s not too far from 900.
Although the math is right – I’ll vouch for the math – it proves nothing. I can’t vouch for more
than that, but it’s interesting that we seem to have a likely candidate in the form of the Chinese
State Administration of Foreign Exchange, a secret sovereign wealth fund with the capacity and
a motive to get out from under the U.S. dollar hegemony.
SAFE has the reserves, the gold, the SDRs, the cash, the dollars, the euros, really everything
they need, so they’re the most likely transactor, but I can’t prove it. Based on the facts we do
know, however, I’ll put them at the top of my list as the number one most likely transactor.
We can see it’s going on, because it can’t happen without manipulation. We have a very likely
candidate, which is the Chinese State Administration of Foreign Exchange. We have a motive,
which I’ve already described, and as I say, a lot of reason to believe that that’s exactly what’s
going on. So, that’s where we are.
What does that mean in terms of, first of all, the predictability, and secondly, where we think
gold is going to go?
The axis of gold is a little different than the transactions pegging the SDR to gold. The SDR to
gold looks like China, but it could involve Russia in secret ways we don’t understand. Just take
open market data, assuming it’s correct. I think it’s correct for Russia and Turkey, but China is
not so clear. If they own more gold, then they own more gold. Russia’s gold reserves are
approaching 20% of their total reserves, and that’s a pretty high percentage.
Interestingly, the United States is 70%. When you say that the United States foreign exchange
reserves are 70% gold, that comes as a shock to a lot of people, but it’s true. We don’t need a
lot of euros and yuan and Canadian dollars. We can go buy them if we need them, but what we
need is gold, and we have it.
Russia is approaching 20%, Turkey is over 10%, and China is kind of struggling to get to 5%. Bear
in mind that China has $3 trillion of reserves, so they started with a pretty big reserve position
before they woke up one day and said, “Maybe we need to get out of dollars,” which they’re
now doing in their own slow way.
We don’t have all the information, but China is going up, Turkey is going up very steeply, and
Russia is steady-eddy and just keeps going up like that. They’ve been a little more transparent
about their reporting. We have that information.
There’s a definite turning point. Official gold holdings hit an inflection point in 2008, an
interesting time. We were at the bottom of a pretty bad recession at the end of 2008, early
2009, and yet that was the bottom year for gold as a percentage of total reserves. Gold fell to
about 30,000 tons officially, but today it’s back up to 33,000 tons where it was in 2000. So, we
started in 2000, went down, went up, and we’re back where we were 18 years ago.
That’s a noteworthy turnaround and an important one, except that the developed markets are
up a little bit – can’t say zero, but not a lot – but the emerging markets have made up the
difference. They’ve engineered this turnaround. Emerging markets include Russia, China,
Turkey, Iran, and some of the countries I mentioned. What’s going on there is interesting.
Beyond that, there’s still no question that the dollar superficially is the king reserve currency.
Using round numbers, it’s 60% of global reserves, 80% of global payments, and almost 100% of
oil pricing. Those are big numbers; that’s a big deal. The dollar is still king of the road, but the
fact remains that all those are lower than they were. Oil looks like the next one to start heading
south as we begin to see more oil priced in yuan and other leading currencies. Maybe Brazil will
charge its local currency for oil; it remains to be seen.
The dollar is going down. In the last four years, it has dropped from 66% to just over 62% as
global reserves. Now, 4% of global reserves is a big number. Likewise, it’s declining as a
percentage of total payments and even slightly now as the price of oil.
Meanwhile, gold is going up for reasons I just mentioned, so we do see a gradual substitution of
gold for dollars, gold pricing, yuan pricing, etc. of oil instead of dollars, and a reduction of dollar
reserves. It’s not extreme, not a collapse, but little by little, things are moving in that direction,
and I think it’s smart to take account of them. I wouldn’t say this is completely established and
operating, but at the same time we see the beginning formation of a cryptocurrency exchange
that is really distributed ledger technology. It’s nominated in SDRs and free of U.S. interference
That would involve at least two currencies. Let’s call it the PutinCoin and the XICoin. You can
call it anything you like such as the SameCoin, the AsiaCoin or a lot of things. Suddenly, North
Korea will sell Iran weapons, Iran will sell oil to China, China will make fixed investment in
Russia, Russian tourists will go to Turkey, and the Turks will buy pistachios from Iran.
There will be more going on, but I just point that out as an example of trade among those
countries that will not involve dollars. Let’s call it an AsiaCoin that will settle and clear through
its own network. It’ll be encrypted and very difficult for the U.S. to hack.
Periodically – whether that’s monthly, quarterly or annually remains to be seen based on
balances – the net payments could be settled in gold. Of course, net payments are always
smaller than gross payments, but when you net things out, plus and minus, they could put the
gold on a pallet, put it on a plane, fly it from Tehran to Moscow or Moscow to Beijing or Beijing
to Ankara. We’re starting to see that.
There is this odd conglomeration of things where Russia and China want to get out from under
the dollar. There are actually other ways of doing it by building up SDRs but then pegging SDR
to gold. In that sense, the gold is hedged, and likewise, the hedge is constant, so you know what
you’re dealing with. That ties into the amount of gold the IMF has, which I explained earlier.
It’s all happening, but is it under one big giant conspiracy? Likely not, but it’s probably being
directed by the Chinese to a great extent. It’s probably being led by them even if they’re not in
charge of every step.
As I said, Russia has gone some of the way in gold, but China is all for it. China is doing their own
thing in gold in their own way, Turkey is breaking out in gold, and Iran is breaking out in gold
even though they’re not transparent.
These things are happening, but are they earth-shattering? In the short run, probably not,
although they’re really interesting once you pay attention to them. But in the longer run, they
could be a very big deal, because you could end up saying, “The dollar price of gold is going
here to there, but who cares? We have an SDR price of gold. It looks like this. We’re
accumulating SDRs. SDR is now a new gold standard. It’s a safe asset for people to get because
it’s hedged by gold, so we would urge you into the SDR and out of the dollar.”
It’s hard to see the IMF objecting to that – they probably wouldn’t – but it leaves the U.S. high
and dry. It’s like, “Hey, we’re 60% of reserves, 80% of payments, 100% of oil.” Then all of a
sudden, “We’re 45% of reserves, 50% of payments, and 70% of oil, and all those things are
heading south. They don’t look good.” Then you get into a stampede type of situation at which
point the dollar price of gold might not mean all that much.
I’m not saying this happens overnight. It probably doesn’t happen for a few years, but the initial
steps have been taken, and they’re clear. We probably can lay them at the feet of the Chinese
even though we can’t quite prove that.
It’s definitely worth watching. If I were a gold investor, I would care. I would say, “The dollar
price of gold is going to continue to fluctuate, but maybe I don’t care as much. Maybe I care
more about the SDR, and I have to keep an eye on that.”
So, it’s a big deal. It’s happening slowly – so slowly that most people haven’t noticed – but the
data is what it is. I have a presentation on this that I meant to give in Vancouver last week.
Unfortunately, I encountered a little illness and was unable to do that, but I will be making it
available, certainly to readers at that conference, and we’ll take it from there.
That’s an overview with a lot of detail and facts. It doesn’t have 100% facts, because we have to
make an inference or a leap when it comes to China’s involvement, but I think it’s a reasonable
leap and definitely bears watching.
Alex: I had a number of questions that came up while you were explaining this, and one by
one, you ended up answering them all.
The first was: How would this happen? How could it be conducted to where there’s something
resembling some kind of a peg? The answer is open market operations. Maybe not open
market, but if there’s a central bank, they can buy and sell various different assets to try to
maintain that peg.
Why does it exist? You explained that as well.
What would be the motive for maintaining it? That would be to get out from under U.S. dollar
dominance in terms of world reserves and payments.
I wondered if this is going to require some kind of massive shift away from U.S. dollars in terms
of reserves and payments. You also addressed that question in that it is happening and has
been happening. I actually knew that, but it took you saying it to remind me of it.
One of my colleagues says all the time, “What’s happening with the change of the world’s
reserve currency is like the slowest train wreck in history.” If people recall, the British pound
used to be the world’s reserve currency, and it took about 50 years for that to change. I don’t
know where you start measuring it from, but yes, I can see how that would be a process, and it
makes a great deal of sense.
Jim: Yes, right.
Alex: Well, this wraps up our time. That was a great explanation of your view, Jim. Hopefully,
we can dig deeper into it as more information comes to light in the future.
I just want to thank you, Jim, for being with us. I appreciate the discussion as always, and I look
forward to doing it again next time.
Jim: Thank you, Alex. I look forward to it also.
You have been listening to The Gold Chronicles with Jim Rickards and Alex Stanczyk presented by Physical Gold Fund. Recordings can be found at PhysicalGoldFund.com/podcasts. You may also register there for news of upcoming interviews with Jim Rickards and other world-class thinkers.
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