Physical Gold Fund CEO Philip Judge and Advisory Board Member Gerry Schubert Discuss Gold Markets, Central Bank Purchasing, and Shariah Law Including Standard 57 For Gold Invevstments



Philip Judge: I’m happy to be joined today by Gerhard Schubert who, I’m pleased to say, is a member of our advisory board. Gerry, you’ve had a career spanning over 40 years in precious metals, so could you give us a some background in terms of your career?

Gerhard (Gerry) Schubert: Of course, but firstly, when you say over 40 years, that shows how old I am. I started in the international precious metals market in Frankfurt, a silver dealer in market making in the interbank market, and then most of my life I worked and lived in England, because obviously the precious metals market there is very little substance or involvement from German banks. Relatively early in the early ‘80s you had to make a decision, London or Zurich, and London is really the center of the OTC market, so I moved in the early ‘80s to London and basically stayed there ever since until I moved to Dubai at the end of 2010.

Philip Judge: You also served on the Management Committee of the London Bullion Market Association while you were in London.

Gerry Schubert: Yes, and I was on the Management Board and the Membership Committee of the LBMA until I moved to Dubai, and I was also on the Management Committee of the London Platinum Palladium Market (LPPM) before I moved to Dubai. Once I was in Dubai, I was – I want to call it – drafted in by the Dubai Multi Commodities Centre (DMCC), a government regulator for the gold and precious metals business in Dubai, straight into their Gold Advisory Committee and also I served on the DMCC Independent Governance Committee.



Philip Judge: Since your time in the Middle East, you obviously have extensive work experience in places like India or other parts of the Middle East itself; in the MENA region. Can you give us a bit of a background on some of that?

Gerry Schubert: Of course. India obviously is one of the main customers of Dubai, and I’m regularly speaking there at conferences and a part of panels. Actually, at the end of this month, I’m going to Amritsar where the India International Gold Conference takes place the first to the fourth of August. And, yes, India is obviously a very interesting physical market.

Once you’re here in Dubai, different to the London OTC Market, you get very involved in the physical market, and I think for a few years now, the gold market – the physical gold market – is really moving from West to East. You can describe the physical gold market as very prominent from Turkey eastward up to and including China. That is really the physical world, and this is now getting stronger and stronger and will have serious impact on price finding in the future.



Philip Judge: Yes, that’s interesting, because late last year when we got together in Dubai, we were talking about the physical market, and you felt very strongly that this year, 2019, we would see a significant move up in the gold price. When we opened 2019 – early January I think – we were trading around $1280-$1285 dollars an ounce, and now on July 11th, we’re trading up consistently around this $1410-$1420 area. So, what do you think some of the factors have been to see this 10% move up? Really, since late May into June through to July we’ve seen this move up. What do you put that down to? Is that a physical situation or how or what can you really identify as the key factors here?

Gerry Schubert: Now the price finding currently is not driven by the physical markets of let’s say the eastern world. This is still driven mainly by the futures market like obviously COMEX which is a very strong influence in the prices. But if you look at the geopolitical and the economic situation, then I think the move is very very easy to understand. I mean, the last two days you had Chairman Powell from the Fed giving signals that the Fed might still be loosening and reducing interest rates with some people speculating on a half percent. I personally do not believe that on the 30th or 31st of July they’re going to lower it by half percent. I mean, all the way down and all the way up the Fed has mostly done everything in quarter percent steps, and I really can’t see why they should change that behavior at the moment.

But it’s irrelevant. The liquidation which you saw a week ago, basically down from $1420 which brought us down to $1382, that was the week-longs getting out, profit-taking, people took their money. And then came strong buying also from governments, let’s say like central banks, into the market again who were supporting and holding the market, and then you saw this very good move up after we couldn’t break down $1382, and we closed yesterday well above $1400, $1422. I think that is an area which will now basically hold and be used as a stepping stone to hopefully break on the upside $1440. $1440 is a double top. If we breach $1440, then nothing until $1474, but I go further and think we will see $1600 in a straight line after that.

I also want to mention very very clearly the geopolitical tensions with Iran. We here in Dubai are sitting very close to Fujairah Ras Al-Khaimah where yesterday the incident happened with the Iranian boats, the British tanker oil vessel, and the involvement of the English warship. I think all these things are very much contributing to uncertainties. But saying this, the real factor is still, and we shouldn’t underestimate this, the purchasing – the continuous buying from central bank – and to be honest, they’re rather getting more central banks who are buying gold for diversification of their reserves than less.

I mean, you always have the prominent Russia, Kazakhstan, China but now you have Poland, Hungary, and quite a number of central banks now buying more gold. I think it’s time that people understand what that is. If I had some hedge fund 500 tons, they then will sell it when gold goes up $50 to take the profit. This buying from central banks is glacial buying; this is buying to diversify their reserves. This is not coming to the market for years, and that changes the balance between supply and demand significantly and for further years.



Philip Judge: We certainly saw a huge uptake of central bank purchasing of gold in 2018, and that’s obviously as you’ve just mentioned continued into this year. In April for example, India reportedly bought upwards of six tons, but then as you’ve mentioned you’ve got Russia, Kazakhstan, China, India, Turkey, and so on. That was definitely a significant factor in 2018, and it looks like it’s continuing into this year, correct?

Gerry Schubert: Oh absolutely. The central banks have so far in the half-year stage bought more gold than they did at the same stage in last year, and last year was a record year for almost 60 years when they bought 650, I think 659, tons in total. So, that will continue. This is changing the behavior of the physical markets, because if gold goes up $100 and is not coming back into the market because it is staying in the central bank vaults, that is a significant shift. Imagine you going up $100 and also hedge funds and pension funds getting involved in addition to the central bank buying. This will change the balance.

You shouldn’t forget now recently the two names of Poland and Hungary who bought gold to diversify their portfolio and to bring the level of gold holding up to the level of other comparable central banks. They can do that because they are not part of the euro. They’re part of the European Union but not part of the euro currency, so therefore they do not have to ask the ECB for permission of what they do with their gold holding or if they want to buy or sell.



Philip Judge: You mentioned a few minutes ago that the physical market over the last 25 years or more has really shifted to the East. Can you talk a little bit about what you’re seeing first-hand in terms of Middle East buying? I guess a large part of physical flows also end up in China, we’ve talked about that many times in the past, but also India, Pakistan, and places like that. What’s your view on what’s happening there from a non-central bank standpoint?

Gerry Schubert: The central banks, if you look at India for example, is irrelevant. I mean their 600 tons or whatever is pretty irrelevant. The private population in India holds somewhere – and this is anybody’s guess – between 22,000 and 25,000 tons, so three times more as let’s say the Feds or the American reserves holdings are in gold. The difference is that last week we had the Indian government in the budget raising the import duty from 10% to 12.5% whilst it was expected that the duty would have been cut, but this wasn’t to be the case. I think it clearly demonstrated that the Indian government is resigned or accepting the import of gold through alternative channels other than the official channels. That means that the Indian budget will have more space to import oil, because oil and gold are the two biggest factors on the current account deficit. Oil they need for the economy. The government doesn’t think that gold imports for the population is the necessity for the government to do, so they are accepting that. Make no mistake, India will still probably be somewhere between 750 to 900 tons over the year, but it will be less official buying and more gold will come through alternative channels.

Having said that, the 2.5% increase from 10% to 12.5% gold in India is on record all-time highs which also might take a little while for people to get used to this price level. I would expect after the monsoon, so looking at September, October, November, for significant purchases again from India. But for the time being, I would probably say there might be a little pause.

China, obviously everyone knows, is the largest producer with 450 tons of their own production plus reported another 1000 tons imported. So, between China and India, you have already the world’s primary production being used up. And then take into addition from secondary market what comes in, scrap jewelry has to satisfy the rest of the physical market, physical world, and as you just said earlier, Turkey, the Middle East, and also other countries central bank buying. If you take again 600 tons, then you see where the balance goes.

Ultimately if you look into Zurich or into London, Zurich is so-called the physical center of the world because they have the refineries, but from there all the gold that comes out of the refinery goes straight on planes to the physical area, Turkey up to China. So that means that western holding and OTC vaults will ultimately be drained of physical gold.



Philip Judge: Right, and obviously the more the buy side grows particularly in the MENA region, the Middle East region for example, that’s going to just put further and further constraints on the physical market, so you know long-term that’s got to affect price.

I’m also curious, and I’m guessing this is 2016, you’re originally part of the AAOIFI Law 57 which is what we call the Shari’ah Standard on Gold for Middle East and Islamic financial products. Do you think the impact of the Standard being passed and Law 57 becoming a Standard for gold investment products has moved the investment market like the financial buying side of the market in the Middle East, and do you think it will continue to do so? What’s your thoughts on that?

Gerry Schubert: First of all, I just want to mention I had the honor of being there at the World Islamic Banking Conference (WIBC) of Iran in December 2016 and also to be there when this AAOIFI Standard Law Number 57 was launched. I have seen quite a few new products being presented in the Middle Eastern region that are gold based, because we shouldn’t forget, before the removing of uncertainties about gold investments for the Islamic community, (the old) Islamic investing community had mostly only the choice of investing in real estate or in sukuks. Now with Law 57, all uncertainties have been removed and within this rule book, gold products can be developed and should pass all Shari’ah boards relatively easily as long as this law is being administered and monitored.

The Islamic investment community, if you look at Malaysia, Indonesia, there’s huge potential, and as it more and more slowly comes into the market, it becomes I would say household acceptance. This is one thing that over a period of time will additionally drain a lot of physical gold from the market and basically put the derivative market very much into the background.

Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles November 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles November 2018


Topics Include:

*Implications of the USMCA between the US, Canada, and Mexico
*The importance of Robert Lighthizer’s role in US trade negotiations
*Update on tensions between Russia and Ukraine
*Russia’s “buffer states” of outlying countries
*How Russia’s gas pipelines running through Ukraine are critical infrastructure
*Why Russia purchasing close to 30 tons of gold per month is a strategic move
*How a decentralized permissioned ledger cryptocurrency sponsored by Russia and or China and settled in physical gold could be the next system used by sovereigns to settle net trade balances without using the US dollar
*Why Switzerland could be an ideal location to settle net payments in gold
*Update on Saudi Arabia stability, succession, and world relations
*Thoughts on the G20 upcoming meetings and trade negotiations
*Update on Fed monetary policy and interest rates


Listen to the original audio of the podcast here

The Gold Chronicles: November 2018 podcast 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. My name is Alex Stanczyk, and welcome to another edition of The Gold Chronicles. Today is November 30th, 2018. I have with me again my friend and colleague, Mr. Jim Rickards. Welcome, Jim.

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

Alex:  Before we get into today’s podcast, please note that you may access an archive of our podcasts going back for three years at If you watch this podcast on YouTube, please take a moment to Subscribe and Like as well as feel welcome to comment below the video. We do like to hear your comments. We want to hear what you think and any questions you might have that we are able to answer.

Jim, diving right into today’s topics, the first one up on deck is regarding a tweet from President Donald Trump this morning. He said he has just signed what he’s calling “the most important and largest trade deal in U.S. and World History.” It consists of the United States, Mexico, and Canada working together to create and sign the U.S. Mexico Canada Agreement (USMCA). What are your thoughts on this, and what are the implications for U.S. trade going forward?

Jim:  It is a big deal. I think for the president to take a little credit and kind of trumpet this is entirely appropriate, although I love the way he says it’s the greatest trade deal in the history of the world. Going back to Alexander the Great, he did his own version of globalization by conquering everybody, but he had a pretty good trading area. Yes, the USMCA is significant, and I wouldn’t underplay it.

First of all, it’s the U.S., Canada, and Mexico. Everyone talks about the U.S./Chinese bilateral trade relationship, which we’ll talk more about, but 80% of the Canadian population lives within 30 miles of the U.S. border. It’s their own country, but Toronto, Vancouver, Montréal, and several their big cities are just over the U.S. border. Take the car industry between Mexico, United States, and Canada’s that’s been integrated for a long time.

It is what NAFTA was intended to be, which is North American Free Trade Area. Trump got, as he puts it, a better deal from Mexico and Canada. More jobs for U.S. workers, and more inputs from the U.S. Remember, if Mexico is doing assembly, they’re buying parts from someplace, and Trump said, why don’t you buy some of those parts from the U.S.? We’ll have some assembled in Mexico, import the cars, more jobs, and more input from the United States in the supply chain.

Likewise, Trump’s threat vis a vis Canada was to put tariffs on Canadian cars coming into the U.S. which would have killed the car industry in Canada. Trudeau knew that, so Trudeau and Chrystia Freeland, his foreign minister, did a good job of negotiating. They got a few points their way, but they didn’t have that much leverage.

This is really the brilliance of Trump. He starts out with a goal, which is an effective way to do things. Some people just go into things not knowing what they’re trying to do, but Trump has definite goals in mind such as definite numeric reduction in the U.S. trade deficit. The next thing he says before he even sets out on a negotiating path is, “Where’s my leverage? What’s the Achilles heel of the party I’m negotiating with?” In Canada, it was easy – car imports – so he says, “Okay, if you don’t see things my way, we’ll put tariffs on your car imports.”

That’s done which does change things from NAFTA. The mainstream media can’t wake up in the morning without thinking of new ways to criticize Trump, so they say, “It’s just NAFTA with a new title, it’s old wine in new bottles,” whatever. That’s not true. It’s not tearing NAFTA to shreds – a lot of NAFTA is retained – but there’s a 323-page technical appendix to what this is with lots of provisions in it.

It’s important to remember who’s behind all this. Trump’s the policymaker and takes the credit, but Robert Lighthizer is the U.S. Trade Representative. He’s not a household name, most people have never heard of him, but he has ambassador rank, so he’s Ambassador Lighthizer. The U.S. Trade Representative is a cabinet-level position, so this is somebody who, in the hierarchy of things, would be on a par with Secretary of Defense and Secretary of State in terms of serving the president.

Lighthizer is very smart, and I don’t mean just in the technical sense. He keeps out of the press, he doesn’t leak, people couldn’t pick him out of the lineup, you don’t see his face, you don’t hear about him. Lighthizer is very happy for Peter Navarro, who’s a special trade advisor, or Larry Kudlow, who is Director of the National Economic Council, to let them be in front of the cameras and take credit at press conferences.

Lighthizer keeps out of it, but he’s the real power; he’s the one the president listens to. You can tell that he has the president’s respect, because the president has never dinged him on Twitter. Trump will go after his friends as quickly as his enemies. Mitch McConnell is getting 50 judges approved, and Trump will say something that’ll get McConnell showed up. Although I think McConnell’s pretty used to it at this point, you never see President Trump dinging Lighthizer.

As another insight, Lighthizer has a house in Palm Beach where Mara Lago is, and there are a lot of weekends or a Thursday or Friday morning when the president will say, “Hey Bob, I’m going down to Mara Lago. You want to ride in Air Force One?” Lighthizer will say yes, they get on the plane, and they have a two-hour one-on-one with no distractions or visibility from the press.

They have a special relationship, and Lighthizer also did this for Ronald Reagan. He wasn’t USTR, but he was top trade advisor to President Reagan and is running the Reagan playbook with the Chinese. At the time he was with Reagan in the early 1980s, the problem was Japanese auto imports. Detroit was falling apart, they couldn’t make a good product, while the Japanese had very high-quality automobiles at very low price points.

They were killing Detroit, and Lighthizer got Reagan to put extremely high tariffs on Japanese autos which left the Japanese with a choice. On one hand, it took away their price competitiveness, because a tariff on top of the price made Detroit suddenly competitive, but what they were really saying to the Japanese was, “Look, if you make a better car, make them here.”

This forced the Japanese to put their auto factories in the United States such as in Tennessee, South Carolina, Mississippi, Alabama, Ohio, and elsewhere. The Japanese did that because they, in effect, started paying the tariffs. They jumped over the tariff wall, put their plants in the United States, and they’ve done very well ever since.

What we got out of it were hundreds of thousands of high-paying jobs and good benefits. They’re not union jobs, because getting around the unions was another part of it. Lighthizer’s job wasn’t to help the unions but to help American workers, and it did.

Now 35 years later, the same playbook is being applied to China by saying, “You want to make cars? Fine, make them in the United States. We’re going to slap tariffs on you, and that’ll give you incentive to come here.” People in wealthy zip codes driving around in BMWs saying, “I’ve got a German car,” and I say, “No you don’t. You have a South Carolina car.” That’s where they make them.

Lighthizer is very seasoned, very smart, has the respect of the president, stays behind the scenes, and is the most powerful voice in all this. He’s with the president right now down in Buenos Aires getting ready for the big dinner coming up with President Xi. They have a playbook, and they have seasoned people to run it.

The Chinese are going to find out the hard way that you can either work with Lighthizer and the president or you can accept the consequences. It’s not like we don’t have enough cars in the United States. Of course, it’s not just cars. That was the Japanese playbook, but today it’s iPhones, electronic components, textiles, and a lot of other goods including manufactured goods that are affected by this.

Trump had a big victory with Canada and Mexico, and he’s on his way to another victory with China, but not soon. This whole Chinese thing is really going to drag out. One footnote on the USMCA, the new NAFTA, is that it does not end U.S. tariffs on steel and solar panels, and Canada and China were the two major sources of U.S. solar panels.

I wouldn’t buy anything from China. You couldn’t give it away as far as I’m concerned, but the Canadians do have particularly good quality, and a 30% tariff was put on those. But that’s not included, so there’s still some unfinished business with Canada. That’s going to get back to our dairy products in places like Vermont and Wisconsin being able to get into Canada, etc.

There is still some unfinished business, but USMCA is a big breakthrough, and the president deserves a lot of credit. It shows that the brains behind the operation is Lighthizer, and he’s also on point with China.

Alex:  In signing this deal and Trump being the negotiator and businessman he is, this probably gives us some pretty good momentum moving into the G20 for his preparations to talk with the prime minister, etc., from China.

Jim:  I think that’s right. Of course, all eyes are on this Saturday dinner. The China story has been overreported. I’m not saying it’s not important; of course it’s important. But it’s all you would hear about. To me, the bigger stories are the ones not being reported. I’m more intrigued by what’s not happening than what’s happening.

What’s not happening is the president is not meeting with Mohammad Bin Salman, the crown prince of Saudi Arabia and at least as of now the next king. We’ll talk a little bit more about that later. Trump’s also not meeting with Vladimir Putin. He was planning on it and wants to but isn’t because of what’s happened in the Kerch Strait between the Black Sea and the Sea of Azov involving a military naval confrontation with Ukraine.

Ukraine has retaliated by declaring martial law on themselves, but I don’t know what good that does. They’ve also just announced a ban on Russian men between the ages of 16 -18 and 60 years old entering the Ukraine. I thought that was a bit ridiculous, because if the Russians want to go into Ukraine, they’ll just walk in. Eastern Ukraine is two breakaway provinces that are de facto under the control of Russia. Maybe you can’t get off the plane in Kiev, but you can certainly walk into Donetsk or the eastern areas of Ukraine. I don’t know why they cut the age off at 60, because I think you can cause a lot of trouble even if you’re over 60.

These are things Ukraine feels they must do, but it’s all for show. The real question is, can the Ukrainian Navy stand up to the Russian Navy? The answer is no. I saw a Democratic politician the other day saying we should give the Ukrainians ship-to-ship missiles – basically, missiles that can sink ships – so they can stand up to the Russians.

I thought to myself, “Great, that’s just what we need; a Russian vessel being sunk by an American cruise missile.” I don’t think that’s the way to deescalate, so Ukraine’s kind of stuck. Are the Russians bad guys? Sure. But they always have been in certain ways and certainly when it comes to their periphery, the territory.

There is strategic thinking behind this. If you look at it on a map, particularly a topographical map, Russia doesn’t have any natural boundaries or borders between it and potential invasion. There are the Ural Mountains, but all the important stuff such as Saint Petersburg, Moscow, and the Crimea at this point are all west of the Ukraine mountains, which means that it’s just a big plain. From the Netherlands to Moscow is just a big plain.

Napoleon and Hitler proved you can roll over it. You might have your hands full when you get to Moscow, but there’s nothing stopping an invasion. Russia has always had buffer states. They say, “Maybe we’re vulnerable from a topographical or geographical point of view, but if we have a bunch of states like Poland, Ukraine, Romania, Georgia, Estonia, Latvia, and Lithuania around us, you’ve got to come through them first to get to us. That gives us a little buffer and a little time.”

Most of that has been lost now because of the fall of the Berlin Wall in 1989, the dissolution and breakup of the Soviet Union in 1991, and a period of about ten years of disorganized chaos in Russia when they were pretty weak. The U.S., NATO, and European allies contributed to the liberation of a lot of those countries along with obviously the sacrifices and bravery of their own people. They broke away from the Soviet Union, and they’re not coming back.

The two or three areas where control was ambiguous or at least uncertain were Ukraine and Georgia. This goes back to 2007 when Russia invaded Georgia. They didn’t take the whole country, but they took the northern half of it. Now it’s just a mess in Ukraine where Ukraine had a functioning democracy and elected a pro-Putin president. Prior to that, they had more western presidents.

There was a modus vivendi that Ukraine was still nominally western-looking to the west, but they had a leader who was close to Putin, so both sides were relatively happy. They probably should have left it that way, but in 2014 the U.S., UK, CIA, and MI6 got involved in this Colour Revolution and chased the leader out of town to exile in Moscow. They got a more favorable leader, and Putin said, “Wait a second. I finally got a friendly guy in there, and you depose him. Where’s your commitment to democracy?”

From there, Putin said, “Okay, two can play,” so he took Crimea, destabilized eastern Ukraine, the U.S. threw on sanctions, and it’s been escalating ever since. I’m not saying he’s a nice guy, but everybody wants to make Putin the bad guy. They say, “Putin started this when he took Crimea,” to which Putin says, “No, you started it when you destabilized Ukraine. Taking Crimea was my answer to that.” We’ve been in this escalating scenario ever since.

Trump would probably love to meet with Putin, but there’s a whole angle here with the Mueller investigation and Michael Cohen, the president’s former lawyer, giving testimony about Trump and his so-called lieutenants or associates talking to Russians about hotel and skyscraper development long after it looked like he was going to get the nomination or join the primary season. My first thought is, the guy is a hotel builder. What’s he supposed to do? Trump himself said this morning, “Well, what if I lost? I can’t miss a business opportunity.”

I don’t want to get into the legalities and ethics of it, but the problem with people in Washington  is they’re so political 24/7. They’ve had their entire careers either in elective office, staff positions, bureaucracy, or the Pentagon. For decades, they’ve had no experience in the real world of business. They don’t know what it’s like to negotiate building a skyscraper or hotel and trying to finance it. Of course you ingratiate yourself with the leaders of these countries; that’s what you’re supposed to do.

I worked at Citibank for ten years, and the country head of every branch in the world told you your job is to ingratiate yourself with the elites. Don’t try to make loans, because we’ve got loan officers for that. Get to know the finance minister, the prime minister, etc.

It was Trump’s own version of hotel diplomacy, but of course, you read the Washington Post that says this is a smoking gun conspiracy, blah blah. We’ll see how it plays out. I think Trump will handle it well, but it’s a pretty bad time to go meet with Putin when there are all these supposed revelations popping out in the Washington Post and all that.

As far as Russia, Alex, you know a lot more about the navy than I do, but there was a video of a Russian destroyer or maybe something larger that just rammed a Ukrainian tugboat. The boat’s siting there in the strait, and here comes this vessel. I do a lot of sailing, and I’m watching it thinking, “He’s going to hit that guy.” Sure enough, it did hit the tugboat. I guess if you’re going to hit anything, a tugboat’s a good choice, but the point being, I think Trump could have gotten past that, because there’s a lot we need to discuss with Russia including arms treaties and sanctions. Can the two of us get together, at least hold hands, and confront China in certain ways? There’s a lot of important business, but this Mueller thing has been clouding the issue for two years.

Alex:  Do you think this is possibly leading up to a Russian push towards more territory in Ukraine?

Jim:  Yes. The gloves are off. If Ukraine says, “We’re going to declare martial law, your people can’t come here, we’re trying to beef up our navy, we’re going to assert our rights in the Sea of Azov” and all that, this opens the door for Russia to escalate. The problem is, if you’re going to pick a fight, don’t pick one with the school boxing champion.

You can go through the motions and posture, but Russia is working hard to negate the only leverage Ukraine has. Russia dominates the world of natural gas. They deliver a high percentage, in some cases 60%-70% or more, of the natural gas that goes into western Europe to keep houses warm, keep factories going, and run various industrial applications. If Russia turns off that tap, a lot of Europe will be freezing in the dark, and a lot of factories will close down literally.

Those pipelines run through Ukraine. There have been disputes about this when the Ukrainians didn’t pay their bills. Some of this goes back to 2006-2007, but even more recently. Russia will literally turn off the tap and cut the gas supplies to Ukraine, but Ukraine can do that in reverse. Ukraine can either turn off the tap or if Russia says, “We’re not giving any more gas to Ukraine, but we want you to keep sending it to Poland or Germany,” Ukraine can divert that gas to Ukrainian applications and cut off the Poles.

There are all kinds of gas wars going on, and that’s where Ukraine does have a little bit of leverage. Again, in this escalation scenario we’re talking about, if Ukraine did something like that, we could see Russian troops coming in and turning the taps back on. What’s the U.S. leverage then? Trump can’t even talk to Putin for 15 minutes in a private hotel room in Buenos Aires. How are we going to confront Russia and Ukraine when we’ve given up?

By hitting Russia so hard with financial sanctions, travel bans, seizing assets, etc., we’ve already thrown everything we can at the Russians short of an act of war, so if Russia escalates, what are we going to do? There’s not much we can do. We can kick them out of Swift, but that’s a good way to start World War III, so that’s not going to happen.

This is typical of Putin, because Putin’s two favorite sports are chess and martial arts. Obviously he’s a very smart guy, but he knows a little bit about turning an opponent’s aggression against them, turning strength into weakness from the U.S. perspective. He can say, “You have thrown everything you can at me, but I’m still standing. Now if I do something, you’ve got nothing left.”

Alex:  It makes sense. In fact, when I saw Russia basically capturing those three ships, the first thing that occurred to me was that he’s testing response. I agree with you. With everything that’s happened, every time something has anything to do with Russia, the media is all over it, and they try to turn it onto a negative circus. Basically, Trump’s ability to do anything at a negotiating level is removed, and now it’s just down to, well, they’re going to do what they’re going to do, and we’re going to have to do what we have to do later.

Jim:  Meanwhile, as you know better than anyone, they’re buying 30 to 40 tons of gold per month. Not year, but month, and they haven’t quit. I’ve mentioned before that between 2014 and 2017, Russia’s reserves were drawn down by $200 billion. They went from $500 billion to $300 billion in their reserves, and that put a lot of stress on the economy. They couldn’t refinance corporations, so they did it by reducing their dollar assets without ever selling an ounce of gold.

And they never stopped buying. Even as their total reserves were going down, their gold reserves were going up. They would buy 10, 15 or 20 tons a month even as the reserve position was melting. Now that their reserve position is growing again, it’s back over $400 billion, because the price of oil is higher. I know it’s down recently, but it’s higher compared to the $24 it was in 2015.

The Chinese and Russians are doing the same thing. The difference is the Chinese are sneaky about it and pretend otherwise. The Russians are very transparent. They update the Central Bank of Russia website once a month like clockwork, and Putin says, “We’re getting out from under the dollar.” Others want to do the same thing and will join quickly, but he’s taking concrete steps.

Alex:  What’s so interesting to me is that they’re clearly setting themselves up to be able to operate financially even if they’re on complete financial lockdown. In other words, if things go to a kinetic level or become much more hostile and they’re completely locked down financially from whatever western systems are controlled, they can still operate.

It blows my mind that so many people miss this about gold. People often say, “Gold’s no longer money; gold no longer backs any monetary systems,” etc., but what they miss is that gold is money for sovereigns in time of serious conflict.

Jim:  That’s absolutely right, and this is much further along than people understand. You just described the situation perfectly, but a lot of people hear that and say, “Oh, they’re working on it. In ten years, who knows.” Forget ten years. They’re almost ready to go in about ten months. I recently guest lectured a very elite team of strategic thinkers from the U.S. Army War College, and this is one of the things I drilled down on. I actually showed them what’s going on.

Imagine the following. In fact, you don’t have to imagine it, because it’s happening. Russia builds a cryptocurrency. (I’m not talking about bitcoin, so please don’t go out and buy bitcoin. That’s going to be a dead end.) Russian creates their own cryptocurrency, a new ruble or PutinCoin or whatever. China does the same thing, and they link up. I call it an Internet, but it’s completely segregated from the main Internet. They just run cables and satellite relays between Shanghai and Moscow, and boom, there you are. They make what’s called a stable coin pegged to a certain benchmark and not meant to fluctuate.

The benchmark is the Special Drawing Right (SDR) from the IMF. Everyone may say, “It’s going to be a gold-backed yuan,” but no it isn’t. China doesn’t have anywhere near enough gold. And it’s not going to be a gold-backed ruble. Both countries have awful rule of law. If you transacted, what’s your recourse? Who are you going to sue? Do you really want to be in China’s court? I don’t think so. But in these digital currencies, you could have a distributed ledger pegged to the SDR.

Because there’s a dollar equivalent, from there, you are de facto pegged to the dollar price of gold. The point is, it is a stable coin. Then you invite others to join this network. Obvious candidates would be to start with the pariahs like Turkey, Iran, and North Korea, but Brazil and South Africa has expressed interest, and Venezuela would come in.

You don’t have the U.S., that’s the big giant, but the whole idea is to get out from under the U.S. Now you have a private Internet and a distributed ledger with a PutinCoin or a XiCoin with stable value equal to the SDR. It fluctuates against the euro and dollar, but so do the euro and dollar. That’s not unusual.

Now you start trading. North Korea sells weapons to Iran, Iran sells oil to China, China sells infrastructure projects to Russia, Russia sells technology to China, Turkey gets in on the act, Brazil’s selling soybeans to everybody, and you denominate everything in these new coins or tokens. What you’re doing is denominating them in SDRs, but your medium of exchange is a private coin in a private network.

Then you do what countries have always done, which is you just keep tabs. You don’t pay for everything in real time. Maybe the vendors do, but the countries run a balance of payments with each other, surplus or deficit, and periodically settle up. It could be monthly, quarterly or annually, but there’s a catch. You settle up in gold equivalent to one PutinCoin or whatever and just fly the gold around. Put it on a pallet on an airplane. The nice thing about gold is it’s got great density, so you get a lot of value on a small pallet. The plane lands in Moscow and Putin sticks it in his vault or the plane lands in China and they stick it in the vault in Shanghai.

Notice that everything I just described does not involve the dollar. Digital coins, private network, stable value, gold settlement, extensive trading network, and the dollar’s not even in the mix. That’s what they’re doing.

Alex:  They can even figure out what they think their net payments are going to be and keep some amount of gold in their own account in that nation. They wouldn’t even necessarily have to fly it. If it was a lot, they might want to, but historically, a lot of that’s been settled with gold that’s already sitting there.

Jim:  That’s right, and for that matter, you could put this gold depository in Switzerland. The Russian gold, Chinese gold, and Iranian gold all goes to Switzerland, and they do what the Fed does – just change the nameplates. Here’s gold, and now it’s yours. Nobody trusts Russia or China, but everybody trusts Switzerland. So that’s right; you could have a central gold depository in Switzerland, and it would be a very efficient system. It’s coming. Like I said, they’re already working on everything I just described.

Alex:  Back to Putin for just a second. I saw a picture of him sitting right next to the crown prince of Saudi at the G20. The Saudis had some really interesting things going. Last year we did a podcast around the time when the crown prince essentially came in and went on a huge program of reformation. He promptly rounded up and arrested different family members from the House of Saud and froze and confiscated hundreds of billions of dollars of assets.

It was a huge shakeup. If you’re interested in getting the history on that, go back to our archive at PGF The Gold Chronicles Nov 2017. Recently,  Saudi has been pouring tens of millions of dollars  into PR. They’ve hired firms in the United States and UK trying to fight back against this recent situation of a journalist named Khashoggi that appears to have been captured, tortured, and murdered at the hands of Saudi Arabia. We’re not absolutely certain, but it’s looking that way. What are your thoughts on Saudi/U.S. relations? Where are we going with this in the future?

Jim:  Going back to the shakedown operation, it’s crazy that instead of putting all these oligarchs, princes, and multibillionaire royal family members in a prison, they put them in a Ritz Carlton. They basically turned the Ritz Carlton into a high-end prison, but they were confined, nonetheless. A couple of folks I know happened to be there and could just get their little iPhone camera out, scan a little bit, don’t be too obvious, and see princes sleeping on the floor, men in black walking around with M4 automatic weapons, and all this stuff.

I remember thinking at the time that it was good news/bad news. The good news was most of the money he was trying to get back was probably improperly stolen to begin with, so in a sense they were just recouping for the state what had been stolen from the state.

He took a third, so if you were worth $30 billion, he’d say, “Give me $10 billion, and I’ll let you out.” Most people took the deal, but some people didn’t and are still confined. One of the holdouts was Prince Al-Waleed who might be worth closer to $40 or $50 billion, who knows, but he had to pay up.

It was sort of nasty and not legal by western standards, but this is typical Arab behavior. I don’t want to paint with a broad brush, but when we look at the history of Arabia, the Bedouins, and House of Saud family prior to the first third of the 20th century, they never had economic growth or technology unless you want to go back to like the 10th century, so they stole from each other.

The way they got wealth was to steal somebody’s sheep, goats or camels or took their water. This would start a feud, a bunch of people would get killed, and then there’d be a peace treaty of sorts. It was never about growth; it was about taking, so this was an updated, 21st century high-tech version of what they had always done culturally.

Mohammed bin Salman (MBS) is trying to grow the economy and has some projects, but I remember when they did this thing with the princes of royal family in the Ritz Carlton, I said, “You better come out on top. You better make this work, because if you don’t, you’ve just made more blood enemies and created more blood feuds than have existed in that peninsula in 500 years. You better not screw up, because you just bet the ranch on this.”

Well, he did screw up with this Khashoggi murder we referred to. As General Mattis said, I don’t think anyone’s seen the smoking gun, but we can draw our own conclusions. The CIA has estimated – that’s their word – that the crown prince was behind it. I’ll leave that to those intelligence channels, but it certainly looks that way.

The problem is, because he’s in his early 30s, he’s coming off as a hothead. On one hand, he’s the modernizer. He let women drive, and he announced big projects as all part of vision 2030. They were going to turn this into a real country instead of an oil pumper, but now he’s gone too far. The royal family knows it, and they’re looking around for alternatives.

The reason I’m giving all that background is when you turn to Trump and you’re the Washington Post or all these other left-wing publications, you’re like, “Oh, Trump’s horrible. He won’t denounce Khashoggi. He kind of maybe did it, maybe didn’t, he’s equivocating,” etc., as if Trump didn’t know what happened and wasn’t willing to hold him accountable. But you have to think of these things from the U.S. perspective. We’re not out to do any favors for anybody in Saudi Arabia; we’re out to do favors for ourselves. The U.S./Saudi Arabia relationship is critical to cutting off oil to China, to confronting Iran, and to building up alliances with Israel.

Russia, Saudi Arabia, and the United States together produce almost 40% of the world’s oil. The U.S. is number one, by the way. We came up from behind, but in round numbers, the U.S., Saudi Arabia, and Russia produce about ten billion barrels a day. The U.S. is now slightly above that, but those 31-32 billion barrels are 37% of global output.

The relationship could hardly be more important, so you can’t blow up the relationship. You don’t push MBS aside until you have something to replace him with. You might not like him or hold him in high regard, you might think he screwed up, but this is no time to go public with that. You either have to give him a chance to make some kind of amends (I don’t even know what they would be, because this is pretty horrific) or – and I think this is what’s going on – you give the royal family time to come up with an alternative so that when they do pull the rug out from under MBS, there’ll be somebody who can come forward.

This is an example similar to the famous line from The Godfather script, “Keep your friends close and your enemies closer.” If MBS has now become a liability more so than an enemy, keep him close and get his mind at ease until he gets whacked.

I see Trump being publicly critical but not blowing up the relationship for two reasons:

  1. The relationship is too important to blow up, because it’s bigger than one man.
  2. Give the royal family time to produce a replacement.

They have one son of Abdul Aziz who was the first king of Saudi Arabia of the Al Saud dynasty going back to the 1930s. I don’t know the exact numbers, but he had something like 45 wives and 75 or 80 children, most of whom by now are deceased or too old and not functional or whatever. But there’s one half-brother, one son of the original king who’s 71 years old. He must be one of the babies in the family, but he seems perfectly capable of taking over, and I think that consensus is forming.

Meanwhile, MBS is not the king; he’s the crown prince. King Salman is ailing. Reports are he’s still the king, but he’s not well, so his days are numbered. I see a setup either where the king is induced to dethrone his own son, make him not the crown prince, and bring in this other guy or the king dies.

But there’s another step. The line of succession is not automatic like in the UK, for example. MBS does not automatically become the king even though he’s the crown prince and sort of the king in waiting. There would be a family council, a sit-down, where the coup happens and they bring in this other 71-year-old younger son of Abdul Aziz to be the next king.

They could be setting up for that. It’s a deep game, but I think Trump is doing a good job of not blowing up the relationship for the sake of one ne’er-do-well.

Alex:  Let’s move on to the G20. One of the major issues I’ve been seeing come up is the trade war everybody’s talking. Trump has been talking about the tariffs. He’s already imposed some, and he’s threatening to impose more.

In the past, Trump has called China a currency manipulator. I think he’s backing off that rhetoric a little bit and, in my opinion, he’s doing that just to position himself for future negotiations. One of the interesting things people miss about Trump is that he’s pretty bombastic or outspoken, but I think it’s all a game to prep for further negotiations.

There are also the issues of the confrontations that have continued in South China Sea, there’s Taiwan, the one nation policy, and there’s the steel dumping thing. However, to me, some of the biggest issues are intellectual property theft and cyberespionage. We did a piece about cyberespionage in our last podcast where we talked about how, at a factory level, the Chinese were embedding little microchips on motherboards that are in servers in sensitive areas in U.S. infrastructure.

I saw an article stating that the chief technology officer of Cisco verified that the largest telco is out of China, and they actually have points of presence (POP), which are Internet nodes, in the United States that route traffic. They’ve been routing U.S. domestic traffic in the U.S., from the U.S., and meant from the U.S., using what’s called BGP routing to send all of that traffic to China and then bringing it back to the U.S. where it’s supposed to go.

Those kinds of things are happening. Then there’s the issue of intellectual property theft, which by some estimates is as high as $600 billion a year worth of U.S. intellectual property being stolen. What do you think are the key things we need to be focusing on for G20? What do you think is going to happen with this dinner on Saturday night? Where is all this leading to?

Jim:  The short answer is nothing’s going to happen with this dinner. Now, could there be what’s called a mini-agreement where Trump delays the activation of the tariffs and China agrees to keep talking about section 301? Section 301 has to do with penalties for theft of intellectual property and tariffs we’ve got on the solar cells and steel and consumer electronics at this point. That’s the big one. China’s thrown tariffs on a lot of our stuff, and they’re buying soybeans away from the United States.

A lot of people don’t understand what a tariff is and how these tariffs work. Under the trade laws of the ’74 Act and ’62 Act and Administrative Procedures Act, you announce them, but then you have to have a 30- or 60-day comment period when affected parties get to comment. Then you get 30 days to construe the comments, tweak your policy a little bit, and it goes into effect.

Even when you get over those procedural hurdles and can put it into effect, you don’t have to do so right away. It’s on standby like a Sword of Damocles, if you will.

We’re getting through that right now where some tariffs announced in May and June are just now getting to the end of the comment period. They are in a place where they could be put in effect at any time, and Trump could say, “We’ll hold off.” It’s really a gun-to-the-head strategy, i.e., we’ll hold off for now, we won’t pull the trigger, but we expect to see some results from you.

That could happen, so it’s not much of substance, but it would buy time. That’s very typical of the Chinese negotiating approach, which is to buy time and lie. Trump’s approach is to find the leverage and go for the jugular. These conflicting strategies are not a big deal or an end to the trade wars or anything that’s going to resolve any of these issues. They might come out of it with nothing, but if they want a little something for show, it could be along the lines I’m describing.

I don’t think the market’s going to buy it, though. It’s funny watching the stock market go up and down along with Trump’s tweets or statements. Trump will say, “I really do want to do a deal with the Chinese,” and the stock market will go up 500 points. The next day, he’ll say, “I don’t know. I’m going to throw these tariffs on anyway, the heck with it,” and the market will go down 500 points.

You can’t fight the market. I’m not telling people to buy stocks or go short or any of this stuff. I’m just saying it’s amusing – except it’s more than amusing, because there’s so much money involved – to watch the market react to what is obviously a Kabuki performance by Trump. This is how he keeps his negotiation opponents off guard and everybody guessing. He confuses the heck out of everybody. You never know what he’s going to do, so you’re thinking, “What do I have to do to keep this guy happy?” This is the Trump art of the deal so to speak.

To see the market take it seriously is a little absurd, but that’s how markets work. Let me explain what’s actually going on. I’m not going to repeat everything I said about Robert Lighthizer, but everything I said about Canada applies to China. He’s on point, he’s a tough negotiator, and he’s taking the hard line. Peter Navarro’s the guy with his hair on fire, but he’s taking the hard line. Larry Kudlow’s been tranquilized, so he’s now sort of with the Trump team even though he hates all this, and it’s the same thing with Mnuchin.

They’re going to go in there and insist on a lot more, but I know the Chinese are not going to give it. This is more than a trade war. Go back to January when the trade wars started and I said this is not going to be resolved easily. It’s going to escalate a lot and affect world trade and markets. Wall Street kind of shrugged and said, “No, it’s posturing. Xi’s got to strut, and Trump’s got to strut, and they’re not going to let this get out of hand,” and all that stuff.

Eleven months later, it obviously looks like the forecast of a long, drawn-out, costly trade war is a lot closer to the mark than the idea that they’re just posturing, and the market has begun to wake up to that. The market’s thinking, “Maybe this is for real. Maybe this is going to drag out.”

I think they’ve gone from dismissing it too lightly to starting to take it seriously. That being the case, will they have this final communique on Sunday? At some of these international meetings, they don’t even have a final communique. They can’t even agree on some happy talks, but let’s assume there is one. If it doesn’t have anything of substance or even if the deal is very superficial along the lines I described, I think the market’s going to say, “You know what? This is going to get a lot worse.”

It’s also gone beyond trade wars. I’ve always made links between currency wars and trade wars. They can be separate, but usually it starts with a currency war and ends up as a trade war. That doesn’t mean the currency war is over; it just means that you’re now fighting two wars at once. China’s doing that. They have devalued the yuan from around six to the dollar to seven to the dollar in about seven months. That’s a big devaluation of almost 20% devaluation.

I’ll explain how the math works. Let’s say China has a product they sell for $100 into the U.S. Trump slaps on a 25% tariff, and all of a sudden it’s $125 to the U.S. buyer accounting for the 25% tariff. Then China devalues the currency 20%, which lowers the unit labor cost, so the price goes down to $80. Slap the 25% tariff on, and now you’re back to $100, which is where you started.

The money gets divided differently. The Chinese manufacturer has to pay the tariff, but they take it out of the hides of their workers, and now their currency’s not worth as much.

They don’t cut their pay; they’re paid the same amount in yuan, but it’s just it’s been devalued 20% or 25%. Trade wars are fought using the currency wars when you don’t have enough trade war tools. That’s already been going on and goes back to the point about Trump getting ready to call them out on the currency wars again.

But this is even bigger than that. Go to Mike Pence’s speech a few weeks ago that they’re now calling the Pence Doctrine, which I think is interesting, because Trump is president. The Pence Doctrine basically says, “We have a currency war, a trade war, theft of intellectual property, and penalties, but this is all part of a much bigger struggle for supremacy in the 21st century. We’re not going to let China dominate 5G, and we’re not going to let China buy U.S. companies.”

I used to say you couldn’t buy IBM, but you could buy an ice cream company. Now I’m not so sure about the ice cream company. They seem to be shutting China out of everything. Huawei can just lose our number, because they’re not going to sell anything in the United States and they’re starting to get kicked out of other countries in the sense that they won’t buy their stuff either because of all the trapdoors, backdoors, and stolen technology we mentioned.

Add in the South China Sea, freedom of navigation, and relations with Japan. There’s a whole long list of things that go way beyond economics. Some critics have described it as a new cold war, and I think that’s not far from the case. Those are all additional reasons why the trade war is not going to be over, because it’s part of a bigger war that’s far from over.

They’re going to have dinner, maybe or maybe not smile for the cameras, but the idea that it’s going to be any big breakthrough is a stretch. That means on Monday, we could expect a very negative reaction from the stock market.

Alex:  Jim, we haven’t talked about the Fed in a long time. It’s been a number of podcasts we’ve gone through mostly hitting geopolitics, some gold, etc., but how about an update on what the Fed is up to and what we could look forward to from them for the next quarter or so?

Jim:  One reason we haven’t discussed the Fed is until a couple of days ago, they weren’t doing anything. You know my Fed model, and I want to emphasize that my Fed model comes from the Fed. I think about this stuff all the time.

I don’t mind talking to people who sit in the room, whether it’s Powell or Yellen or Bernanke, but I have one source in particular who is the most informed, influential, and highly-placed source inside the Fed other than the chairman. He’s not a governor or the chairman, but he sits two doors down and does all the wordsmithing, all the descriptions, all the orchestration behind the policies and therefore has to understand the policies better than anyone else.

He explained this to me, and it’s simple. I have no idea why the markets don’t get it, why more people don’t write about it or talk about it, but I’ve had very good forecasting results as an outcome of seeing this.

The Fed is out to raise interest rates four times a year, 25 basis points each time, every March, June, September, and December like clockwork. That’s the baseline. Just four times a year, 25 basis points each time, until they get to about 3.5% or maybe higher depending on conditions, so 3.5%-4%.

They’ve never said this publicly, but the reason they’re doing it is because they want to get interest rates high enough so that when the next recession comes, they can cut them enough to get out of the recession. The research is clear. Larry Summers and others have done a lot of this. That number is about 4%.

How are you going to cut rates 4% to get out of a recession if you’re at 2.25%? The answer is you can’t. If we hit a recession tomorrow, they would cut 2.25%, hit zero, and be in the same situation Bernanke found himself in in 2008.

Now what do they do? They cut anymore, but if they don’t cut, they can’t get out of the recession. The answer is QE4 or QE5, but they don’t want to go there. They will if they have to, and they’ve said so, but they don’t want to go there. What they do want to do is get rates to 4% so they can cut 4% and get out of the recession without going to QE4.

That’s what they’re doing and why they’re doing it. Notice that nothing I just said has anything to do with the “neutral” rate. Neutral rate is, first of all, an invention. It’s one of those egghead theories nobody can quite pin down, so there’s widespread disagreement over what the neutral rate is.

I say if you can’t even agree on what the neutral rate is, have you thought about the fact that maybe there is no such thing as a neutral rate? Maybe there are too many factors too intertwined from a complexity perspective that anything such as the neutral rate, even in theory, doesn’t really mean anything. There are too many other things such as psychology, velocity, and labor force participation to pin it on one thing.

The recent big stock market rally was up 600 points. What was that all about? It was about a speech Jay Powell gave to the Economic Club of New York when he said, “We’re very close to the neutral rate.”

If neutral rate means, like Goldilocks, it’s not too hot, not too cold, but just the exact rate needed to maintain economic growth without stalling the economy or giving it too much juice (as if there was such a thing), Wall Street said, “If he’s close to the neutral rate and gets to the neutral rate, he’s going to stop raising rates. That’s sooner than we thought, because the last time Powell said something about this, which was a few months ago, he said we’re really far from the neutral rate.” But that was off the cuff. That was not a prepared speech or one that my friend had written.

So he says we’re really far from the neutral rate and markets go, “Oh, man, he’s going to be raising rates forever,” and then this week he said we’re really close to the neutral rate. Well, that was nothing more than a do-over. That was just Jay Powell correcting in a formal setting something that he said off-handedly and probably got wrong the first time. Remember, Powell’s a lawyer, not an economist, so he doesn’t have this in his DNA.

By the way, I read the speech before he was done delivering it, and 80% was about risk management having nothing to do with interest rate policy. This little blurb was in there on the front, so the market said, “He’s going to stop raising rates. We thought it would take longer, and therefore, the rate is going to be lower, he’s a dove, discount factors are lower, so stocks go up.” Then they slept on it and said, “Maybe that’s not what he meant.”

What I’m telling you is it is not what he meant. He may have meant that, but that has no bearing on interest rate policy. The idea that they’re going to stop at 2.5% or 2.75%, because that’s the theoretical neutral rate, is nonsense. They’re going to go to 3.5%-4% for the reason I mentioned.

They pause for reasons that have nothing to do with the neutral rate. They pause if there is a severe stock market crash, job losses or extreme disinflation. Look for those three things. If you see one, certainly if you see two of them, they’re going to pause. But if you don’t, they’re going to keep raising until they get to 3.5%-4%.

The market is slow to realize that, but they will. If you combine the delayed reaction to higher rates than they thought, plus a bad outcome at Buenos Aires in G20, those are two major headwinds for stocks at least in the weeks ahead.

Alex:  Very good. For those of you who have been looking for another update on the Fed, there you have it.

That wraps up our time today. Jim, I want to thank you, as usual, for participating. What a great discussion. I think we covered some really good material.

Jim:  Thank you very much, Alex.


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Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles October 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles October 2018


Topics Include:

*Cyberwarfare Update – Chinese embedding hacking chips onto server mother boards used in American Industry and Department of Defense Systems at the factory level
*Why infrastructure will be most likely targets for cyberwarfare
*How cyber financial-warfare versus financial systems, stock markets, banks is an evolving and real threat
*How physical gold is resilient versus cyber financial-warfare
*IMF Global Financial Stability Report
*How markets are over 90% automated trading, and there are no human market makers available to stabilize falling markets
*Total official gold adjusted upwards for Central Bank buying. Eurozone countries now buying gold may be signaling important shift in Central Bank behavior
*Gold requires no counter-parties to retain its value, all other currencies rely on counter parties
*Game Theory on Future Monetary System Based On A Sovereign Issued Crypto Currency: Permissioned Distributed Ledger sponsored by China / Russia / IMF, Digital Coin tied to the SDR for measure of value, net of payments settled in Physical Gold


Listen to the original audio of the podcast here

The Gold Chronicles: October 2018 podcast 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 Alex Stanczyk, and welcome to another addition of The Gold Chronicles. Today is October 18, 2018, and I have with me again my friend and colleague Mr. Jim Rickards. Welcome, Jim.

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

Alex: Before we dive into today’s podcast, I’ll mention that you can access an archive of all of our podcasts going back for several years at If you happen to watch this on YouTube, please take just a moment to subscribe, like the video, and recommend it to friends if you think this information could be valuable to them.

Jim, the first thing we have up is something that over the years you and I have discussed quite a bit. We’ve talked about the concept of full-spectrum warfare, which is the combination of kinetic, financial, and cyber warfare. There have been some interesting developments on the cyber warfare front we should touch on and that is regarding a Bloomberg article published earlier this month. In this piece, there’s a story about Amazon conducting due diligence on a company, vetting a company, because it’s looking at buying the company. When doing this, Amazon started discovering some really disturbing things.

Specifically, they found that the motherboards these companies were using had tiny little microchips, smaller than the size of a grain of rice, embedded in the motherboards that was not part of the original design. As it turns out, these chips were embedded at factories run by manufacturing subcontractors in China.

We’ve talked about cyber warfare before. You’ve talked about it extensively, and I know you lecture about it on a regular basis. If I’m understanding it right, this is taking it to an all new level, because being able to embed stuff at the manufacturing level is huge. U.S. officials are describing it as the most significant supply chain attack known to have been carried out against American companies in history. China makes 75% of the world’s mobile phones and almost 90% of its PCs. These motherboard servers were found in the Department of Defense data centers, in CIA drone operations, and on board Navy warship networks. What’s your take on all this, Jim?

Jim: I certainly share that level of concern. Credit goes to Amazon for uncovering this and Bloomberg and others for putting the story out there. In listening to your introduction and question, the words that jumped out to me were that this is the most significant known attack. Well, what about all the ones we don’t know about? This is news because it was discovered, but it’s been going on for at least 15 years, probably longer. There’s nothing new about China’s efforts to do this.

Going back to 2010, it was discovered that a few lines of code were implanted in the NASDAQ operating system for malicious purposes. It is believed to have come from Russian military intelligence. It’s not clear what it could do, but at a minimum, it could monitor. At worst, it could shut down the NASDAQ with a server switch. This has been going on for a long time now.

I’ve spent over a decade working with the intelligence community, the CIA, on something called CFIUS. That’s an acronym for the Committee of Foreign Investment in the United States. It’s an inter-agency committee housed at the Treasury and composed of the Treasury and other branches of government such as Congress Department, the Defense Department, and Homeland Security. They have the power to review and unwind any foreign acquisition of any U.S. company based on national security grounds.

My role at the CIA was as a lawyer. When a deal would land at Treasury, as either the buyer or the seller, you had to notify the CFIUS via the Treasury that there was going to be an acquisition.

Think of it as a four-part matrix. On the horizontal X axis were degrees of sensitivity, meaning is this an ice cream company nobody cares about or are we trying to buy IBM? On the vertical Y axis, we had another gage as to whether it was a friendly acquisition or an unfriendly acquisition. Presumably, Canada or the U.K. would be on the friendly side and something from Russia or China would be on the unfriendly side.

We had a quadrant or what we call a four-part quad chart. The lower left would be a friendly acquisition of something nobody cared about. For example, the U.K. wants to buy an ice cream company; fine, go ahead. In the upper right would be an unfriendly actor (say Russia or China) trying to buy something extremely sensitive such as a computer telecommunications company. Those almost always got a no. The hard ones were the upper left and lower right where we had either had an unfriendly buyer or a sensitive technology and we had to think about it.

The Treasury would outsource the national security review to the intelligence community. The intelligence community did not have yes or no authority to say the deal could or could not go through. We would simply collect the intelligence and report back if there was a threat here or there. It’s actually quite similar to corporate due diligence except using more sources and methods that we don’t have to go into now.

When I was doing this, mostly during the Obama administration, the attitude was that they wanted deals to go through. They were not oblivious to national security. Of course, they cared, but the attitude during the Obama administration and even earlier – I’ll say including the Bush administration – was to find a way to let the deal go through. That meant entering into what are called mitigation agreements. A mitigation agreement is basically saying, “Yes, we know you’re China, and we know it’s a sensitive technology, but if you agree that none of your Chinese directors can be on the board of a U.S. target, and if you do classified information or classified projects, nobody outside the U.S. can be involved in that, and if you’re open to inspections… We had a list of things that would appease the government, and then the deal would go ahead.

Personally, I was never comfortable with that. There was very little enforcement and very little after-the-fact inspection. I felt it was a much too relaxed attitude. Again, I was just helping with analysis and was not a decision-maker, but my personal view, which I expressed privately, was that we ought to be a lot stricter on those. At the time – and this was included in the 2008 Financial Crisis – we were mainly focused on the financial sector in December 2007. The crisis came to a height, a panic, in September 2008, but the crisis actually began in the summer of 2007. By December 2007, there was a lot of distress, and all these foreign sovereign wealth funds came along and bought big chunks of the U.S. banks. It was essentially bailout number one, if you want to put it that way, as opposed to what happened in October 2008, which was bailout number two.

Abu Dhabi bought Citigroup, and the Government Investment Corporation of Singapore and Temasek and Kuwait Investment Authority all went around and snapped up big chunks of the U.S. banks. If you go back and look at those deals, they were all held below 10%. Nine percent to 9.5% was usually a comfort level that could have a financial impact but not too much governance power, and we were comfortable with that. We took a close look at all those deals.

What has changed, and I think changed for the better, is that the Trump administration has now weaponized CFIUS. We’re telling China flat out, “You cannot buy any sensitive U.S. companies at all.” You saw this when an affiliate of a Chinese company went to buy Qualcomm. That deal was shot down, and a lot of deals are getting shut down. Walway, forget it. Walway couldn’t buy an ice cream company let alone a technology company in the United States.

I don’t know if metastasized is the right word, but this has now certainly spread into a broader effort by the United States to contain the Chinese government, and we’re kind of in a new cold war. This is going beyond just the national security implications of M&A, which is where it starts, and broadened into an effort to prevent China from getting all this technology or overtaking the United States’ critical sectors, etc.

The chips story you mentioned is a very important story, but I’m just trying to put it in a broader context. This is an all-out financial and technological war between the United States and China. At least so far, it’s not kinetic war, but you can’t rule that out. And let’s not forget the Russians, because they’re pretty good at this also.

The idea of an embedded chip or code is something we’ve been concerned about and warned about for years. Again, this is an example that has come to light, and that’s good, but who knows how many chips, how many lines of code, how many embedded back doors and portals are already in all the stuff we use every day. At a minimum, it’s a massive invasion of privacy, but worse than that, we could have major gaps in national security.

What’s interesting is that the U.S. is just as good at this as China. We’re probably better than the Chinese, but they don’t buy that much stuff from us, so our opportunity to kind of turn the table on them is limited. We’re really good at surveillance, we have a better satellite network, we’re better at picking up microwave transmissions, and we have pretty good eyes and ears on this, but we’re not as good as they’ve apparently been by being able to pull off embedding these chips.

Let’s put that in the broader context you mentioned, Alex, which is cyber warfare. Part of this is preparation for a cyber war, but cyber war is a broad category and could include a lot of things. At the low end is surveillance information. Think about what spies used to go through spending years cultivating a resource in a foreign country, then hoping that resource could get access to a few papers, pull out a Minox camera, take a few pictures, and pass them along without anybody getting caught. That was the old way of doing it. Now we’re hacking into systems, tapping into systems, monitoring communications, and all that.

Intelligence gathering is better than it’s ever been, but that only goes so far. Then comes the analytical side. Okay, I got all this information, but what do I make of it? What do I think is going to happen next? What’s my estimate?

Cyber warfare can go right to any form of critical infrastructure. That would include hydroelectric dams, nuclear power plants, transportation networks, communication networks, gas stations or ATMs. When we think of anything electrically powered that we rely on, it’s probably a pretty long list, and you could just start shutting that down collectively. Or worse, if you’ve got control of the operating system of a huge hydroelectric dam, what about opening the floodgates and flooding communities downstream killing hundreds and thousands of people who had no warning and were suddenly caught in a horrific flood? What about shutting down airport networks? That kind of thing is all on the list of targets you could attack.

It is warfare. Just because it’s cyber doesn’t mean it’s not destructive. When we think about kinetic warfare, what happened in World War II? Waves of bombers were sent up. They flew all night over Germany, tried to drop bombs on the targets, the German Luftwaffe was up there trying to shoot them down, and we had fighter escorts. The casualty rates and damage were high, and the bombsites weren’t that good. If they were aiming for a bridge, they were lucky if maybe one bomb in a hundred would hit the bridge.

Why was that done? To degrade the critical infrastructure of your opponent. If you took out a bridge or a refinery or a railroad hub – and railroads were a big target – you slowed down their economy and ability to fight the war. What if you could do that without a bomb? What if you could do that with just pure cyber warfare? It’s the same thing. In other words, it’s not the means, it’s the objective. The objective is the same, which is to shut down your enemy, but if the means switched from kinetic to cyber, then it’s so much the easier, so much less expensive, and you don’t have your own casualties.

Within the realm of cyber warfare there’s a subset called cyber financial warfare. Just to step back for a second, I was involved for quite a long time with financial warfare. When I started doing this around 2003, one of the things I warned about was, for example, take a power like China with basically unlimited funds. What if they took $50 or $100 million dollars, which is not a lot of money to them, and started a hedge fund in disguise in a place like the Cayman Islands, the British Virgin Islands, Malta, Macaw or all the places where hedge funds are usually formed? They had a network of these, but it wasn’t apparent from the outside that it was a network all working for China, and they traded and traded. If you long and short the same stock, it’s not a smart way to make money, but you’re not going to lose any money other than the transaction cost.

They would gain trust and credit lines. Then one day on a signal from Beijing, they would start flooding the market with sell – sell Apple or Google or Facebook – and just take the market down destroying trillions of dollars of Americans’ wealth. By the way, don’t do that on a sunny day; do that on a day when the markets are already down a thousand points. It’s what’s called a forced multiplier. Then we would come up with ways of looking for these hedge funds and all that.

What if you didn’t need a hedge fund or an actual party with financing and credit lines and an ability to do this? What if you could hack your way into an entry system at Morgan Stanley, Goldman Sachs, Citi or any other major bank and do the same thing? You would basically mimic orders by sending out the same wave as sellers I just described and take down the market, but it wouldn’t involve any actual transaction. It would be spoofing or phony transactions that you did because you hacked into their operating system. It would be discovered eventually, but it might be too late.

For people to say this could never happen, just go back a few years to Night Trading. Night Trading was a legitimate broker/dealer with an automated order entry system that went crazy. It started doing exactly what I just described. In their case, they were putting in all these sell orders and taking the market down. Nobody could find the kill switch. They were running around Night Trading at 9:30 or 10:00 in the morning saying, “How do we shut this thing off?” They lost almost $500 million dollars in a couple of hours before the New York Stock Exchange finally shut them down from their side even though Night Trading could never find the kill switch on their side. That happened by accident. Imagine if you were trying to do it on purpose and knew exactly what you were doing.

Alex, you’re right. We’ve been doing these podcasts and videocasts for years, and I move around quite a bit, so you never know where I’m coming from. Right now I’m in Washington, D.C. for a meeting tomorrow morning on de-dollarization. Washington is finally waking up to the fact that the dollar is not necessarily permanent unless you take steps to bolster its role. We can’t take it for granted, and that’s something I’ve been worrying about for a long time. It’s good that people are waking up, although it may be a little too late in terms of what Russia and China are doing, but we’ll talk a little bit more about that later.

When talking to people in the national security community and on Wall Street, everybody gets financial warfare – sort of; some better than others. Everybody gets cyber warfare. They understand the example of taking control of transportation or hydroelectric infrastructure. The thing that frightens people the most is the combination: cyber financial warfare. You would go right for the heart of the financial system in cyberspace, and it would be either impossible or extremely difficult to detect and impossible to stop.

This is the most serious threat out there. You brought up the chip story, and I mentioned the other one about NASDAQ. That’s two, but there could be a hundred like it that we don’t know about. It makes a strong case for having some physical assets such as land, gold, fine art, and some cash. I know I sound like a broken record, but I go down this same list because they’re all physical. My rock collection can’t be hacked. If I have a gold coin safe in my bank storage, you can’t hack it. The same goes for land.

Any investor who does not have an allocation to physical assets in safe custody is sitting there on the frontlines of a potential cyber financial warfare and could be wiped out.

Alex: I totally agree. This reminds me of a conversation I had recently with a very prominent commercial real estate developer in the area. I met him in my gym. As we were talking, he found out that I was in the gold industry, and he didn’t quite understand it. I simply pointed out it is the only asset that’s truly uncorrelated. By truly, I mean everything else requires functioning markets, etc., to work, but gold doesn’t.

Jim: That’s right. Again, it has that physical aspect to it. I gave a speech down in North Carolina the other night on some of the topics we’re touching on. Occasionally people say to me, “Jim, you have some money in precious metals. How can you sleep at night?” And I say, “You’re 90% in stocks. How can you sleep at night?”

Alex: Exactly. Moving on, our next topic today is going to be the recent release of IMF’s global financial stability report. Some of the follow-up commentary was that there’s been an increased level of risk among multiple global metrics following its publication. Stocks in the U.S., Europe, and Asia lost 4%, 3%, and 4% respectively over three days. In addition, as the U.S. market retreated, gold held steady, but as the sell-off really started rolling, gold began to rally meaningfully.

Another comment was that a lot of complacency could creep in because we’ve had years of sustained one-directional movement in the stock market. Trading volumes are light.

Something caught my attention that I’ve heard you mention before, so this is a very important point. Liquidity under stress has not been tested in over a decade. What do you think about that?

Jim: I’ll do the last part first and come back to the first part. Liquidity under stress is almost an oxymoron. It has been tested, and there is no liquidity under stress. Let’s start there.

I’ve talked to people about this. I talked to the Director of Floor Operations at the New York Stock Exchange. This guy is on the floor, he’s got one of those brightly colored coats, he’s got his badge, but he has other roles including Director of Floor Operations. As we were standing on the floor of the New York Stock Exchange in a one-on-one conversation, he said, “Jim, there’s no liquidity here. Don’t ever think that.”

Back in the old days, there was a specialist in each stock, and they were a market maker. They had some privileges one of which was they could see the back of the order book. Maybe they knew buyers at this level would go down half a point. If there were a whole bunch of buyers, that was sort of the source of strength. That was their privilege, but their responsibility was to stand up to the market meaning if everybody wanted to sell, they had to buy. If everybody wanted to buy, they had to sell. They didn’t have to go bankrupt in the process, so if they were buyers, they could move the price down a little bit, but they were a source of supply. And, of course, they knew the people behind it.

That system is gone. Over 90% of trading is totally automated. There are no human errors, no using common sense, and no making judgements. Even on the 10% where maybe you’d go over to the booth or the crowd, that’s only ‘normal’ markets. Block trading is automated.

We’re completely computerized not only in terms of bids, offers, and matching systems, but the decision itself to put in the order is automated based on scanners and when the FED releases the minutes. You and I are sitting there reading the minutes while the computers have read it instantaneously and counted the number of words. Did they use patient? Did they use normalization? What words dropped out compared to the last time? A computer can do that in a nanosecond, and they’re preprogrammed to buy or sell based on that even if it doesn’t make sense. I guess if you wanted to mess around with it, you could use a keyword that would trigger selling that actually meant, “We would never do this,” but the word itself would trigger the selling. It’s probably not a good practice, but that’s how sensitive these computers are.

There’s no human decision-making behind the buy and sell order or in the middle of the buy and sell order. It’s fully automated and volume sourced. In that world, does anybody think that if everybody went to sell, anyone would stand up and buy? Or vice versa?

What you can do is what Warren Buffet has done. Berkshire Hathaway, led by Buffett, has $115 billion dollars in cash. It’s the most cash they’ve ever had. Now, Warren Buffet is not going to talk about markets crashing, because it’s not in his interest. Even if he felt inclined to talk about it privately, he doesn’t know when it would happen any more than anyone else does, but he does know that it happens from time to time. When it does, the guy with the cash can come along and scoop up some great bargains, but when the market is crashing around you, you don’t want to be too quick to do that. You want to wait until a couple of banks are calling up saying, “Hey, Warren, can you bail me out here?” Then you drive a hard bargain. That’s the world we live in.

There are many examples of this. October 15, 2014, we had the flash crash in yields in the U.S. Treasury market. This came out of nowhere. There’s an official Treasury joint working group report on this that I looked at that said there had only been four or five examples of such an extreme move in yields in such a short period of time. In every other case, there was a reason for it. Maybe the FED surprised the market or maybe there was a rumor that Alan Greenspan had a heart attack or a war broke out – something that might explain it. In the case of 2014, there was nothing. It just happened out of thin air.

I believe it was May 16, 2010, when we saw the Dow Jones drop a thousand points in two or three minutes. Back in the day when Jim Cramer and Erin Burnett were on CNBC, they were watching it and just couldn’t believe it. It bounced back, but that came out of nowhere. There was no major company that missed earnings expectations or anything that happened that day.

These things are happening repeatedly. We saw it in January 2015 when the Euro crashed 20% against the Swiss Franc in 30 minutes. That’s when the Swiss National Bank came out in December and said, “We are never going to break the peg to the Euro.” Then in January they said, “Whoops, we’re breaking the peg.” Boom – the Euro dropped 30%. Well, if you’re on the wrong side of that trade, you could be out of business.

There was a catalyst for the Euro example, but not for the other ones. But it doesn’t matter. What it shows you is that behind the day-to-day flow of buys and sells, there is no liquidity. What the IMF is referring to is, if that’s true – and it is true – what if it can’t be contained? What if it’s not a 30-minute headline-making crash that bounces back but just keeps going? That’s the danger, that it just keeps going. Then you say, “Who’s going to stand up to that and turn it around?” The answer today is nobody.

The central banks can, but does the FED want to be a market maker in foreign exchange? Does the FED want to be buying U.S. stocks? The answer is no. The Japanese and Swiss don’t mind it. There are central banks that trade in everything, basically, but the U.S. does not. In this situation, who comes in?

The central banks themselves are not in the kind of shape they were in 2008. In 2008, the Federal Reserve balance sheet was $800 billion dollars and had ample room to cut interest rates, so they did. They cut interest rates to zero, left them there for six years, and ballooned the balance sheet from $800 billion to $4.4 trillion dollars.

The problem is they haven’t normalized. Yes, they raised interest rates up to 2.25%, but if the U.S. economy goes into recession, they need rates at 4% or maybe 5% in order to have enough room to cut to get out of the recession. Well, they’re only halfway there. They’re still two years away from that level. The question I ask is, “Can you get to the level you want without causing the recession you’re preparing to cure?”

I think the answer is no. Long before they get to the 4% level, they will have stalled out the economy. And they’re making even less progress on the balance sheet; it’s still about $4 trillion dollars. It’s come down a little bit, but one of the reasons it hasn’t come down faster is because people are not refinancing mortgages. A mortgage-backed security doesn’t have the maturity the way a Treasury bond does. It pays off when it pays off. People refinance their homes long before their 30-year mortgage is paid off dollar for dollar, so the weighted average maturity in a lot of these things is seven years, give or take.

When interest rates go up, there’s no longer any advantage in refinancing. They’ll keep their 2% mortgage, thank you very much, because they don’t feel like paying 5%. They don’t move, because the new mortgage is going to be more expensive, and they can’t afford it. The prepayment rate for mortgages slows down, so the maturity of those securities is extended, and they don’t pay off as fast as the FED thought they would.

The reason they’re not is because the FED raised rates. Duh. “Oh, you raised rates on the one hand, but you’re surprised that your mortgage payments dried up and you’re stuck with the mortgages?” The FED has painted themselves into a room, and they can’t escape. They’re trying, but it’s not clear that they will be able to.

Here is what the IMF is warning about:

  1. There is no liquidity.
  2. If you need liquidity and turn to the central banks, they don’t have the degrees of freedom they had in 2008.

Was the FED supposed to take the balance sheet from $4 trillion to $8 trillion? Legally they could, but can they do that without destroying confidence in the dollar? And where is the boundary? Maybe they could take it to $5, $6, $7 or $8 trillion? I don’t know where the boundary is, but I do know it’s there somewhere. Part of the reason the FED is trying to reduce the balance sheet is because they also know it’s there. They’ve never said it publicly, but that’s one of the drivers behind this.

It really is kind of a double tightening, so fair warning to investors. If you think you can just go along, la-di-da, buy your stocks and bonds, and watch your account go up and look forward to a happy retirement – and hopefully you do have a nice happy retirement, no one’s against that – I would warn investors. First, the kind of drops we saw in the flash crashes I mentioned could spin out of control, keep going, and not bounce back. Second, the ones that did not bounce back until there was government intervention were seen in the 2008 financial panic and 2007 mortgage panic.

Going back before that, 2000 was different. The dot-com crash was as severe – NASDAQ dropped 80% – but what was different about 2000 was there wasn’t that much leverage. That’s what causes a financial crash to spin out of control. It’s not that a particular market went down (it’s just tough nuggies for the holder; your stocks and bonds went down), but when there’s a lot of leverage behind it, you’ve got to sell. You can’t sit there. You’ve got to sell, because brokers are breaking down your door for margin calls. You more or less have to sell.

We saw that in 1998 with long-term capital management Russia, 1994 with Mexico, and on October 19, 1987, when the Dow dropped 20% in one day. That would be the equivalent of 5,000 Dow points today – not 500, but 5,000.

I think five crises in the last 30 years is not that infrequent. They happen every six, seven, eight years. It’s been nine years since the last one. I’m not predicting one tomorrow, although it’s possible, but I am saying that the next one will come along sooner than later. The liquidity won’t be there. The central banks’ hands are tied.

Coming back to my earlier point, an investor needs true diversification. When I say true diversification, a lot of investors say, “I’ve got 50 different stocks in my portfolio. I’ve got semiconductors, consumer non-durables, technology, etc., and I’m fully diversified.”

I say, “No. You may think you’re diversified with your 50 stocks, but you have one asset class: stocks. Today stocks have become commoditized. They tend to go up and down together with their high correlation. It’s risk on/risk off. We’ve seen this over and over. Your diversification in the stock market doesn’t help you.”

For true diversification, you’d have some stocks, cash, bonds, land, and gold as part of your portfolio. That’s a much more robust form of diversification.

Alex: I agree. The single point of failure if you’re all in stocks, obviously, is the stock market. If the stock market is not working, you’re in deep kimchi.

As part of this discussion from the IMF about markets selling off, gold has been characterized as a flight to safety asset in terms of that most recent activity. Do you have any thoughts on that?

Jim: We see these terms all the time. There is flight to safety, a haven, a safe haven, it’s a dead asset, blah-blah-blah. The same words and phrases are used over and over by the pundits.

As you and a lot of our viewers know, we’ve been continually talking about Russia and China in terms of buying gold. Russia and China have tripled their gold reserves in the last ten years. We’re talking hundreds of tons. In the case of Russia, 1400 tons, and in the case of China, maybe 2000 tons. That’s a lot of gold.

As we’ve mentioned before, the total official gold in the world is about 33,000 tons. When I say official gold, I mean gold owned by central banks, finance ministries, sovereign wealth funds, basically owned by countries. That doesn’t count personal gold, private investments, somebody’s wedding ring, etc. That’s separate. There are about 33,000 tons of official gold.

I think it’s a reasonable estimate that China and Russia, just the two of them, have acquired over 4,000 tons in the last ten years. Think about it. That’s more than 10% of all the official gold in the world, which is huge. The entire mining output of the world by all the miners in all the continents is a little over 2,000 tons per year. That’s flatlining, by the way. There’s no California gold rush going on. The producers continue to produce and some new mines get started, but old mines get shut down. There has not been any trend or tendency to big gold discoveries, even at these higher prices, that would make that number go up.

We have flat supply and increasing demand, so where’s the gold coming from? The answer is, it’s coming from existing holders who, for whatever reason, want to sell, and Russia and China are sitting there with their checkbooks open ready to buy. That’s the tailwind for gold. That’s what’s helping to keep the gold price where it is. The headwinds are the FED raising interest rates, European Central Bank thinking about raising interest rates, and a few other concerns.

People keep saying, “Why isn’t the price of gold going up?” I keep saying, “You should be surprised it’s not going down.” Real interest rates are soaring. As the FED raises nominal rates, there’s no inflation. There’s a little bit, but the most recent inflation data indicates it went down. We’re getting back to a mild form of disinflation.

If you raise nominal rates and there’s no inflation, then real rates have gone up. Real rates are the biggest single headwind, and the strong dollar. A strong dollar means a lower dollar price for gold. Higher real rates is usually a lower dollar price for gold, because the real rates compete with gold which doesn’t ever yield, so gold has to be going up to make money. That’s what’s keeping gold from going up. What’s keeping gold from going down is the constant demand I mentioned in a world where supply is not increasing. That’s the balance.

What’s changed very recently is that Poland announced they were acquiring gold for the reserve. Wait a second – Poland is in the EU. They’re supposed to be one of these countries that goes along with this system of paper money and no gold, etc., and yet they’re buying gold for the reserves.

There was an even bigger announcement the other day. Hungary, which is not in Europe, has the Hungarian Forint currency. They announced that their reserves increased by 1,000%. I don’t want to get this wrong, but I believe they increased their reserves by a factor of ten, which is also huge. And it’s hard to buy that much gold without market impact.

All of a sudden, the markets are going to say, “Hey, wait a second. It’s not just Russia and China. It’s our friends in our backyard, our friends in Europe.” I think this was a catalyst for people saying, “Maybe I ought to get a little gold.”

What occurred to me the other day is perhaps it’s not a safe haven. Maybe it’s not a flight to quality. Maybe it’s just money. Why do we have to rationalize it? Why do we have to justify it? If it’s money, you want some. What’s happening is that central banks, observers, and analysts are starting to say that gold is money. As JP Morgan said in 1910, “Money is gold and nothing else.”

If you’re a central bank reserve manager, you look at your books and say, “I’ve got some treasuries and bonds, I’ve got some Japanese government bonds. Maybe I ought to have some gold.” And they’re starting to buy. Put that demand on top of existing demand in a world of flat supply, increasing nervousness, and the kind of thing we just talked about in the IMF, and you’re going to see a higher dollar price for gold.

In our last call, I talked about how gold has been trading in a very narrow range for months. The range was $1185 to $1215; that’s a $30 range centered around $1,200 ounce. That was a 2.5% trading range, and it was stuck there for three months.

I said that when you see that pattern, a couple of things will occur. Number one, it’s going to break out either down or up. My analysis was that it was going to break out to the upside for the reasons we just discussed which are fundamental supply and demand and the view that if the FED goes much further when they say are, they’re going to slow the U.S. economy and then have to pause. When that happens, watch out, because that’s like a boxer in the corner throwing in the towel. That says you can’t tighten any more without sinking the economy. That’s that, which means that gold will definitely have its day, because it won’t be competing with rising interest rates any longer.

That’s exactly what happened over the past week. Gold did break out to the upside as I expected and told our viewers. It’s at a new level between $1,225 and $1,230. We’ll see what happens next. I would expect that as the market has these bad days, as the Saudi story continues to unfold, as intellectual property theft becomes more front and center and the U.S. clamps down on China, we’re still throwing sanctions on Russia, plus the actions of central banks…. This is not just analysts or people like me anymore. Central banks are saying, “Get me some gold.” Everything I’ve just described is going to push people to wake up and do that themselves.

It looks like a very bullish picture, and gold will have a good run between now and the end of the year, and maybe even more next year.

Alex: I had a thought while you were talking about gold being money, i.e., why don’t we just look at it as money. I’d like to point something out for our listeners that many of them probably already know. One thing about gold as money is that it’s different from every other form of money on the planet. Gold is money regardless of the counterparty issuing the money. United States dollars are issued by the United States government, yuan is issued by the Chinese government, and so on. Even Bitcoin and cryptocurrency rely on a counterparty of source. It relies on a functioning Internet, so if the Internet is gone, the Bitcoin is useless and valueless. What if a country is gone? I’m not saying China is going to disappear tomorrow, but historically empires have risen and fallen. If the empire falls, guess what? That money is worth nothing, whereas gold will at all times retain its value.

On another topic, Jim, you recently did a lecture on the future of the International Monetary System. That’s no surprise, because you’re in high demand. You’re probably one of the top experts in the world on this right now. Would you name a few key takeaways from that lecture that you thought were important?

Jim: I’ve recently done a lot of lectures probably because of my books. People read my books, and I get invited to an event. Sometimes they’re huge events like a national resource conference, and sometimes they’re quite small. The one I’m doing Friday is invitation only, closed door. We’ll have a small group of maybe 15 or 20 government officials and subject matter experts. It’s not the kind of place to do a slideshow, but we’ll be talking about what you and I are talking about now.

I have a standard presentation I just update. When I’m getting ready to give a presentation, I pull out the last one and say, “What happened since then? What have we learned about the FED? Any personal changes? Any announcements?” It’s always fresh, but I kind of work off the foundation and freshen it up.

I had two basic presentations. One was about the International Monetary System, currency wars morphing into trade wars, the role of gold and the future the International Monetary System, etc. We’d go through that story.

I got invited to a lecture with the military and intelligence community for a group of mid-career officers who are on track to be the big brains, the strategic thinkers of the future at the U.S. Army War College. Then, just a few weeks ago, I went down to the Naval base in Norfolk, Virginia, and gave a presentation to one of the Joint Commands. We had Army, Navy, Air Force, Marines, the Coast Guard, and the CIA all in the room. It was confusing me, because they all showed up in camouflage and I couldn’t read their ranks. I know what the ranks are, but I was squinting at their uniforms. What are you? A Colonel, a Major, a General? How deferential should I be here? Again, it was a very top-tier group.

That presentation was on financial warfare and some of the things we’re talking about in this conversation. What I realized is that they’re not two separate subjects anymore. They’re really the same, just different facets of the same subject. This goes to your point that there’s never been a strong empire or country with a weak currency. They don’t go together.

When the British empire was at its height, the pound sterling was at its height. When the U.S. was at the height of its power at the end of World War II and the decades that followed, the U.S. dollar was at the height of its power. You can track the rise and fall of great powers side by side with the rise and fall of their currencies. It’s a high correlation.

We really cannot talk about the future of the dollar and the International Monetary System without discussing U.S. National Security and the future of the U.S. as a great power. In my more recent presentations, I’ve merged those two. I talk about both, and I’m breaking down that distinction.

The presentation I gave the other day down in North Carolina was for a great group, fairly small, a smaller conference than I often do. It was a local organization that invited speakers in. I don’t want to overstate this, but they were sort of conservative in nature and were in the middle of the research triangle. You got the UNC on one side, Duke on the other side, and all these major universities and research labs. It’s kind of a liberal part of North Carolina. Even though it’s a conservative state, it was the most liberal part, and there was this little cadre of conservatives saying they were going to keep the torch burning, so I was very happy to be talking to them.

I went through much of what we’ve talked about in this conversation and explained that a lot of the future of the International Monetary System is well under way. This is not guesswork and certainly not science fiction. These are not things that are going to happen in ten years. They’re happening now, and more to the point, they’ve already happened. We’re down the path.

That’s interesting to me, because I think that’s why this meeting I’m going to be attending tomorrow morning was convened. People in Washington are starting to wake up to this even though I’ve been talking about it for ten years and other people have been talking about it even longer.

It used to be that the conventional wisdom on the future of the dollar went something like two schools of thought. One was, what are you talking about? The dollar is the global reserve currency and has been for a long time. It is today, and it always will be. They bang the table and say, “Just stop talking about it. It’s not a threat.” You can’t really argue with those people, because they have a very ossified point of view.

If you know more about it and know more history, you know that any currency is vulnerable. Any currency can be deposed as the global reserve currency. You must look out for that and take steps if you want the strong dollar. When I say strong, I don’t mean any particular exchange rate. What I really mean is the stable dollar; the dollar continuing to have its role as part of global reserves.

If you want that, you have to work at it. You can’t take it for granted. You need to have an attractive investment environment, a strong military, a stable fiscal policy, and you can’t be going broke which, unfortunately, the U.S. is.

By the way, it wouldn’t hurt to buy a little gold. I always tell the Treasury while I’m here: why don’t you guys go buy some gold? That would shock the world, but it would be a pretty smart move on the part of the United States. We have the most gold, so why not make it go up?

That’s the debate. The rebuttal of even the more sophisticated counterparts used to be, “Okay, Jim, I hear you. There are some vulnerabilities here, but where are you going to go?” Is anyone going to use the ruble or the yuan? No. Argentinian pesos, anybody? How about the Euro? Well, the Euro is always falling apart according to Paul Krugman and Joe Stiglitz, so maybe that’s not the way to go.

Look around the world, and there really aren’t any good alternatives based on one of several factors: liquidity, rule of law, financial infrastructure or how big a bond market is. Everyone says the Chinese are starting to shoot bonds. Well, maybe, but there’s no rule of law stopping them from reneging on all those bonds. The market is not that big and not that liquid. It’s a long list.

Then, I say, “Where are the dealers, the repos, the futures, the options, the critical infrastructure, what’s your settlement?” You need all those things people take for granted to run a bond market, and you need to have a bond market to have original currency, because otherwise there’s nothing to invest in. So, that’s a valid criticism.

What has changed is, I can get up from this table, walk out of the room, come back in 15 minutes, and start a currency. I can buy software to start cryptocurrency in about 10 or 15 minutes or less. It could be a GMICO, but more likely it’s going to be the Bitcoin. The point is, it could be the PutinCoin or the XICoin. In other words, if you’re starting with a blank sheet of paper, then all the deficiencies in the ruble and yuan don’t count. What counts is how good is the new thing you just created?

Imagine the following. When I say imagine, I’m just trying to get people to think about it. It already exists in part, and they’re working on the finishing touches right now. So, imagine a highly secure, highly encrypted distributed ledger maintained by Russia and China with others allowed to join in. That would include Turkey, Iran, North Korea, Syria, Venezuela, Brazil would probably sign up, etc.

They would have a new coin called the PutinCoin or the XICoin. Call it whatever you want – it could be baseball cards – it doesn’t matter. All you’re doing is keeping score. Denominate it in SDRs, Special Drawing Rights. Say one XICoin is worth one SDR, and there’s your anchor. You don’t have to talk about the dollar or the euro anymore. One of these new coins is worth one SDR. The same thing with Russia. If they all agree that one coin is worth one SDR, you suddenly now have a relatively stable global store value maintained by the IMF.

Now you start trading. Iran ships oil to China, North Korea sends weapons to Iran, China sells critical infrastructure to Russia, and Russia sells weapons back to China. Wealthy Russians go on vacation in Turkey, and Turkey buys whatever from Iran, and so forth. You now have a trading network. Throw in Brazil, India, and some other countries, and it could be a very significant trading network.

Denominate everything in these new coins in SDRs, maintain a highly encrypted, private intranet with a distributed ledger to keep score, then periodically – monthly, quarterly, once a year – look at the scorecard. If somebody owes a balance to somebody because of running up a trade deficit or surplus, then settle up in gold.

What’s interesting about the settle up part is that this is on a net basis. A net settlement is always much smaller than a gross settlement. If I had to send you a gross amount of gold for the weapons I just bought, and you had to send back to me a gross amount of gold for the oil you just bought, that’s a lot of gold flying around and it’s a bit clunky. But if we keep score in SDRs, tally up quarterly, and only pay the net, the net should be much smaller. There’s a little bit of gold to put on a plane. If U.S. intelligence is good enough, it’s still an act of war to shoot down the plane, so I don’t know how you’d actually interdict that.

That system works fine, but to do it, you need a lot of gold to start, because your first couple of balance payments could be negative. Guess what? That’s what they’ve done. Russia, China, Iran, Turkey, and all the countries I mentioned have been stockpiling gold. We know they have the technology. We know Putin’s meeting with SKYcoin, Vitalik Buterin, (the guy who co-founded Ethereum), and that whole smart contract network. When you mention this, all the crypto groupies run out and go, “Oh, buy Bitcoin.” No, don’t buy Bitcoin or Ethereum or Ripple or any of the known coins.

Imagine a coin that doesn’t exist, that is created out of thin air, sponsored by Russia and China, anchored to the SDR, and net settled in gold. What’s missing from what I just said? The dollar. That is a much more clear and present danger than the world going to something like the ruble. The world is not going to go to rubles, because the Russians always steal your money and China is not much better.

That’s the kind of threat we must be alerted to and the kind of model we must carry around in our head to see this coming. When it is unveiled, which it will be eventually, the dollar could collapse immediately. I’m not saying it’s the end of the dollar – we’ll still have dollars when you want to buy a pack of gum or pay your electric bill – but what would the dollar be worth relative to the SDR or these other currencies I mentioned? That’s the threat

Let’s say you forward deploy a U.S. Navy aircraft carrier task force. A destroyer pulls up to a fuel depot in Singapore and says, “Fill ‘er up.” The guy says, “Fine. Pay me in SDRs.” Suddenly, you have to pay for a forward deployed military in a currency you don’t print.

That’s the threat I will talk about more tomorrow morning. I’ll have to check the ground rules to see what I can say or not, but maybe in our next call we’ll have more information to share with our viewers.

Alex: I was just thinking about the dynamic with retail investors in the cryptocurrency markets. The cryptocurrency market’s heyday that got a lot of stir and buzz back in the very beginning of this year and even the entire year of 2017 saw a large influx of capital. If there was something like what you’re describing where large transactions were being settled in XICoin or whatever it turns out to be, and that continues to grow, I think there’s going to be a lot of runway where people will start to see it coming. With the cryptocurrency buzz, it got so much attention, but it was still just a very tiny drop in the ocean of actual liquidity in U.S. dollar terms that’s out there.

Jim: The difference is that what I’m describing is backed by countries. I would imagine if you’re in Moscow and you want to buy a beer or a pack of gum, you’re still going to use ruble as a street level consumer in Russia. What I described is for the big boys. This is for countries. This is a mercantilist system. It’s a way to settle balance of payments transactions among participating countries. How long before the U.S. has to get onboard?

My advice to the Treasury would be:

  1. Look out for this, because it’s coming.
  2. It might be a good time to buy some gold.

Alex: That’s the other thing I wanted to comment on before we wrap this up. You said every time you’re there, you tell the Treasury, “Hey, maybe you guys should buy some gold.” I don’t disagree with that – I think that’s a great idea – but what it makes me think of is the entire plan. If you go back and read papers that have been declassified such as private conversations at Camp David, etc., between the President and his top financial advisors going back to the ‘70s, all this information has been revealed about an intentional delinking of gold as money from the U.S. dollar. This is not a conspiracy theory; there’s plenty of documented evidence of this. Can they go back, and can they do that? Will they do that?

Jim: August 15, 1971, is the infamous day when Nixon ended the conversion of U.S. dollars into gold by our foreign trading partners. For U.S. citizens, that had been ended in 1933 by Franklin Delano Roosevelt. Gold was contraband. Having gold in the ‘60s for a U.S. citizen was like having drugs. You could get arrested for it, technically. But if you were a foreign trading partner (France or Italy, or whatever), you could still cash in your dollars for gold. There was a run on the bank, a run on Fort Knox, and Richard Nixon ended that.

There were five decision makers and close advisors at Camp David that weekend. It was President Nixon, John Connolly, who was Secretary of the Treasury, Arthur Burns, who was the Chairman of the Federal Reserve, and Paul Volker, who at the time was Deputy Secretary of the Treasury. He was not yet Chairman of the Federal Reserve. This sounds like a John le Carré novel, but there was a fifth man there, and I never knew who he was. I couldn’t find any record of it.

I spoke to Paul Volker about it personally, and then I had a good friend who was Dean of the University of the Chicago Law School who used to be with me on some of these intelligence efforts I described. I was talking to him once and said, “You know, I’ve never been able to figure out the fifth man.” And he looked at me and he said, “It was me.”

At the time, he was a young attorney in the White House. It was literally the case that they were all leaving the Treasury, and as they were getting in the helicopter to fly to Camp David, Connelly thought, “Maybe we need a lawyer here, because we’re going to make a pretty big decision. Can he come with us?” He said, “You come with us. You’re the lawyer.” So, off they went.

I’ve spoken to two of the five leading participants who were at Camp David, and they both told me the same thing: Nixon thought it was temporary. He did not think he was permanently going off the gold standard. They just wanted a time out. They knew they were going to have to divide the dollar and reset Brenton Woods. That’s why they had the so-called Smithsonian conference in Washington the following December. They thought they were going to go back to Brenton Woods with a devalued dollar, but they never did.

What happened was, Japan, Germany, and some others said, “The heck with it. We’re going to foreign exchange rates. We’re just going to do our own thing.” In other words, you Americans figure it out.

There was some compromise, some give and take. Gold got devalued, revalued to $42 an ounce instead of $35 an ounce, a 20% devaluation of the dollar, but that was it. We never went back to the gold standard, of course, and we’ve been living in the nightmarish world of foreign exchange rates ever since. Again, they didn’t think they were doing that. They thought it was just a reset.

We now may be back at a point where we need to do another reset, except it’s the other way which is to strengthen the dollar and buy some gold. As individual investors, I would love to be ahead of that curve.

Alex: Yes, so would I, and I think a lot of our listeners feel the exact same way.

Jim, thank you very much for being with me again today. It was a great discussion our listeners are really going to appreciate. As always, I look forward to doing it again next time.

Jim: Thank you, Alex. See you soon.


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Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles July 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles July 2018


Topics Include:

*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

The Gold Chronicles: June 2018 podcast 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, 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.
Welcome, Jim.

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 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
and sanctions.

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 You may also register there for news of upcoming interviews with Jim Rickards and other world-class thinkers.


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This Podcast is not an offer to sell, nor a solicitation of an offer to purchase, any security. This Podcast is intended for general education and information purposes only, and may include broad discussions of markets, geopolitics, monetary policy, and geoeconomics. Nothing in this Podcast constitutes investment, legal or tax advice, nor an evaluation of or prospectus for any particular investment or market, including gold. This Podcast should not be relied upon to make any investment decision. You are encouraged to seek the advice of qualified financial, legal and tax advisors before making any investment decisions.

This material is provided on an “as is” and “as available” basis, without any representations, warranties or conditions of any kind. In particular, information provided by third parties in this Podcast has not independently evaluated or confirmed. Furthermore, we take no responsibility to update this Podcast to reflect any changes in any of the information presented. Physical Hard Assets Fund SPC and Physical Gold Fund, its officers, directors, employees or associated persons will not under any circumstances be liable to you or any other person for any loss or damage (whether direct, indirect, special, incidental, economic, or consequential, exemplary or punitive) arising from, connected with, or relating to the use of, or inability to use, this Podcast or the information herein, or any action or decision made by you or any other person in reliance on this information, or any unauthorized use or reproduction of this Podcast or the information herein.

Transcript for Philip Judge Interview with Islamic Finance News

Philip Judge, Chief Executive Officer, Islamic Finance News June 2018


Interview with Philip Judge, CEO of Physical Gold Fund IFN brings you an interview with Philip Judge, CEO of Physical Gold Fund, to find out more about the Shariah compliant fund and the motivation behind its creation as well the outlook for the global gold market for 2018, among others.

Tell us more about Physical Gold Fund. What are your investment targets and investor profile?

Physical Gold Fund was started in 2012 and is designed to allow investors access to allocated gold bullion within a fully regulated fund structure. We believe gold can only truly be classed as a wealth protection asset if liquidity is assured and access to the physical gold itself is available at all times. The fund’s unique structure and settlement procedures provide high liquidity while reducing counterparty risk as well as allowing for the delivery of the physical bullion if required. Shares in the fund are at all times backed 100% by allocated physical gold that is held in LBMA-approved high security vaults. Shares are redeemable for cash or bullion at any time.

The fund is suitable for both private and professional investors and has clients around the world. Currently, we are increasing our exposure to the MENA countries and the Islamic finance sector.

What is your motivation behind forming Physical Gold Fund in the first place?

I have been in the private allocated custody and logistics of precious metals business for close to 30 years and we established a company providing these services in the early 1990s which became quite prominent in this sector throughout the 1990s and into the first decade of the 2000s. Heading into 2008-09, we were seeing an important shift to higher regulation and greater transparency in this industry. As a result, we sought to be ahead of the curve and establish a fully regulated and highly transparent solution that caters to this growing market. Today, that is our Physical Gold Fund. Importantly, I think we approached the establishment of the fund with vast experience and unique relationships in the physical precious metals acquisition and custody industry, rather than from a purely financial services background. I think this makes us unique in this space.

Physical Gold Fund recently secured a Fatwa certifying its compliance to Shariah. Why the decision for Shariah endorsement and how important is this in your business strategy? Has it always been in your plan to be Shariah compliant? What triggered it?

The Islamic World has always been of great interest to Physical Gold Fund given its long tradition of gold ownership and the understanding it has of gold’s unique benefits. It is only fairly recently, however, that gold as an investment or as a financial product has become more prominent in the Islamic finance sector. As such, the World Gold Council worked closely with Amanie Advisors to produce a new standard for Shariah certification for gold-related products. Physical Gold Fund is proud to have received its Fatwa from the Shariah board of Amanie Advisors in February of this year and we are already in discussions with several key players within the Islamic finance sector. We believe we can meet the needs of this growing sector and are dedicating resources to establish Physical Gold Fund in several Islamic countries.

Many have compared bitcoin to gold, even calling it Gold 2.0. What are your thoughts on that? Are bitcoin and cryptocurrencies comparable to gold as an investment asset class?

It is interesting that almost all cryptocurrencies represent themselves visually as gold coins in what seems to be an attempt to harness gold’s legitimacy and I think this in part has led to cryptocurrencies being labeled as digital gold or Gold 2.0. But cryptocurrencies are not gold and never can be. I think that some of the comparisons that are being made are valid up to a point as both gold and cryptocurrencies can be considered as mediums of exchange; in fact, for transaction purposes, it can be said that cryptocurrencies and the underlying blockchain technology are a more efficient medium of exchange than gold.

However, as a store of value, gold has been and will continue to be unrivaled. Gold has served as a store of value for thousands of years due to the fact that it is indestructible, it has unique physical qualities, it cannot be hacked or erased, it cannot be undermined by new technology, it does not rely on any external factors for functionality and it requires no maintenance. All other financial instruments will fall apart and devalue if left unattended. Gold will always be gold. I am a believer in cryptocurrency technology and believe it has an important role to play, and I think gold and cryptocurrencies have a fantastic synergy and can benefit each other greatly. In short, cryptocurrencies can never replace gold but there is huge potential for the two to work together.

We’ve seen fintech change the business dynamics of the financial industry, including in the gold sector where gold trading fintech start-ups are gaining prominence. Is this a concern for Physical Gold Fund and if so, what measures will you take to stay ahead of the game?

As a fund that deals solely in gold bullion, we are relatively immune from disruptive technologies and we see fintech gold trading companies as potential clients rather than competitors. We are regularly approached by fintech companies trading in gold that wish to explore business relationships with us, be it for gold backing for cryptocurrency tokens or for investment into the fund for other purposes. We welcome such enquiries but as a regulated entity, we are very cautious who we engage with. We have, however, recently entered into an agreement with a fintech start-up that has developed a fantastic business model based around using gold to back financial transactions. We will be providing the structure to support the gold backing as well as any logistical support on the gold delivery side. We will make an official announcement on the deal in due course.

What is your outlook for the global gold market for 2018? What trends or events should investors look out for?

2018 promises to be an interesting year for gold and we believe the price will likely continue to climb as it has in the previous two years. There appears to be a return to volatility in the stock markets and the chances of a significant correction seem to be increasing. Trade disputes are on the horizon and the geopolitical landscape is looking precarious. All this would suggest that investors will increasingly be looking for safety and gold will, as always, be high up on the list as a way to achieve that. It is important to remember that only physical gold provides a true safe haven and the ability to liquidate at the right price is extremely important.



This Transcript is not an offer to sell, nor a solicitation of an offer to purchase, any security. This Transcript is intended for general education and information purposes only, and may include broad discussions of markets, geopolitics, monetary policy, and geoeconomics. Nothing in this Transcript constitutes investment, legal or tax advice, nor an evaluation of or prospectus for any particular investment or market, including gold. This Transcript should not be relied upon to make any investment decision. You are encouraged to seek the advice of qualified financial, legal and tax advisors before making any investment decisions.

This material is provided on an “as is” and “as available” basis, without any representations, warranties or conditions of any kind. In particular, information provided by third parties in this Transcript has not independently evaluated or confirmed. Furthermore, we take no responsibility to update this Transcript to reflect any changes in any of the information presented. Physical Hard Assets Fund SPC and Physical Gold Fund, its officers, directors, employees or associated persons will not under any circumstances be liable to you or any other person for any loss or damage (whether direct, indirect, special, incidental, economic, or consequential, exemplary or punitive) arising from, connected with, or relating to the use of, or inability to use, this Transcript or the information herein, or any action or decision made by you or any other person in reliance on this information, or any unauthorized use or reproduction of this Transcript or the information herein.

Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles June 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles June 2018


Topics Include:

On the In Gold We Trust report ( @IGWTreport ) by @RonStoeferle and @MarkValek

*The New Axis of Gold – How emerging market central banks are accumulating gold and what it means

*Conversation with the former head of the IMF, John Lipsky

*Why Russia buying gold for 38 consecutive months is a strategic move

*US is engaged in financial warfare with China, Russia, Iran, and North Korea

*How and why targets of US sanctions are working on alternatives to the US dollar system

*A game theory scenario on a Chinese/Russian controlled permissioned distributed ledger with a government issued token backed by physical gold

*Why some institutions are buying physical gold, changing from paper gold allocations to physical gold allocations


Listen to the original audio of the podcast here

The Gold Chronicles: June 2018 podcast 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, and welcome to another edition of The Gold Chronicles. This podcast is sponsored by our fund, Physical Gold Fund, and I have with me once again the excellent and brilliant Mr. Jim Rickards. Welcome, Jim.

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

Alex: Among the topics we are going to cover today, we’ve discussed one a couple of times in the past. It is this idea that gold has been transferring from the west over to the east on a continual basis.

We talked about gold going through the refineries in Switzerland a number of years ago. It came to light that the gold in the delivery format was going into Swiss refineries, being melted down, and then recast into one-kilogram bars for the most part as it’s being shipped over to China as well as India.

In addition to that, you have a chart in front of you from one of our common friends and colleagues, Ronnie Stoeferle. Once a year he creates the In Gold We Trust report. It’s usually really good, and this year is no different. One of the interesting charts from that report indicates the increase of gold in reserves of central banks from emerging markets. Some of the numbers are noteworthy.

From 2006, when they were running about 4596 tons, gold holdings in emerging market central banks rose to 8755 tons in 2017. According to this chart, in just over ten years, we saw almost a 91% increase.

The one that really caught my attention was the Central Bank of Russia. They’ve been buying gold pretty much nonstop the past 38 months, and they’ve accumulated 683.1 tons during that time.

A comment from the World Gold Council says, “This commitment to growing gold reserves – a directive by authorities – shows no signs of abating and reinforces the view of gold as a strategic asset.”

As you know, our view from the Fund is that gold is a strategic asset and always has been, which is why we’ve chosen the jurisdictions we use. Consider the effect of that and where this is all going as far as emerging market central banks and what it means for the emerging monetary system.

Before I get to you, Jim, I’m going to read one quote from the deputy chairman of Russia’s central bank, Sergey Shvetsov. He said, “The major gold-producing nations are tired of an international gold price that is determined in a synthetic trading environment” – he’s talking about paper markets – “having little to do with the physical gold market.”

All that said, Jim, what are your thoughts on this, the new axis of gold?

Jim: First of all, you’re absolutely right about the data, and you made reference to this report, In Gold We Trust. You and I both know Ronnie Stoeferle and his partner, Mark Valek. They produce this once a year but spend a whole year working on it. They’re always gathering material, doing research, gathering interviews, talking to experts, etc.

It’s available online for free and is probably the single most closely studied gold report, even more so than what the World Gold Council puts out, so I would encourage all of our viewers to get a copy. Again, you can find it online and download it. You don’t have to print it out, but you can if you want to. It’s a couple of hundred pages, a heavy lift, but well worth it.

Alex, we’re analysts and students of this, but you’re right with all this data we’re talking about. You framed it as west to east, and that is true in the geographic sense. Where’s the gold coming from? A lot of it is coming out of private vaults or even the Bank of England vaults in London and moving east to Switzerland where it’s re-refined from the old gnarly 400-ounce bars into the shiny new one-kilogram bars, four-nines purity, 99.99% pure gold. From there, it’s off to China and the other countries we mentioned.

The flow is west to east, but by itself, saying west to east does not have a lot of explanatory power. It’s correct as a geographic direction and a convenient way to think about it, but what’s behind it? What’s really going on?

We have to talk about what I call the new axis of gold. What is this? It is basically a set of countries, secondary powers and tertiary powers who are allies, trading partners, and people in the same regional configuration whether it’s central Asia or eastern or central Europe, etc., who are looking for ways out of the dollar payment system.

Let’s be clear, though. The dollar is still boss right now. I don’t dispute that.

I just got back from Hong Kong where I spent an hour one-on-one with the former head of the IMF on a panel. This was John Lipsky who was the head of the IMF before Christine Lagarde. He had a long career at the IMF, a Wall Street economist, a PhD economist from Stanford University – really at the pinnacle of the global monetary lead.

If you asked me, “Who knows the most about the system? Not an analyst or student or commentator, but actually in a seat, in a policy-making position. Name the people, Jim, who you think are the super elite,” it would be a short list. You might start with Christine Lagarde and Jay Powell, but John Lipsky would be top five.

Regarding the panel we were on, John and I are friends, so before the panel, we took a couple of chairs, pulled them to one side, sat down, and had a one-hour one-on-one. What a privilege to be able to talk to the head of the IMF about the stuff we’re talking about. It’s one thing to talk about SDRs in theory, the special drawing rights, the IMF world money, and links to gold -there’s a lot going on – but again, this gives us some rare insights.

With that said, what’s going on with Russia in particular? You’re absolutely right, they’ve been buying gold all along, consistently, just like clockwork. Some months it might be nine tons, other months it’s 16 tons, but it’s never zero. They just keep accumulating it.

Remember, in late 2014, the price of oil collapsed. It went down through all of 2015 and didn’t really bottom until 2016. When I say collapsed, it went from $100 a barrel to as low as about $22 a barrel. It’s back up since then and today is over $60 a barrel, but that was a huge collapse.

We all know that Russia is an oil-dependent economy, so it’s like saying, “I’m going to cut your paycheck by two-thirds.” That’s what happened to Russia in terms of their reserves, but they still had a lot of obligations and needed that foreign exchange. They needed those dollars to basically monetize payments. If your corporations borrowed in dollars and were earning money in rubles, you’d have to go to the central bank, hand in your rubles, and get dollars to pay your debts.

Well, that was a drain on the hard currency. Using round numbers, Russian reserves went from approximately $500 billion to $300 billion in a period of about a year and a half. That’s a 40% decline, but they never stopped buying gold.

You would think, “Gee, my reserves are disappearing. I have to economize or stop,” but they never stopped buying gold. They sold dollars, treasury obligations, Ginnie Maes, euros, European sovereign debt; they sold whatever they needed to sell, but they never stopped buying gold. This was with Elvira Nabiullina as the head of the Central Bank of Russia.

That says something very powerful about Russia’s view of gold, which is they made it a national priority even in distress. It’s one thing in good times when you’re adding reserves to say, “I’m going to allocate something to gold.” Individuals can do that. But when you’re losing reserves and you still buy gold, that tells you what your priorities are.

Russia is fairly transparent, believe it or not. You can look at the Central Bank of Russia website, and we also have good geological information and mining output. Their intentions may be opaque – although I don’t think so – but we can see about their gold.

We know the story with China – they never stopped buying – but they are a lot less transparent. We do know that they officially had 600 tons, but how much gold they might have piled up on the side could easily be 1000 or 2000 tons more, so we’ll see about that.

We know that Iran has some gold smuggled in from Turkey and Dubai.

Turkey has acquired a lot of gold but is also a major trans-shipment point. There’s a lot of gold coming from our friends in Switzerland, flying to Istanbul, being loaded on a different plane, and then going to Tehran.

The U.S. clamped down on that a couple of years ago, although I’m not sure Turkey cares that much today. There was a time when Turkey was a little more attentive to U.S. requirements, and they did clamp down on it, but prior to that, Turkey was a major trans-shipment point for gold west to east, Switzerland to Tehran. And then Turkey itself has been acquiring gold.

Another big acquirer is Kazakhstan in central Asia on the border with Russia.

What’s interesting is that beginning in the late 1990s until 2010, more specifically 1999 to 2010, central banks were net sellers of gold – so much so that they actually came up with the CBGA, Central Bank Gold Agreement, which is also known as the Washington Agreement. This was to limit and allocate their sales, because they were worried they were selling so much gold, they were going to depress the price on the world market. That’s no longer a worry. That agreement is still in force, but it’s a dead letter, because 2010 was the year that central banks flipped from being net sellers to net buyers.

Some of these central banks had been buying all along, but in the aggregate, even as China and Russia was buying, Switzerland was selling. Switzerland sold 1000 tons, and the U.K. sold well over half of their gold reserves in the late 1990s.

The other interesting thing to me is that the last time the U.S. had any significant gold sales was 1980. We run around the world telling everyone else, “You have to sell your gold,” but we’re not selling any of ours.

Who were the big sellers after 1980? We had the U.K. at about 400 tons, Switzerland at 1000 tons, the IMF at 700 tons, and some of the other central banks as well. These are big amounts. Interestingly, people like Germany, France, and Italy never sold any or at least not a significant amount.

The gold was going out, but there were always buyers. That’s changed now. Central banks have stopped selling gold. I don’t know of any major central banks selling any gold. I can give you ten central banks that are buying a lot of gold, so net, that demand is there.

In terms of mining output, we’ve flat-lined. I don’t want to say that we have peak gold, because I’m not a geologist. I study and follow it, but without being a geologist, at least what I hear is that miners are having a very hard time finding new gold.

They’re re-opening some mines that were shut in 2013 when the price collapsed, so they know the reserves are there. They’re just digging it up at an attractive price, but they’re not making new finds or discovering large new gold deposits, so output is kind of flat.

When you have flat output and rising demand, we all know what that does to the price leaving aside manipulation and some of the other things we’ve talked about. What’s going on is strategic. This is not simply, “Oh, I want to diversity my portfolio. I think gold is going up.” It’s more than that; this is strategic.

I mentioned king dollar. Today, the U.S. dollar is 60% of global reserves, 80% of global payments, and over 90% of oil payments. When you buy or sell oil, you do it in dollars, so that’s in a dominant position.

I talked to Ben Bernanke, John Lipsky, and Tim Geithner about this one-on-one. They don’t see a problem. They think, “Yes, the dollar is the king. It’s always going to be the king.”

They use concepts that we hear about in Silicon Valley like sticky eyeballs or whatever, i.e., once you attract people to your website, they don’t go away, or once something becomes an embedded advantage, it’s very hard to disrupt. There’s some truth in that in marketing and sales. It is good to have an embedded advantage and barriers to entry, but they’re not always permanent or always unassailable.

Here’s the point, really: The U.S. is using this advantage in a geopolitical context. We are in several wars. The United States right now today is in a financial war with Iran, Russia, North Korea, and we’re getting close to an outright trade war with China that may turn into a financial war.

We’re doing this through sanctions to different degrees. I would say on a scale of ten, China is about a five right now, Russia is maybe a six or a seven, North Korea is a nine, and they’re trying to make Iran a ten.

These sanctions work. When we tell any country, “You cannot use the dollar payment system; you can’t use SWIFT to move euros around; you can sell oil but you can’t get paid for it at least not in a currency that anybody wants; your officials can’t buy plane tickets; if you go to Geneva, your credit cards don’t work; your institutions cannot trade or do business; anybody in Europe that does business with any of your institutions can’t do business with in the United States,” that’s the secondary boycott.

These things are extreme, and they work. The problem is that the rest of the world is getting a little bit tired of it.

I describe it as the schoolyard bully. When I was in elementary school, there was always a bully in the class. One day, he would go and beat up one little kid, and that could be Russia with the U.S. as the bully in this metaphor. The next day, he beats up another little kid, and that could be China. Next, he beats up another little kid, which is Iran.

In the real world, all the victims get together, form a gang, and beat up the bully. They kick his butt one of these days.

That’s what’s happening now. The victims or the targets of U.S. sanctions are putting their heads together, putting their resources together, and saying, “How do we get out from under this dollar payment system? We know the U.S. controls it and uses it very aggressively. We know they can sanction us, they can hurt us. We get that, so how do we get out from under it?”

This is where Russia, China, Iran, Turkey, North Korea – and I dare say you’ll see Brazil, Venezuela, and others joining in – are saying, “What’s the alternative to the dollar payment system?”

Here’s how it’s shaping up. Part of it will be a cryptocurrency. I’m not talking about bitcoin, so don’t run out and buy bitcoin. I really don’t like bitcoin, but I understand distributed ledger technology, which is the so-called blockchain.

They could create an encrypted distributed ledger that would be run by, let’s say, Russia and China, but participants would be anybody they wanted to let in. It would be what’s called a permissioned system as opposed to a completely open permissionless system, which is what bitcoin is.

Russia and China would say, “We just set up a new payment system. We call it the PutinCoin or the XICoin.” Maybe they’ll call it the WorldCoin. They can call it whatever they want. “We just set up a new payment system. We have a token, and we say that our token is worth one-whatever of an ounce of gold.”

It doesn’t matter; they can set up any amount of gold they want. The point is, there is now an alternative to the dollar. “We’re going to start selling our balance of payments in our new token, in our new WorldCoin, on this distributed ledger.”

There would be a system where Iran ships oil to China, China ships coal to North Korea, North Korea ships weapons to Iran, Russia ships oil to China, China does infrastructure investments in Russia, and everyone takes a vacation in Turkey because it’s a beautiful country. All these payments would be flying around, and they wouldn’t have to settle them up in real time.

The central bank would have to settle them up with the commercial banks in the country and the merchant acquirers for credit cards and things like that, but the countries wouldn’t have to settle them up. They could just kind of run a tab. It’s like being at a bar and telling the bartender, “Run a tab. I’ll settle up at the end of the evening.”

Periodically – monthly, quarterly, annually, whatever tempo you want – these countries through their central banks and finance ministries could say, “I owe you a billion WorldCoins, or you owe me half a billion WorldCoins,” or whatever, and they could settle that in gold. Just put the gold on a plane, fly it from point A to point B, and it’s done.

Where is the dollar in this scenario? It doesn’t exist. There is no dollar in this scenario. You create a new currency out of nothing; it’s just digital. You back it with gold, but you don’t have to settle every payment in gold. Just keep a tab, a distributed ledger, run a balance of payments, and settle up periodically using gold.

Remember, when you’re settling on net, you don’t need all that much gold. You need a lot, but you’re not sending gross gold shipments every time you invest or buy or sell from another country. Your credits offset your debits, and you settle up on a net basis.

I see this system evolving. This is not science fiction. This is not, “Oh, it’s coming in ten years, and here’s what I think is going to happen.” These pieces are being put in place right now. You quoted the Russian finance minister or one of the senior Russian officials on the subject saying, “We don’t like the paper gold market.” Okay, but they’re also working on cryptocurrencies.

The cryptocurrency groupies get all spun up and say, “This proves bitcoin is valuable.” No, it doesn’t. I don’t think bitcoin has any real value, but an encrypted digital currency sponsored by Russia or China and backed by gold is the real deal. That can work. I see all these pieces being put in place.

Coming back to my conversation in Hong Kong with John Lipsky, I raised a lot of these issues with him. Look, these guys are skeptical. They understand it, they’re smart enough to get it, of course, but they tend to think that the dollar’s embedded advantage that is true today will always be there.

I make the point of what’s sometimes called the global monetary reset, the GMR or whatever you want to call it. The world went off the gold standard to fight World War I. We also had one in 1944 towards the end of World War II when we needed to come up with a new system, and they came up with the Bretton Woods system. We had one in 1971 when President Nixon suspended the redemption of dollars into gold. It took a couple of years to play out but tore up the old system.

Two of those, in 1914 and 1971, ended the old system but did not replace it with anything. They just went with a kind of chaotic system. In the 1920s and 1930s, we had a hybrid gold standard, and in the 1980s, 1990s, and 2000s, we had floating exchange rates. It’s definitely incoherent. This is what Bernanke and John Lipsky told me: We have an incoherent system.

First of all, what’s the tempo? I just gave you three global monetary resets in the past 105 years. Doing the math, that’s one every 35 or 36 years. They don’t happen every day or every ten years. It’s not like a business cycle or even a financial panic. It’s a big deal, but they do happen. It’s been 47 years since the last one, so if they happen every 35 years or so, we’re probably overdue.

The system is unstable for the reasons I mentioned. History teaches that these things do happen every 30 or 40 years, and it won’t take much to topple the dollar, at which point the new system will roll out. It may not be a strict gold standard, but gold absolutely plays a role, and we see that with these gold acquisitions you cited.

Alex: The next area we want to talk about is what we’re seeing from our perspective. When I say “our,” I mean myself and our team with the Fund. We’ve had a team over in Dubai off and on, basically every other week for about the last five months running. In the institutional space we’ve been talking to over there, we’re starting to see a big interest in getting out of what we’ve termed and discussed many times as paper gold.

That would be anything from perhaps some kind of ETF where they don’t have or can’t take delivery of gold, etc. to a situation where they want to make sure they have physical gold. They want to know for a fact that there’s physical gold backing it up that they can take delivery of away from the whole paper gold scenario.

I ran across an interesting article stating that the Swiss government pension fund – Switzerland’s AHV/AVS fund – has decided to diversify into physical gold bars. They have a fund that’s a €30.5 billion pension portfolio. They’re shifting their investment strategy where they only previously invested in gold via what they call swaps, and now they’re requiring as part of their governance that they’re buying actual physical gold from here on out.

Do you have any thoughts about this? Do you think this is the beginning of a shift or trend in this direction, or do you have any experience with it?

Jim: I do, and yes, we may be in the early stages of this. Bear in mind that institutional allocations to gold are so low that any increase – even a small increase – is a big deal in terms of the demand for gold. Institutions have about 1.5% to 2% allocation of gold. That’s tiny. How much do you have in treasury builds? It might be 20%. How much do you have in stocks? 30% or 40%, maybe 60% depending on the fund. How much do you have in gold?

By the way, when I say 1.5% average, that’s an average. For most people, the answer is zero, and then there are a couple of 5% people. When you average the handful of people with a bunch of zeroes, you get an average of 1.5%, but it’s not like every institution has 1.5% gold. Most institutions have zero, some have a little more, and the average is 1.5%.

My point being, if the average only went to 3% – it doubled – that would be huge. It doesn’t have to go to 20%. There’s not enough gold in the world – and there never will be at anywhere near current prices – to satisfy an increase in the allocation even up to the 10% level, forget about 5%.

What you point to, Alex, is very significant. Even a small change at the margin could have a huge impact in the supply and demand for physical gold.

My favorite story in this respect involves my friend Kyle Bass, who runs Hayman Capital. That’s his very successful hedge fund. He’s a great guy. We have co-lectured at Texas A&M, and I believe he still is on the board of trustees of UTIMCO, the University of Texas Investment Management Company. It’s the pension trustee for the professors’ and employees’ pensions of the Texas state university system.

Some years ago, he was insisting they invest in gold. They said, “Okay, it makes sense, we hear you.” And he said, “I want physical gold. I don’t want GLD, ETF, I don’t want unallocated forward contracts from J. P. Morgan; I want physical gold. I want it in our name, and I want it fully allocated.” So, he bought it from HSBC. It was a lot, like $500 million worth of gold.

Then he took it a step further. That’s why he’s such a great investor. He’s very diligent. He said, “I want to see the gold. I want to see it segregated. I want to know it’s ours, it belongs to Texas.” HSBC, the vault operator, said, “You’re really being a pain in the neck here.” He replied, “No, I insist. It’s my due diligence, my fiduciary duty,” so they said okay.

They let him into the vault. He goes in and says, “All right, where’s my gold?” They’re like, “Well, there’s some over there, there are a couple of bars on the shelf over there, and we think we have some…” He said, “No. I want my bars in one place, serial numbers, manifests.”

Alex, you and I have been in the vaults with the Physical Gold Fund on more than one occasion, and that’s exactly the way it is. That gold is not only allocated in the legal sense; it’s physically segregated in a separate case. The case is sealed, so before you even open it, you have to break the seal. You need a crowbar to open the case, because it’s a wooden case. Auditors are standing by with the manifest with all the bar numbers on it. You open the case, look at the bar number, look at the manifest, and say, “Check.” You go down every single bar .

Kyle Bass wanted something similar for Texas, but they said, “All right, you’re just being a pain.” He went away, came back, and the second time, they had it the way he wanted. I don’t know if it was in cases, but he said all of their gold was in one place and the numbers checked out.

That’s a very large institution, one of the largest institutional investors in the world, and he’s one of the most prominent investors in the world. HSBC is one of the biggest banks in the world, and that’s what he had to go through to make sure his gold was really there.

As I said, I’ve been in the vaults with Physical Gold Fund. I can raise my hand and say that gold is there because I’ve seen it and counted it.

That is absolutely what institutions should do. The reason is that you have to ask yourself, “Why am I buying gold in the first place? Because it’s shiny and pretty?” Well, it is shiny and pretty, but that’s not why you’re buying it. You could say, “It’s for diversification.” Yes, but there are a lot of ways to diversify. That’s not the main reason you’re buying it.

The main reason you’re buying it is twofold:

  • It’s a kind of insurance.

It’s catastrophe insurance. If everything falls apart, markets are crashing, we have a 2008-type scenario but worse – which we will, because you can see that coming – gold might be the only asset or one of very few that retains value.


  • You’re not going to be able to get gold.

If you like reason number one, when this crisis unfolds, you’re not going to be able to get the gold.

A lot of people say, “I hear you, Jim, but call me when the crisis starts, and I’ll go get some gold.” No, you’re not going to be able to get it. Dealers are not going to return your phone calls. It’s all going to be spoken for. There will be no sellers, there will be a huge list of buyers, and the price will be skyrocketing. The price won’t matter to the person who doesn’t have it; they’re not going to be able to get it at any price, because it’s all going to be spoken for.

Get it now while you can at attractive valuations, because it’s going to be scarce, very hard to get, and very expensive when the time comes.

We’ve covered that ground before. Think about it. The time you want your gold the most is when conditions are going to be the worst. Do you want a paper contract that’s going to be reneged? Do you want an unallocated gold forward from J.P. Morgan when what you’re actually going to get is a notice, probably by e-mail, saying, “Your contract has been terminated as of the close of yesterday. We’ve wired your profits to the account. Thank you very much”?

You’re going to think, “No. I didn’t want it for yesterday’s profits; I want it for today’s profits, tomorrow’s profits. It’s going up hundreds of dollars an ounce every day, every hour.” They’re going to say, “Sorry. We’re not stealing your money. Here are your profits, but you’re not in this gold anymore.” That’s just because they don’t have enough gold to satisfy physical delivery on all those contracts, so they need to tear them up and send you a check, because they don’t have the gold.

That’s the world where you really want the gold. Why would you want a contract? Why would you want a COMEX future or a GLD ETF or a non-allocated contract with a London Bullion Market Association bank? You want the physical gold, and you’re not going to be able to get it at that time.

Yes, you want physical, and don’t put it in the bank. Banks are the easiest place for governments to come knocking, and they’ll be the first places to shut down. In the next crisis, they’re going to shut down the banks. Not permanently but temporarily until they work out some kind of solution, because they’re certainly not ready.

I mentioned John Lipsky and Ben Bernanke. John Lipsky was head of the IMF, and Ben Bernanke was chairman of the Fed. I’ve also spoken to Tim Geithner, former Secretary of the Treasury and President of the Federal Reserve Bank of New York. In addition, I’ve talked to a fellow who’s less well-known. His name is David Dollar (interesting last name; it’s like Dr. Pain). David Dollar was the U.S. Treasury’s ambassador of the dollar to Beijing with an office in the U.S. embassy in Beijing. He was on point in terms of treasury relations with China involving anything about the dollar and treasury securities for them.

These were all private conversations with a former chairman of the Fed, a U.S. dollar emissary to China, a former treasury secretary, and a former head of the IMF. None of them see the scenario we’re talking about coming. They understand it theoretically, but they don’t see it coming, which should come as no surprise. Go back and look at what Ben Bernanke said in March 2007. This was literally months away from the beginning of the biggest financial crisis since The Great Depression, and he was on record in the FOMC minutes saying, “This will blow over.”

Because there were some indications that mortgage defaults were picking up and the subprime mortgages weren’t performing well, he said, “Yes, whatever, but it’ll blow over. We can handle it. It’s not out of control.” He was dead wrong.

The elites never see this stuff coming. They’re powerful, they’re smart, and they’re important, but they don’t think outside the box. They’re in a thought bubble with other elites, and they don’t see these kinds of things coming. That’s exactly what happened in 2007 going into 2008, and it’s exactly what’s going to happen the next time.

They don’t see it coming, which means they’re not ready for it, which means that rather than proactively come up with a new monetary system in a Bretton Woods type of format, they’re just going to walk into a buzz-saw and have to react. But guess who is being proactive? Russia, China, Iran, and Turkey – this new axis of gold.

Whether it’s western elites reacting in a mad scramble going to gold to restore confidence or eastern elites – Russia and China in particular – being proactive and setting up a new system also backed by gold, all roads point to gold.

Alex: Yes, I totally agree.

That about does it for today since we’re out of time. If you want to go back and hear any of our previous podcasts, you can do so at Jim and I have been doing this for three or four years now, so there’s a massive archive of really good information and material in there that we encourage you to check out.

Jim, thanks once again for your time. It’s been a great discussion, and I look forward to getting together with you again next time.

Jim: Thank you, Alex. I look forward to it.

You have been listening to The Gold Chronicles with Jim Rickards and Alex Stanczyk presented by Physical Gold Fund. Recordings can be found at You may also register there for news of upcoming interviews with Jim Rickards and other world-class thinkers.



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Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles May 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles May 2018


Topics Include:

*Update on gold markets

*New phase of financial warfare with Iran

*Financial system chokepoints

*US Dollar payments system

*SWIFT transfers and third party influence

*How the US uses dollar payments leverage to control non US transaction

*How Inflation turns people against government and increases probability of civil unrest, limits government options

*How the current situation with converging factors in Iran, China, Russia, can lead to a disturbance in the gold markets and dollar payments system


Listen to the original audio of the podcast here

The Gold Chronicles: May 2018 podcast 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, and welcome to another edition of The Gold Chronicles. I want to welcome the brilliant Mr. Jim Rickards.

Jim: Alex, it’s great to be with you and our audience.

Alex: It’s good to have you back again. I know people are looking forward to this one, because we have some important and special things to talk about today. What we’re going to be covering is already being talked about in the Twittersphere.

As a bit of review, in our last Gold Chronicles, we did a deep dive into common objections to owning gold and using gold as a gold standard for monetary policy. We covered objections such as there’s just not enough gold to support finance and commerce, the gold supply doesn’t grow fast enough to support economic growth, gold has no yield, gold causes depressions and panics (particularly The Great Depression), gold has no intrinsic value, and gold is a barbarous relic.

If you’ve heard these kinds of objections and aren’t sure how to deal with them or even how to answer them for yourself, I highly recommend going back and checking out our last podcast where we spent close to an hour really deep-diving those topics.

If you’re watching this podcast on YouTube, you like the content, and you think people need to hear what we’re talking about, please take just a second to hit the little “thumbs up” button at the bottom and subscribe to the channel. YouTube then calculates that in their search algorithm and recommends the podcast to people who are taking a look.

Also, we’re actively monitoring comments, so if you want to leave comments underneath the video, we are answering questions and taking note of questions that might be useful to talk about in the future.

Why don’t we dive right into our topics now?

Jim, first, I want to make a quick note about gold. I know we’re going to be talking about gold later as to how things are playing out, but I think people realize it’s been trending sideways in a channel since the beginning of 2018. It’s basically bouncing between $1300 and $1366. All economic activity really hasn’t impacted it; there have been no major panics or catastrophes or anything like that.

I do note that demand out of India has dropped off and, as far as we know, sovereign demand from China is not reporting any increase. That doesn’t mean they’re not increasing it off the books, but they’re not reporting any increases. Demand in the west has been extremely flat, so the fact that gold is not going down is really interesting to me.

Do you have any thoughts before we get into the rest of it?

Jim: I agree completely. First of all, you’re right; gold has been trending sideways for months. My thesis – and I think there’s good support for it – is that we’re in a multi-year long-term bull market that actually started in December 2015. If you look at the six-month chart, there’s not much action. If you go back to the post-Brexit high around July 8, 2016, we’re not really past those highs. That was around $1360 with a lot of action. In the meantime, it was down as far as the low $1200s.

The point is, it never got anywhere near the December 2015 low of $1050. It’s never been anywhere near that. It’s barely been in the $1100s, bounced around the $1200s a little bit last year, and has traded in the low to mid $1300s since then. But that’s still a good 30% pop from the low. Yes, trading sideways lately but in a bull market since 2015. That’s number one.

Number two, the amazing thing about gold is not that it’s not higher but that it’s not lower. Considering monetary conditions, stock markets peaked on January 26th, so stock markets are off their highs – that’s tightening; the Fed is raising interest rates – that’s tightening; the Fed is reducing its balance sheet by tens of billions of dollars a month – that’s tightening; and the dollar is stronger – that’s tightening.

Going down every item on the checklist, we have tighter monetary conditions across the board which is usually bad news for gold. If you gave me that scenario ex ante, I would have said, “Gold is going to go down to $1250,” but it’s not. That is a very positive sign. When you maintain your levels against headwinds and those headwinds turn to tailwinds, you’re going to take off like a rocket.

That’s what I’m watching for. I believe the headwinds will turn to tailwinds. That’s really the point, because the Fed is not putting the U.S. economy into recession. Three or four months ago, there was all this buzz about inflation. Now suddenly, most recently the inflation data looks weak. It’s not deflation, but it looks a little disinflationary.

Europe has slowed down and may be very close to a recession. What does that mean? It means they must go back to the currency wars and cheapen the euro. Well, if you have a cheaper euro, you have a stronger dollar. That’s going to import deflation in the form of lower import prices if the dollar is stronger. That’s going to push the Fed away from the goalpost in terms of their inflation targets.

A lot of things have come together that cause me to believe that later this year – not in June, but I’m watching September to December – the Fed may go back to pausing on the rate hike series, which is an easing of conditions, and that’ll give gold a boost.

We know that Trump and Mnuchin want a weaker dollar, because they said so. They have not been shy about it, and I’m getting more and more evidence from inside the White House that they’re just going to start beating on Jay Powell about not raising rates.

Powell has so far maintained his independence, but history shows that when the White House and the Fed diverge, the White House wins. That’s the history of monetary policy going all the way back to FDR, Richard Nixon, take your pick.

The fact that gold is holding its own in a tough environment, and the fact that that environment may switch later this year to an easier environment for the reasons I’ve mentioned, is one more rationale to say it looks like gold is on sale right now. You ought to get it now.

It’s an amazing thing, Alex. All the people who won’t buy gold at $1310 will line up to buy at $1390. We know the reason; it’s human nature. All I can do as an analyst is say, “It looks cheap to me. Get some here and enjoy the ride.”

Gold has shown a lot of resilience. On top of the economic analysis I just gave, in the rest of this podcast, we’re going to talk about some very big geopolitical vectors that should push gold a lot higher. Again, all the more reason to get your gold now at an attractive level.

Alex: Let’s get into the core topic for today. In private conversation, you have mentioned to me that there are some urgent developments occurring with Iran. The potential scenarios moving forward are all interconnected and could impact everything from oil sales to China to the world’s gold markets. Would you elaborate on this?

Jim: Sure. In addition to this podcast (which is my favorite), I do quite a bit of writing and get invited to keynote speeches and TV and all that stuff. Fortunately, I’ve never been at a loss for topics, but people will say, “Jim, what do you want to talk about? Do you want to talk about Iran, China, currency wars, trade wars, gold, oil?” I look at them and say, “That’s one topic.”

Those six things I just mentioned are all connected, and I mean densely connected. Let’s try to unpack that a little bit starting with Iran, but we’ll just play out the thread as we unspool it.

We are in a financial war with Iran. To put it maybe more starkly, we’re in a war with Iran using financial weapons.

A couple of weeks ago, I had the privilege of leading a seminar at the United States Army War College. Among the group are career officers such as lieutenant colonels and majors who have

been identified and fast-tracked as the future strategic thinkers. This is something called the Advanced Strategic Art program. I’m a guest lecturer/seminar leader covering financial warfare; they don’t need any help from me on cruise missiles or whatever.

We went through in detail what we’re going to talk about now. Afterwards, the Commandant of the U.S. Army War College based in Carlisle, Pennsylvania, General Kem, was very complimentary. He said, “We’re actually going to change our curriculum, because this was a wake-up. We realize we have to get these financial weapons into the curriculum a little more.” I took it as a very nice compliment from the Commandant.

We’re in our second financial war with Iran using financial weapons. The first financial war went from 2011 to 2013. I cover this in chapter two of my book, The Death of Money, but let me briefly talk about a number of things we did to Iran.

You have to look at the chokepoints in the global financial system which are no different than geographic chokepoints. What do people worry about in the Middle East? The Straits of Hormuz. It’s only about 12 miles across, so if you block the Straits of Hormuz, none of that oil can get out of the Middle East. The Strait of Malacca in Singapore is one of the major pathways to China, etc. The Navy keeps an eye on these chokepoints.

There are also financial chokepoints. One of them is the dollar payment system, which goes through the banks but is run by the Federal Reserve and the Treasury. It’s called Fedwire. If you’re Citibank or Bank of America and want to send money, it either goes through the New York Clearing House or through Fedwire.

We kicked Iran out of the dollar payment system and said, “Anybody who moves dollars for Iran, you’re breaking our sanctions, you’re in trouble. Maybe we can’t arrest the mullahs, but we can arrest you.”

The banks have had enough fun in this area. They’ve paid somewhere between $70 billion and $100 billion in fines and penalties over the last 15 years for various violations of money laundering, know your customer, Iranian sanctions, and other similar violations in the money transfer area, so they don’t mess around with this.

Iran was kicked out, so they said, “Fine, we’ll just sell our oil for euros.”

There’s another payment system based in Belgium called SWIFT – the Society for Worldwide International Financial Telecommunications. This is the central nervous system of the entire global financial system and where banks in different countries pay each other.

I mentioned Citibank and Bank of America using Fedwire, but what if Deutsche Bank wants to send euros to Citibank or the biggest bank in China wants to send Swiss francs to UBS? Those payments go through SWIFT.

I’m very involved with sanctions and thinktanks in Washington and have a lot of experience working on this with the intelligence community, much of which I’ve described in my book, so I’m a little more than a bystander; let’s put it that way.

Well, we went and got our allies and kicked Iran out of SWIFT. The term for this is de-SWIFTing. That’s the jargon. We de-SWIFTed Iran and kicked them out of SWIFT. That’s serious, because not only can they not use dollars, which they never expected, but now they can’t use euros, Swiss francs, sterling, yen or basically any other currency.

Now what can they do? In theory, they can ship oil to India, open an account in Indian Bank, and be credited in rupees, but what are they going to do with the rupees? That’s the thing. Now they must dump $50 billion equivalent of rupees. So, that didn’t really work.

There are lots of other sanctions aside from the financial area. For example, vessels flagged in these countries cannot pick up oil in Iran, oil supply firms – the Halliburtons and Schlumbergers of the world and European equivalents – cannot sell equipment to Iran, no aircraft, on and on.

Just looking at the financial side, even if there weren’t sanctions on selling them stuff, they couldn’t pay for it, because they can’t use the payment system. Dollars were being smuggled into Iran from Iraq due to all the dollars floating around in Iraq because of the war. By the way, this is under pain of death. You get the death penalty for money smuggling in Iran, but they were doing it anyway.

It’s a black market and a free market rate. This caused a run on the banks, because everyone was like, “I’ll take my money out of the banks and get the black-market rate to get some dollars.” The smugglers in Dubai were cash and carry. If you bought some black-market dollars from Iraq, you could hire smugglers in Dubai.

The Iranians are actually fairly sophisticated as President Trump said the other day. The people of Iran like their iPhones, their HP printers, and their Macs as much as we do, and that stuff comes in from Dubai. You can see smugglers lined up on Baniyas Road down on the waterfront.

With a run on the banks, bankers raised interest rates to 20% to keep the money in. “Here, I’ll pay you 20% interest to keep your rials in the bank.” Because the currency depreciated so much, it was hyperinflationary.

Think about what’s going on in Iran. There’s a hard currency shortage, there’s a run on the bank, interest rates are 20%, and inflation is out of control. There’s no faster way to turn a population against you than inflation, because you’re robbing them of all their life savings.

Very few people know that Tiananmen Square, the protest that ended up being a massacre in Beijing, China, in 1989, started as an anti-inflation protest. It turned into a pro-democracy protest and they had their papier-mâché Statue of Liberty, but it started as anti-inflation.

The Iranians were in the same place, and now you get into psyops (psychological operations), you’re playing with our heads on Twitter, etc. We were going down the path to regime change without firing a shot. I’ll give credit to Obama and the Assistant Secretary of the Treasury who engineered all this stuff, but they declared a truce in December 2013 because the Iranians said, “No más. We’ll come to the table.”

I’ve personally spoken to people who were in the Treasury at the time and said, “Why didn’t you double down? Nobody was getting shot at or killed. We weren’t invading. The 101st Airborne wasn’t marching to Tehran. We were getting close to regime change. Why didn’t you double down?” They said, “Because we wanted to negotiate, and it worked. They came to the table.”

That’s okay. I might disagree, but that’s not an unacceptable policy. The problem President Trump has pointed out is that the negotiations were a complete failure. John Kerry and Valerie Jarrett – who was born in Iran, by the way – signed the worst deal ever.

No teeth. It didn’t limit anything in the long run. It deferred some things for a number of years but didn’t limit other things that were just as important. It had no teeth. “Other than that, how was the play, Mrs. Lincoln?”

A part of this was unknown at the time and has since been declassified, and we know about it now. We gave the Iranians hundreds of billions of dollars.

Remember, we got our hostages back. There was the whole controversy in 2014/15 of whether this was ransom for hostages or not. Obama kept saying it’s not ransom because it’s their money; we’re just giving it back to them. Well, that turns out not to be true. Some of it was their money and we did give it back, but a lot of it I would call ransom money that we paid. Bribery, whatever you want to call it, to get this deal done.

This money was delivered in cash, and I mean physical notes. With Iran kicked out of the banking system, they didn’t want wire transfers, because we could freeze it again if we changed our minds. I’m sure if they had a nickel in the financial system, Trump would have frozen it, but they don’t, and this is the reason.

We flew in pallets of 500-euro notes that we got from the Bank of the Netherlands. Our Bureau of Engraving and Printing doesn’t print euros, and Iran didn’t want dollars, so we had to go to the Netherlands Central Bank, do a swap, get the euros, and ship them. And gold – a lot of gold.

I haven’t been able to get the exact numbers, but we’re talking perhaps $30 billion in gold. Doing the math, it comes out to maybe about 800 tons. You know gold better than I do; that’s a lot of gold.

Where’d that gold come from? A lot of it was trans-shipped through Turkey, but it started with our friends in Switzerland. It came from refiners and existing vaults, but that is an enormous amount of gold. For all I know, some of it came from the Federal Reserve Bank of New York.

Now Iran was like, “Hey, I got the gold,” and started spending the money on terror. They’re firing missiles into Riyadh from the Houthis, they’ve re-armed Hamas, Hezbollah, and the Houthis, they’re encircling Saudi Arabia. It’s typical Iran.

This is what Trump said the other day. He said, “We were supposed to get better behavior in exchange for all this goodwill. We gave them the goodwill – cash and gold and relief from sanctions – but the behavior got worse.”

That brings us to today, but just put a footnote next to that gold, because it was a lot of gold. Iran is completely intransparent. We don’t know how much gold they have, but my estimate would be well north of 1000 tons, maybe 1500 tons, which puts them not too far behind Russia and what China at least admits they have not counting their off-the-books gold.

Follow the thread. Now Trump comes out and says, “The deal is off. We’re putting sanctions back on.” Our European allies don’t agree, but too bad. Going back to what I said earlier, this is all based on the dollar payment system, which we control.

They’re saying, “Trump is making the U.S. an unreliable ally, because one administration promises something, and the next administration tears it up. How can our allies trust us, because we change our minds? Blah, blah, blah.” That’s not true. What Trump did is in the four walls of the agreement that Obama negotiated. You’ll hear it on this podcast, but you won’t hear this on CNN or NBC.

This is called the JCPOA, Joint Comprehensive Plan of Action. There are seven members to this agreement – if it is an agreement; that might be an over-statement. It’s the five permanent members of the United Nations Security Council – U.S., China, Russia, U.K., and France – plus one, which is Germany, and Iran. With seven countries in this, that’s why they call it joint.

Comprehensive? I don’t know what’s comprehensive about it. There are a lot of loopholes, but it sounds nice. Plan of action? What is that? It’s a loose statement of intent. It’s like, “Here’s

what we all intend to do,” but it’s not legally binding. I don’t think it was ever signed. I’m not sure who signed it in Iran, but it’s out there. Another thing you get into is if you read the Farsi version (the language of Iran) and the English version. A lot of translators will say they’re not the same, so this is a hot mess at best, but it’s basically a handshake deal between two people who don’t trust each other. So, that’s what you got.

To the extent that it is in English, it says that the President of the United States has to periodically certify that Iran is complying with the terms and provisions. Trump issued two or three positive certifications – maybe three, but at least two. Every time he did, he said, “I’m warning you. I’m not happy with this, and one of these days, I might not recertify. You’re on notice. Europe, Germany, Iran, you better bring a better deal.” They didn’t, so he said, “Okay, I am not certifying. I’m putting sanctions back.”

That was a legal act in accordance with the JCPOA. It wasn’t a rogue act. This is really Obama’s fault. Why didn’t he get a treaty? A treaty is law. Changing a treaty is a much tougher process. A president can’t just wave his hand and change a law, but he can decide not to certify something if that’s his role. That’s what happened, so it wasn’t rogue. As I said, it was within the four walls of the agreement.

Where are we now? We are right back where we were in 2012 and early 2013. We’re in a financial war with Iran, and we’re putting all these sanctions back on again.

Some of them have 60-day or 90-day windows. If you shipped goods and they’re in the middle of the Mediterranean Sea on their way to the ports in Bandar Abbas – one of the big ports in Iran – the president is not saying you must turn the ship around. He’s saying, “You can finish that delivery. You have 90 days to clean up that work in progress or things in motion, but nothing new. Don’t do a new deal today. I’m not giving you 90 days on new deals; I’m only giving 90 days to unwind existing deals.” They’re out of the dollar payment system again.

I don’t know where things stand with SWIFT, because the U.S. cannot act unilaterally in SWIFT, but what we can do that’s even more powerful is what’s called secondary boycott. As an example, we can say to Germany, “I can’t stop you from paying Iran in euros unless we agree in SWIFT – and they may do that – but if you pay Iran in euros, tell Deutsche Bank to close up shop in New York. France, you want to pay Iran in euros? You want to do business with Iran? You want to sell them hydroelectric plants or whatever? Tell BNP Paribas to close up shop.”

Every one of these countries’ banks will say, “Our U.S. operations are far more valuable to us than anything we do in Iran.” So, they’re going to comply. They may not like it, but we have all the cards, so this is going to work. This is going to put the screws to Iran and begin to destabilize Iran.

The false dichotomy you hear is, “We’re going to war.” In other words, we had two choices: 1. Stick with the agreement, as flawed as it is, or

2. If you pull out, Iran will restart their nuclear program and they’ll either become a nuclear power sooner or we’ll attack them. Either way, you’re in a war.

That is completely false.

That’s a false dichotomy. Those paths are possible. I’m not saying those things cannot happen, but what I’m saying is there are many other outcomes or paths that are far more likely than the worst scenario.

We’re seeing this in North Korea. I was very vociferous in the fall when I said, “We’re on a path to war with North Korea by the end of March.” We were on a path to war with North Korea by the end of March. Precisely because of this and the fact that North Korea and China believed us, we had this change of behavior by Kim Jong-un.

That’s what’s called a self-negating prophecy; making an accurate forecast and the forecast itself causes changed behavior that makes the forecast become untrue. That’s a good thing. It worked the way it was supposed to.

Back to Iran, it’s the same thing. If we were close to regime change in 2013, we’re going to be close to regime change later this year, except that the Iranian people are even more receptive to our message and less tolerant of the Iran regime than they were five years ago. This is going to hit Iran very hard.

In May, the desired purpose was to bring them back to the table, negotiate a better deal, and then kind of do what we’re doing with North Korea. Then maybe Trump will meet the ayatollah. You never know with Trump, but maybe he will. Maybe he’ll meet Ayatollah Khomeini or the president of Iran in Vienna or someplace. You can’t rule that out. That would be a really good outcome. That’s what you get out of putting the screws to Iran.

I said that gold, oil, China, and all that stuff is connected, so let’s pivot a little bit. Who is Iran’s biggest customer for oil? The answer is China. China gets an enormous amount. They’re the biggest by far. The next biggest customer isn’t even close to China. It’s China’s leading source of oil. Saudi Arabia is in the same ballpark.

The Iranian-Chinese oil relationship is blood and oxygen to the Chinese. Their economy doesn’t run without Iranian oil. How are they going to pay for it? They can’t pay in dollars; we just went through that. They could pay in yuan in a Chinese bank, but now Iran is like, “I have a Chinese

bank account with tens of billions of yuan in it. How much chop suey do I need?” What are they going to do with the yuan? That’s the thing.

You can get into cutouts and illegal money laundering, but what Swiss or U.S. or German bank is going to be a party to that? They’re risking their franchise. They’re risking jail. They’re not going to do it.

What’s the third option? If it’s not going to be dollars or euros, and if yuan are impractical because there’s not sufficient liquidity, the third option is gold. China can pay Iran in gold – physical gold. Put it on a plane, fly it over.

We know that China has been acquiring gold like crazy hand over fist for the last ten years. Officially, they’ve tripled their gold reserves from about 600 tons to about 1800 tons. Unofficially, we believe they have significantly more, but the mining output is starting to deplete. They ran at 450 or 500 tons a year for four or five years, but if you know anything about old mining, that’s a very hard level to sustain. And they used all kinds of environmentally unfriendly techniques to cut costs. The bottom line is, apart from putting cyanide in the water, they’re depleting their mines.

If China is trying to get all the gold they can to catch up with the United States for the dollar reset that is coming down the road, how much more gold are they going to need to pay Iran for oil? The answer is a lot.

I haven’t worked through all these numbers, but this is a huge hidden uptick in demand for gold at a time when global mining output is flat-lining. It’s not declining, but it’s flat-lining around 2100 tons a year. It has for several years and may go down a little bit. Peak gold is a separate discussion we don’t want to have right now, but it’s certainly not going up. Gold is getting extremely difficult to find and costly to mine.

The beauty of gold is that it’s nondigital. You can’t hack it or freeze it; it’s fungible. China has a pretty sophisticated refinery industry. They can just take any gold bar with a serial number, melt it down, put a new serial number on it, and ship it to Iran.

That’s what I see happening. Obviously, it is happening because we’ve been here before. As I say, this is a replay. I know the playbook for the first Iranian war, and this is running some differences. I think Iran is a little weaker, the screws are a little tighter, and China is maybe a little more desperate.

That said, let’s widen the aperture and look really big picture. We have sanctions on Russia because of Ukraine and Crimea, and there are Syria sanctions. Russian global corporations cannot refinance dollar- or euro-denominated debt in western capital markets. They’ve been

begging the central bank, and Nabiullina won’t give them the money. She’s building up the Russian reserves and has said, “Gazprom, you go get your own dollars.” This sanction has been in place for a while.

We now have sanctions on China, not related to war and peace but related to theft of intellectual property. These Section 301 sanctions are a much more broad-based opportunity for the president to do pretty much whatever he wants to get compensation for the theft of intellectual property, which we estimate at $1 trillion. Trump is getting ready to dial that up, and Venezuela is sanctioned, and we’re using maximum pressure on North Korea and Syria.

Look around the world. Venezuela and Iran are out of the system. Russia is out of the system to a great extent but not completely. China is not out of the system, but they’re under scrutiny and the target of sanctions. And there’s North Korea and others.

If you’re these countries, at what point do you say, “You know what? The only reason the U.S. can do all this successfully is because they control the dollar payment system.” (This is true, and we have buddies that control SWIFT.) “We need a different system. We have to get out of this system, because until we get out of the system, this is the financial equivalent of the Seventh Fleet. We can’t fight the Seventh Fleet, but we can fight the dollar.”

If you can’t build a bigger navy – and you can’t – can you build an alternative to the dollar? Well, that’s a lot easier than matching the Seventh Fleet ship for ship, and they’re working on it.

They’re using blockchain, distributed ledger technology, physical gold, and their own proprietary Internet. Not that you can’t hack it, but if they have good encryption using blockchain and a proprietary network that’s pretty secure, even if you do hack it, what do you see when you get there? You see some encrypted message traffic, but you really don’t know what it means.

They’re getting close. I believe this will be announced in the not distant future meaning in the next two years – I’m not saying tomorrow but sooner rather than later – that they’ve set up what I call the Putin coin or the Xi coin. Let’s just call it the world coin or something other than the dollar. It’s encrypted, distributed ledger technology. By the way, it’s not bitcoin, so don’t go out and buy bitcoin based on this; that’s junk.

In effect, it’s some kind of worldwide cryptocurrency that is secure and encrypted and used for payments between all the people I mentioned. Iran, Russia, China, Turkey would probably join, Venezuela, and maybe others as well will say, “I’m not kicked out of the dollar system, but you guys have an alternative. I’ll join that too.” It’s redundancy like a spare tire.

None of this is a stretch. I’m not talking 22nd century science fiction here. This is all happening. This is all work in progress.

At the IMF spring meeting about a month ago, Christine Lagarde said that the time has come to look at the SDR. The IMF executive committee has launched a new study on the uses of the SDR and explicitly how that can be expanded. Why would you have the existing SDR system today with distributed ledger technology or so-called blockchain? You would have an e-SDR, a crypto- SDR.

The IMF can’t get too far out of their lane or they’ll run into trouble with the United States, but they can push a lot. With Russia and China looking at this on their own, the IMF saying “Let’s look at a crypto SDR,” a lot of gold piled up in certain places, and a necessity to transact in gold because you’re kicked out of the dollar payment system and probably SWIFT, we’re getting closer to the point where there’s going to be an all-out attack on the U.S. dollar.

That’s the other side of financial warfare. I’ve said to people at the Treasury, “You guys are pretty good at this, but be careful what you wish for, because your success will drive a reaction function that may lead to the demise of the dollar as the leading global reserve currency.”

There’s a big picture here, and my takeaway is to get some physical gold now. Get it while you can and while the price is attractive. Put it in a safe place. Don’t put it in a bank; put it in safe nonbank storage in a good jurisdiction. Go to some extent – not all in, but to some portion of your portfolio.

If you don’t, you may be caught completely unaware on the day when Putin and Xi have some kind of joint press conference to say, “We came up with our own payment system. See you later, dollar.”

Alex: I totally agree. Thinking about all these different components we’ve been talking about, another area just occurred to me that might be something worth watching. Depending on which scientific papers you’re reading as to who’s claiming to be farther ahead in the race for quantum computing, basically whoever gets there first is going to have stronger crypto than anybody else and theoretically be able to break everybody else’s crypto.

If the Chinese get quantum computing first, then you have that. They’re already bouncing quantum messages off satellites now. There was a huge breakthrough way ahead of any other nation. I don’t think it’s very farfetched to see a satellite-based distributed ledger that’s locked up by quantum computing technology and does everything we’ve just been talking about.

You and I have been talking about this whole idea of blowback for years. The fact that the United States can essentially lock down the entire international monetary system because of

the U.S. dollar being the world’s reserve currency, even if countries are transacting with each other using U.S. dollars, they have that chokepoint. We’re going to come to the point where all the other sovereigns are ultimately like, “We’ve just had enough of this nonsense.” Right?

Jim: Right. The dynamics are the same as the schoolyard bully. The schoolyard bully goes out and beats up a little kid. The next day, he beats up another little kid. The next day, he beats up another little kid. Day four, all the kids have a gang and they beat up the bully.

I’m a U.S. patriot. I love America, so that’s why I’m warning when I meet with Treasury officials, Fed officials, and Intelligence Community officials. I have to say that the military lends a more eager ear than the Treasury. What I hear from the Treasury is, “You’re exaggerating. This’ll never happen. The dollar will always be the global reserve currency. What are you talking about?”

The military are a lot smarter in my view. They take it in and they’re like, “Yes, this is serious. We have to think about dealing in a world where we have to use currency we don’t print.” It’s something they’re not accustomed to.

That’s what’s happening. We’re beating everybody up, but all the victims are getting together, and they’re going to form a gang and try to beat us up. That’s going to be bad news for the dollar and good news for gold.

Alex: Yes, I agree totally. Jim, we’re out of time. This has been an invigorating discussion. I think these last couple of topics we were talking about are really great. I appreciate your time as always, and I look forward to getting together with you again next time.

Jim: Thanks, Alex. I look forward to it.

You have been listening to The Gold Chronicles with Jim Rickards and Alex Stanczyk presented by Physical Gold Fund. Recordings can be found at You may also register there for news of upcoming interviews with Jim Rickards and other world-class thinkers.


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The Gold Chronicles: May 2018 podcast with Jim Rickards and Alex Stanczyk


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Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles April 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles April 2018


Topics Include:

*There is not enough gold to support finance and commerce

*The gold supply doesn’t grow fast enough to support economic growth

*Gold has no yield

*Gold causes depressions and panics, particularly the great depression

*Gold has no intrinsic value

*Gold is a Barbarous Relic – John Maynard Keynes


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The Gold Chronicles: April 2018 podcast 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, and welcome to another edition of The Gold Chronicles. This edition is for April, and I have with me today the brilliant Mr. Jim Rickards. Welcome, Jim.

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

Alex: As a matter of quick housekeeping, a review of our last TGC shows we covered a full spectrum review of current events including currency wars, trade wars, and potentials for kinetic warfare. It was also our very first ever video podcast, which has been pretty well received.

Speaking of video, if you watch our podcast on YouTube and think people need to hear this message, please take just a second and do the little “thumbs up” thing, that’s the Like button, and then also subscribe to the channel. It helps a lot, because the algorithm picks it up and syndicates it out so a lot more people end up hearing this information. If you’re like me, I think a lot of people need to get this information.

Another thing we’re going to be doing from now on is actively monitoring your comments for questions. So, if you leave comments on the podcast on the YouTube channel itself, we’re going to do our best to answer those. If a question is particularly good or relevant, Jim and I will talk about it in the next podcast.

Why don’t we dive right into our topics. First up on deck, we’re going to talk a little bit about gold.

Jim, I thought we could go back to some basics. Every now and then it’s good to touch on stuff that’s kind of universal and timeless. We can always talk about current market events, but anybody can read a tape. I figured it might be good if we talk a little bit about things that are eternal, timeless principles.

I’d like to talk about common objections to gold. There are a lot of objections in terms of it as an investment. You might be at a cocktail party or something like that and mention that you’re invested in gold, and you get the typical responses, right? Let’s talk about some of those, if that’s all right.

Jim: I think that’s great, a very good idea. This is The Gold Chronicles, that’s the name of the podcast, so we always talk about gold. We usually run 40 minutes to an hour and talk about a lot of things such as geopolitics, securities markets, and a little bit of the political scene. As you know, I don’t do a whole lot of politics, but to the extent it affects markets, we need to address it whether we’d like to or not. As we get to the end, we find some time to talk about gold, but I think it’s great to, as you say, get back to the roots; start with gold and do a little bit of a deep dive.

You’re right about the cocktail party conversation. Your best friends will look at you funny, and your less good friends will say something like, “What’s wrong with you? Didn’t you go to college?” Or some people just burst out loud laughing.

I’m pretty used to that, but the fact is, people might not know anything about gold. They don’t teach gold, they don’t explain gold. Gold is not taught as a monetary asset and hasn’t been for 45 years. I remind people that I got my graduate degree in international economics in 1974, and I was quite literally the last graduate-level class that was taught gold as a monetary asset.

Everyone thinks the gold standard ended on August 15, 1971, when Richard Nixon very famously – or infamously – suspended the convertibility of U.S. dollars into gold by foreign trading partners. That had already been suspended for U.S. citizens by Franklin Roosevelt in 1933. From 1933 onwards, gold was a contraband for U.S. citizens. It was like having drugs or a machine gun or something. You weren’t allowed to have it, but we continued to make gold convertible under the Bretton Woods system for foreign trading partners.

On August 15, 1971, Nixon ended that. You can find his Sunday night speech on YouTube. He pre-empted Bonanza, the most popular show at the time in America, to give that speech. He said, “I’m temporarily suspending the redemption.” They used the word temporary, and Nixon and his advisors believed it was temporary.

I’ve spoken to two of the five people who were with the president at Camp David that weekend, and they both told me, “Yes, that’s what we thought we were doing. We thought this was a temporary suspension. We were going to devalue the dollar, reset the price, and carry on with the gold standard at a new level.” Of course, that was 45 years ago, so the temporary became permanent.

But that was not quite the end of the gold standard. It took a few more years, because as I said, they did think they were going to reset the price. We had the Smithsonian conference in December of 1971, and then there were some projects at the IMF, because this was a global issue, not just the United States.

France argued vehemently in favor of the gold standard. They said, “Okay, you Americans screwed it up, maybe you have to devalue the dollar.” This was long before the euro. At the time, they still had the French franc, and they thought they were going to go back to it. There were all kinds of fights inside the IMF, so it took a few more years before the gold standard was dead and buried, and that was 1974.

When I was in graduate school in 1973/74, we still had to learn it. My professors at the time – let’s say you have a 50- or 60-year-old professor – were scholars who were the young guns of Bretton Woods. They joined the IMF when they were 25-year-old students in the early to mid-1950s. They created and ran the gold standard for all those years, and then some of them took the academic path and were my professors, so I was learning from the people who in effect created the Bretton Woods system, and we had pretty tough exams.

I grew up internalizing it and always thought of gold as an asset. When I was a nine-year-old, my father would sit me down at the kitchen table, pull out an old silver certificate and a Federal Reserve Note, put them side by side, and make me read what they said – convertible into silver – versus a Federal Reserve Note, which is just an IOU. I kind of have it in my DNA, but if you’re younger than me and know anything about gold, you either went to mining college or you’re self-taught, because they just stopped teaching it.

When you talk about gold, you typically encounter people who know nothing about it in the monetary sense. They might have some jewelry, they might like it and think it’s shiny and pretty, but they don’t know about gold as a monetary asset. If they do know anything, it’s probably a former propaganda involving one or more of the points we’re going to discuss today.

Every one of the customary objections to gold as a monetary standard falls down. As you suggested, Alex, why don’t we take them one by one, explain what the conventional wisdom is, and why it’s incorrect.

Alex: One of the ones that’s pretty common – and I’m sure you’ve heard this many times – is that if the idea is floated that gold can be used as a monetary standard, it is countered with, “There’s just not enough gold to support finance and commerce. There’s not enough.”

Jim: This is one of the many unfortunate – and I would say toxic – legacies of Milton Friedman. He was a great scholar, a great humanitarian, a strong advocate for free markets, and I think we all respect that, but his economics were awful, and this is one of those examples.

Milton Friedman was the most powerful voice in favor of going off the gold standard and going to what became floating exchange rates. We take the whole floating exchange rate regime that we have for granted; dollar is up, sterling is up, euro is down, yen is up, yuan is down – all the craziness for what’s supposed to be money or stores of value. Well, where’s the value if cross exchange rates are going like this continually, which they are.

We can thank Milton Friedman for that. As a typical academic, he believed a lot of things that weren’t true. He believed central banks would manage their money supplies prudently so we wouldn’t have those kinds of extreme fluctuations in exchange rates. Sorry, guess again.

He believed they would run their money supply in accordance with his vision of the quantity theory of money, which is saying velocity is constant. That’s another incorrect assumption, because it’s not constant. It’s a little bit like saying the world is flat; there are all kinds of flaws in it. That’s how we ended up with these floating exchange rates.

Milton Friedman was a strong advocate for what he called elastic money. He said, “The economy grows” – at least we hope it grows, and it usually does except for occasional recessions – “so the money supply has to grow.” Now, it can’t grow too fast or you risk inflation, but he needed what he called elastic money.

By the way, that’s one of the big flaws in bitcoin. All these cryptocurrency engineers think that too much money is bad (and they may be right about that), so their solution is to cap the money supply. That’s not the right solution either, but we’ll come back to that.

Friedman wanted his elastic money supply. What’s happened is that since 1971 – pick your starting date – the economy has grown enormously, the money supply has grown enormously, the amount of gold currently in the system.

It’s important to distinguish between official gold and the total gold supply. Official gold is about 33,000 tons. The price fluctuates, but today it’s about $1340 an ounce and has been in the $1330 to $1350 range for a while. If you multiply that price by the 33,000 tons, you get a certain theoretical money supply, i.e., here’s how much all the official gold in the world is worth. Then you compare that to the size of the economy. The global economy is about $70 trillion, and you’re like, “Hold on, that’s not enough gold to support that amount of commerce. We’d have to shrink the money supply.”

Certainly, if you were backing currencies dollar-for-dollar at today’s price, you would have to shrink the money supply drastically in order to maintain the gold standard. That would be highly deflationary and throw the world into another Great Depression.

That part of it is true, but there’s a very simple solution, which is to raise the price. That’s what FDR did in 1933. He increased the dollar price of gold 75% by taking it from about $20 an ounce to $35 an ounce. That’s a 75% increase.

I would say it’s not really an increase in the price of gold. What happened was the dollar devalued by 80%, but that depends on which end of the telescope you’re looking through. If you want to go back to a gold standard today with the existing money supply and existing gold, all you have to do is reprice the gold.

I’ve done the math; it’s not complicated. We have the data. It’s eight-grade math. You don’t need a calculus or anything more demanding than that. Working on a couple of assumptions, assume 40% backing which historically has worked (not 100% backing as some would insist), and use M1, which is one definition of money.

We have this distinction between M0, M1, and M2. If it was money, how come we have three different definitions? Right away, that shows you the beginning of the problem in terms of relying on central banks.

If you use M1 with 40% backing and the amount of physical gold, you come to a price of about $10,000 an ounce. You don’t need any more gold. Keep the gold you’ve got, increase the price to $10,000 an ounce, declare that as the official price of gold or the value of the dollar when denominated in gold, and go forward on a prudent, sound basis.

Whenever anyone says there’s not enough gold, just look at them and say, “There’s always enough gold; it’s just a question of price.” You do have to get the price right, because you can get that wrong as Winston Churchill did in 1925, which was one of the precursors to The Great Depression.

Subject to that, at $10,000 an ounce with 33,000 tons, that would back a $24 trillion M1 at about 40%. It would work fine, and then you could go forward from there on a very stable basis. Again, when people say there’s not enough gold, just say, “There’s always enough gold; you have to get the price right.”

Alex: A quick point on that is you had mentioned a $24 trillion M1. You’re talking about global currencies, not just the U.S. dollar, right?

Jim: Correct, and just the ones that matter. It’s a moving target. I did that calculation recently, but you have to keep raising it because they keep printing more money.

I’m using U.S., Europe, Japan, and China. Counting the eurozone as a block (all the members of the European monetary zone) plus China, Japan, and the U.S. are the four largest economies of the world with over 70% of global GDP. I left out Zimbabwe and some smaller countries, but that pretty much is the whole puzzle, as they say.

Alex: That reminds me of a meeting I attended in China a couple of years back with a Chinese think tank. They had a bunch of people for monetary policy there from the Chinese government as well as representatives from all the usual suspects, the biggest banks in the world who were there to give advice.

We were discussing gold, and it came up at one point – and this is something a lot of professional money managers will often throw out there – that the gold market is simply not deep enough to absorb the kind of liquidity necessary to, for example, compete with the U.S. treasury market, things like that.

I made the point to them that is basically the same thing you said; it’s true now, but if gold were $10,000 an ounce, it’s a completely different animal. You could tell that all the banking guys got really uncomfortable with that, and the monetary policy guys were like, “Hmm, that’s interesting.”

Jim: In my book The New Case for Gold, I actually found a quote from an interview that Paul Volcker gave. Paul Volcker, as the Undersecretary of the Treasury in August 1971 when Nixon went off the gold standard, was one of the people at Camp David with the president. I spoke to Paul Volcker personally about this, but in another interview he gave, the question was, “Could you go back to a gold standard?”

He said very candidly, accurately, and honestly, “You could, but oh my goodness, the price would be sky high.” In other words, he didn’t do the math in this head, but he said, “You could do it, but the dollar price would be much higher.” That shows a very good grasp of the issue – it is not quantity; it’s price. Volcker understood that better than anyone.

I don’t know of a market that’s more liquid than gold. I’m a buy-and-hold guy, so I buy gold and hang on to it, but every now and then, I’ve sold a little bit maybe to pay taxes or write a big check or whatever. I’ll buy some more later, but I’ve never had difficulty.

When I want to buy or sell gold at the market, I have never had difficulty, never had a phone call not returned. I’ve tried to sell municipal bonds, and my broker would say, “Jim, are you kidding me? I can’t dump these things.” But I’ve never had a difficulty with gold. That’s at today’s price. Certainly, if you had a gold standard at a much higher price, the liquidity would be even better.

Don’t be so sure about liquidity in the treasury market. Look at October 15, 2014, when we had a yield crash. We’ve had a couple of flash crashes in the treasury market. Participation by primary dealers and institutions at auctions is declining, and issuance is skyrocketing. I think I could get better liquidity in gold than in treasuries.

Alex: That’s a very good point.

The next common objection is that the gold supply doesn’t grow fast enough to support GDP growth.

Jim: This is another canard or red herring or whatever you want to call it, but this one is simple. Global economic growth is about 3%, give or take. It’s actually been lagging a little bit. As we’re speaking, the IMF is holding their spring meeting in Washington to do the world economic outlook. It’s a big deal announcement this week when they’re going to update their forecasts on global growth. It fluctuates, obviously, but let’s call it 3%.

Regarding mining output, take the total stock of gold in the world estimated at about 180,000 tons or a bit more, and then say how much are the miners producing, and what does that add to the global stock on an annual basis? That number is a little under 2%, so you say, “Global growth is 3%, mining output is 2%; it’s close but it’s not exactly right.”

It’s pretty good, and that’s why gold is a very good monetary standard, because it grows at about the level of global growth. If you say that global growth is slowing, which it is because of demographics and other structural headwinds, and mining output even remains constant – I don’t know if we’re at peak gold or not – those two match up pretty well.

It’s not perfect, but nothing is perfect. It’s a lot better than relying on central bank printing presses, uncertain velocity, and money creation by banks. There are so many wildcards. That’s a type of monetary system where I’d feel a lot more comfortable with gold.

Having said that, it’s completely irrelevant. Go back to what I said about official gold versus total gold. There are approximately 33,000 tons of official gold but 180,000 tons of total gold. That means we have 147,000 tons of privately owned gold.

By the way, you can have discretionary monetary policy and a gold standard at the same time. It’s not as if, under a gold standard, we’re all going to walk around with gold coins in our pockets and pay our rent by handing the landlord a gold coin or two. No, you can have printed money; it’s just that it’s backed by gold and convertible into gold at a fixed rate. That’s what a gold standard is.

You can have a central bank and discretionary monetary policy and a gold standard side by side. From 1913 to 1971, the U.S. had both. We had – and still have – a Federal Reserve, and we had a gold standard, and the U.S. stuck to that.

Therefore, when you have this discretionary monetary policy, you go, “We’re in a really bad recession or we’re in a depression. Good old Milton Friedman or Ben Bernanke told us we should expand the money supply, but there’s just not enough gold. Those miners aren’t working fast enough. It’s a drag on global growth.” So what? Just buy some private gold.

It’s called an open market operation and is exactly what central banks do today. They do it in the bond market, and you can do it in the gold market. How does the federal reserve expand monetary supply today? They call up Goldman Sachs or Citibank and say, “Offer me some ten-year notes or two-year notes.” Boom – done. The bank – Goldman Sachs, for example – delivers the notes to the Federal Reserve, and the Federal Reserve pays for it by crediting Goldman’s bank account with money from thin air. That’s how they create money; they buy bonds and pay for it with money that comes out of nowhere.

Right this minute, the Fed is doing the opposite. The Fed is actually destroying money. They’re not selling any bonds, but when the existing bonds mature, the Treasury pays them. Just as the Fed creates money out of thin air, if you send money to the Fed, the money disappears. So, when bonds mature and the Treasury pays the money to the Fed and the Fed does not buy a new bond, that money goes away.

The Fed is actually reducing base money. Picture Jay Powell with a pile of $100 bills and a roaring furnace and a shovel. He’s shoveling $100 bills into the furnace. That’s what’s going on with money supply right now.

Having said that, when the Fed wants to expand or contract money, they buy and sell bonds. Well, you could just buy and sell gold. Call up our friends in Switzerland, the refiners, and say, “I’d like to buy 10 tons of gold, because I need to expand the money supply.” Print the money and pay PAMP or Argor or Johnson Matthey or any of the big refineries with money from thin air the way you pay Goldman Sachs or Citibank for bonds. You’ve now expanded the money supply, and you have the gold.

In other words, the fact that mining output is about the same or even less than economic growth is irrelevant to the ability to expand the money supply in a gold standard. All you have to do is buy private gold, and there’s lots of it. So, there’s really not a constraint. That’s another one of these things that on examination just completely falls down.

Alex: In our last podcast, we talked a little bit about the difference in mentality between people who have wealth and are trying to protect it versus people who don’t necessarily have the wealth they want yet, so they’re basically chasing growth, chasing yield. You hear that all the time – chasing yield.

This next objection comes a lot of times from people who are in that frame of chasing yield. Sometimes they’re professional money managers, sometimes they’re not. The objection is that gold has no yield. I think that came originally from Warren Buffet.

Jim: It’s certainly one of Warren Buffet’s complaints. He has this reputation as an awesome, incredible stock picker. Well, he’s pretty good, and he does fundamental analysis. I don’t want to disparage Warren Buffet’s stock picking ability, but one of the reasons he’s worth $90 billion is because he’s the king of tax deferred interest, tax deferred yield. This is why he buys insurance companies.

When Warren Buffet was a little kid, he figured out compounding, and anyone who does the math understands the power of compounding. He said, “If I could just not pay taxes…” Interestingly, he was in favor of a tax increase for the rest of us back in prior years, but he doesn’t pay much taxes himself. Be that as it may, that’s the power of compounding, so Warren Buffet hates gold because it has no yield.

Here’s the answer: Gold is not supposed to have a yield; it’s money. Some things have yields, because they’re investments, because you take risk. Other things don’t have a yield, because they’re not investments, at least not in the conventional sense; they’re money.

I’m going to do something I don’t usually do, because it is a little bit of stagecraft, but I happen to have it handy. I’m holding up a $100 bill, and hopefully our viewers can see this. I’ll turn it around so you can see Ben Franklin. My question for viewers is, “I’m holding a $100 bill in my hand. What’s the yield?” The yield is zero. This $100 bill has no yield. I took it out of my wallet, I’m going to put it back in my wallet, it has no yield. I don’t have a piece of gold handy, but if I did, it would have no yield either.

In other words, money has no yield and isn’t supposed to have a yield. If you want yield, you have to take risks. People go, “Wait a second, my money in the bank has yield. It’s not much, a quarter of 1% or half of 1% or whatever.” I remind people, if you have money in the bank, it’s not money. You may think of it as money, but it’s technically an unsecured liability of an occasionally insolvent financial institution.

How good was your money in 2008 when Lehman was failing, there was a run on Citibank, and Citibank was failing? Talk to bankers, talk to anybody, really. People were pulling their money out of the banks, stuffing it under a mattress, moving it around. If they had more than $250,000, they were spreading it around so they could get under the FDIC insurance cap.

One of the things the Fed did to restore confidence was to guarantee every bank deposit in America. Well, if that were really money like this $100 bill or a bar of gold, you wouldn’t have to guarantee anything. No one has to guarantee gold. If you have gold, it’s gold; it doesn’t need a guarantee.

The fact that they guaranteed it to stop the run on the bank tells you it’s not money; it’s something else. And it is something else; it’s a liability. People go, “I have money in the stock market, I have money in the bond market, I have money in real estate.” No, you don’t. You may have stocks, bonds, and real estate, but that’s not money.

If you want money, you have to sell them. And guess what? When you go to sell them, everyone else is going to be selling them, because it’s a panic, and the price is collapsing, and the potential money you’re going to get is disappearing in front of your eyes.

The answer is, gold has no yield. That’s absolutely true, but that’s because it’s real money. This $100 bill is real money, and it has no yield either. Gold is not supposed to have a yield. If you want a yield, you take risk, and if you take risk, it’s not money anymore.

Alex: Next up: Gold causes depressions and panics, particularly The Great Depression. I hear that one all the time.

Jim: That’s been the subject of a lot of scholarship by Barry Eichengreen of University of California Berkeley, Paul Krugman, Ben Bernanke, and many others. I haven’t spoken to Krugman, but I’ve spoken to Bernanke and Barry Eichengreen and a number of other scholars on the subject.

They look at all these financial panics historically, and there were a lot of them – 1837, 1873, 1893, 1907 was a classic, 1929, etc. They say they all involved a run on the bank, people grabbing their gold, and liquidity traps.

In 1929 in particular, the fact that we were on a gold standard meant we could not expand the money supply fast enough to get out of the depression, and gold therefore caused The Great Depression. That’s wrong, but let me explain why it’s wrong.

Barry Eichengreen is a great scholar. He looked at all the countries, all the major trading partners of the world during the period of 1929 to 1933, and said that when they got off the gold standard, they started to grow.

They didn’t all break with the gold standard at the same time. France and Belgium devalued in 1925, the U.K. devalued in 1931, the United States devalued in 1933, France and U.K. devalued again in 1936, there was the Tripartite agreement, and there were other examples in Italy and Belgium. Remember, there was no euro at the time, so these were all separate countries with their own currencies and gold standards.

He showed that if you went off the gold standard, you grew, and the people who stayed on the gold standard did not grow as fast. Voilà, getting off the gold standard gets you out of a depression.

It was great scholarship, because it was very hard to come up with all the data and do that work. Maybe he’ll get a Nobel prize for it, but what that ignores is that the countries that grew did so at the expense of their trading partners. In other words, it was just a monetary version of “beggar thy neighbor” trade policy.

Empirically, did they grow? Yes, but you can’t conclude that abandoning the gold standard was the key to growth. If they had all abandoned the gold standard at once, they all would have grown the same. If they had all remained on the gold standard at the same time, they all would have grown the same. It was only because some did and some didn’t that the ones who abandoned stole growth from their trading partners. The world did not grow.

This is the point Eichengreen misses. The world did not grow; the world continued to contract. Did certain individual countries grow? Yes, but they did so at the expense of the rest of the world, so that’s not a solution in a global depression or a global panic.

The other point is (and Krugman is particularly glib about this), “The Fed should have done QE in 1929. They could have got us out of The Great Depression faster if only they had printed a lot more money.” There is no evidence for that.

They say gold constrained the ability of the Fed to print its way out of The Great Depression. I’ve read the research, and the guy who refutes that is Ben Bernanke. I spoke to Bernanke about this in person and said, “Mr. Chairman, I’ve read your book and your research, and here’s what I think you said. Do I have that right?” And he said, “Yes, you do.”

What he said was that gold was not a constraint on the increase in the money supply in The Great Depression. At the time, we had a certain amount of gold, we were on a gold standard, and there was a fixed ratio between money and gold. That was all true. But the law said that the Fed could print up to 250% of the market value of the gold.

Take the amount of gold we had – at the time, it was $20.67 an ounce – and do the math. That gives you a number times 2.5 (250%) as the legal limit on base money, M0. The Fed never got to 100%. Bernanke showed that if hypothetically the Fed had gotten to 250%, maybe then there would have been a constraint, but it never happened. They never got past 100%.

The problem was not that the Fed couldn’t print more money; they could. The problem was that nobody wanted it. Nobody wanted to borrow or lend or spend. We were in a deflationary period. When you’re in a deflationary period, the last thing you want to do is borrow money, because when you pay it back, the money is going to be worth more. People were taking it out of the bank like, “Hey, I’m not losing any interest, because the value of money is going up every day.” That’s what deflation is.

This is a liquidity trap as Keynes defined it. This is a problem. I’m not saying this wasn’t a problem, but I’m saying the problem wasn’t gold. The problem was confidence and policy flipflops from Hoover and Roosevelt.

There’s this whole notion that Hoover was a bonehead and Roosevelt was a genius, but if you look at the policies, they were very much the same. I’m not name calling. Hoover’s and FDR’s policies were very much the same. They were highly interventionist. They would do something, and if it didn’t work, they would try something else.

Historians (except for a few – Amity Shlaes is one who gets it) by and large ignore the fact that all that flipflopping destroyed confidence. Capital went on strike. Capital went to the sidelines and said, “Call me when it’s over. When you’re done with all these administrations and all that, we’ll get back to it.”

There were causes for The Great Depression, but they had to do with asset bubbles caused by earlier Fed blunders, the Fed tightening at the wrong time, discretionary monetary policy, and with policy coming out of the executive branch that caused a loss of confidence. It did not have anything to do with gold. Gold never acted as a constraint on money supply; the constraint was that people didn’t want the money. They didn’t want to borrow, and they didn’t want to lend.

Having said all that, tell me that we haven’t had financial panics since the end of the gold standard. Let’s just take since 1971 and no more gold. According to Krugman, we’re not going to have any more financial panics. Well, what was 1987 when the stock market fell 22% in one day, equivalent to over 4000 DOW points or 400 S&P points today? What was 1994 and the Tequila Crisis with the Mexican peso? What was 1997 in Thailand? What was 1998 with Russia and Long-Term Capital? What was 2000 with the dot-coms? What was 2007 with mortgages? What was 2008 with Lehman?

In other words, we’ve had one long string after another of financial panics, liquidity crises, etc. without the gold standard. So, if you’re a statistician, you would say “We had panics with the gold standard and we had panics without the gold standard. There’s no correlation, therefore no causation. Gold has nothing to do with it.” That’s the right conclusion.

They’re just using gold as a whipping boy or a kind of boogeyman regarding financial panics. Financial panics are behavioral. They’re not monetary; they’re psychological. They’re easy to foresee yet hard to predict the exact timing. We don’t know exactly what’s going to trigger it, but they’re behavioral and psychological, not primarily monetary, and they have nothing to do with gold.

Alex: Moving on, the next common objection when it comes to gold is that gold has no intrinsic value.

Jim: The one you probably hear most frequently is, “It’s just gold.” Joe Weisenthal on Bloomberg is a nice guy, but he makes fun of me. He says, “Jim, you support gold, but it’s a shiny rock.” I say “Joe, it’s not a rock; it’s a metal, so why don’t you get your chemistry and your geology straight?” It is a metal. Objectors say, “You look at it, it’s pretty, you can put it on the shelf, but it has no intrinsic value.” What does that mean, if you even know what you’re talking about? I think most people who use that phrase do not know what they’re talking about.

The theory of intrinsic value goes back to David Ricardo, one of the great economists of all time. As an early 19th century economist, he was trying to solve a problem. He was trying to say, “What are things worth? How do we value things? When we decide that something is worth a certain amount and something else is worth more or less, how do we do that?” His theory was, “Let’s take the inputs – how much labor, capital, and raw materials went into this? Add it all up, and that’s the intrinsic value. That’s what the thing is worth.”

Fast forward about 30 years, and along comes Karl Marx who looks at Ricardo’s intrinsic theory of value and says, “That’s a good theory. Oh, by the way, you have multiple factory inputs, and you have labor and capital. But because capitalists control the means of production, they don’t give labor their fair share.”

There’s some intrinsic value, but labor doesn’t get all it deserves. The surplus labor value goes to the capitalists, because they control the means of production. That’s not fair; that’s going to lead to a revolution, communism, and all the rest. We’re all familiar with Marxian dogma. Marx was using the intrinsic theory of value but just adding to it by saying, “Yes, and somebody is taking more than their share.” That was called the surplus theory of labor value.

Come forward another 30 years to 1871 in Vienna, Austria, University of Vienna. Carl Menger, the founder of Austrian economics, said, “Nonsense. Nice job, Ricardo, you were solving a hard problem. Marx, you got a little crazy with the whole thing. There is no intrinsic theory of value, or at least that’s not the way to think about value. Value is subjective.” The common expression is ‘something is worth what someone will pay for it.’

I have a pen right here. If I want to sell it, what am I offered? If I put it on eBay, I might get two dollars, five cents or a buck, I don’t even know. The point is, it’s worth what somebody will pay for it, and this is why we have markets, so we can have price discovery. For that matter, this is why we have eBay in the 21st century version.

It’s fine to say something is worth what somebody will pay for it, but how do people know what’s for sale? How do people know that if they’re looking for it, they can even find it? Well, that’s why we have markets, which led to a free market theory that was the basis of Austrian economics. That was brought forward into the 21st century. We could get into Keynes, Milton Friedman, and some variations on that.

Ever since 1871, all economists – neo-Keynesian, monetarist, modern monetary theory, Austrian, historical, pick your school of economics – they all think Menger got it right that things are basically worth what somebody will pay for it, and we need markets to discover that despite market imperfections, which is a separate discussion.

When someone says to you, “Gold has no intrinsic value,” you should compliment them on their firm grasp of Marxian economics and remind them that that has been junk science since 1871. The theory of intrinsic value has nothing to do with what things are actually worth.

Alex: This reminds me of another conversation we had on a recent podcast when we discussed gold’s unique properties. One of the things we were talking about is how gold is unique in physics. There are a lot of different forms of money all throughout history such as shells, feathers, wooden sticks, cows, and so on. The common thread amongst all of them is confidence, right?

Jim: Right.

Alex: Something that is unique to gold – and this is a physics property – is that you really can’t destroy it. You’d have to take it apart at a subatomic level in order to destroy it. You’d have to fire it into the sun or something of that nature.

My feeling is that it ties into why gold has been money for so long. Humans want our own value and value for our labor to be retained over time, and that’s been very attractive or a part of it.

Jim: That’s exactly right, Alex. Combine that with what we said earlier about mining output. It’s not like miners aren’t trying. They’re out there doing the geology, the surveys, the feasibility studies, gathering capital, drilling, testing, and core samples. I’ve been to mines, and I’m sure you have as well.

I’ve been to the other end of the spectrum at refineries and vaults where the finished product comes out, and I also walked around Quebec in future mines, just walking around rocks in the middle of nowhere. I’ve seen that end of the business as well.

The fact is, try as hard as they might, they can only increase the physical supplies just a little under 2% a year. It’s interesting to me that this global output syncs up with population growth and productivity. We don’t have to get theological, but is that a God-given property of gold? Plus the fact that it’s an element – it’s not a molecule – it’s atomic number 79, and it does have these properties that make it extremely suitable as money.

You can say some, but not all, of the same things about silver. Silver is a close second, but there’s nothing like gold, and there’s never been a form of money that has worked as well as gold.

I obviously invest in physical gold, and very recently I’ve started collecting rare gold coins. When I say rare, we’re talking about 1400 years old, the Aureus and the Solidus from the late antiquity. It’s just for fun. I have no illusions that I’m getting my money’s worth in gold. Whatever I pay, I’m paying for the numismatic value. It’s not a good way to invest in gold, let me put it that way, but it’s a hobby.

If you want to invest in gold, get an American gold eagle, an American buffalo, a maple leaf, or a one-kilo bar from a reputable refiner. That’s the way to invest in gold. Don’t pay up for a 33 Morgan or whatever unless you’re a real collector and you know what you’re doing. It’s not a good way to buy gold.

As I said, I’ve started buying coins, because they’re beautiful and very interesting. I study history quite a bit and see that the greatest empires in history lasted a long time while they had these coins as a monetary standard until the minute they abandoned it one way or the other. Some began clipping the coin where you actually see these coins with little clips around them. Everyone took a little piece and melted it down, or in the case of silver or gold, mixed it with base metals or abandoned it completely, etc. Those empires collapsed.

Hopefully the U.S. will wake up before it’s too late, but it is an extremely suitable form of money. When I say something like that, people go ,“Come on, Jim, it’s progress. A horse-drawn carriage used to be a good way to get around, but we don’t do that anymore. We use cars, and pretty soon we’ll have electric cars.”

I understand that. I recognize progress and technology and embrace it to a great extent, but not everything that has ancient roots is to be abandoned or has been improved upon. Some things have not been improved upon, and I would say gold is one of them.

Alex: I totally agree. Both of us are students of history. What you just mentioned is where the term “debasing the money” came from.

Jim: I guess you could say gold is an ancient form of money, but it’s not as if paper is not also an ancient form of money. It goes back to the 7th century and the Tang dynasty in China. It’s been tried many times and always failed. We don’t have time on this podcast, but maybe you’d have a different debate with bitcoin, because bitcoin is new. By the way, I don’t recommend bitcoin. I have a whole long criticism of bitcoin as we’ve discussed on a previous podcast.

If gold were ancient money and paper money were some new late 20th century invention, maybe you would say the jury is out on paper, but paper is not new either. It’s been around not as long as gold but quite a bit of time. So, you actually have two very old forms of money that have competed head to head time and again over thousands of years, and gold always wins. Again, if you’re a student of history and monetary policy, you understand that.

Alex: We’re running close to the end of our podcast here. We had lots of other topics on deck, but this has been a fascinating discussion. In the same vein, the last objection to gold is John Maynard Keynes saying that gold is a barbarous relic.

Jim: There’s a short answer, but I’ll give you a slightly longer backstory. The short answer is he never said it. Other than intrinsic value, this is the one you hear the most when you say to people, “I buy gold” or “I have gold in my portfolio.” Usually, the first objection is that gold has no intrinsic value; we already disposed of that. The other one is it’s a barbarous relic.

Keynes never actually said that. You see the quote all the time, “Gold is a barbarous relic.” You can find it on Wikipedia. I write books and do a lot of research, and I’m fanatical about sourcing. I was finding different versions of this quote in different citations, and I said, “This is important. I want to get this right.”

I went to an antiquarian book seller and got a first edition of John Maynard Keynes’ monetary theory from 1924. It’s interesting that it was 1924 before England went back to the gold standard and certainly before the 1930s when they abandoned it, etc. What Keynes actually said is that the gold exchange standard is already a barbarous relic.

In other words, he was not talking about gold; he was talking about the monetary arrangement of the day, which was the gold exchange standard. This came out of the general conference in 1922. The words ‘gold exchange’ means ‘gold plus foreign exchange.’

If you’re a country with trading partners, what are good reserves and what can you use to settle your balance of payment? You have a trading partner, you run a deficit, you have to pay the other guy – whether it’s England, France, Italy, Belgium or the U.S. for that matter – for your deficit in something they accept. The question is, what’s acceptable?

They all agreed that gold was acceptable, but they also said that certain kinds of foreign exchange such as pound sterling, French francs, and U.S. dollars were also acceptable. This is a way to expand the money supply. It was gold plus foreign exchange, so they called it the gold exchange standard.

That’s what Keynes was talking about when he said it was a barbarous relic, because he said it wasn’t working well. And he was right. I agree with Keynes on that. He did not say gold is a barbarous relic; he said the gold exchange standard of today is a barbarous relic.

In 1914, at the outbreak of World War I, the U.K., the Exchequer and His Majesty’s Treasury, were considering going off the gold standard, because Germany, Belgium, France, and all the other combatant belligerent nations had already done so. Bear in mind the U.S. was not in the war at that time. We joined in 1917, but the U.S. was a neutral power from 1914 to 1917.

All the belligerent powers had gone off the gold standard while the U.K. was still on it, and there was a debate about whether they should go off also. Keynes was the loudest, most persuasive voice saying, “No, stay on the gold standard.”

As his reason, he said, “London is the heart of global finance. We have the best credit in the world. If we abandon the gold standard, we’ll destroy our credit. If we remain on the gold standard, our credit will be preserved, and we’ll be able to borrow. Borrowing is the key to winning the war, because nobody has enough money to fight the war unless you can borrow.” Of course, printing money is just a way of borrowing from your own citizens. He said, “We’ll stay on the gold standard, preserve our credit, and borrow.”

That’s exactly what happened. The House of Morgan, Jack Morgan who was the son of J.P. Morgan and was running the House of Morgan in 1914, organized huge loans for France and the U.K. You know how much he raised for Germany? Zero. Morgan did not raise a penny for Germany, and the U.K. won the war.

So, Keynes was right about that. Flash forward 30 years later to 1944 and Bretton Woods. Who was in favor of a gold standard? John Maynard Keynes. The U.S. wanted a gold standard but a different kind of gold standard. In the U.S. vision, the dollar is linked to gold and everything else is linked to the dollar. So, there was a dollar-sterling exchange rate, a dollar-franc exchange rate, etc., and then the dollar was linked to gold.

Indirectly, everybody else was linked to gold, but all those other countries could devalue. If your terms of trade changed, if you had persistent deficits, if you made structural changes, if you couldn’t get out of it, you could apply to the IMF and, subject to a process, devalue your currency. The one country that was not allowed to devalue was the United States.

This was a dollar/gold blanket with everyone else hitching a ride to the dollar. That’s not what Keynes wanted. He wanted a world where you had a world money, which he called the Bancor similar to the current Special Drawing Right, that was backed by gold. Everyone else could link to the Bancor, and there would be more multilateral control. Well, Keynes got shut down.

My point being, Keynes advocated for gold in 1914, and he advocated for gold in 1944. He never said gold was a barbarous relic. If Keynes was alive today, he’d be spinning in his grave.

Alex: I suspect it’s just an easy thing for people to remember. That’s what makes the best memes, the ones that are easy for people to remember and repeat.

Jim: That’s true of everything we’ve discussed in this whole podcast. “Gold is a barbarous relic. Gold has no intrinsic value. Gold caused The Great Depression. There’s not enough gold.” Everything we’ve gone through is simply an “off the top of the head,” all-purpose rebuttal to gold, and none of them are true. The only one that’s true is the one that’s irrelevant, which is that gold has no yield. Yes, but again, it’s not supposed to.

Alex: This has been a super interesting conversation. We spent almost an entire hour doing a deep dive on this. We had a lot of other things lined up, but I think this has been great. We’re out of time, Jim, so I want to say thanks for the discussion today. I appreciate it as always, and I look forward to getting together with you next time.

Jim: Thank you, Alex.

You have been listening to The Gold Chronicles with Jim Rickards and Alex Stanczyk presented by Physical Gold Fund. Recordings can be found at You may also register there for news of upcoming interviews with Jim Rickards and other world-class thinkers.


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The Gold Chronicles: April 2018 podcast with Jim Rickards and Alex Stanczyk


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Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles March 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles March 2018


Topics Include:

*Update on 3rd Great Gold Bull Market

*Proper portfolio allocation when it comes to gold

*The difference in mindset between investors that are trying to accumulate wealth, versus investors who have wealth and are trying to protect it

*Gold as insurance versus investment

*Currency Wars

*Trade Wars

*Moving jobs from outside the US, into the US

*North Korea Update


Listen to the original audio of the podcast here

The Gold Chronicles: March 2018 podcast 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, and welcome to another edition of The Gold Chronicles. This
one is for March 2018, and I have with me the brilliant Mr. Jim Rickards. Welcome, Jim.

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

Alex: Just briefly, in our last episode of The Gold Chronicles, we covered several different things
including why exploding sovereign debt and the debt-to- GDP ratio are critical to market
stability in the next few years, how student loans at about $1.5 trillion is a big problem and how
its significant default rate is going to affect other things, what the two critical conference
boundaries are and how we might cross them, and then finally, we did an interesting potential
scenario. Jim wasn’t calling this a forecast, but it was a three-year playbook.

If you’re interested in that episode, you may access the archive of all of our podcasts at

Why don’t we dive right in, Jim. The first topic is gold. I’m not going to prompt you at all
regarding this topic; I’m just going to let you run with your thoughts. Let’s keep this one short,
because we have a couple more that are really important, but what are your current thoughts
on gold right now?

Jim: Just very big picture, as I mentioned before, we’re in the third great bull market of my
lifetime – actually, the third bull market in history.

The reason I say that is, prior to 1971 – or in different ways, 1933 – the world was on a gold
standard. We didn’t really have bull markets and bear markets in gold, because the whole idea
was that the money was gold or that the money was backed by gold. Either way, it was a
constant store of value and a constant exchange rate, so people were happy with that. They
weren’t looking to make money on gold, because gold was money.

It’s only in the 20 th century when countries went off the gold standard that we had to say,
“What’s the ratio of dollars to gold by weight?” Now we get these bull and bear markets. I can
say it’s of my lifetime, but maybe it’s of all history. It’s just the new world we’re living in.
That said, the first bull market was 1971 to 1980 when gold was up well over 2000%. The
second bull market was 1999 to 2011 when gold was up almost 700%. The third bull market
began in December of 2015 and is running today. It will run for many years to come, and in my
view is the one that’s going to take gold up to $10,000 an ounce.

I don’t want to go through all the analysis behind that, because you know I don’t like to make
claims without the analysis. I just made a claim about the bull market, but we did provide all
that analysis in prior podcasts.

To update that story a little bit, gold has been strong very recently, back to that $1350 to $1355
level for the third time in just the past three months. It fluctuates and could be down tomorrow
and up again the day after. We all understand that.

What strikes me the most and is the real story on gold right now is that gold is showing a lot of
strength in the face of very adverse conditions. Two charts in particular caught my eye. One
was the comparison of gold to real interest rates.

The real interest rates were shown on an inverted scale, meaning if the line went down, that
meant interest rates were going up. These were real interest rates, so using five-year TIPS to
strip out inflation (because the principle is adjusted for inflation), this was just the real rate, the
so-called term premium. The other line on the chart was the dollar price of gold, and that was
on a normal scale, meaning up is up.

It shows from 2013 to 2017 that those are highly correlated. If you take it back even longer, the
pattern is very similar. They go down, up, down, up, but they move together with a high degree
of correlation. That makes sense. Money, bonds, and notes compete with gold for the investor
dollar. As we’ve talked about before, gold has no yield. It’s not supposed to, because it’s

These other instruments, whether bank deposits, five-year notes or ten-year notes, do have
yields. The higher the real yield is, the more an investor is inclined to buy the note and not buy
the gold, because they can get a higher return. With lower real yields, gold looks relatively more
attractive, because the opportunity cost of holding it is a lot lower. To me, that’s not the reason
to hold gold, but for a lot of people, that is the reason to hold gold or not hold gold.

That’s a very meaningful figure. The fact that they were correlated makes sense, except
beginning in 2017, continuing today, and getting more extreme by the day, those lines
diverged. All of a sudden, real interest rates were continuing to go up (which meant that the
line was going down on the inverted scale), but the dollar price of gold was also going up.

There was this correlation, but then suddenly, gold goes like this, real interest rates go like this
(meaning they’re going up; a downward-sloping line is up), and there was this spread opening
up between higher real rates and higher dollar gold prices. That’s extremely unusual. When you
see that, it tells you something is going on. You have to ask yourself more questions, because
that is a highly unusual pattern.

There are a couple of narratives you could apply to that. The first one is, one of them is wrong.
The market is never wrong; the market is what it is, so you take the data. You can’t make up the
data, but from a narrative and forecasting perspective, you would say one of those is wrong.
Either gold prices must correct sharply – gold must come way down and get back in line with
real rates – or the real rates must crash down a lot and get back in line with gold. One way or
another, that gap is going to be reconciled. Either the gold price is going to come down or real
rates have to come way down, meaning that line goes up and they get back in sync.

My view is that the real rates have got it wrong. In other words, this inflation narrative – the
strong growth narrative, the fiscal stimulus narrative coming out of the Trump tax cuts – none of
that is going to materialize the way markets expect.

These real rates are real rates, meaning they’re going to slow the economy. They’re not
happening because growth is strong or borrowing demand is high or thriving enterprises are
competing for funds. Those are normal business cycle events that you might see. They’re not
happening, and that’s not what we see.

What we see is expectations, Fed policy, and other factors taking real rates higher for no good
reason. In my view, that’s going to correct by real rates coming down and those lines getting
back in sync. In other words, gold is looking through the cycle a little bit. Gold is more forward-
leaning than five-year note rates, and it’s saying the Fed has to back off.

The Fed has to switch from this double tightening mode we described – tightening by raising
rates, tightening by reducing the balance sheet, tightening into the teeth of a weak economy.
They’re going to have to back off. They’re not going to cut rates, but they can easily use forward
guidance to indicate they’re going to skip a rate hike.

Right now, the stars are aligned for two or maybe three more rate hikes over the course of the
year. I expect as of now that they’ll hike one more time in June, but after that, they’re going to
hit a wall. If I’m right in the economic forecast and growth slows, they’re going to hit a wall and
won’t be able to raise for the rest of the year. Real rates are going to go down, and those lines
are going to converge.

That’s one explanation, but there’s another explanation equally powerful that has very good
evidence, which is that it’s just good old-fashioned supply and demand. Gold is saying, “To heck
with real rates and all these other correlations. We’re going to go our own way, because people
want gold.”

When I say people, unfortunately I don’t mean Americans. I spoke to a gold dealer recently, and
he said, “Jim, business is awful.” I said, “Well, I’m always here for you.” But business is pretty
bad. He showed me some numbers he gets from the Mint because he’s on a special mailing list,
and they were just dismal. Americans don’t get it.

Again, I don’t have to spend a lot of time on this story. Russia, China, Turkey, and now Iran
(secretly, because they’re nontransparent) are major economies. They’re emerging markets,
but they are big economies with 80 million people in Iran, a billion people in China, upwards of
200 million in Russia, and Turkey around 80 million people. These are very big economies
among the 20 largest in the world with China in second, of course. They’re buying all the gold
they can. There’s also India’s consumer demand as opposed to government demand.

The mining capacity is not growing and, in fact, is barely keeping even. I don’t want to get into
peak gold; that may or may not be true. There’s some evidence it is true, but you don’t have to
go there. You just need to understand that when they took mines offline in 2013, 2014, and
2015 when the price of gold was in a bear market and those mines were not economic, it’s not
like throwing a switch; it takes years to get those mines back online.

I think both things are true:
 Gold is correctly anticipating a flip to ease by the Fed, because the Fed is over-tightening
and will have to reverse course thereby giving gold a huge boost later in the year and,
 There is a supply-demand fundamentals story there

Again, gold is very strong. As of this podcast, it’s outperforming the Dow Jones and S&P 500 this
year. This bull market goes back to 2015. Gold is up 35% with a lot of strength in the face of a
lot of adverse factors. As those adverse factors flip, the headwind will turn into a tailwind, and
gold will go even higher. It’s a very bullish scenario for gold right now, and it looks like a great
entry point.

Alex: Let’s talk a little bit about forecasting gold, because I think you and I have a lot of the
same viewpoints and values when it comes to the way we look at gold. I know you and I look at
gold as insurance. In my experience in the industry going on 11 years, I run into two different
kinds of gold investors.

The first type of gold investor is basically just capital gains oriented. They’re looking at gold as a
trade. They want to get in, get gains, and get out. Another type of investor is more interested in
gold as sort of an insurance for the rest of their portfolio.

I notice there are a number of people who follow our podcast and follow you, Jim. Sometimes
they say, “Jim, you’ve been talking about gold for X number of years, and I could have done this
other trade. It hasn’t done what I thought it was going to do in this time frame, etc.” What do
you think about that?

Jim: Two things. Number one, I recommend a 10% allocation; 10% of your investable assets. If
you go back and look at my books, at podcasts, and at interviews, I’ve consistently said this for

I have a working definition of investable assets, and it’s not the same as your net worth. Take
your home equity or whatever it may be and put that to one side. Also take your business
equity. If you’re a doctor, lawyer, dentist, auto dealer, dry cleaner, restauranteur or whatever it
may be, you have some equity in your business. Put that to one side, because you don’t want to
mess around and speculate with your home and your business. That’s your livelihood and the
roof over your head, so exclude those.

Whatever’s left are your investable assets. It’ll be a 401(k) or savings account or stock portfolio,
etc. Take 10% of that – which is less than 10% of your net worth assuming you have some equity
in the other things – and put that into gold. If you want a slice for silver, that’s fine, but primarily

People approach this topic as if it’s a binary world. “Jim, I either have to be 100% stocks or
100% gold. You like gold, but if I’m 100% in gold, I miss out on the stock market.” Well, I never
said that. That’s a bad portfolio choice. It shouldn’t be 100% in one.

That’s a false setup, a false frame. Honestly, I think a lot of the people who complain about
that, if you met them in person and drilled down a little bit, you’d find that they do have a
balanced portfolio. They’re just grumpy about the gold part, or they have one gold coin and no
stocks and wish they owned ten shares in Google or whatever it might be.

The more thoughtful listener, the more sophisticated viewer, understands what I’m saying. If
you put 10% in anything and it goes down 20%, you take a 2% ding on your portfolio, but you
could have been making a lot more on everything else.

This is not my recommended portfolio, but if you happen to be 10% gold and 90% stocks, you
didn’t miss anything in terms of stock market rally. In fact, as I’ve described, gold has out-
performed stocks this year. In the 21 st century, and in the last couple of years, it has at least
held its own. As I said, gold is up 35% since the bottom in December 2015, so it’s not true that
gold has done poorly.

Gold has actually done very well since 2015. Okay, we had a bear market from 2011 to 2015. If
you backed up the truck and bought gold in August 2011, you’re down significantly, 40% or so. I
understand that, but that would not have been a prudent decision.

You should be buying gold all along, accumulating it. As you get more income, take the 10%
slice, buy the gold, and do what you want with the rest. You should diversify that as well, but I’ll
leave that to individuals. If you’re getting an average price as opposed to a peak price and you
went for a 10% slice, you haven’t done that poorly at all.

It’s a myth that gold hasn’t done well; gold has done well. It has not had the kind of bubbly
activity in recent years that stocks have, but we’ve seen lately that that’s a two-edged sword.
There have been days when the stock market is down 4% or 5% in a single day, as it was very

recently and has been more than once. We’ve had a number of 3% or 4% down days in the past
several months, and as I say, gold has held itself.

Number one, diversify. If you have 90% in stocks and 10% in gold, you’ve done just fine and
have no cause for complaint.

As far as the 10% gold is concerned, people have insurance. They have fire insurance, casualty
insurance, liability insurance, all kinds of insurance. When you write a check to the insurance
company for the premium, you don’t think you’re throwing your money away. You think you’re
doing something smart, because how could you sleep at night if you didn’t have insurance? We
all know we’ve seen a lot of natural disasters, we live in a litigious society, etc., so you think
that’s a good use of money.

Well, when you have gold, if stocks outperform gold in some stretch – and sometimes they do,
of course – take the opportunity cost. Here’s a simple example: 90% of your portfolio went up
30% and 10% of your portfolio (which is gold) went up 10%. What’s your opportunity cost? Your
opportunity cost is 10% of 20%, in other words 2%. That’s what it cost you in terms of overall
portfolio performance to be in gold instead of stocks for the 10% slice. It costs you 2%.

That’s the check you’re writing to the insurance company in order to have the insurance in case
the stock market falls 20% or more in one day (which it did on October 19 th , 1987) or just does a
very quick 10% down in a couple of weeks, which we’ve seen twice in recent months. You write
that insurance check, and now you preserve wealth in that portion of the portfolio. That’s a
mild thing, and you’re glad you have the gold.

What I just described is not Hurricane Andrew or Hurricane Katrina. Hurricane Katrina in stocks
versus gold is when you have a global liquidity crisis, when they shut the stock exchange – which
has happened many times, by the way, and people tend to ignore that – and the price of gold is
going up $100 an ounce a day, $200 an ounce the next day, it’s screaming, and you say, “Give
me some gold. This is the only thing that’s going to protect my portfolio.” You call the dealer
and the phone is off the hook, you call the Mint and they’re backordered, and you’re watching
it go up on TV and you say, “I want some gold,” but you can’t get it.

That’s Hurricane Katrina, the real insurance scenario. That’s the reason to have gold, and you’ll
be very happy you did. You will not end up unhappy when that happens. My answer is to do a
10% slice. When it underperforms, think of it as insurance, which it is, and when it outperforms,
you’ll be very glad you did.

Alex: That whole scenario you’ve just described, when gold’s running and people are trying to
get it and they can’t, is the entire reason we decided to not trade on the secondary market. I
totally agree with you there.

As a final comment before we move on to the next topic, in my experience, I’ve noticed there’s
a different mindset. You mentioned a sophisticated investor versus someone who’s maybe not
as much. There’s a difference between somebody who’s trying to build their wealth and
somebody who’s already got wealth and are trying to protect it. They look at the world another
way, so that makes a big difference.

Jim: Let me drop a quick footnote there, Alex. I won’t mention names, but I was having dinner
with an individual who would be a household name, a multibillionaire who runs one of the
biggest hedge funds in the world. This fund is multi-strategy and trades stocks, bonds,
commodities, currencies, and private equity all day long. You would associate this individual
with being a big foot in the stock market.

It was a private dinner with himself, his wife, and my wife, so just the four of us. We weren’t
talking about stocks or gold; we were talking about other things that interest us, but my wife
has this insatiable curiosity, so she turned to this hedge fund manager and said, “By the way, do
you own gold?” He looked at her and said, “Lots,” and that was the end of the discussion.
I’ve had more than one encounter like that where I meet these billionaires who are known for
hedge fund stock trading, but you ask them privately, “Do you own gold?” and they say, “Yes, I
do, and a lot of it.” These are the most sophisticated people in the world, and they think it’s a
good move.

Alex: I totally agree. I have numerous stories similar to that. We won’t get into the weeds on it,
but yes, absolutely.

Let’s move on to the next topic. In February, there was a pretty serious correction in the U.S.
stock market. There’s been a lot of talk about that and a trade war. What are your thoughts on

Jim: We are in a trade war, and that has been one of the drivers of the stock market in recent
months. Let me unpack that a little bit. A lot of viewers know my first book called Currency
Wars that came out in December 2011. I said at the time that the world is not always in a
currency war, but when we are in a currency war, it can go for 10 or 15 or 20 years. I
documented several cases where that was true, and I outlined the dynamics behind that in
terms of why it’s true.

I said this new currency war began in January 2010. The reason I could pinpoint it is that was
President Obama’s 2010 State of the Union address at the end of January when he announced
the National Export Initiative to double U.S. exports in five years.

I said to myself “That’s interesting. How do you double U.S. exports in five years?” We’re not
going to be twice as productive, we’re not going to be twice as smart, there aren’t going to be
twice as many of us. There’s only one way to do that, which is to trash the currency. That’s

what we did between January 2010 and August 2011. In August 2011, the dollar hit an all-time
low using the Fed’s broad real index.

I prefer the Fed index to DXY. A lot of traders use DXY, and that showed dollar weakness at the
time, but DXY is heavily weighted to the euro. It’s almost a euro-U.S. dollar cross rate. I can get
that anywhere, so I don’t need DXY to tell me what that’s doing.

The Fed index is trade weighted by our actual trading partners, so it tells you more about how
the dollar is viewed globally. That index hit an all-time low in August 2011. We did trash the
dollar, here we are in 2018, and guess what? The currency wars are going strong, and I expect
we’ll be back here a year from now with the currency wars still going on.

I also said that the reason currency wars go on so long is because they don’t have a point of
resolution. It’s like a tennis match between two good players. It goes back and forth and back
and forth. I devalue and then you devalue, and then I devalue again, and you devalue again, or
I’m down and you’re up and then suddenly, I’m up and you’re down. It goes like this.

Alex: It’s the so-called race to the bottom.

Jim: Yes, it looks like a race to the bottom but with one difference. A stock or bond – or a
country as a whole if you want to take Venezuela or Zimbabwe as examples – can go all the way
to the bottom. Currencies have the dynamic of a race to the bottom, but one difference
between stocks and major currencies is that they don’t go to zero. The Zimbabwean dollar and
Venezuelan bolivar did, and maybe all currencies get there eventually, but at least in the short
to intermediate term, major currencies don’t go to zero. They can just go up and down like this.

If you look at the euro-U.S. dollar cross rate, in the last 20 years, that has made seven 20%
moves both ways. In 2000, the euro was about 80 cents. Within a few years, it was $1.60, $1.60
came back down to $1.20, it went up to $1.40, came all the way down to $1.05, and now it’s
back to $1.25. These are big moves in currency land.

In fact, when everyone was bemoaning the lack of volatility in 2017 prior to the recent
volatility, they said, “We’re looking at stocks and bonds, and there’s no volatility. Looking at the
DXY, there’s no volatility.” I said, “Look at the currency markets. There’s your volatility.” It’s
true, because that’s how countries were managing their growth. They were stealing it from
each other in the currency wars. That’s what currency wars are.

The point being, they go on for so long because they don’t have a resolution. After some period
– five or ten years – policymakers and leaders wake up to this fact. You would think they would
know it already because we have enough history, but they go, “You know, we’ve been fighting
these currency wars that are not really working. We still have the original problem, which is too
much debt and not enough growth.”

Those are the conditions in which currency wars emerge: too much debt and not enough
growth. We saw it in 1919 after World War I when the Germans owed reparations to the
French and British that they couldn’t pay, and the French and British owned war debts to the
United States that they couldn’t pay. Nobody could pay anybody, and so you have this debt
overhang standing in the way of growth, and you can’t pay your debt. It’s too much debt and
not enough growth.

The temptation is, “I’m going to steal growth from my trading partners by cheapening my
currency,” but it doesn’t work. After about ten years, they say “Oh, I’ve got it. Let’s have a trade
war.” In other words, currency wars become trade wars.

This trade war was completely predictable. It’s exactly what happened. The currency war – one
of the two I documented – began in 1921 – 1922 with the Weimar hyperinflation. Then we had a
French/Belgian devaluation in 1925, the Sterling devaluation in 1931, the U.S. dollar
devaluation in 1933, and the French and British devalued a second time in 1936. There was a
whole series of devaluations, but the trade wars started in 1930 with Smoot-Hawley, and then
you had a lot of reciprocal tariffs being imposed.

By the way, they can overlap. It’s not like one day the currency war is over and the trade war
begins. That’s not how it works. The currency war keeps going, but somewhere along the line,
the trade war begins, and then you have both.

Unfortunately, they end up in a shooting war. The sequence is currency war first, then trade
war, then shooting war. History shows that shooting wars work. When there’s a lot of
destruction and debt, that gives economic growth. It’s not a good outcome we should wish for,
but it does solve the debt problem by wiping out the debtors, and it solves the growth problem
by creating so much destruction that you have to rebuild. I’ll save that story for another day,
but based on that, the trade wars are 100% predictable, because it’s exactly what you would
expect in year seven or eight of a currency war.

Now that trade wars have begun, the fact that Trump did this, I couldn’t believe the markets
were shocked. From February 2 nd to February 8 th , U.S. stock markets had a full correction down
11%. They ran into correction territory, and everyone was like, “Oh my goodness, what a
surprise. Trump is starting a trade war.” Are you kidding? He’s been talking about this since the

Decades before he was even a public figure or certainly a politician, this was his biggest
grievance. “U.S. is getting ripped off with trade deficits,” etc. He talked about it. It was in his
speech in June 2015 when he announced he was running for president, and he talked about it
all throughout the campaign.

The only thing that threw people off is that when he got into office in January 2017, he did not
launch the trade war immediately after talking about it forever. There was a reason for that,

and that was North Korea. Who’s one of our biggest trading partners? China. Where do we
have the largest trade deficits? China and South Korea. Whose help do we need in dealing with
North Korea? China and South Korea.

The national security team, which at the time was McMaster, Tillerson, Mattis, General Kelly,
Dina Powell, Gary Cohn, and a few others, were saying, “Mr. President, don’t start this trade
war with China and South Korea, because we need their help to deal with North Korea.” And we
had what I call the trade troika (Wilbur Ross as Secretary of Commerce, Peter Navarro as White
House Trade Advisor, and most importantly but least well-known Robert Lighthizer, who today
is the U.S. Trade Representative) making the case for tariffs.

Throughout 2017, the national security team won. The trade troika did not have their voices
heard, but Trump wanted to do the tariffs. He realized China and South Korea were not really
helping. South Korea was kind of rolling over acting like a doormat for Kim Jong-un, China was
going through the motions doing a little of this and a little of that, but nothing really
substantial. Trump said, “I’m not getting the help I want, so why am I holding off on the trade
war if my reason for doing so is not being satisfied, which is I’m not getting the help I want with
the North Koreans?” So, he said, “Okay, time’s up. I gave you a year, you didn’t do anything, so
game on.”

We’ve seen references to the Trade Act of 1974, Sections 232 and 301. Section 232 allows
reciprocal tariffs for dumping, so if you can make a case that China is dumping steel, then you
can put a tariff on imported steel.

Section 301 is very different. It has to do with national security considerations. If you can show
that the trade or even non-trade practices or economic practices and policies of a trading
partner or an adversary are damaging national security, you can slap penalties and tariffs on

Trump is doing both. The first round, and the thing that knocked the stock market down in
February, were Section 232 tariffs. He started with solar panels and washing machines. Solar
panels are big and so are appliances coming out of mainly South Korea and some out of China.
Then he dropped the hammer on steel and aluminum, which are much more important, a much
bigger part of the economy. Those were all Section 232 tariffs that sent the stock market into
correction territory. Very recently in the past week or so, he’s come back with Section 301

They needed a report, because you can’t just do it arbitrarily, but it is important to note that
the president can do this on his own. He does not need Congressional approval to impose these
tariffs. It’s the law. Congress has already given the president the authority to do this, so he
doesn’t have to worry about Mitch McConnell, Paul Ryan, Chuck Schumer, Nancy, and all those

The Section 301 tariff is $50 billion on China for openers. They say there’s potential to go up to
$1 trillion, but he’s starting with $50 billion. That’s what sent the stock market into a swoon.
Why did the stock market bounce back? It hasn’t come all the way back as it’s still well below
the highs on January 26 th . It’s down significantly from there, but there are days like last Monday
when the stock market performed well. The reason is because of news that maybe the trade
war is not so bad after all. The news that sent the stock market up on Monday the 26 th was that
China was willing to negotiate.

That’s exactly what Trump wanted. Trump didn’t want a trade war. He said, “I’ll start one, but
what I really want is for you to come to the table.” China said they would, so the stock market
went up.

That’s fine, but the problem is that China has done this forever. They always go through the
motions, say nice things, put up a good appearance, and then they don’t deliver. Stocks, enjoy
your respite here and good news from China, but I don’t put much weight on it. As I said, just as
currency wars go on for a decade or more, so do trade wars. They don’t have a logical
conclusion; it’s just back and forth.

Some of the exemptions Trump has given by saying, “You’re exempt and you’re exempt,” or “I’ll
give you a temporary…” is a little ‘inside baseball.’ It was done for an unusual reason, which is
U.S. companies that buy imported steel put those orders in and agreed on a price. It takes
sometimes a month or two for the steel to get fabricated, loaded, shipped, and unloaded. If
tariffs were put on immediately, the steel would get to the Port of Los Angeles let’s say, and all
of a sudden there would be a 25% tariff. Well, that U.S. manufacturer did not price their goods
or do their deal assuming there were tariffs. They put the order in maybe last December before
the tariffs were imposed. Suddenly, the steel gets to Los Angeles, boom, here’s the tariff.

Trump extended the deadline not to be Mr. Nice Guy or help the stock market, but so as not to
unduly penalize those U.S. importers who ordered the steel in good faith before the tariffs were

Once that’s up, he is going to put the tariff on. He’s going to say, “You’ve been warned. Now
you know if you put your order in in mid-February and it’s not arriving at the port until May,
you know you have to pay a tariff, so don’t blame me if it’s there. It also gives you time to
redirect those orders to Nucor, U.S. Steel, and other U.S. steel manufacturers.”

That’s not being Mr. Nice Guy; that’s just a little bit of trying to achieve some fairness in terms
of the speed at which this is implemented on people who didn’t expect it. So those are going to
come back.

Yes, Mexico and Canada are trying to be nice on NAFTA and China is trying to be nice on
bilateral trade negotiation. Let’s see where they go. Hopefully it has a big kumbaya ending, but I

don’t expect it. I expect the trade war to continue, I expect the stock market to continue to
suffer from those headwinds, and I think we have a very long way to go.

Alex: Not to get too far into it, because we have one last important topic we need to discuss,
but at this point, would you say it’s more about the job situation than anything else? Is this
reminiscent of what happened with Japan?

Jim: Japan is a very good example. Now we’re talking about the early 1980s when U.S. auto
manufacturers were getting hammered by Japanese imports. Nissan, Toyota, and others were
making better cars. They just were. And they were cheaper, and Americans were buying them.
Detroit was suffering and unemployment was going up. We had a very bad recession in 1981 –
1982. At the time, it was the worst recession since The Great Depression, and Detroit was being
hollowed out.

President Reagan was in office. It’s important to note that Reagan’s trade advisor (not the
ambassador level U.S. Trade Representative) was one of his White House advisors at this time.
It was Robert Lighthizer who today is the U.S. Trade Representative and has cabinet rank,
ambassadorial rank, so he has seen this movie before. Lighthizer threw steep tariffs on
Japanese imported automobiles. He didn’t do it to collect money; he did it to force the
Japanese to move their manufacturing to the United States.

A tariff is a wall, so the goods are flowing like this: Put up a tariff as a 25% or 30% wall on
imported goods. They can pay it, in which case they’re not competitive, or they can jump the
wall by moving their manufacturing to the United States.

That’s what they did, and it wasn’t just the Japanese; it was also the Germans. Today, people
drive around in BMWs and say, “I have this nice German car.” No, you don’t; you have a nice
South Carolina car. They’re driving around in their Hondas like, “I have this really cool Japanese
car, great quality.” No, it was made in Tennessee or Kentucky or Ohio. Quite a few of these cars
are made in the United States, and that created high-paying jobs.

This idea that tariffs don’t work is not true. You hear the whining from the globalists, the special
interests, and the global corporations that, taken individually, may incur some cost associated
with this, but America has always thrived on tariffs. Alexander Hamilton, Henry Clay, and
Abraham Lincoln were all in favor of tariffs or what they called the American plan: create
American factories, support American manufacturing, create American jobs. Reagan did the
same thing, and Trump is doing the same thing.

Tariffs are as American as apple pie. This whole globalist, Bloomberg, Gary Cohn, Goldman
Sachs, and academic economist rap you hear about tariffs imposing cost on consumers, etc. It’s
here and there a little bit, but they do a lot more good than they do harm.

You need to look at the secondary and tertiary effects. We must create high-paying jobs.
There’s nothing wrong with being a barista or an Uber driver, don’t get me wrong. I think
there’s dignity in all work, so if you’re an Uber driver or a barista, be the best, make the best
coffee you can. But candidly, those are not the jobs that support household formation or home
ownership, bringing up a family, income security, and pensions.

Jobs of the kind I just described come from several sources such as transportation and
technology, but they also come from manufacturing. That’s what Trump is trying to do, so it’s
not going away. Every sign is that with help from Lighthizer, Trump is doing this intelligently. As
I say, it’s as American as apple pie and a very good thing.

Alex: Moving on, Jim, you and I have been talking about North Korea since the beginning of
2017. Things progressed over the course of 2017 to the point towards the end of the year when
you were saying strongly that we were going to be at war with North Korea by March. We’re in
March, and there are people asking questions.

Jim: Fair enough. I did say that categorically in September, October, and November of 2017.
The great thing about doing podcasts and interviews is that you can always timestamp the
commentary. You don’t have to guess.

By the end of 2017 and certainly now in 2018, that timeline has been pushed out. Let me
explain that. In November of 2017 – because that’s a fairly late date – I said we’ll be at war with
North Korea by the end of March. I did not make that up; I got that from Mike Pompeo, who is
the Director of the CIA, and H.R. McMaster, who is the Director of National Security. I met with
both of them personally in Washington D.C.

I agreed with that forecast and wasn’t just parroting what they said. That was my analysis and
their analysis based on conditions or circumstances, but those circumstances change. And when
they change, you have to change your forecast.

Pompeo was asked the same question. You can ask me, and that’s fine; I’m happy to answer it,
but they asked Pompeo. They said, “Mr. Director, you said five months.” That’s what he said in
October; five months happen to be March. “You said five months. Four months into it, what

The answer is, he said it was five months then and it’s five months now. In other words, it’s a
five-month window. Here’s the way to put it: North Korea is five months or less away from
building a nuclear arsenal of ICBMs tipped with nuclear weapons that can end U.S. civilization.
Enough of them – let’s say ten would be enough – so that even with our anti-missile defenses,
four or five of them could get through and destroy Seattle, Denver, L.A., and Chicago.

Well, America’s over at that point. We’d fight back, destroy North Korea, and pick up the
pieces, but that’s a scenario under which the veneer of civilization gets pulled away. Apart from

death and destruction, you get some bad results. That’s an existential crisis no president, no
flag officer, no admiral or four-star general will ever allow.

They’re five months away from that. That’s what Pompeo meant when he said that in October,
and that’s how I understood it. What happened was we have a timeout. In other words, we hit
the pause button.

It’s like a two-hour movie on Netflix or in the Blu-ray player. It’s downloaded, and I say, “Alex,
this movie is going to be over in two hours.” One hour into it, we hit the pause button, get up
and get some popcorn and snacks or whatever, and we come back. Now it’s not going to be
over in two hours. It’s going to be over in two and a half hours, because we hit the pause
button for a half hour. It doesn’t mean I’m wrong about the two hours; it means that somebody
hit the pause button, and we must take that into account.

North Korea and the United States together hit the pause button in early December because of
the Olympics. We knew the Olympics were coming, so that wasn’t new news.

The U.S. has been conducting joint military exercises with the Koreans and Japanese for a long
time. We do this with military forces all over the world, but there’s no doubt that this was one
of the hot zones and an area where troops need to be prepared.

If you’re the 101 st Airborne and fighting in the desert from Mosul or Kirkuk and suddenly you’re
told that your mission is to land behind enemy lines in the mountains in the middle of winter,
you have to do some mountain training up in Alaska or the Rockies or wherever. It’s the same
for bomber pilots and the navy. Everyone must change. This training is very important, and
we’ve been doing it on a regular basis.

North Korea has been shooting missiles, setting off atomic weapons, and firing missiles on a
much faster tempo under Kim Jong-un than either his father or grandfather. (His grandfather
didn’t have missiles, but he wanted some.)

The idea was called Freeze for Freeze. “We, North Korea, will freeze our missile and weapon
development if you, the United States, freeze your operational tempo in terms of military
exercises.” Russia and China supported this, and North Korea wanted it.

The U.S. refused, saying, “No, we’re not going to let North Korea dictate the operational tempo
of our training. We have to do what we have to do. If you want to get rid of your weapons,
we’re all for that. We’ll talk to you about that, but you’re not going to tell us how to run our

In December, President Moon of South Korea turned to the United States and in kind of a soft
voice said, “Hey, do you think we could just postpone these exercises? Not end them, but just
postpone until the Olympics are over so that nobody makes a mistake or does a provocative act

in the middle of the Olympics.” The U.S. kind of said in a very quiet voice, “Um, okay,” at which
point Kim Jong-un stopped firing missiles. His last missile test was November 2017, and his last
nuclear weapons test was September 2017.

We fell into a Freeze for Freeze, hitting the pause button as I described it, without anybody
losing face and with no formal announcement, but nobody said they wouldn’t start it up again.
That’s what happened. From December, January, February, now into March, we’ve hit the
pause button.

The question is, do we now have our popcorn and snacks? Are we ready to hit play and let the
movie keep playing out? The answer is, possibly, because the U.S. has scheduled military
exercises for April. Let’s see what happens.

During that, we had some Olympic diplomacy with Kim Jong-un’s sister, Ivanka Trump, Mike
Pence, and all these people showing up in Pyeongchang for the Olympics. Who knows who said
what to whom behind the scenes, but suddenly the South Koreans came out on the West Wing
driveway or lawn outside the West Wing and said, “By the way, we just met with President
Trump and told him that North Korea wants a summit, that they’ll meet with Trump.”
Two hours later, Trump gets in front of the press and said, “Yes, I’m willing to meet with Kim
Jong-un, and we’ll try to do it before the end of May.” That was hitting the pause button a
second time.

Where does that stand? No one knows, because the North Koreans have not responded to that.
The South Koreans said that the North Koreans told them they would have a summit, and
Trump agreed, but the North Koreans themselves have never said this publicly. That doesn’t
mean it’s not happening, but there’s something kind of strange about it.

It looks like Kim Jong-un might be in Beijing right now. He doesn’t travel by plane; he goes by
train, and he has a specially constructed armored train that he travels in. He doesn’t go far,
because how far can you go by train? Japanese satellite surveillance and media have reported
that his train is in Beijing. Is Kim Jong-un on the train? It’s hard to say, but there’s good reason
to believe he is, which means he’s meeting with Chinese leadership, so there’s some behind-
the-scenes diplomacy.

I doubt this meeting will happen in May. The reason I say that is it takes a very long time to
prepare. You can’t wing it. There’s a lot of intelligence collection, analysis, and game playing.
“What if they say this? What do we do? What if they say that? What’s our response?” You must
do this all in game theoretic space. You must debrief the president. That takes six months if
you’re lucky.

Then there’s the logistics. Where are you going to have this summit? Are you going to have it in
the demilitarized zone? It’s not exactly a Ritz Carlton up there. I haven’t been there, but I

studied it and there’s a lot of reporting about it. It’s a pretty spartan environment, and there’s
no way you could secure the safety of the president of the United States on the border with
North Korea. Maybe it will be there, but that’s a heavy lift.

It’s not going to be in South Korea, because the North Korean president doesn’t want to lose
face. It’s probably not going to be in China, because the North Koreans don’t want to appear to
be kowtowing to the Chinese. It’s not going to be in Japan for the same reason, and the
Japanese and the Koreans hate each other. It’s not going to be in the United States, and the guy
doesn’t fly.

Through a process of elimination, the most logical place is Russia, because they do stand back
from this a little bit, and you can go by train from North Korea to Vladivostok, Russia.
Imagine the impact of this on the whole Russia collusion story. I don’t want to get too far down
the trail, but this would vindicate every Russia conspiracy theory we’ve ever had. But hey, it’s
Russia, you have to expect that.

When someone says, “Jim, last fall you said March. It’s March, and there’s no war,” my answer
is, “Yes, but it’s a two-hour movie. Somebody hit the pause button. It’s still a two-hour movie,
but we’re on pause. Let’s see if somebody hits play and we get back to this scenario.”

It’s still on the table, but I’m a good Bayesian. A suitable quote that’s attributed to a lot of
people goes, “When the facts change, I change my mind. What do you do?” A good analyst will
update the forecast. It’s still on the table but on hold for the moment.

Alex: As you said, the two major takeaways from that are, number one, sometimes people
tend to look at a forecast as if it’s written in stone tablets by the finger of God when in reality
it’s a fluid situation. And, facts can change, so you have to update.

Jim: I just explained that in this podcast, but I’ve been saying it since January. It’s not like I
waited until March to update. We maybe even covered some of the same ground in earlier
podcasts and certainly on Twitter and other platforms.

A lot of what I do is for free in the sense that we make it publicly available, so I’m not trying to
sell subscriptions, but for regular listeners and viewers, you need to stay with the story. You
can’t come in in the middle and raise your hand about timing, because we updated this a while

Alex: The other part is that this story is continuing. It’s not done yet. This play button can be
pressed again at any time – as soon as they start weapon testing, basically.

Jim: That’s right. In one sense, somebody has a finger on the play button, because we are going
to have these military exercises in April. Kim Jong-un has said, “I kind of understand you have to
do that, so it’s not a trigger for me to go ahead and fire a missile.”

There is a lot of weapons development you can do without launching missiles or detonating
nuclear weapons. You can test what’s called ruggedization in wind tunnels or you can fly a
missile into a turbocharged jet engine exhaust. There is stuff you can do, and I’m sure they are
doing it and moving the ball forward in the way that Mike Pompeo described.

The last thing is that McMaster is gone. He’s been replaced by John Bolton who is more of a
hawk. And Tillerson, who was on the dovish side, is gone, replaced by Pompeo who is more of a
hawk at the State Department. And, his replacement at CIA is a very hard case. Gina Haspel is
very well-respected inside the agency. We now have more hardliners than when the pause
button was hit. If we hit the play button, it’s going to be a very tough case.

Alex: Very good. Jim, that does it for our time today. Thank you for being on with me. As usual,
I think this was a great discussion, and I look forward to doing it again next time.

Jim: Thank you, Alex.

You have been listening to The Gold Chronicles with Jim Rickards and Alex Stanczyk presented by Physical Gold Fund. Recordings can be found at You may also register there for news of upcoming interviews with Jim Rickards and other world-class thinkers.

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Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles February 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles February 2018


Topics Include:

*How BLS jobs data largely being mis-read by financial media

*Why all current narratives in the financial media are missing the true causes of early Feb US stock markets correction

*Why Atlanta Fed analysis is more of a nowcast than a forecast

*Why exploding sovereign debt and debt to GDP ratio are critical to market stability in the next few years

*How student loans are a $1.5T problem with a significant default rate

*What the two critical confidence boundaries are, and how they might be crossed

*3 Yr playbook – not a forecast but a potential scenario

*Why the idea that Central Banks dont need capital would be challenged in a collapse of confidence


Listen to the original audio of the podcast here

The Gold Chronicles: February 2018 podcast 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, and welcome to the February edition of The Gold Chronicles. I
have with me today Mr. Jim Rickards, the brilliant analyst and member of our advisory board.
Welcome, Jim.

Jim: It’s great to be with you, Alex.

Alex: Just briefly, let’s review some of the topics we covered in our last podcast, and then we’ll
dive into our topics for today. We discussed why we are potentially on the cusp of a new set of
rules for the international monetary system, why gold may be in the first stages of a new multi-
year secular bull market, and we talked a little bit about what the significance is of central
banks that had been buying gold – net buyers of gold. I think they started doing that around
2010, so this would be going on almost a decade now. You can find all our previous recordings

Our topic today is regarding a recent significant correction or meaningful movement in the U.S.
stock markets for the first time in almost two years. It’s been up for a very long time, and
starting at the end of January running into early February, we began seeing these corrections.
There are narratives all over the media as to the reasons this has occurred, but I’d like to get
your point of view, because I think you look at things a little differently.

Jim: You’re exactly right, Alex. A correction is conventionally defined as 10% down from any
high. That’s not an ironclad rule, but it’s the conventional wisdom on Wall Street and a good
rule of thumb. The last correction ran from January 1 st to February 10 th , 2016, in reaction to a
Chinese effort to devalue the Yuan. And they actually did devalue the Yuan.

What was interesting about that is it was the second correction in six months. There was
another correction that ran from August 10 th to mid-September, 2015, about four months
earlier than the 2016 correction, which was also in response to a Chinese shocked evaluation
on August 10 th .

For two years since these two corrections (August 2015 and January/early February 2016), not
only was there no correction, there was no significant drawdown. I don’t know the exact
percentages, but if you want to use a 2% benchmark, there were no 2% corrections. There were
no days for many days in a row where it was down more than 1%, then the number of days in a
row when it hit highs. These were all records and good reason for concern, because that’s not
how markets operate.

There’s a technical name for that, but basically it’s when things go up on a steady basis in more
or less even increments with no corrections, no down days, no volatility. When you see that
pattern, you know something is wrong, because it’s not normal or sustainable. That pattern is
what tipped off some analysts that Bernie Madoff was a crook, because those were the kinds of

results Bernie Madoff was producing. There’s no money manager in the world, no matter how
good – I don’t care if you’re Warren Buffet or Bruce Governor – who can produce returns like

That’s what the stock market was doing and very much cause for concern. All those chickens
came home to roost just a few weeks ago between February 2 nd and 8 th , 2018.

Wall Street loves a story, so when something like that happens, you need a story. You’ve got to
reassure people, you need something to talk about if you’re going on TV or writing or are an
analyst at Morgan Stanley or writing notes. The story went something like this: Friday, February
2 nd , was the first large down day when it was down about 500 points. The following Monday it
was down 1,000, and Thursday it was down 1,000 again.

It all started on that Friday, February 2 nd , at 8:30 in the morning when the Bureau of Labor
Statistics released the monthly employment report, nonfarm jobs, which in this case was the
January employment report released February 2 nd . There’s a lot of different data in that. The
economy created approximately 200,000 jobs which is normal and healthy growth. It’s been
that way for a long time, so there’s no real news there.

The news was that wages year over year had grown 2.9%. Everybody jumped out of their seats
and said, “Oh, my goodness. Look at that 2.9%. It looks like the Phillips curve is alive and well
and Janet Yellen’s notion that it was just a matter of time. Inflation was just around the corner
and all these headwinds were transitory and – boom – here we go. Here comes the inflation.

The Fed is going to tighten more than we expect and raise interest rates. A fixed income
competes with stocks, so dump your stocks, buy your bonds, etc.” That was the conventional

I’ve just recited the narrative, but I would poke holes in everything I just said. Let me point out a
number of flaws in that.

First, that 2.9% number is nominal, but people get used to seeing real numbers. When the
Commerce Department Bureau of Economic Analysis reports GDP, that’s the real number. The
wage number I just referred to is a nominal number, and you must subtract inflation to see
what the real wages were.

With inflation running, depending on your measure, if you use CPI, non-core, that’s about 2%.
Taking the 2.9% minus 2%, real growth was 0.9% year over year. That’s better than getting bit
by a dog, because up is up, but that’s not a big number. In strong recoveries, we’ve historically
seen real wage growth, not nominal, but real wage growth of 3%, 4%, and sometimes 5%.
That’s what a booming economy that’s pushing limits and maybe heading for inflation looks

Nine-tenths of 1% year over year is nothing. I acknowledge that it was bigger than it had been,
so it could be the beginning of a trend, but it was not a big, scary number.

Meanwhile in the same employment report, they also reported weekly wages. Weekly wages
went down. Year over year, wage growth went up as we just described, but weekly wages went
down. The amount that people were actually taking home in their paycheck went down,
because the hours went down. What good does it do me to get a raise if you cut my hours from
40 to 30? Maybe my hourly went up, but my weekly wages went down, because you cut my
hours or moved me from full-time to part-time, etc. So, that was weak.

The labor force participation was unchanged. It’s very close to 40-year lows, but in an economy
that was booming, drawing more people back, and creating more jobs, you might expect that
number to go up. It didn’t. There was a lot of weakness in that report that got overlooked by
the headline number.

There was another thing going on literally the same day. I happened to be on Fox Business that
day with Stuart Varney, a great guy and I enjoy doing that show. Stuart was pointing to this
2.9% number, but the other thing he and a lot of people were saying is that the Atlanta Fed,
which produces what they call the GDPNow cast (not a forecast, but a nowcast prediction of
the present) was estimating first quarter growth at 5.4%, which is huge. Maybe he had to go
back to the Reagan administration in 1983, probably not that far, but he had to go back pretty
far to find a 5.4% quarter. So, everyone said wages are growing 2.9%, economy is growing 5.4%,
and here comes the inflation.

I watch that Atlanta forecast very closely as one of the numbers I look at it, but a lot of people
don’t understand the methodology there. You have to read the technical papers behind it. A
typical Wall Street forecast looks like this because they’re estimating GDP for the quarter while
still in the quarter. The data comes in at different times, and some of it lags. They won’t tell us
their first estimate of first quarter growth until the end of April even though the quarter ends
March 31 st . That’s because some of the data is not in yet and doesn’t come in on a regular
schedule. Some is weekly, some is monthly, some is quarterly with a lag, etc.

A typical Wall Street forecast takes the data they have and estimates all the rest, the missing
pieces, based on extrapolations and their own estimates using whatever methodology they
have. That’s not what the Atlanta Fed does. The Atlanta Fed says go with what you’ve got; let’s
not guesstimate the rest. We’ll take what we’ve got and fill in the blanks with correlations and
regressions. In other words, we won’t look forward. We’ll look back, fill in the blanks, and then
update. This is Bayesian analysis, which I think it’s a good form of analysis, but you must know
what you’re looking at.

The point being, that time series is consistently high at the beginning of the quarter. Go to the
Atlanta Fed website (a very useful service) and look at the second, third, and fourth quarters of
2017 when they put all this data out there. Look at their quarterly estimates from the beginning
of the quarter to the end of the quarter. You’ll find that they always start up high and go down,
down, down, and at the end of the quarter, they converge pretty closely on a real number.

When the number was 5.4%, I said, “It’s only mid-February, so it’s going to come down.” Well,
it did, and guess where it is today? It’s closer to 3%, and I expect it to be lower by the end of the
quarter. The 2.9% was not what it was cracked up to be because it was nominal, not real.

Knowing Atlanta methodology, it was easy to say that the 5.4% was going to come down, and it
has, so it’s looking like the first quarter is not going to be particularly strong.

For all those reasons – inflation, real growth, higher interest rates, capacity constraints – I don’t
buy that story at all.

Let me tell you what I do think took the stock market down, because the stock market is smart.
It’s a lot of players out there, and not all of them are going on TV making up stories. The market
was shocked by what I call the debt bomb. This emerged very quickly. Remember, the Trump
tax bill did not pass until almost the end of the year. It was close to New Year’s Eve before the
President signed it, and it was so complicated that you couldn’t absorb it all overnight. I was a
tax lawyer earlier in my career, so I know how complicated these things are. It took people a
while to figure out the impact of that, and they were working on it in early January.

I remember the rap on the tax bill. Yes, we’re cutting taxes by close to $2 trillion if you do a
static analysis, but we want to do a dynamic analysis, because this is going to stimulate the
economy. We’re going to get so much growth out of these tax cuts that the extra taxes on the
growth will offset the statutory rate cuts and it won’t cost us very much at all. Free lunch, in
other words.

You heard this from Art Laffer, Larry Kudlow, Stephen Moore, and Steve Forbes. These are all
good guys, and I’m not disparaging anyone. I know Art Laffer really well. He’s a good friend, and
I’m a big admirer of his. This is their analysis, but it does not hold water for several reasons.

A tax cut – in other words, a larger deficit – can be stimulative in certain initial conditions, but
those initial conditions would be the following:
 You’re either in a recession or the very early stages of a recovery
 You have a lot of slack in labor and industrial capacity
 Consumption is low
 Velocity of money is low
 Your debt burden is not too high (i.e., you don’t have a lot of debt, you want to take a
loan, and you’ll get your credit approved immediately)

All those conditions – in a recession or early stages of recovery, a lot of slack in the economy, a
pretty good debt-to- GDP ratio in the case of a country – make a case for some Keynesian
stimulus, but none of those conditions are true. Today, we’re not in a recession or the early
stages of recovery; we’re in the ninth year of a recovery. Capacity constraints are real,
unemployment is extremely low, and, most importantly, our debt-to- GDP ratio is 105%.

Kudlow, Kramer, and Steve Moore are veterans of the Reagan revolution. They were in the
White House in the OMB or the Council of Economic Advisors or on Capitol Hill. They were in
various official capacities in the early ‘80s when Reagan did this, and we did get strong growth
under Reagan. In 1982, we were in the worst recession since the Great Depression and our
debt-to- GDP ratio was 35%, so not in 1981 or 1982, but in 1983 to 1986, we had that incredible
run of growth where the economy grew 16% in three years.

Remember, those are the conditions under which a little fiscal boost works. It did work and
produced growth, so these guys are trying to run the same playbook. The problem is, in 1983 it
was like playing a D3 college team, and today they’re playing against the New England Patriots.
In other words, the headwinds are enormous. Our debt-to- GDP ratio is not 35% as it was under
Reagan; it’s 105%. We’re not in a recession; we’re in the ninth year of recovery. We don’t have
a lot of excess capacity; we have capacity constraints.

None of those conditions exist now, so what you’re going to get out of this tax cut is just
deficits. Number one, you’re not going to get the kind of growth you need to make up the
deficit. Number two, in 2011 during a prior government shutdown, the Republicans and
Democrats actually agreed on something, that they were going to put some caps on spending
to take the continual debt ceiling and resolution budget debates off the table.

In terms of the federal deficit, entitlements are on autopilot – they’re statutory, there’s a
formula. Congress just has to find them, because they are what they are. For example, interest
on the national debt must be paid. You can’t say, “We don’t feel like paying the interest this
month.” Entitlements and interest on the national debt are a big part of the total government
expenditure, so what’s left that they can mess around with? Discretionary domestic spending
and defense are the only two things they can play with, so in 2011 they put caps on both. This
was called the sequester.

Here we are six years later. The defense budget has been bled dry, training is down, the cruise
missiles have been used up (we need to replenish those), all these vessels sadly are crashing
into each other because people are working long shifts, and there’s an absence of training and
new systems. We’re stressing our military to the breaking point, and everyone agrees we need
to spend more there, but the Democrats have veto power. This is not one you can jump to with
51 votes; you need 60 votes to do this. The Democrats are saying, “Okay, Republicans, you want
more defense spending? Give us more discretionary domestic spending.” The Republicans
didn’t like it, but they went along because they wanted the defense spending.

Congress blew off the caps on both, so now there’s no more sequester. They say this is going to
add $300 billion, but my estimate is more like $400 billion because of additional defense
spending in the immediate future.

Bear in mind that everything we’re talking about – $1.5 or $2 trillion from the tax cut, $300 or
$400 billion from blowing off the caps – is in addition to the baseline deficit. We have a deficit
anyway of probably $400 billion, but we’re piling all this on top of it.

The third thing I’ll give you that no one is talking about are student loans. Right now, student
loans are about $1.5 trillion. That’s bigger than subprime mortgages going into the mortgage
crisis in 2007. If you count what’s called Alt-A (a kind of subprime mortgage with low-doc, low-
credit mortgage), subprime and Alt-A together in the middle of 2007 before the crisis were
about a trillion dollars. Today, student loans are about $1.5 trillion, so it’s a bigger monster to
wrestle to the ground.

Here’s the main difference. Even at the worst part of the 2008 meltdown, default rates on
those mortgages were 6% or 7% which is quite high for mortgages. Default rates on student
loans are 20%, so 20% of $1.5 trillion is $300 billion. Most of that has not hit the budget yet,
because the Treasury doesn’t make the loans. Private banks and companies make and service
the loans, and the Treasury guarantees it.

When the student first gets in arrears, they do some kind of work-out. They have grace periods,
consolidation refi loans, and certain kinds of public service to get a deferral. There are a lot of
ways to put off the debt reckoning, but those have all been used and now we’re getting to the
point where a bad loan is a bad loan. There’s no more grace period, extension or deferral, and
the banks are saying to the Treasury, “Here’s the loan file. Pay me.” The Treasury must pay
them, and that’s when it hits the deficit. It’s starting to come in right now like a tsunami, so add
that on top.

Using low round numbers, $1.5 trillion for the tax cuts, $300 or $400 billion for the sequester,
blowing off the caps, and another $300 billion for student loans brings us close to $2.5 trillion
on top of $400 billion-a- year baseline deficits. These are trillion-dollar deficits as far as the eye
can see. That’s what I mean by the debt bomb the market suddenly woke up to. That was the
shock. Interest rates were going up, but it wasn’t this inflation story you hear about. That’s a
red herring. It’s this debt bomb that I just described, and that’s what shook the markets.

By the way, rating agencies are talking about cutting the credit rating of the United States of
America. They already did once. I believe it was Fitch in 2011 if I’m not mistaken. The others,
S&P and Moody’s, didn’t, but now S&P is making noises about that.

Once the market goes down, it feeds on itself. I analogize this to a mine field where the mines
are all buried, but it looks like a very nicely groomed lawn you have to walk across. You don’t
have a map or minesweeper, and you’re just hoping you don’t step on a mine. That’s the way
the stock market operates. Once the meltdown begins, what are the mines? Derivatives,
leverage, triple leverage, and inverse ETNs. As the volatility goes up and credit Swiss bonds are
triple, inverse, exchange traded note on volatility, that thing went to zero pennies on the dollar.
They had to suspend redemptions or suspend trading and liquidate that.

People say, “What’s next?” The answer is, “We don’t know.” A distress point causes that
counter party to sell other good assets to raise cash to meet margin calls, and then those good
asset sales hit somebody else’s trigger causing cascading stops. This is a densely connected
system that feeds on itself.

That’s why we saw those big thousand days. Remember, they weren’t just thousand-point days
in terms of going down; they were down 1500, back up 500, and back down again. Enormous

The first question is, “Is it over?” To answer that question, I tell investors to ask two other
1) What caused it?
2) What has changed?

We just talked about the things that caused it – the debt bomb – and that hasn’t changed. The
derivatives are still there as well, so nothing has changed. The market is very vulnerable to this
happening again, and it could be tomorrow.

Alex: We’re obviously looking at multiple trillions of dollars of new debt. I’ve heard economists
talk about how the U.S. can run unlimited deficits and unlimited debt, but is that really true? At
some point, will the sovereign debt load ultimately lead to a failure of confidence either in the
U.S. government or possibly, as importantly or maybe even more importantly, the Fed’s ability
to control the economy? That’s the narrative that allows everybody to sleep well at night. If
confidence in the Fed’s ability to control the economy goes away and the narrative changes,
that changes the whole picture for the entire global economy, does it not?

Jim: It does, and that’s a very good point, Alex. There are two separate confidence boundaries.
You mentioned both, but I think it’s important to separate them, because one or the other
could be triggered first.

The first confidence boundary is the ability of the Fed to control the economy. People have this
blind faith in the Fed. I’ve talked to Fed governors, Fed chairs, and Fed staffers, and privately
they’ll say, “Yes, we can do a little bit with money supply by giving it a slight boost, but we can’t
really create jobs or steer the economy. The most we can do is try to create some conditions
under which job creation can thrive and inflation doesn’t knock it out of control.” The dual
mandate is to help with job creation and avoid inflation. They feel confident in their ability to
avoid inflation or at least squash it if it appears, but they have no confidence in their ability to
avoid deflation.

If you ask a central banker what keeps them up at night, they won’t say inflation. They’ll say,
“We hope inflation doesn’t happen, but if it does, we can squash it like a bug.” Paul Volcker
proved that in 1981. “What we worry about is deflation, because we don’t know how to turn
that around.”

I know how to turn it around, which is devalue the dollar against gold. Take gold to $10,000,
and you’ll get all the inflation you want, but they’re not ready to go there yet. That’s what FDR
did in 1933. He didn’t devalue the dollar against gold because he wanted to enrich holders of
gold. In fact, he stole all the gold before he did it. It was the ultimate inside trade. He did it
because he wanted inflation, and it worked. The economy grew robustly from 1933 to 1937.

If you date the Depression from 1929 to 1940 – those are the conventional dates, and I think
that’s a pretty good frame – it wasn’t down every year. We had a severe tactical recession from
1929 to 1933, and we had very good growth from 1933 to 1937 off a very low base. Then, a
second severe recession occurred in 1937 to 1938, a weak recovery in 1939, and then in 1940
the war spending kicked in, and that worked. The economy started growing very strongly again,
because we had the second World War.

Looking at that pattern, the growth from 1933 to 1937 was because of the dollar devaluation.
That did create inflation and get the economy moving. 1933 was a great year for the stock
market in the middle of the Great Depression. Bear in mind, you had lost 80% of your money,
so if you were in stocks, you were down 80% from the 1929 high, but if you happened to come
in and buy at the 1933 low, you had a great ride in ’33, ’34, and ’35. Those were great years for
the stock market.

The point is, the Fed says they don’t know how to get out of deflation, but they do. It’s just that
they don’t want to go there, because that would mean going back to a gold standard. If gold is
$10,000 an ounce, there’s your inflation, and then you’d have $400 oil, $100 silver, and $20
copper. All those other things would fall into line.

Getting back to pure monetary policy, there’s no central bank in the world that’s ready for a
gold standard yet except maybe for Elvira Nabiullina, head of the Central Bank of Russia, so
they’re not going to do that. In terms of monetary policy, no, they cannot get out of deflation.

They feel that they can control inflation as part of the dual mandate. The other part is the Fed
doesn’t have a hiring desk saying, “Come here, sign up, and get a job.” They don’t create jobs in
that sense. They try to create monetary conditions under which confidence builds, employers
hire people, and it’s very inexpensive to invest. For example, you can buy a new plant and hire
some workers. That’s the best they can do.

Yet, look at what they had to do to get there. Once interest rates hit zero in 2008, how did they
continue to stimulate the economy when they couldn’t cut interest rates? The answer was QE1,
QE2, and QE3 beginning in 2008 running through the end of 2014. Six years of QE took the Fed
balance sheet from $800 billion to $4.2 trillion.

The empirical research is starting to come in, and there are people who are very skeptical that it
did much for growth. It didn’t seem to do much harm to growth, but it didn’t particularly do a
lot of good, because we had the weakest recovery in history. What it did do was inflate asset
values. The stock market tripled, no question about that, and real estate got off the floor and
has nearly doubled since then, so it did have that effect of inflating asset prices, but not very
much wealth effect, and velocity was still declining. It didn’t do nearly as much as they thought
it did, but it did get asset prices up; however, that was probably creating a danger in and of

Here’s the point. Is there an invisible confidence boundary in terms of the Fed balance sheet
that if they cross it, people could lose all confidence in their ability to help the economy? The

answer is undoubtedly yes. The problem is, you don’t know where it is. It’s not $4.2 trillion,
because they got there. Is it $5 trillion? Maybe. Is it $6 trillion? You’re getting warm. Is it $8
trillion? Almost certainly south of that.

That’s where I part ways with these modern monetary theorists, the MMT crowd. They’re nice
people. I met a lot of them – people like Paul McCulley from PIMCO, Professor Stephanie Kelton,
advisor to the Bernie Sanders campaign, and others. Again, they are smart people and good
analysts, but they say in effect that there’s no limit; all you really need to do is have larger
deficits, borrow the money, have the Fed monetize the debt, and you could just do that as far
as the eye can see to get the economy going. I don’t believe that for a minute.

Now you’re invoking both boundaries. I mentioned one boundary, which is the Fed balance
sheet. The other boundary is, how big can the deficit be? Deficits are annual concepts that
cumulatively add up to the national debt which you judge as manageable or not manageable by
using the debt-to- GDP ratio. $20 trillion of debt doesn’t mean anything unless you compare it
to GDP. $21 trillion of debt in a $20 trillion economy is 105% ratio, but $21 trillion of debt in a
$42 trillion economy is only a 50% ratio. If we had a $42 trillion economy, I wouldn’t fret over
the debt, because there’s enough growth to pay for that debt. But that’s not the ratio; the ratio
is over 100%.

How do we know there’s a limit? Look at Greece, Spain, Portugal, Ireland, and a lot of countries.
Look at Mexico in 1994, Argentina in 2000, and the southern tier of Europe in 2010-2011. All
these countries hit their limit.

Alex: The same economists who say that the U.S. can run unlimited debts and deficits are going
to point out that all those examples are not the world’s reserve currency.

Jim: Right, and I would point out that the world reserve currency status is not a gift from
heaven or a permanent state of affairs. World reserve currency can change. People have
alternatives and can vote with their feet. They can wake up one day and say, “You know what,
dollar? Nice job, nice run since 1914, but I’m out of here. Get me some art, some silver, some
gold, some land, or maybe some euros.” There can be what economists call repugnance to the

People say you can have unlimited amounts of debt, because you can print unlimited amounts
of money, and that’s actually true. The U.S. will never default on this debt for that reason, but
that doesn’t mean the dollar retains its value. The oldest joke in banking is, if I owe you a
million dollars, I have a problem; if I owe you a billion dollars, you have a problem, because you
have to collect it from me.

Looking at China versus the United States where China holds a trillion dollars of U.S. Treasury
debt, I would say China has a problem, not the U.S. We could just print the money, ship it over
there, and say, “Here’s your trillion dollars. Good luck buying a loaf of bread, because we
inflated the currency.”

The U.S. will always pay its debt, because it can print its money; the Fed can always monetize it.
All of that is true, mechanically speaking, but it does not mean that you maintain confidence in
the dollar or that you don’t have hyperinflation or that you don’t end up like former Germany
or Argentina in 2000, which you probably would. That’s all clear.

The more interesting question is: Where is that boundary? I’ve had Fed governors tell me,
“Central banks don’t need capital,” but that’s a quote I disagree with. In my view, it’s one of the
reasons the Fed has started balance sheet normalization and quantitative tightening, which is
the opposite of quantitative easing. They are on the record articulating that they know they’re
close to that boundary, but they don’t know where it is any more than I do. They’re thinking
maybe $5 trillion or $6 trillion.

What if they had a recession, a liquidity crisis or had to cut rates back down to zero before they
got them to 3.5%, and they were only starting at 1.5%? They’d hit zero in no time. History
shows that you must cut interest rates 3% – 4% to get the U.S. out of a recession. I’m not
forecasting that we’ll go into a recession tomorrow, but it could happen. We’ll go into one
sooner or later, because expansion is nine years old. In a recession, they have to cut interest
rates 3% – 4% to get out of it, but they’re only at 1.5%, so how do they cut 3%? They can’t.
They’d get to zero pretty quickly, and then what would they do? They’d go to QE4.

This is where the concern comes in. Starting QE4 at $4.2 trillion is pushing that invisible
confidence boundary. They’d be rolling the dice on a complete loss of confidence in the Fed,
the Treasury, and the U.S. dollar. They are desperate to get the balance sheet back down to $2
trillion so they can expand it to $4 trillion again under QE4 or QE5. They’ll say, “We’ve already
been to $4.2 trillion and the world didn’t come to an end, so that feels okay. If we can get it
down to $2 trillion, we can go back to $4 trillion without the end of the world.” If they’re sitting
at $4 trillion and try to go to $6 trillion, that may be the end of the world, so they have said we
need to normalize things so we can do this again.

The bigger question I ask is, will they get to $2 trillion on the Fed balance sheet and 3% – 3.25%
in terms of Fed funds target rate before the next recession. Or, will they go into a recession
with not enough dry powder – rates not high enough and balance sheet not low enough to run
that playbook again.

It’s very likely, in my view, that the Fed will not get to where they want to be before the next
recession. They’ll be hitting these boundaries, and that will be a very dangerous time. You just
never know, though. As I said, people may wake up. I just explained it and gave you a three-
year playbook. Now, if I can think of it, other people can think of it. They may look at that three-
year playbook and say, “Why would I wait three years for the end of the world? I’ll get ready
now and go buy some gold.”

Alex: Something that occurred to me when you mentioned central banks not needing capital is,
how much of this hubris? That statement alone says a great deal about perhaps the way they’re

thinking right now. If it is really true that central banks don’t need capital, why do they all hold

Jim: Well, they do, and they don’t. I think there’s a little bit of hubris in it. I talked about this in
chapter six of my last book, The Road to Ruin. Be that as it may, at dinner with a small group
around the table, I was seated next to a member of the Board of Governors. There’s no need to
mention names, but I said to her, “It looks like the Fed is insolvent on a mark-to- market basis.”

The key phrase there is “mark-to- market.” They had a lot of ten-year notes, and interest rates
were going up at the time. The balance sheet wasn’t quite at the $4 trillion level but was getting
there. If you were running a hedge fund instead of a central bank, the losses on your ten-year
notes on a mark-to- market basis would’ve wiped out your capital.

Bear in mind, the Fed runs a $4.2 trillion balance sheet with about $50 billion of capital. In
round numbers, that’s over 100 to 1 leverage ratio. 100 to 1 looks like the worst hedge fund
you ever saw. That sounds like my old firm Long-Term Capital if you count the derivatives.

When you have 100 to 1 leverage, which the Fed does, it only takes a 1% change in your asset
value to wipe out your capital. One percent of 100 is one, and if you have 100 capital, it’s gone.
The Fed doesn’t mark-to- market; they carry those assets – they use historic cost accounting. If
they were using generally accepted accounting principles and had to mark-to- market, they
couldn’t do it.

I said to the Governor, “It looks like you’re insolvent on a mark-to- market basis.” She said, “No,
we’re not.” I said, “I think so.” She said, “No one’s done that enough.” I said, “I’ve done it, and I
think others have done it.” She sort of harrumphed and said, “Well, maybe …”

I kind of stared her down a little bit. She looked at me and realized that I knew what I was
talking about. She was just putting up a good front, so then she said, “Central banks don’t need
capital.” That was her answer. I said to her, “Thank you, Governor,” and thought to myself, “I
bet they do when confidence is in play.”

Banks don’t need any capital when no one is questioning their solvency or confidence. It’s only
when confidence is called into question that people take a look. “Oh, you’re insolvent? Well,
I’m out of here.”

That’s when we get into phrases like “black swan” and “tipping point.” To me, they’re
metaphorical, because they don’t really tell the tale. The technical term for this is hyper-
synchronicity which is when people’s adaptive behavior is affected by other people’s behavior.

For instance, with a small run on the bank, people see the line and say, “Oh, there’s a line at the
bank. I’m getting in line, because I don’t want to be the last guy to get my money out.” Next
thing you know, the line is around the block, the bank closes its doors, and they’re insolvent. It
didn’t start out that way, but a couple of people lining up because of a loss of confidence very
quickly leads to a longer line and then a shut-down.

The technical name for it is “phase transitions.” It’s what a physicist would say or a
mathematician would call hyper-synchronicity, but it’s the same thing. It basically means that
everyone wakes up, and confidence is gone. That is definitely a threat.

The Fed has never said, “We’re doing this because we’re worried you’re going to lose
confidence in us.” A banker should never use the word “confidence.” He should always take it
for granted. But, they have said, “We want to normalize the balance sheet in case we have to
do this again,” which means that they were not comfortable doing it again from the old level.
This means there is a boundary, but we just don’t know what it is.

Alex: That wraps up our time for today, Jim. What a great discussion that I think we should
explore more. The entire two vectors of confidence thing, as far as whether it’s government or
the Fed, may be in future discussions. Thanks so much for being with me today.

Jim: Thank you, Alex.

You have been listening to The Gold Chronicles with Jim Rickards and Alex Stanczyk presented by Physical Gold Fund. Recordings can be found at You may also register there for news of upcoming interviews with Jim Rickards and other world-class thinkers.

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The Gold Chronicles: February 2018 podcast with Jim Rickards and Alex Stanczyk


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