Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles EP 93 May 2020

Jim Rickards and Alex Stanczyk, The Gold Chronicles May 2020

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Topics Include:

*New Book under development on the Pandemic and Depression

*Why Scientists without expert knowledge of the economy may not be the best source for determining economic policy

*Why discernment of the various views of scientists with opposing views on how to deal with Coronavirus is important

*Unemployment Claims have exceeded 38m in the US

*There has never been a time when the stock market does not accurately reflect what is happening in the real economy

*S&P 500 is a cap weighted index where a few major companies dominate the index. Major companies which are doing well do not reflect the stock market as a whole or the rest of the economy

*Algorithms that decide the majority of trading in markets today were written before the Pandemic

*Deflation, Inflation, Hyperinflation

*The psychology of inflation and what leads to increase of velocity of money – quantity theory of money versus phase transitions in psychology

*In a deflationary environment where the Fed has printed close to $10T but still cant get inflation leaves one tool left in the toolkit.. raising the price of gold

*Raising the price of gold would require open market operations in gold – Fed printing money to buy gold or to sell gold in order to maintain a specific price range measured in USD

*Raising the price of gold as a tool to get inflation in the USD during prolonged and massive deflation is not a theory, it has been used in the past

*Expectations of continuing deflation in the short to mid term, but inflation must be created, the trick for the Fed is making sure it sticks the landing

*Scenarios for gold price and inflation numbers if the Fed overshoots and ends up with higher inflation than it wants

*Censorship and deplatforming of people from major media platforms such as YouTube and Twitter

*The polarization of views of people around the world in terms of freedom vs authoritarian approaches to governance, and where it is leading

*The “inner fascist” – #NeoFascistGene

*Essential versus Nonessential Businesses and Occupations

*United States Code: Law enforcement officers, judges, public officials violating Constitutional rights under color of law versus emergency powers granted during threats to national security

*Reparations for China such as seizing/cancelling UST’s or delisting Chinese company stocks on US exchanges

*Will reparations move the US and China closer to kinetic warfare

 

Listen to the original audio of the podcast here

EP. 93 The Gold Chronicles: May 2020 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. Welcome to Episode 93 of The Gold Chronicles. Today is
May 21, 2020. I have with me my friend and colleague, Mr. Jim Rickards. Welcome, Jim.

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

Alex: Before we dive into the podcast, I want to let everyone know that they can access an
archive of podcasts and transcripts going back several years at PhysicalGoldFund.com/podcasts.
For those of you who are new to the podcast, Jim Rickards is a bestselling author of numerous
books, and he’s a well-known and respected expert in geopolitics and a number of other subjects.
At different times throughout his life, he’s been a lawyer, an economist, a hedge fund guy, and
he’s been tapped off and on by the U.S. intelligence community for his insights and perspectives.

Jim is one of the smartest guys I know, full stop. He’s been a friend and mentor for many years
now. If you haven’t read Jim’s books, I encourage you to do so. His books include Currency Wars:
The Making of the Next Global Crises, The Death of Money: The Coming Collapse of the
International Monetary System, The Road to Ruin: The Global Elites’ Secret Plan for the Next
Financial Crisis, and Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos. For
those of you who are interested in gold or new to gold and want to know more about it, Jim has
also written The New Case for Gold. Many do not know, but we’ve codeveloped that using
material from these podcasts as well as Jim’s research and his own amazing mind.

We have a lot of topics today, so let’s jump right in. Jim, like me, you’re a lifelong learner, you’re
always doing research, and you’re always reading. If you had to name one topic right now that is
holding your focus, what is it and why?

Jim: I have to say it’s two topics that are joined together; they’re kind of inseparable. And you
could say that they’re obvious ones. It’s the pandemic and the economic depression. Why?
Because they’re big topics you should know about.

I’m actually working on a new book that’ll be coming out. It’s on a very fast track. Often, I take a
year and a half or two years to write these books, but my publisher said, “We want this one
yesterday.” So, we’re working very hard on it and will be announcing it soon. We’ll have an
Amazon page and all that stuff, but I’m working on it.

It’s on the pandemic and depression, the two topics I mentioned, and should be one of the first
books on the topic. When you do research, you think, “Well, how do you research a pandemic if

we’re in the middle of one?” The answer is, there’s a lot out there, but you have to go back to
prior pandemics.

I find that my day consists of waking up in the morning and writing as long as I can write. Usually
after two or three hours, my brain turns to Jell-O. I can’t do a lot more than that, but writing for
two or three hours on the pandemic. For relaxation, I’ll read a book on the pandemic of 1918,
and then I’ll go to bed and dream about pandemics. It’s sort of all-absorbing right now.

It’s a fascinating topic. I certainly don’t claim to be a virologist or epidemiologist, but I’ll point out
some things. Epidemiology is about half medical science and half math. I’m not a doctor, but I’m
pretty good at math. Once you establish a certain number of factors or make assumptions about
the inputs based on the best available information, it’s just super linear mathematics. I’m pretty
comfortable with that. Of course, when you get over to the depression side of it, public policy
and so forth, that’s what I do for a living, that’s what I do all the time.

I’ve read a lot of peer reviewed papers. I can’t raise my hand and say I have two degrees from
Johns Hopkins, so I think that makes me an honorary doctor even though I’m not one. But on a
serious note, the epidemiologists and virologists are saying to people like me and others, “Hey,
shut up. What do you know about virology or epidemiology? We’re in charge here.”

I say, “Well, fine. How come you’re dictating economic outcomes?” In other words, if you want
to say that an economist doesn’t understand epidemiology, I can raise my hand and say what
does an epidemiologist know about the economy?

The answer is what we call team science, people working together and sharing views. I think
we’ve fallen into a trap of letting the scientists dictate economic outcomes without enough
economic input,so I’m not shy about treading on their territory, because they’re treading all over
my territory. Indeed, America’s territory, which is, do we really need to shut this economy down
to the extent that we did?

There’s certainly room for mitigation, nobody really would argue with that. Why don’t we cool it
with the handshakes, there’s a time and place to wear a facemask, and social distancing in line is
not a bad idea. There’s stuff like that, but I’m very doubtful that we needed to go to the extremes
that we did.

Every time they say, “We’re saving lives,” I say, “Okay, you probably are, but you’re also costing
lives. Alcoholism, drug addiction, suicide, domestic violence, so-called deaths of despair.” Let’s
not discount that at all. When you add it all up, I think there are probably some better solutions.
The short answer is, I’m immersed in the research for this and working hard at writing. We’ll have
something for readers and listeners around mid-summer.

Alex: Outstanding. I’m looking forward to that.

You mentioned there’s a lot of talk about listening to the scientists and that type of thing.
Something that concerns me a great deal about that is that there was a time in human history
when the scientists were actually burning people alive for disagreeing with their views. I think we
need to be super careful about that, especially as it affects things like our freedom and liberty,
our ability to earn and feed our kids, and those kinds of things, which we’ll talk more about in a
few minutes.

Jim: I agree with that. It is good to listen to scientists. The problem is, even when you put the
fringe thinkers, the conspiracy theorists, and the people with bad intent to one side – and that’s
not always easy – filtering is an important part of it. You say, “Okay, I’m just going to read peer
reviewed scientific papers or even an interview or an article from someone who’s a well-regarded
epidemiologist” or whatever. What I find is that the scientists don’t agree. It’s not as if the
scientists are all saying one thing and you’re like, “You’re a dope if you don’t listen.” No, I’ve got
a stack of research on my desk here of one guy saying you have to wear a face mask, the other
guy saying they do absolutely no good, they’ll make you sicker because you’re recycling carbon
dioxide.

I’ve got two PhDs telling me opposite things. Yes, I’m all for listening to science, but you need to
kind of fish with a big net, so to speak.

Alex: Absolutely. It’s where discernment comes into play.

We’re three months into varying degrees of stay-at-home, and right now, despite stock markets
being pretty happy based on what the Fed’s doing of basically buying everything in sight, just this
morning there was another 2.4 million unemployment claims filed. This brings the total to over
38 million in just nine weeks.

Credit cards, auto loans, mortgages, and rents aren’t being paid. The media has been remarkably
quiet about how many small businesses are failing. I’d really like to know more about that.
Something I’m curious about is your view on what this looks like moving forward. I know we’re
in a massive sort of deflationary environment. We’re seeing food supply chains having problems.
What does the market psychology have to look like to lead to more inflation and possibly even
hyperinflation versus a massive deflation?

Jim: That’s a five-part question, so let me try to unpack it a little bit. The first thing I would say is
that there’s never been a time when the stock market was less reflective of the economy. Put
differently, the disjoint between what’s going on in the real economy and what’s going on in the
stock market has never been greater.

 

People say, “Come on, Jim. Don’t you know the stock market is a discounting mechanism? It looks
forward. Today’s stock price isn’t about today’s economy, it’s about where the economy is going
to be six months or even a year from now. It’s this great discounting mechanism, so get with the
program.”

I say, number one, I have a rather good idea of what the economy is going to look like six months
or a year from now. It’s going to look awful, so don’t lecture me about the discounting mechanism
of the stock market, because that’s not what the stock market is doing.

Number two, can we please bear in mind that the S&P 500 is a cap weighted index? The Dow
Jones is not. There’s a complicated formula behind the Dow Jones, so it’s a different story. But
the S&P 500 – which most institutions say is our benchmark, our bogey – is a cap weighted index.
This means the larger your market capitalization, the more weight you carry in that index.

It’s not as if they add up the prices of 500 stocks and divide by 500. That’s not what they do. They
take the market capitalization, which might have nothing to do with earnings or anything else.

The S&P 500 is really the S&P 5 or maybe the S&P 6. There are five or six companies. This isn’t
mysterious; we all know who they are. It’s Facebook, Amazon, Netflix, Apple, Google or so-called
Alphabet, and Microsoft. If you add up their market capitalization, they dominate that index.

Whatever they do, the S&P is going to do.

Firstly, don’t tell me that the stock market is discounting the future, because the stock market is
completely detached from the future. Secondly, the stock market is five or six companies. The
other 495 are just treading water or going down. Yes, there are some particular companies that
may be doing well such as Zoom and some pharmaceutical companies. That’s always true.

Why wouldn’t Facebook, Google, Amazon, Netflix, Apple, and Microsoft do well? They’re all
digital. Amazon has physical delivery, but they’ve got that pretty well sorted out. It’s online
execution followed by physical delivery. The rest of them are all online. Google doesn’t ship
anything to my house, it’s a search engine. It’s a lot more than that, it’s a big advertising platform,
of course, and it’s a bunch of other things.

But these companies have not suffered from working from home or from people in quarantine.
In fact, in a lot of ways, they’ve prospered. Should those stocks be going up? I don’t know, I’ll
leave it to investors, but maybe they should. Don’t confuse a cap weighted index where five or
six companies dominate the index and those companies are relatively unaffected by the
pandemic with the health of the stock market as a whole or the health of the economy. They’re
very detached.

One more thing. I believe the correct number is 95%, but I’m certain it’s over 90% that all the
trading on the New York Stock Exchange is done by robots. When I say robots, I’m not talking

about order matching systems where I’m a seller, you’re a buyer, there’s a computer somewhere
that connects us, and you’re done. I’m not talking about that. That’s been around since the ‘90s.
I’m talking about a situation where the computer itself makes the decision. How does it make the
decision? You have algorithms. When were the algorithms written? Probably before the
pandemic. I wish everyone well, but some 27-year-old H-1B visa engineer in Silicon Valley has
never even been to the New York Stock Exchange, and they’re the ones writing these algorithms.
These haven’t been updated for the pandemic or the new depression, but they contain their basic
code, which is buy the dips and read headlines. So, they’re scanning all these headlines, and they
do have a buy the dips buy. When stock prices get low enough and somebody’s got some good
news, okay, buy them, bid them up.

And then the people with the 401(k)s, what are they doing? They’re not trading stocks; they’re
in index funds. They’re along for the ride. So, all this stuff is going up, and I’m looking at what you
mentioned earlier, 38 million unemployed. We’re talking about GDP in the second quarter. I get
100 emails a day from various research services. They’re only the good ones, because I don’t read
a lot of junk. Every time they update, they say it’s worse than we thought.

Second quarter GDP might be down – again, on an annualized basis – 40%. That’s $8 trillion of
annual output if you annualize it. Now, it’s only one quarter, so I don’t know, maybe it’ll be off
the bottom in the next quarter. But even if you divide by four, you’re talking about $1-$2 trillion
of lost output. You can’t tell me that’s not going to have repercussions that go well into the 2020s.

Alex: Just like we were talking about on our last podcast, these are next Great Depression
numbers, right?

Jim: Right.

Alex: Talk to me about the psychology. What causes velocity of money to pick up? We talked
about this a lot in the past, and there are two schools of thought. One school of thought says
money creation leads to inflation, but I think you and I both agree that that sets the foundation
for that, but it won’t happen unless there’s velocity.

In your view, what has to happen psychologically? What are the things we want to be watching
for that will start to lead towards more inflation and then ultimately, if it does happen, some kind
of hyperinflation of the U.S. currency?

Jim: You put your finger on it. It’s psychology, but what kind of psychology? It’s the psychology
of expectations. Inflation will happen when enough people think inflation’s going to happen. I
understand that’s a circular argument, but that’s what recursive functions look like. That’s how
complexity theory works.

So, what’s the expectation today? The answer is deflation. No one’s expecting inflation. There
are a few Milton Friedman followers out there or a few monetarists, a few Neo-Keynesians, who
still think that printing money causes inflation.

I would first suggest that the last 12 years refutes that notion. The fact is printing money causes
inflation if velocity is constant. Yes, the quantity theory of money, if you hold velocity constant
and you expand the money supply at a rate that exceeds the potential real growth of the
economy, then the difference is going to be inflation.

The problem is velocity is not constant. This was Milton Friedman’s great mistake. In fairness,
through a lot of his career from the 1950s to the 1980s, velocity actually was constant. So, if that’s
what you observed and that was your assumption, then Friedman’s notion that inflation is a
monetary phenomenon would be correct except that the input is not correct.

Velocity started to crash in 1998. That’s an important point. This is not a 2008 phenomenon or a
2020 phenomenon. By the way, velocity did decline after 2008 and is declining right now, so I’m
not saying those events had no impact. They continue to drive velocity down, but the steep
decline started in 1998. And guess the other time when velocity crashed: the 1930s.

A blunder I see time and time again with analysts, Wall Streeters, trades, and programmers is,
“I’ve got a time series to do the correlations and regressions.” I’m like, “Yeah, fine. How long is
your time series?” “Oh, 20 years.” “Okay, why don’t you try 80 or 90 years and see what has
happened in the past facing these conditions?”

Velocity is just the turnover of money. Let’s say I have some money and I have a choice. I can put
it in the bank to sit and spend very little. That’s what I’m doing now; I’m not going out a lot. I take
a walk in the sun, but I haven’t been to many restaurants or bars or trips or airports in months.
So, I can put it in the bank or I can go spend it or I can invest it. Those are my choices.

What am I going to do? Well, it depends first on opportunity. Right now, it’s hard to spend money.
We’ve actually been trying to support some local merchants, caterers, and restaurants with
takeout meals just to try to help out a little bit, but you don’t have much opportunity to spend
right now.

Beyond that, and more importantly, what is my expectation for inflation? Well, it’s negative. I
expect deflation. What happens to money in deflation? The value of money goes up. You don’t
get much interest. It’s not like a dividend or interest, but the actual real value of money goes up
in deflation. So, what do people do in deflation? They save money, they save more, and you fall
into what Keynes called the liquidity trap.

How do you get out of the liquidity trap? You have to get people to spend that money. How do
you do that? You have to change their expectations, their psychology. Okay, how do you do that?
Central banks have shown that they don’t know how to do that. If printing $5 trillion and then
printing another $5 trillion – which is what they’re doing; the Fed balance sheet is going to cap
out based on what we know now at around probably $10 trillion – if that doesn’t do it and that’s
all you have in your bag of tricks – interest rates are zero and you’re going to print $10 trillion – if
that doesn’t cause inflation, which it won’t, then I would say you’re worthless. You can’t do what
you say you want to do.

This has been true for 12 years. The Fed’s been trying to get just 2% inflation for 12 years, and
they haven’t been able to do it. Well, how are you going to get 4%-5% inflation? That is what you
need to get out of this debt problem.

There is one way to do it, and only one way that I can see, which is, you have to raise the dollar
price of gold. That gets people’s attention. I’ve said before: If the Board of Governors of the
Federal Reserve System went into a room, closed the door, took a vote, walked out, and Jay
Powell walked up to the microphone and said, “Ladies and gentlemen, as of now, the price of
gold is $5000 an ounce. If you think that’s cheap, we’ll buy it from you and print the money, of
course. If you think that’s expensive, sorry. If you think it’s cheap, come and get it. We’ve got the
gold in Fort Knox. If you think it’s cheap, come and get it, and we’ll deliver the gold. If you think
it’s expensive, sell us the gold, we’ll buy it, and we’ll print money.”

The point is, if you make it a two-way market, your buyer $4995, your seller $5050, gold is $5000
an ounce in that example. The point of doing that would not be to enrich gold holders or owners,
and they don’t care. The point would be to change expectations, exactly what we’ve been talking
about, because the world of $5000 gold is also the world of $400 oil and $20 copper. And there’s
your inflation, because everything would go up.

This has been done twice, by President Roosevelt and President Nixon, so it works.

Alex: Yes, that’s what I was just going to say. This isn’t just theory; this has happened already.

Jim: It happened twice. Roosevelt did it on purpose, and Nixon did it by accident. The result both
times was that we got inflation. I was looking at the numbers. I was kind of familiar with them,
but I went back and checked. From 1933 to 1936 – the Great Depression is usually defined as
1929 to 1940 – in the middle of the Great Depression from ’33-’35, the stock market was going
up 20%-30% a year. One year was 5%, but it was booming.

It had gone down 90%, so when you’re down to 10%, even when you go up 30%, that’s only three
points. You haven’t made it back. It recovered the 1929 high in 1954, so it took 25 years to come
back. We could be looking at that kind of situation, but FDR devalued the dollar against gold not

to enrich gold holders. In fact, he confiscated all the gold first. He did it to change the psychology,
and it worked.

Alex: What could lead to a hyperinflation? Do you see any percentage chance of something like
that happening? What are the odds, and what would have to happen for that to occur?

Jim: I want to be very clear; I see deflation for now and deflation into next year. When I talk
about hyperinflation, don’t expect it to pop up next month. I certainly don’t; I expect deflation.

But you are going to have to get to inflation because of the debt burden. Our debt-to-GDP ratio
is catching up to Italy, and we’re probably not that far behind Lebanon and Greece at this point.

You’re not going to be able to borrow your way out of the problem. You’re not going to be able
to make the U.S. economy productive enough to pay off that debt or even sustain. You don’t
have to pay off the debt, but you do have to roll it over and sustain it, and we’re going to fail
those tests with the kind of productivity we’re capable of.

If you can’t borrow and spend your way out ,and if you can’t grow your way out, what else can
you do? You can inflate your way out, and that’s the American way. America’s been doing that
since the Revolutionary War. That’s what we do. We used to be pretty good at it, but that’s back
when we had gold, so we’re not good at it today.

I don’t know how long it’ll take the Fed to wake up. I’m telling you the answer, and if Jay Powell
were on this call, maybe it’d be nice to have a nice conversation. No central banker, no PhD
economist, nobody in a tenure position at MIT, Harvard, Yale or Chicago wants to talk about gold.

They just don’t. I know a lot of them. I’ve met Fed chairmen, vice chairmen, and governors. I’ve
met them all, and they don’t want to talk about gold. They don’t want to have the conversation
we’re having right now.

We talked earlier about having science on your side. I’ve got history on my side, which is that this
is the only way we’ve ever been able to get inflation. Now, here’s the point. Let’s say that they
do it. Let’s say that we’ve got to get the dollar price of gold up.

Remember, when the dollar price of gold goes up, gold isn’t really going up. What’s happening is
the dollar is devaluing. It takes you more dollars to get your ounce. I think of gold by weight. If it
takes you more dollars to get your ounce, well, that’s a nice win for someone who has gold. But
what you’re really doing is devaluing the dollar, which is inflationary. That’s the whole idea.

They’ll wake up eventually when the damage gets bad enough, but it’s just hard to say when.

Here’s the danger: You can segue from deflation to inflation pretty quickly by doing what I said,
which is getting the dollar price of gold up. But there is the danger that you shoot past the mark.

You’ve got to stick the landing. Six percent inflation would be fine. It would be very damaging to

a lot of investors, and those investors need to look out for that. That’s a separate issue, which is
what kind of portfolio would you have to prepare for this, but you start with gold.

Six percent inflation would wipe out the debt in about 12 years or less. It would cut the value of
the dollar in half. Twelve years is not long, and if you could cut the debt in half, nice job. The
problem is, you try to get to 6% and end up with 12%-14%, which we did see in the 1970s.

People forget that in 1977, the United States issued Swiss franc denominated bonds, because
nobody wanted dollars. They were called Carter bonds. You had U.S. treasury bonds
denominated in Swiss francs, because institutional investors said, “We trust the Swiss franc; we
don’t trust the dollar.” Then inflation peaked at around 15% in 1980. That’s when gold went to
$800 an ounce.

Yes, it’s hard enough to get inflation, although I just told you how to do it, but it might be even
more difficult to fine tune it in such a way that you don’t get into hyperinflation. So, you cannot
rule out hyperinflation.

Alex: So 15%, 1980, $800 an ounce. That was a pretty famous secular bull in gold, and we’re
talking almost a 25-fold increase from the ‘70s.

Jim: That’s right. Again, I’m sure you know this. Let’s say gold hit $2000 an ounce in the next few
months, which I think is entirely possible, maybe even likely. That would top the all-time dollar
price of gold, which was $1900 an ounce in August 2011.

Let’s say it goes to $2000 an ounce. In real terms, that’s less than January 1980. In nominal dollars,
yes, that’s an all-time high, nice going. But in nominal dollars, that $800 an ounce in 1980 looks
closer to $3000 an ounce. It’s going to get closer to $3000; it’s just got to get to $2000 first.

Alex: On to some more edgy topics. There’s been a big discussion lately about censorship,
suppression of discussion, commentary, and deplatforming people from things like YouTube,
Twitter, etc. Just this morning, there was a host on one of the main media outlets pushing to have
the President deplatformed from Twitter.

Jim: Mika Brzezinski?

Alex: I wasn’t going to name any names, but I’ll let you do that.

Jim: I will.

Alex: All right. At the risk of that happening to us, the whole censorship, deplatforming,
whatever, there are certain things that really need to be talked about. I want to ask you some
questions that I think lot of people are hesitant to talk about, but we’re going to do it.

This is my view, and maybe you can put it into your own words or what you think you see
happening here. I think that we’re seeing a polarization of the people. Not just in America, but
I’m talking globally. My view is that it’s not really about political parties but about how people
see the difference between freedom and not freedom.

In other words, some people seem okay with losing it, and others don’t. There are different
personalities, different levels of education and intellect on both sides of the argument, but I’m
seeing this happening more and more. Each side seems to consider the other side as naïve about
everything, maybe ignorant, dumb or whatever you want to fill in the blank with, and that the
other side is wrong.

What I want to know from you is, how do you view this? Do you see this as one side or the other
coming to their senses, or do you see it ending up in a much more difficult, challenging
circumstance?

Jim: I think the latter. First of all, I agree with your overview. There’s a lot more that could be
said, but as kind of a synopsis just to put a finer point on that, I mentioned I’m working on this
new book on the pandemic and the depression. Last fall, I was working on another book, and I
just put that on the shelf. I can’t deal with that right now because this other book is on a fast
track. I’ll come back to it.

Remember what the world looked like last fall before COVID-19, before this virus, before the
pandemic, before the depression. What was going on last September and October? You had riots
in Paris. Remember the yellow jackets. I’m not going to try to say it in French, because I’m not
good at it. There were riots in Barcelona that had to do with separatism. You had riots in Beirut,
kind of the Cedar Revolution 2.0, the secular society pushing back against the warlords,
Hezbollah, and others. You had riots in Santiago, Chile, because they raised the public
transportation fee 4 cents or something, and all of a sudden, they’re burning down every subway
and bus station in Santiago. Oh, and Hong Kong was maybe the biggest tinderbox of all.

I was stepping back and saying, wait a second; riots in Paris, Beirut, Barcelona, Santiago,
Hong Kong, and other places. As Stephen Stills wrote, “Something’s happening here.” There has
to be a thread. It can’t just be coincidence that ten major cities around the world, maybe more,
are rioting all at the same time.

I think it does go to what you’re talking about, which is liberty versus oppressive government and
income inequality. Taxes are a funny thing. They can put a tax on you, and you pay it. Put more
tax on you and you’ll pay it. But there comes a time when you’re like, you know, I’m out of here.
I don’t know what I have to do. Maybe you’ve got to move to Puerto Rico or drop off your
passport on the way out of town or whatever, but there’s a tipping point, a critical threshold, the
straw that breaks the camel’s back. Take whatever metaphor you like.

When you see riots about a four-cent transit fee increase, that’s the tipping point. It wasn’t about
the four cents. It was about 30 years of increasing taxation that finally pushed too far. That was
already there before these shutdowns arrived.

Behind every government bureaucrat is a neo fascist. There’s something in the human DNA that
just wants to tell other people what to do. I personally don’t have it. I have a missing gene. I have
enough trouble keeping myself pointed in the right direction, so I’m not big on telling other
people what to do, but a lot of people are.

When you have a crisis of this kind, the inner fascist comes out. The governors, the mayors, the
Center for Disease Control, the epidemiologists, their kind of inner fascist comes out. They’re not
limited to getting supplies where they’re needed, personal protective gear, ventilators – although
the ventilator thing turned out to be a fiasco that probably killed more people than it saved.
Masks, intensive care units, whatever it was, getting that stuff to people in need is a big deal.
That’s what leadership is about, and that’s what your executive position should be about. Let’s
get help to people who need it as fast as possible. There was a lot of wrestling about that.

Who was it, the governor of Michigan? Gretchen Whitmer. They love coming up with lists of
essential and nonessential businesses. In my opinion, if it’s your job, it’s essential. If it’s what you
do to put food on the table for your family, it’s essential. So, that’s an arbitrary distinction. She
decided they’ll shut down barber shops, hair salons, gyms, all that stuff, but she prohibited the
sale of paint and carpets. Why? It’s not like they’re using lead-based paint, it’s not like there are
noxious fumes, it’s not like carpets are going to spread coronavirus. If you’re working in my house,
come on in and work. It’s not like we’ve got 50 people watching a football game. Why paint and
carpets? The answer is, it’s the inner fascist. She can’t resist bossing people around.

We saw it with the hair salon owner in Dallas, Texas, who was arrested and sentenced to a week
in jail for cutting hair. Okay, you could have given her a $200 summons on what’s called a
violation. Violation is not a crime. When you get a speeding ticket, that’s actually not a crime.

Reckless driving is a crime. A speeding ticket is called a violation. You could have given her a $200
violation and said, mail it in, and she probably would have paid it. But no, they arrested her.

There was this Atilis Gym in New Jersey the other day where they were arresting customers. The
cops were waiting outside and handing out summons. They have to ask your name, and a guy
wouldn’t give his name. Why should he? Have you got a warrant? What’s this all about? Who
gave you the right to stop me on the street and demand my name? It’s like people trying to
escape Nazi Germany when they asked to see your papers. That’s what we’ve come to.

Not to belabor the subject, but this has empowered a lot of political leaders. Their inner fascist
is out, the neo fascist is out. They can’t wait to tell people what to do. And just to make it worse
– and I’ll leave it at this – there’s what I call the liberal progressive ratchet. You know what a

ratchet is. You turn it one way, but it doesn’t turn back. It doesn’t mean you can turn it more the
next minute, but it does mean it never goes back.

Someone said to me the other day, New York City is taking all these streets offline, city streets
are closed to traffic. They will never be reopened. When this thing is over, you’re going to find
that the mayor wanted to close those streets all along. All he needed was an excuse, so don’t
expect them ever to reopen.

That’s the problem with all of this. I can pick on Mayor de Blasio and the streets in New York, but
it’s true across the board. When they start issuing these orders, the virus diminishes, and it’s kind
of safe to go outside, but they’re not going to reverse the orders. Some of them, yes, but a lot of
them you’ll find that they were trying to do it all along. This was their excuse.

That’s the liberal progressive ratchet. I have studied the history of fascism, and you’ll find that it
came from progressives and socialists. Mussolini, who was the father of 20th century fascism,
said that his greatest inspiration was Woodrow Wilson.

Alex: Amazing. Two quick comments on this and we’ll move on to two more things before we’re
done here. For me, number one, the whole concept of allowing a politician to pick winners and
losers economically is extremely dangerous. Basically, what that means is this politician gets to
decide that this business gets to prosper, and this business gets to fail. These people get to feed
their kids, and these people do not. That is a very dangerous slippery slope.

The second thing that I find really interesting, because you know I have a background in the
military and a brief law enforcement background in the military as well, there is a video done by
a police officer talking about how certain actions by governors and also police officers are
violating constitutional rights of U.S. citizens.

I got really curious about this and looked it up. It’s USC Title 18 on the U.S. Department of Justice’s
website. USC Title 18, Section 242, basically says that any law enforcement officer, judge or public
official that denies or infringes on a U.S. citizen’s constitutional rights under color of law –
meaning the governor writes an executive order, they pass some kind of law or whatever that is
contrary to what a United States citizen’s rights are under the constitution – that’s actually a
crime.

Jim: That’s right, but the U.S. Code is a big document. You referred to Title 18, which is the U.S.
Criminal Code, and you’re right about that part of Title 18. But there are other titles in the United
States code that deal with national security, and they’re a lot scarier than the one you’ve just
read. I cover this in Chapters One and Two of my book, The Road to Ruin.

As a side note, I’m regularly active on Twitter and do a lot of public speaking and have been living
on Zoom lately, so I get a lot of questions and answers. One of the things I’m hearing a lot is that
my books, including Currency Wars which came out in 2011, are selling extremely well. Of course,
my publisher is thrilled, and I’m happy about it too, but it’s odd to see a ten-year-old book still
selling almost like a bestseller, not quite. People say, “Jim, I wish I’d read your book two or five
years ago.” Well, Aftermath came out in November 2019 and has only been out six months. Pick
it up and read it now. It tells you everything that has happened in the past six months.

I say, “First, thanks for buying the book. Second, it’s not too late. Maybe you would have been a
little bit ahead of the curve if you’d read it two or five years ago, but it’s not too late, because
this is going to get worse, and these trends are going to continue. It’s not too late to get into
some of the allocations we talked about.”

In my book, The Road to Ruin, that came out in 2016, the first two chapters talked about what
we’re talking about now. A lot of these laws were enacted, and some of them go back to the
Trading with the Enemy Act of 1917, but these laws were enacted in the 1950s as we were
preparing for a nuclear attack.

The question was, what would the United States do in the event of a nuclear attack? It’s called
COG, Continuity of Government. I have a friend who’s working on COE, Continuity of the
Economy. I’m sure we all wish we’d figured that one out a couple years ago. But with Continuity
of Government, they’ll land helicopters on the mall in front of the Capitol, members of congress
will come out to the helicopters, and they will be taken to either Raven Rock or Mount Weather
not too far away in Virginia. Raven Rock is kind of on the Pennsylvania-Maryland border not too
far from Camp David.

They have underground complexes there that can talk to each other and in theory run the
government. So, the government’s figured out how to take care of themselves, but they haven’t
really thought much about taking care of us. Abraham Lincoln declared martial law and
suspended habeas corpus, and that was constitutional, because we have a law that says you can
declare martial law and mobilize the National Guard.

Having said that, Alex, you make a particularly good point. I think the International Emergency
Economic Powers Act of 1977 makes the president a financial dictator in the event of a national
security issue, and I think we’ve got those galore.

The laws that exist that empower government officials to act in an emergency capacity in ways
that we would normally regard as dictatorial are already on the books. You don’t need Nancy
Pelosi or Mitch McConnell to pass these laws. They’re there, but they were done in preparation
for nuclear attack. Well, how about a pandemic? It’s maybe not too far removed.

These executive orders issued by the governors, to the extent that people have been able to
litigate them – and not everyone has the resources or the time – they’re winning almost every
time. I notice the governors are losing these cases in their own state courts. Wisconsin Supreme
Court overruled the governor’s shutdown, and the governor of Texas went the other way and
overruled a local judge who would imprison this lady who runs a salon.

Citizens are winning these cases for exactly the reason you mentioned, which is that the executive
authorities, which would be mayors and governors, are exceeding their authority. They’re just
doing stuff and making stuff up without legal authority. And the police who are executing these
orders are probably breaking the law. I’m sure they just think they’re doing their duty, but they’re
probably breaking the law when carrying out an unconstitutional order.

Alex: My perspective warrior code-wise is that the job of these people is to protect the citizens,
not to mess with people who are just going about their daily lives trying to do their thing.

Jim: I was wrestling with that. As I said, I’m writing this new book, and one of the things I included
in the introduction is that I can’t just write a book. Obviously, you can make money on a book,
but I asked myself, am I doing something that is exploiting the hardship of others?

I said the answer is no if two things are true. Number one, you have to offer advice and guidance
and help people. So, if the book helps people, then I’m very comfortable with that and I’m glad it
can do that.

But I’ve also put in a big thank you. I said there’s a lot of problems to go around, a lot of disaster,
but we have a lot of heroes. Doctors, nurses, emergency medical workers, attendees, people just
cleaning the streets or cleaning rooms, disinfecting, everyday citizens, the National Guard, the
Army Corps of Engineers that built a hospital in the Javits Center like overnight, and Franklin
Graham who put up a tent hospital in Central Park. A lot of heroes.

But I had to hesitate a little bit when I got to the police. I’m like, well, whose side are they on?
Are they doing what the Army Corps and Franklin Graham and many others are doing, or are they
the shock police?

I don’t know. You can’t generalize. I’m sure there are plenty of cops who are heroes, and you
have to say that, but it did make me think. I think both is the right answer.

Alex: I wanted to ask you about the upcoming 2020 presidential election, but we’re going to save
that for the next podcast, because there’s something else I want to hit really quick, and we’re
just about out of time.

There have been some mentions of reparations for China. There are some folks who believe that
China has some responsibility in terms of how damaging this pandemic has been, and there’s talk

of reparations. One theory is that it might take the route of cancelling their treasuries. I don’t
know if that’ll happen. I’d like to get your opinion on that.

The second thing is there’s also been some discussion of delisting Chinese companies on U.S.
stock exchanges.

Ultimately, the third part of this is, does this move us closer to war?

Jim: The answer is yes, yes, and yes. Let me break that down a little bit. First of all, there are
plenty of ways. You know as well as anyone the oldest joke in banking: If I owe you $1 million, I
have a problem, but if I owe you $1 billion, you have a problem, because you have to collect from
me. I can just default and sleep in tomorrow, and it’s your problem.

But what if I owe you $1.4 trillion? I’ve been dealing with this for over a decade. All these national
security forums saying, “China has us over a barrel, we owe them $1.4 trillion, they’ve got us by
the …” Whatever. It’s not true; the opposite is true. If I owe you $1.4 trillion, you’ve got a big
problem, because I’ll think about whether I want to pay you or not.

It is a great resource for the United States to compensate ourselves for Chinese damages. One
scenario would be you’d go into the good old federal district court with probably an 800-page
complaint, maybe a class action, maybe not, maybe there’s some other statutes. And you would
sue China for about, let’s say, $1.4 trillion.

Let me just pick a number out of the hat. The lost wealth is multiple trillions including how much
the stock market went down, the lost output – we’re into the multiple trillions. So, let’s just pick
a nice, round number of $1.4 trillion. You win the case, but now you have to collect. That’s always
the first thing lawyers learn. You might think, oh, you learn how to win a case. No, you learn how
to collect in case you win.

You just basically get a marshal or somebody to serve the Fed and say, “We’d like you to freeze
the Chinese account to pay us the $1.4 trillion they owe us.” Well, that’s technically not a default;
that’s a perfectly legal process. If they let China come in to defend themselves, let them hire
Covington & Burling or one of these deep state law firms, and defend themselves, maybe they’ll
win. But maybe the Plaintiff will win, and they’ll owe us $1.4 trillion.

At that point, you’re not defaulting on the bonds, you’re just collecting. You’re seizing an account
which, by the way, people always ask me what I think about cryptocurrency. I say I love them.

The dollar is the greatest digital cryptocurrency in the world, but the Fed and the Treasury keep
those ledgers. That’s one way to think about it.

Another thing – and the president could do this today with one phone call without litigation – you
could freeze the Chinese account. You don’t have to seize it. You could, but you don’t have to

take it. Just say, “Hey, China, they’re still your bonds, no worries. They’re accruing interest, and
we’ll keep close track of that. Oh, by the way, you can’t sell them until further notice. And we’d
like to see you on your best behavior.”

You could do that. That’s not a default or stealing their property. That’s freezing the account,
which we’ve done. The U.S. is exceptionally good at this. That’s how we got Bayer Aspirin in World
War I. We took it from Bayer AG because they were Germans, and we used the Trading with the
Enemy Act of 1917 to get ourselves an aspirin company. And we did it to Iran. We do it to people
every day.

So, it’s a bigger ticket, but you don’t have to steal the money. You take it. You could just freeze
it, hold it, and not let the Chinese have it until they shape up. People say, no, you can’t do that.
You’ll destroy the U.S. government securities market, you’ll destroy the credit of the United
States.

I was general counsel and Chief Credit Officer at one of the largest government securities dealers
for ten years, so long before I stepped into the hedge fund world and a lot of other things, I spent
my life in the government bond market. So, I would say, wait a second. If the United States has
$22 trillion of debt – which we do – and you take $1.4 trillion away so you don’t have to pay that,
I like your credit better. I think you just improved your credit because you don’t have to pay as
much.

People need to think hard about these things. I think the Chinese need to think hard about these
things. I’ve been to China quite a bit and met with everyday people, peasants, and government
officials. The everyday Chinese people are very nice. I love China, but the government officials
are evil, for want of a better world.

But you say, “Jim, don’t you have the smartest people, the greatest scholars, the greatest
resources and intelligence service? Can’t you figure this out?” The answer is no. They really have
a hard time figuring out Washington. I tell people that Americans have a hard time figuring out
Washington as well, so it’s not just the Chinese.

Things that may seem obvious to you and me are a lot less obvious to the Chinese. It’s not
because they’re dumb, it’s just because there’s a cultural outtrade where they can’t quite bridge
the gap. But if I were China, I would be trying to figure this out, because I think it’s real.

You asked, “Then can that lead to a shooting war?” That was the history of the 1920s and what
my first book, Currency Wars, was about. In the 1920s, you had a knockdown, drag out currency
war. By the 1930s, it had turned into a trade war and the Great Depression, and by 1939, Hitler
invaded Poland.

That sequence of first currency wars, then trade wars, then shooting wars has proved true in the
past. The currency wars started in 2010 and is what I talked about in my book. The trade wars –
pick a date. You could say January 2018 when Trump slapped tariffs on Chinese washing machines
and solar panels, and that got a lot worse.

And now, even that’s going on three years ago. Are we at the stage where a shooting war is on
the table? Well, the President and Secretary Pompeo sent congratulations to the new president
of Taiwan, and they were not treating her like a regional governor of a communist Chinese
providence. They were treating her like a head of state.

That’s the kind of thing that, combined with everything we’re talking about, could set the Chinese
off. I would say, if we did seize or freeze their $1.4 trillion of treasury bonds, which we may end
up doing, do they jump over the straits to Taiwan or do something crazy in the South China Sea
or crash into India? I don’t know, but I don’t think you can rule it out.

Alex: It’s been a great discussion today. I really appreciate it, as always. I know you’re in your
undisclosed location off the grid, so you take care of yourself out there.

Jim: I call it the corona-free mountain.

Alex: Excellent. Stay safe, and until next time, thanks a lot, Jim.

Jim: Thanks, Alex.

 

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

 

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Transcript of EP. 7 Global Perspectives: April, 2020 Interview with Alex Stanczyk and Special Guest Duncan Cameron

EP. 7 Global Perspectives April 2020 with Alex Stanczyk and Special Guest Duncan Cameron

Topics Include:

*Gold transfers into China through Russia

*How the US Dollar is moving towards losing its status as the world reserve currency

*The rise and fall of empires *Full spectrum warfare

*Why it may not be not possible to accurately estimate China’s physical gold reserves

*How policies during the French yyperinflation resembles “Modern Monetary Theory”

*The demonization of free speech that disagrees with other ideologies

*How social conditioning is affecting discussions of inflationary consequences

*How the Federal Reserve embarking on a junk bond buying voyage is reminiscent of the French Hyperinflation

*Unemployment numbers are likely higher than reported

*The Federal Reserve publicly saying they can print an unlimited amount of money pushing people towards a loss of trust in the USD

*Break down of supply chains are being projected to cause shortages in food supply and potential civil unrest

*How the economic consequences of the shutdown over coronavirus may be worse than the effects of the disease itself

*MMT violates basic natural laws and disconnects human from labor, removing all incentive

*Honest money versus fiat

 

 

Listen to the original audio of the podcast here

EP. 7 Global Perspectives: April, 2020 Interview with Alex Stanczyk and special guest Duncan Cameron

 

Physical Gold Fund presents Global Perspectives with Alex Stanczyk and invited guests exploring international markets and the complex forces that drive them including geopolitics, economics, and the global monetary system.

Alex:  Hello. I’m Alex Stanczyk, and welcome to Episode 7 of Global Perspectives. Today is April 14, 2020. I have with me my colleague and friend, Duncan Cameron. Welcome, Duncan.

Duncan:  Good day, Alex. How are you doing, mate?

Alex:  Very good, thank you. Duncan is a member of our research team and is a precious metals industry veteran of many years. 

Before we dive in, just a quick note. I know a lot of you watch or listen to our podcasts on YouTube. If you like our material and content, please take a moment to Subscribe and Like the video. It helps a lot with the distribution and circulation which we appreciate a great deal. Also, feel welcome to comment below the video in the Comments area. We love to hear from you and are happy to engage in conversation with you.

Duncan, how is everything going down there in your neck of the woods? Duncan is from New Zealand for those of you who don’t know.

Duncan:  New Zealand is one of the countries that has gone really hard in the lockdown phase. We quickly moved from what we called level two where the elderly should be safe inside and business was still going to a very brief couple of days of level three, and then we went into level four, which was complete isolation, complete lockdown. That’s been running since the 26th of March.

Everyone’s a bit stir-crazy. I go out for a run every day, which is nice, and I’ve been out to a dairy to get a bottle of milk once. That’s the only time I’ve used my car. Yes, everyone’s getting a bit stir-crazy, but the number of deaths and cases is extremely low by international standards. They’re talking about potentially releasing economy back out into the playground within the next two weeks.

Whether that will deal with the bigger issue of the waves of virus that will come back around or whether the damage is greater than the actual disease itself remains to be seen. But essentially, people are really chafing at the bit to get out and start getting the economy back. A huge number of businesses are out of action.

Going down memory lane, Alex, you remember the 2012 China Gold Summit. I went to assist you with Physical Gold Fund. I arrived in Shanghai a couple of days before you did and got scammed as fast as anybody does. The tea scam was quite funny, really. Here I’m not supposed to be scammed, and I was scammed on the first morning, but I got the scammers back. I wanted to go on a guided tour, visit the gold markets, and have someone show me around. After being scammed by these three people and paying some exorbitant amount for a cup of tea, they must have thought I was Duncan Lots-of-Bucks.

Alex:  Yes, you walked into the country and you’re obviously an ATM.

Duncan:  I expressed my desire to want to look at the main gold markets. That’s where we’ve seen many photos popular around that time showing hundreds of people lined up desperately waiting to buy gold.

They proceeded to take me down there and guide me all around, so I got my day’s tour. Then, instead of going to dinner and spending an exorbitant amount of money which is kind of what their real agenda was, I said, “I’m feeling a bit tired now. I want to go back to my hotel.” I got what I wanted.

Again, I arrived a bit earlier than you, and then we had the China Gold Summit where you were a keynote speaker. In fact, your speech was applauded roundly, and you were embraced by one of the senior Chinese hosts of the entire conference. Maybe you can talk a little bit about the actual speech and put it into your own words better afterwards.

Meanwhile, as your trusted steed, I shot off for lunch with a very senior executive of one of the world’s largest security companies. They openly talked about the amount of gold that was coming in via Hong Kong and being shifted across the border. At the time, it was put in the conspiracy category. Everyone was a blogger or writer, and they basically said that China can’t be storing as much gold as they’re storing. 

While China may not be completely candid or may be slow to release data on the amount of gold, they had said some years ago that they wanted 10% of their foreign reserves denominated in gold. That was their big picture goal. They had like 500 tons and then they said they went to 1,000. 

They released it all very slowly, but the real belief behind the system was that gold was being hoarded on a super massive scale. This was done not only by the thousands of people down at the gold markets but by sovereign wealth funds acting on behalf of central banks to effectively squirrel away lots and lots of gold.

Somebody like you and me, we’re at the call phase here, but I’m sitting there with a senior executive who has credibility. We’re just talking as people inside the industry jabbering on about, on the outside, the Physical Gold Fund side or AFE2 and what was happening at the refinery level as gold was leaving the Swiss refineries and being broken down. It was leaving there, and you even told me a story that was talking about apples at the bottom of the barrel in terms of the amount of gold coming out of the place.

But here I was witnessing and hearing the firsthand accounts of someone who is virtually watching the gold coming into the country on the level of hundreds of tons a year, and this was happening year after year after year. He recounted the stories of when I first started getting in the gold mining space and you could buy gold mining stocks for gold mines in China. China, the world’s largest gold producer, right?

In time, they started to bring in a law that said, “Look, you can own shares in these gold mining stocks, but no gold leaves China. All the gold must be sold to China itself, PBOC, whatever you want to call it.” Eventually, of course, all their gold mines were effectively nationalized.

I’m kind of struck by this article from GATA, and I’m going to pose this question in light of what I’ve just talked about. Alasdair Macleod said it is possible that the total is much higher – talking of gold – that the central bank is 20,000 tons and the Chinese people have another 12,000 tons for a total of 32,000 tons. If and when China dumps its $1 trillion in U.S. treasuries and buys more gold and then backs its currency, the yuan, with the gold, the yuan could become the world reserve currency for all of China and associated benefits.

This is something that’s been popped out there for a long time. At some point, as America and in fact the entire world is bursting deep into money printing, what are your thoughts with respect to China playing the gold card? Jim Rickards talked about it in his book, Currency Wars, where he took that position in the war room scenario. What are your thoughts about China playing the gold joker?

Alex:  I think we’re headed towards an inevitable dethroning of the U.S. dollar. Whether China is able to replace that or not as the world’s reserve currency, I don’t know. There are a lot of other factors including all of the treasury markets and whatnot that the U.S. has as part of the world’s reserve currency and are massively deep markets in terms of the ability to absorb capital. I don’t know that the yuan is capable of doing that, but I’m not saying they may not end up being the next. I mean, it’s pretty obvious. 

I saw a really interesting article by Ray Dalio who is the founder of Bridgewater Capital, one of the largest private hedge funds in the world. They run money for sovereigns, sovereign wealth funds, the largest pension funds in the world, etc. He was pointing out the rise and fall of empires and how the U.S. is essentially a waning empire while China is a rising empire. We have that scenario throughout history. This is nothing new, and I’m not trying to say anything critical about the U.S. or promote China or anything like that. It’s just history. China was the world’s leading country in terms of empire something like four different times in history over 3,000 years. They peak and sort of take the lead, then they fall behind, and the lead is passed between empires.

When there’s a waning empire and a rising empire, it inevitably leads to conflict. That’s what happens when the rising empire tests the waning empire. I think those tests are happening and are playing out on the world stage in terms of the financial aspect of it – financial warfare. Jim Rickards and I have talked about full-spectrum warfare for a long time. That is all of the above; it’s kinetic, financial,  cyber, possibly biological, social engineering, and all those types of things. There’s been financial warfare going on between the United States and China for a very long time now.

It’s interesting what you said about the data, what they own, and the gentleman you were sitting next to at that lunch who is a very highly placed director of one of the largest private security companies in the world. It’s fascinating what you learn sitting down and talking to people at lunch or over a cocktail, isn’t it?

Duncan:  It certainly is.

Alex:  My understanding is that he was talking about riding with these trains of tanks coming out of Russia full of gold. There are so many people in the industry, newsletter writers, who have written about this over the years speculating about how much gold China has. The truth is nobody really knows.

I explained this to one of these guys one time and he was like, “Well, how can they get away with not reporting the data? We have import/export figures where it shows how much gold is imported and exported.” I responded, “They’re a sovereign entity. If they’re bringing gold by the People’s Republic Army across the Russian border … Why does that have to be reported on the import/export data?” You understand what I’m saying?

Duncan:  Exactly.

Alex:  What we’ve learned over the years is that China reports what’s in their interest to report. If it’s not good for their public image or whatever it is they’re trying to portray at the time for them to report certain data, guess what? They don’t. They didn’t report their gold reserve data for a long time, then all of a sudden, they reported it. What ended up happening is that one of the sovereign wealth funds that was purchasing physical gold shifted it from their balance sheet onto the PBOC’s balance sheet, and voila – the gold total went up. Who knows how much they’ve got off balance sheet?

In answer to your question, it’s going to change, but I don’t know what it’s going to change into yet. The battle for that is being waged right now.

Duncan:  I’ve reopened one of my favorite books of all time by Andrew Dickson White. It’s a free download called Fiat Money Inflation in France set in the time of the late 1780s. You can get it from the Mises Institute, and I encourage everybody to read it. There are a lot of amazing statements in this book about the history of the time, but I think this is one of the most telling that I have never been able to get out of my head:

“In the municipality of Quillebeuf, a considerable amount of specie being gold, having been found in the possession of a citizen, was seized and sent to the Assembly. The people of that town treated this hoarded gold as the result of unpatriotic wickedness or madness instead of seeing that it was but the sure result of a law working in every land and time when certain causes are present.” 

People were ostracized, because the French government had basically said, “We’re going to print millions and millions of assignats to cover the entire national debt. As Mirabeau gave his speech, the people applauded, shouted, and raved. They saw this as a salvation to what were far more underlying economic problems. They were effectively engaging in what we would regard as modern monetary theory right now.

At PGF, we try and pride ourselves on being ahead of the curve. We tend to be contrary in nature looking for things under the carpet that others don’t. The rising price of gold is something we, in our industry, figured out is inevitable in a world that has just kept printing and printing and creating more money and credit. For us, we’re now watching the manifestation of this with a fascination, but it is not new and is not surprising us.

We start to think ahead about what happens to people who own gold in the form of government creating heavy taxes or vilifying and persecuting because we should all buy into this one world financial system where we’re going to special draw right all from the IMF lots of money, and you’ll get your allocation of money, and how dare you hold gold. Meanwhile, renegade nations like China just say, “No, we’re going to trade gold. You can actually swap our currency for gold,” which is what Alasdair Macleod talks about in his article.

What are your thoughts on a return to life in France where the value of their money became less and less? If you read the book, it talks about how business activity just continued to drop. They pumped in more and more money, but it seemed to have less and less effect. We’re going back through history right now, aren’t we? It is quite scary.

Alex:  It’s eerily familiar to what’s happening right now. You know what’s fascinating to me? People around the world are cheering this money printing. 

There is actually a term for people who say that inflation is dangerous. People like you and I are called inflation truthers by the people who are MMT fans, the people who are, “Yeah, just print it all” fans. Apparently, they’ve come up with a way to demonize our reporting or talking about it. I call it free speech, just sharing our thoughts and opinions on why inflation is dangerous to the common man.

Like all things, I think you pointed out quite succinctly that there’s a war going on for people’s minds right now in terms of getting them to believe certain things about both economics and money. There’s a lot of censorship of speech, and it’s taking the form of social conditioning.

Calling someone an inflation truther is demonizing them and trying to shut down anybody who’s attempting to raise warning bells about potential inflationary consequences. It’s a basic tactic, right? 

Duncan:  When you look at how this all started off, it talked about getting money like in New Zealand. I’ve got a big staff level across three companies, and we got a six figure sum basically to look after people’s salary and a subsidy form. They’ve got a big, fat bank account full of money to pay a subsidy to people for quite some time.

Then you get into the area of companies like a company here in New Zealand where it’s the same thing. I spent the entire weekend studying all the American airlines. In New Zealand, they bailed out Air New Zealand years ago, but they took a 52% stake, and of course, the more you take a stake, the less it becomes a private or capitalist system. This is the battle raging in the United States right now over what degree does America take ownership or take a stake for the sake of the tax holders, people like you and everybody else who has to pay taxes, to bail out private companies. The same argument happened in ’08 with the banks.

Obviously, what we’ve got right now is a situation where the Fed starts off buying investment grade bonds, and now they’re saying they’re going to buy non-investment grade bonds. They’re going to buy ETFs. 

Alex:  They’re buying corporate junk bonds to the tune of $2.2 trillion if I remember correctly.

Duncan:  Yes, that’s right, $2.2 trillion. This is exactly what happened in inflationary France, and it did not go well for them. At the end of the day, you can’t print your way to prosperity. 

Alex:  Did they have a hyperinflationary episode from that particular time?

Duncan:  Absolutely. People hoarded goods and ended up starting to have to barter things. The money had no value, yet they kept printing more and more. The same happened in the Diocletian Crisis of the Third Century in Ancient Rome and has happened in Weimar, Germany.

We talked about this a couple of weeks ago. You talked about the amount of bread on an island, the amount of currency, and what happens when you just print more currency, because there’s only so much bread to go around.

The modern monetary theory is now completely being embraced as it has been in the past. The Fed has gone into total and 100% buying everything. This article I’m reading right here talks about the link between what’s happened and the Lincoln greenback. We call it the Continental. They would say, “Not worth the Continental,” because the currency that was being pumped out wasn’t worth anything.

At the same time, you’re seeing gold jump. Interesting things have happened, as you know, in the separation. You sent out to our chat group the separation and spread between physical gold and paper gold. Every second month on the COMEX, there’s a deliverable month and then a non-deliverable month. April is a deliverable month.

The COMEX raise margins to arrest the rally in gold, forcing longs to liquidate. Now, this has happened many times before in the COMEX over various metals. The official story was there was a shortage of 100-ounce COMEX deliverable bars, and the rules of delivery had to be changed to accept 400-ounce bars instead. Those LBMAs couldn’t be smelted down, and the Swiss gold refinery supposedly shut. That was the official story.

But we know that, and it happened in inflationary France. Gold became worth so much that people hoarded it because the money wasn’t worth anything. The market is already sensing the same thing right now as we see the separation of physical gold to paper gold. They play around with margins, that causes longs to liquidate, and then you have a bit of a drop. In that case, at the time of reading this article, it had been $1,700 and then it dropped back into the $1,630s as we approached the settlement date of the COMEX month.

Yet, here we are today. On my screen, it’s $1,726 and was up to $1,739. In my currency, gold just about hit $2,900 yesterday, and we’re going to hit $3,000. 

Meanwhile, these separations of the paper price and physical price are quite profound. You’ve commented, and I’ve sent you little snips of our physical gold spread. I guess this is something we’re going to see more of – the separation of physical gold to paper gold and the waking up amongst the general markets that you can play with this monopoly paper, but you can’t get gold handed to you in any physical form.

Alex:  I think it depends, being honest. I don’t know that there’s a shortage so much of the metal as there is a shortage of manufacturing capacity at the refineries and farther down the chain. If there’s a mint that doesn’t necessarily refine its own metal, if it gets blanks from a refinery and then they produce, these are all manufacturing processes.

It’s not that there’s enough gold. The question is, what does the price have to be for it to clear?

Duncan:  Exactly.

Alex:  Just a couple of weeks ago, Jim and I talked about if there are bottlenecks in the retail market in particular. When we were talking about clearing out the whole precious metals complex, we were talking about at the retail level, not at the wholesale level. There’s metal, but the question is, who is going to be willing to sell it, and at what price? That’s what it really it comes down to.

I’m curious about something you mentioned just a minute ago. We’ll get back to the whole inflationary topic because I think we should talk more about that, but you had mentioned that you got a subsidy from the government to cover payroll. I know you own three different companies. For those of you who don’t know, Duncan is a very successful business owner in New Zealand with multiple corporations. How many employees would you say you have total at peak? 

Duncan:  It’s a mix of contractors and employees that is probably around about 60 across the three. That’s not big by international standards, but in a country our size, it’s reasonable.

Alex:  They gave you a substantial subsidy to cover payroll. For how long do you think is that going to last?

Duncan:  They gave it for 12 weeks. In fact, the law came out that even if we make people redundant, which we’ve started to do for a couple of individuals in one of the businesses, whatever happens, you are required to pass the subsidy on for the entire 12 weeks. The government is effectively trying to say, “Look, we’re going to give you the money. If you have to let someone go, we understand, but you keep paying them their subsidy so they don’t have to come to government.”

Government wants to eliminate the processes of application. In fact, New Zealand is probably ahead of the curve. I’m watching the slowness with which the U.S. is getting your money up, and Canada is even worse.

Alex:  In the United States, they passed the legislature something like three, almost four weeks ago now, I think.

Duncan:  It’s unbelievable.

Alex:  I and a lot of entrepreneurs have been asking, “Has anybody gotten approvals on any of these loans? Is anything happening here?” They’re like, “No, no, no, no, no.” The first time I heard of one was today. The person received $10,000, and it’s basically $1,000 per employee which is not going to help at all.

I saw something that was really interesting to me the other day. A guy had done a calculation based on the original bailout package they came up with in the United States, and he figured out that for every man, woman, or citizen in the U.S., it was the equivalent of $40,000 per person. They were basically saying, “We’re going to cut a check for $1,200 per individual to help through this process.” His point was that you don’t even need to know where the $38,800 is going to figure out that you’re probably getting shafted there. I thought that was pretty interesting.

Duncan:  As they pumped that money out, we uploaded our application. Within two days, I had $100,000 for about 17 employees. I had $100,000 in my bank account just like that, and that was covering 17 employees, not the contractors. Contractors apply separately and get their money direct from the government.

Here’s another interesting thing you can comment on. Some of those contractors take the money we pay every month and don’t pay tax. Naughty, naughty, naughty. When they try to upload an application for a subsidy, the government says, “We can’t see you in our system.” Then they say, “Well, what can I do?” And they say, “You need to go register for unemployment.” The subsidy is $580 a week, and the unemployment benefit is less.

Suddenly, you have this huge group of people who have operated below the radar of taxation in a situation where they’re being flushed out. Their deeds have found them. They’re reaping what they’ve sown. They just look at them when they phone up saying, “I uploaded my application,” and they get phoned by people in government. We’ve heard various ones had this happen. They get phoned up, and they basically say, “Well look, you’re going to need to apply for just an unemployment benefit.”

Whatever projection countries are doing around the world, it’s one thing if you’re a taxed person following the rules and your subsidy is paid out very quickly, but if you’re working off the grid, which is what a lot of people do, they effectively are going to be flushed out. You’re going to see unemployment numbers a lot larger than is actually official, because the government hasn’t grappled or come to this understanding.

Alex:  This is happening in the United States as well. The last time we talked, we were discussing how unemployment was skyrocketing. The number of unemployment claims in the United States passed 16 million last week. This is historic. 

Duncan:  Yes, I saw that 16 million. They’re talking 30%. The Great Depression was 25%, one in four, and now they’re talking in the U.S. of potentially being 30%. That is a Great Depression. That’s not a recession. A recession is just two negative quarters.

Alex:  The markets are happy. Just like you were saying when the French came out and said that they were going to print, print, print. Well, that’s what’s happening in the U.S. Everybody is excited, markets are buoyant, but people have not figured out that when this Coronavirus lockdown ends, it’s not just going to go back to normal.

Duncan:  Until we have vaccines, people aren’t going to want to go to football stadiums. They’re not going to want to get on planes. They’re not going to want to congregate in large meeting places.

Alex:  There are entire industries that are changing over this. No doubt. 

Duncan:  They’re not going to feel comfortable. You can’t return restaurants and eating places back to normal until people know that if they were to get sick, there’s a guaranteed way they can get better. A lot of people are overweight, obese, and have high blood pressure or underlying health conditions that mean they are in the firing line of a respiratory disease that will drown their lungs.

The reality is vaccines take time to produce. I know because my wife works at Thermo Fisher Scientific as a site leader here in New Zealand. She’s following the epidemiology a lot closer than I am, and I’m understanding that whilst there are lots of breakthroughs that they’re pushing and driving hard as fast as they can, there is the hardcore reality that people will not want to go back to their normal lives even if they financially could until they feel they’re not in a revolver playing roulette, a revolver where there’s one bullet out of every six that’s got their name on it. That will take time.

Meanwhile, the economic effects will start to flow through in the numbers around the world. New Zealand is not alone. This business of a bunch of my guys in the Korea business who keep all their money that’s paid to them and they don’t pay tax is not … There are guys doing cash jobs on building site. There are all sorts.

We’ve got a cleaner that comes around every week here to our house. She insists on being paid cash. That’s not my problem. I have not committed a crime giving her cash. But guess what? Has she and her mate gotten the ability to go to the government and apply for a subsidy when she’s just getting the money paid total and keeping it in her pocket? Suddenly, she’s going to go into those numbers, too.

I don’t think the government has fully factored this in. The economists and all the people who are blasting into all these markets at the moment thinking we’re just going to have a V-shaped recovery, I don’t think they’re realizing that economic systems and supply chain solutions are a complex model. Jim talks about this a lot with you. Systems are complicated. They have layers and layers and layers, and they’re all interconnected.

As an ISP, we’re building towers for the government and connecting all the school kids who can’t get Internet. We’ve been given grant money to build, but even we are constrained by people below us who are not deemed essential. Their businesses close, so I can’t get the parts.

Alex:  That’s something I want to address, but before we go there, let’s talk briefly about what a lot of people have not factored in. One is the fact that there has been a lot of destruction of small and medium businesses that may or may not restart. A lot of them probably won’t.

Duncan:  Not initially. Not for a long time.

Alex:  That’s going to affect supply chains and things like that which I want to talk about more in a minute. But something else has happened recently that was pointed out by Anthony Pompliano. (He goes by Pomp.) He has a podcast, and he said that he’s noticing that because of Coronavirus, people are at home. They’re trying to figure out what’s happening. A lot of people don’t understand why things are going the way they’re going, and they’re learning about the monetary system because they have to right now. They’re watching the Fed. This has never happened before in history, and I think this hasn’t been factored into the equation for a lot of people. In public, the Fed is saying, “We can print an unlimited amount of money,” but they have never done this before.

Duncan:  That’s exactly what Mirabeau told the French, that you can back it all with land. You can print hundreds of millions assignats, and we’ll just back it with the land of France.

Alex:  I think the important part about that is it’s a psychological vector. Jim talks a lot about this. It doesn’t matter how much money is actually created; hyperinflation is a psychological event. In other words, when people lose trust in the currency and decide it’s not worth anything, that’s when hyperinflation occurs, because they try to get rid of it and buy anything of value such as hard assets. Then prices skyrocket. That is hyperinflation. It’s a psychological event, right?

Duncan:  That’s right.

Alex:  The Fed just came out and said in public for the first time in mankind’s history, “We can make unlimited amounts of money,” and you have all these people sitting at home watching this. He pointed out how many people are starting to think, “If they can just make an unlimited amount of money, what’s the point of taxes? What’s the point of paying rent? What’s the point of going to my job? They can just make the money.” That is the kind of thing that could create that sort of effect, and people are starting to wake up to it.

Duncan:  Because economic models are complex, every layer is required to be at an equilibrium in order to keep prices at a sustainable level. Nowhere is that more obvious than in a courier business where we are charging big callouts on top of the normal charge to send a driver to go, because we don’t have synergies of numbers doing the normal number of deliveries.

At the moment, they’ve said food is essential, farms are essential, anyone that’s in the supply chain is essential. But companies like mine still make choices as to whether we’re going to do their job or not. If you want to pay us enough, yeah, we’ll do it. And if you’re not, then we’re not going to bother. We’ll just let the job go.

Alex:  Speaking of which – supply chains, this is super-important, right? Guggenheim just came out with an analysis predicting that there’s going to be shortages of goods and food in emerging economies and markets very soon, which they also said is going to lead to social unrest.

A lot of people don’t realize this is true for not just emerging market economies but for well-developed economies as well. Logistically speaking in most major cities, there’s only three days’ worth of food supply. If those trucks stop rolling in with food, that becomes a problem very quickly, especially for cities with high populations. We’re starting to see the first signs of the U.S. food supply chain breaking down.

The exact same thing happened during the Great Depression. 

Duncan:  Food rotted in the fields.

Alex:  We’re seeing reports of this coming in now where they’re throwing away literally tons of food in some cases, thousands of gallons of milk are just being dumped. The reason is that the companies in the middle – the distribution, logistics, and transport companies – are all failing and there’s no one to buy the food from the farmers to transport it to the cities.

Duncan:  That’s right. You go from a COVID health event, which is an immediate employment event, to a financial event that becomes a social event, and then people get angry and they get out. This is eventually what happened in France. As most people know, it didn’t go so well for the leaders in France, and they started to guillotine a lot of people.

The reality is, people get really angry because they can’t feed their families, they can’t pay their mortgage, they can’t get ahead, they feel trapped. It may start off as a health event, but what becomes an employment event then becomes a financial event, which then becomes a social event.

Alex:  So, the question then becomes, “Is the cure worse than the disease?”

Duncan:  That’s right. That’s what’s being debated among leaders of our country and every country all over the world. 

I wrote about the monetary genie in the latest newsletter that’s just been released to AFE people. I listed all the countries including the Bank of England, Japan, the European Central Bank, and the U.S. If I wrote another newsletter next month, those numbers would be even larger and then larger and then larger.

This is what happened. They tried printing hundreds of millions of assignats in France, and it didn’t work, so they printed more. Then they just printed more and eventually people lost confidence.

Alex:  Yes, it was a psychological event. At one point, people said, “Well, if you can just make unlimited money, then really what’s the point of all of this?”

Duncan:  That’s right. Why bother paying taxes? There’s no need to pay taxes.

People want to call us “gold bugs,” but we’re not gold bugs at all. I don’t call myself a gold bug; I’m just a student of history. I want to understand how history defines financial events and what do people do to cover themselves for situations where there is a margin call? And those margin calls happen regularly.

Warren Buffett has famously said, “Until the tide goes out, you don’t see who’s swimming naked.” In reality, it’s a voyeur’s paradise. Just go down to the beach, and everyone’s naked because the tide has gone out, full stop. In other words, everybody that is levered up to the gills, which is really what people are, are now realizing they’re highly exposed.

At the moment, the government is just trying to put it all on ice by saying, “You can’t be kicked out of your rental house. Landlord, you can’t take your tenant to task for not paying rent. Commercial landlord, you can’t kick your tenant out. Tenant, if you can’t pay your lease, then don’t pay your lease. Employee, you can’t fire or let go your person, or if you do, you’ve still got to keep paying them. We’ll give you money.”

There is an artificial attempt on a massive scale to somehow rescue a system, but the financial system was an unhealthy, obese, fat, overweight, liver-damaged, alcohol-drinking mess.

Alex:  Careful, mate. You’re describing the average American right now.

Duncan:  No, the average Kiwi, the average Australian man, leads. Our Pacific island communication has skewed the obesity rate somewhat higher than is probably fair because we have the highest Polynesian percentage in the world. It’s like 10% of New Zealand is now effectively. They naturally put on weight more so. Look, Australia has high obesity. If you’ve got high blood pressure or high obesity, Corona’s not good. This Coronavirus is not good.

Alex:  No, it’s not. I think America is particularly vulnerable. 

What you just said a minute ago that really stood out to me is the term “gold bug.” People are getting this crash education in honest money right now. I say that because it’s becoming really clear what dishonest money is.

For people in America who the government’s promised them a $1,200 check and $38,800 is going to bail out the people who are closest to the issuance of the currency, the bank owners, the large corporation owners, etc. The 1% basically are getting that much richer and the average American is getting that much poorer. It’s clearly an unjust system, and people are catching on to this.

The word “gold bug” is just like the word “inflation truther.” It’s another way to demonize people who are pointing out the truth and to try to get them to shut up about it. As far as I’m concerned, I know you’re a seeker of truth, I’m a seeker of truth, we have always been. We call gold honest money because you can’t tamper with it.

Duncan:  No, you can’t.

Alex:  Unjust weights and measures are an abomination unto the Lord, right? Whether it’s the dollar, the New Zealand Kiwi, the Euro, whatever it is – if the value of the purchasing power is changing all of the time, how is that a usable unit of measure? If I was a carpenter trying to build a house and I pulled out a slide ruler and the inch or centimeter or whatever you’re going to use as your unit of measure was moving on you all the time in terms of talking about money’s purchasing power, how are you going to build a stable foundation with that?

Duncan:  That plays into the bigger question that the U.S. currency is still the senior and premiere currency to just about all the others. I’m sort of getting the feeling that the U.S. would like to devalue their currency.

Alex:  I think it’s happening, but I don’t know that the U.S. would like it. There’s the saying, “cui bono.” It’s a Latin phrase meaning, “Who benefits?” I say this all the time: In all things “cui bono,” who would benefit from a debased U.S. dollar? Who exactly would benefit from a United States that was second in the world, that was no longer the leader in things like freedom, human rights, and all that other kind of stuff that matters to free people? Who would benefit?

I’m just going to leave it at that. I’m not going to dive into any theories. I’ll let people read between those lines all they like, but there’s definitely something going on as far as terms of debasement of the currency. That is for absolute certain, and there’s a reason why people are buying gold all around the world right now. There is a reason why our business is doing quite a bit more business than normal. There’s a reason for those things, and people are starting to figure it out.

That about uses up our time, Duncan. Is there anything you want to wrap up with?

Duncan:  No, that’s a perfect sign-off note. Obviously, we’re all going to be looking more at how we emerge out of this COVID crisis. 

I find it interesting, that the Bible talks about war and pestilence, and if I look at the Kondratiev wave, as you came out of winter, the people were hungry and angry. Regarding the world’s population at the moment, it’s all very well to hibernate economies like a mean bear that’s gone into hibernation, but basically, they want a pot of honey and milk and food sitting straight out the entrance of the cave. The reality is the bear has to go out and get the food once it’s been hibernating, and the longer you hibernate, the hungrier and meaner you’re going to be.

I’m looking at where we’re heading out of this and how people will be desperate to try and get fed, quite literally in all aspects of their situation. There are going to be a lot of distortions, and the socialism time to think that we can try and look after everybody is going to fail. It’s going to fail really, really poorly like it always has in history. There’s no such thing as not working for your money, and you can’t prosper just by being handed free money.

Alex:  Yes, it’s a disconnection from reality. It breaks us from the natural laws in a way that is simply unsustainable.

Duncan:  As we close off this session, I’m going to flag the possibility that the next stage at some point down the line will involve wars. Famine and pestilence, wars and pestilence, is not a pleasant topic, but it’s going to create its own sort of issues and problems. For posterity’s sake, I’m going to get it out there right now that in history, like coming out of Kondratiev wave bottoms and going into the spring, people are hungry and angry.

Nations are angry. They tend to use that psyche that’s been built up by the people to rally it against others to take the attention and focus off the pain they’re in. If we were being true to ourselves to imagine how we’re positioning and going forward, not only are you going to need to own precious metal, you’re going to need to be very, very aware of the season and the time we’re in. You’re going to have to weather that, because we’re all in it together. 

Alex:  Duncan, thanks a lot. We’ll do this again in a couple of weeks to catch up and see where we are. Be safe.

Duncan:  Good stuff. All right, mate. Catch you later. See you guys.

You have been listening to Global Perspective with Alex Stanczyk presented by Physical Gold Fund. Recordings may be found at PhysicalGoldFund.com/podcasts. You can register there for news of upcoming interviews with Alex Stanczyk and other thought leaders in the fields of geopolitics, economics, and the global monetary system.

 

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Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles EP 92 March 2020

Jim Rickards and Alex Stanczyk, The Gold Chronicles March 2020

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Topics Include:

*Opening salvos of Global Financial Crisis II (GFCII)

*The entire precious metals complex (gold and silver) has been cleaned out globally

*The best time to act has past, now is the second best time to act

*The global run on precious metals is probably less than 5% of the population, when the majority catches on to damage done to USD the demand could be historic

*Price dis-connect between paper and physical gold price

*How price discovery in the gold market is resolved *What happens when the Swiss refineries open again

*The effect of key relationships with Swiss refineries on access to gold and silver

*Mining output dropping due to mines getting shut down reduces available supply of gold

*US Unemployment Claims hitting record levels, 3.28M claims in one week

*Fed injecting capital into system trying to prevent liquidity freezes (Ice-9)

*Why we are entering the next Great Depression

*In comparison, during “The Great Depression” Dow Jones dropped 89%

*The Great Depression played out over 3 years, we are a third of the way there in 3 weeks

*Consequences of Supply Chain Shutdowns

*Why the US could lose up to 50% of its economic output by the end of the downturn

*The social and political consequences of QEternity *What happens when complex systems collide

*Regarding mass migrations and unrest, watch South Africa and Mexico

*Full Spectrum Warfare – Financial, Biological, Cyber, Social Engineering, Kinetic

*What are the chances we will see kinetic warfare

*Why China could be eyeballing Taiwan during the crisis

*How the Covid-19 numbers out of China are questionable

*CARES Bill – Whats in it

*Whats happens to gold if we see massive deflation (Great Depression II)

*The two ways gold is revalued in a massive deflation

*It took 25 years for US markets to recover from the Great Depression

*Jim: “Be wary of suckers rallies”

*Practical things people can do during this crisis

*Spoiler – Jim’s new call on the US Presidential election and how the crisis has changed the probabilities

 

Listen to the original audio of the podcast here

EP. 92 The Gold Chronicles: March 2020 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. Welcome to episode 92 of The Gold Chronicles. Today is March 27, 2020, and I have with me my friend and colleague, Mr. Jim Rickards. Welcome, Jim.

Jim: Alex, it’s great to be with you.

Alex: Before we dive in, I’ll let you know that you may access the archive of our podcast transcripts we have done going back several years at PhysicalGoldFund.com/podcasts. If you watch this podcast on YouTube, please take a moment to Subscribe, Like, and feel welcome to comment. We’d love to hear from you.

For those of you who are new to our podcast, Jim Rickards is a Wall Street Journal and national bestselling author who is a well-known and respected expert in geopolitics and a number of other subjects. He has a ridiculous number of degrees and professional credentials I won’t go into, but you may want to go to jamesrickardsproject.com to learn more about that.

The first time I ran across Jim was around 2010. I think I saw you on Bloomberg talking about gold, and I was thinking to myself, “Who is this guy? This Wall Street pedigreed guy talking about gold. Isn’t that forbidden by Wall Street code? You’re not allowed to talk about gold. What’s going on with that?”

Later, I picked up Jim’s book, Currency Wars, and I realized very quickly that I need to get to know him. If you haven’t read his books, I encourage you to do so. They include Currency Wars: The Making of the Next Global Crises, The Death of Money: The Coming Collapse of the International Monetary System, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis, Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos, and my personal favorite, The New Case for Gold – yes, I’m biased.

Jim, the audience is by now already familiar with coronavirus as well as that we are probably in the opening salvos of Global Financial Crisis II. I’m just being honest and calling it what it is. We don’t have to rehash a lot about how we got here, so let’s discuss where it goes from here. Seriously, how bad is this?

Jim: It’s bad. I think that’s pretty well known. The questions are: how bad, what’s the right way to think about it, how long will it last, and what will the impact be. Those are all big open questions. We can address all of them to some extent, but I think “bad” is a good place to start.

By the way, Alex, thank you for mentioning my books. I’m very grateful for that, and the readers generally like them. The thing about the books is they include some history, some analysis, and some science, but there is mainly a lot of prediction and warning, i.e., here’s what’s going to happen, here’s how it’s going to happen, here’s the impact, etc.

I do a lot of public speaking, interviews, and so forth, and over the years, one of the questions I get asked most frequently is, “Jim, I hear you and understand what you’re saying. I agree. Could you call me the day before and let me know? I’ll sell my stocks to get some gold and all that.”

My response is, “Well, a couple of things. I’m not going to know the day before. I can tell you what’s coming, give you some idea of the order of magnitude, but I won’t necessarily know that day. If I did somehow know the day, I’d probably be a little busy myself. Beyond that, what are you waiting for?” In other words, if you agree with the analysis that something like this is going to happen, why would you wait until it happens?

It’ll be too late. By the time everyone wakes up, 30% of wealth and stocks will have disappeared, which did happen in the last few weeks, and the price of gold will soar. We’ll get into this a little bit more, but right now, if you’re not the Central Bank of Russia, the price of physical gold doesn’t matter. You can’t get any. I can explain that in a lot of detail, but call a dealer and try getting some right now. You can’t do it unless you’re dealing with a well-established relationship.

The irony is, you warn and you warn, but everyone is like, “Thank you, but I’m going to keep buying stocks.” Then it happens and they’re like, “Oh, gee, I should have listened.” That can’t be helped. Human nature is what it is, meaning you can’t change it. So, when you tell people or suggest to them that they ought to buy gold when it’s $1100, yeah, $1200, yeah, $1300, yeah, $1400, $1500, all of a sudden it hits $1600 and everyone’s like, “Get me some gold.”

Guess what? It’s exactly what I said – dealers are not returning calls, the US mint is backordered and not taking new orders, the Royal Canadian Mint is closed, and Swiss refiners still have some output but can’t ship it to the United States because of all the transportation bans.

Brinks has the vault near JFK that’s one of the largest depots of gold in the world outside of the Federal Reserve or the Bank of England, and they’re working half shifts because of coronavirus. Brinks has an alternate facility in Salt Lake City, but they got hit by an earthquake and closed because they have to assess the damage. So, when it rains, it pours. An earthquake is not correlated to coronavirus, but Murphy’s Law. If I ever catch Murphy, he’s in trouble.

Alex: Let’s strangle this guy Murphy, right?

Jim: Yes, as soon as I find him, he’s in big trouble.

Alex: What’s amazing to me is that we’ve had this global run on metal and the whole system is cleaned out. The fact that Swiss refineries have shut down makes it even worse. We’ll probably talk about that more later, but what is fascinating to me is how small a fraction of the human population understands what’s happening right now to have cleaned out the metal complex.

In my estimation, I’d say it is way less than 5% of the population buying the gold.

Jim: Oh, yes. Maybe 1%.

Alex: If that’s the case and we’ve already cleaned out the metals complex, what happens when we start to have problems in the U.S. dollar and people really get switched on to it? It just blows my mind where that could go.

Jim: You’re absolutely right, Alex. We’ve said this a lot. I said when you most want your gold, you’ll be least able to get it. It won’t be about price anymore.

Another interesting disjunction is that people say the futures price and the physical price have diverged. My response to that is yes and no. The futures price is what it is, but it’s not gold. They’re paper contracts linked to the price of gold somehow, someway, but they kind of set the price of gold. That’s not gold. If you want to get physical bullion, a dealer will do spot plus commission.

For spot, refer to the COMEX. It is what it is. For commission, the discount dealers are kind of 2% and another dealer might be 4%, which is higher, but there may be good reasons to be dealing at the higher commission price. Now the commissions are 10% – 15%.

Alex: Yes, they’ve blown completely out.

Jim: Correct. If gold is $1600 and the commission is 10%, add $160, so that’s $1760 for your gold. Is it two different prices? Well, all in, yes. When you count the commission, it is even though that’s really spot plus commission. The 10% commission is five times the normal commission. There is this disjunction even though the way its quoted is spot plus commission, so check out the commission. That’s a reflection of the fact that you can’t get it at all.

As an interesting legal footnote, if you’re a dealer or the man or anybody selling physical gold, it’s actually illegal to sell it for delivery more than 28 days forward. The reason for that is, if your delivery is more than 28 days forward, you’re classified as a futures contract. That’s the difference between the physical. I can deliver to you in one or two weeks, but if I deliver to you in two months, I’m technically a futures contract off exchange, so I’m probably violating the Commodity Exchange Act. I think people – not me, but some regulars – are turning a blind eye to that for the moment, but even dealers who take your order might tell you that you have to wait a month or longer to get the gold.

Alex: At retail, the whole complex is cleaned out.

Here’s a question that came up from one of our viewers. How do we get back to price discovery? Price discovery in the market is broken. One of our colleagues in the industry recently said it’s discovering the price of something, but it’s not physical gold. What is it? How do we get back to normal?

Jim: Again, any contract you make – whether it’s a futures contract, an ETF, an unallocated forward under the LBMA rules or a phone call when a guy takes your order with “I’ll get back to you” – none of those are gold. None of those are physical bullion. They’re contracts, and contracts can be terminated. People can claim force majeure or people can just not show up.

We’re in an environment where you don’t just have to worry about the price and availability; you’ve got counterparty risk. How do you know the person you’re buying the gold from is going to be there when you give them a credit card number? What if they disappear?
I’m not suggesting that’s widespread. I know some very honest, reliable dealers out there who will tell you the truth. They’re the ones who will say, “Thank you, but there’s no gold.”

The answer is, sometimes you don’t get back to normal price discovery. We’re seeing that right now in the stock market. We all know what the stock market has done this past month; it’s dropped over 30%. There was a little rally a couple of days ago, but it went back down again. You get into these big up days and down days, but even accounting for the rallies, it’s certainly down about 30%.

So, what’s going on there? Well, the stock market is trying to reprice.

Alex: As far as price discovery just in the gold markets, I think people are wondering how we fix this. From my perspective, I’m really curious to see how this is going to work out at the refinery level. In my experience in my entire time in this industry, we’ve never seen the refineries close. In fact, as far as I’m aware, they didn’t close through wars, and they didn’t close through the London Gold Pool. This is a really unique event, so I’m really curious to see what happens when they open.

I suspect it’s all going to be deals based upon people they know they trust, just like you said. I think they’re going to be wondering and looking at whether these people are going to stay solvent or not, their counterparties, and they’re going to be doing direct deals. We’re probably going to end up – when I say we, I mean Physical Gold Fund – with what we call refinery spot pricing that’s going to be based upon their book, not the futures market or any of those kinds of things.

Jim: Correct. PGF is one of the funds that has longstanding, positive relationships, a trusted counterparty. You can pick up the phone and they’ll take your call, but if you’re calling from out of the blue or they don’t know you or you’re a fund that started yesterday, they won’t take your call. They’ll say, why waste our time?

Without mentioning names, you and I met with the head of precious metals at one of the biggest refineries in the world several years ago. What we were told at the time was that this particular refinery was working 24 hours a day. They were working triple shifts and could not meet the demand. China wanted more, but they said, “Okay, we’ll sell a lot to China, but we’ve got our longstanding customers, Rolex or Cartier or whoever needs the gold. We can’t cut them off.”

Three years ago, they were at capacity and turning down orders,. Now, they will not pick up the phone unless it’s you or Central Bank of Russia or some very established account. Even then, it may be hard to get.

As to when things get back to normal, it may not be anytime soon, because this feeds on itself. There’s a recursive function. People who didn’t want gold or turned up their nose at gold for years suddenly want gold. “I can’t get it? Well, now I want it more.” So, it feeds on itself.
Alex: That’s the whole world right now.

Jim: One thing I’ve observed is that mining output is flat. I’m not saying it’s disappearing, but mining output has not increased in six years. It’s running at about the same level of several thousand tons a year, but it’s not going up. When you have a fixed supply and skyrocketing demand, you learn in the first week of economics that that makes the price go up.

Alex: Yes, prices are going to have to rise to clear, especially with miners shutting down. A lot of miners are shutting down because of coronavirus. That’s only going to feed into the lack of supply in the system. It’s basically going to have to come from either scrap or people who own it who are willing to sell it, which means that right now, a lot of people are probably willing to and the only thing that’ll change that is the price.

Jim: Correct. With the liquidity squeeze and seeing as the thing – when I say thing, I mean starting with the pandemic – it runs through the economy.

Capital is scarce. The Fed’s printing trillions upon trillions of dollars just to keep the lights on. You can call this helicopter money if you want, but it isn’t really. They’re just trying to keep the commercial paper market, the muni market, the bond market, the currency swaps at foreign central banks, and the repo market open.

Alex: They’re trying to prevent Ice-9.

Jim: Yes, they’re trying to prevent Ice-9, but this is not like extra money. This is a massive amount of liquidity injection just to keep things from getting worse. Where’s the capital going to come from for miners to expand? They might have very attractive opportunities, but capital’s going to be scarce, coronavirus is an impediment, there’s a transportation shutdown, and borders are closed.

I spoke to a major gold dealer a few days ago. Like yourselves, he’s mainly into a physical gold fund and is a guy who is well regarded and plugged in, so his phone calls do get returned. He told me a lot of the things we’re discussing right now. He said your dealer might have a little bit of inventory, and if he has some, he might sell to you out of inventory, but he’s not replenishing, and they’re all going to run out of inventory very soon.

Alex: Yes, I can see that.

Let’s move on to the next topic I think a lot of people are wondering about. Last week, the unemployment claims came in at 3.38 million for the week. Here’s a serious question: is this the next Great Depression?

Jim: The answer is yes. I think we’re already there. The data is going to trickle in over the months ahead, so April 28 or somewhere around the end of April, we’ll get the first quarter’s GDP. Bear in mind that the first quarter ends on March 31st. It you have an awful March, but January and most of February are okay, that’ll be bad, but it might not look as bad as it’s going to get. April is going to be horrific, and second quarter GDP, but we’re not going to get that number until the end of July.

We’ll have plenty of data between now and then, because it is already coming in. You just mentioned one of the data points. By the way, I forget if it was 3.1 or 3.3 million initial claims last week. The previous high was 700,000. This is not just, “Oh, it got a little worse.” No, this is four or almost five times the worst on record. That’s how bad it is.

You’re going to see GDP drop. These are all estimates, but at least 5% or more in the first quarter – bearing in mind you had a good couple months in that quarter – it’s going to drop. Take your pick, 20% maybe in the second quarter.

We’ve never seen anything like this since the Great Depression. You’ve got to get 2008 out of your head. That’s not the baseline, that’s not what’s going on. This looks like 1929. That’s where you have to go to see anything like this. What happened in 1929? From 1929 to 1932, July of ’32 specifically, the Dow Jones index dropped 89%. Let that sink in. It’s down 30%, but what if there’s another 60 percentage points to go? That’s what happened then.

Unemployment went to the mid-20%, around 25%. World trade shriveled, etc. Banks were closed. The President woke up one day and closed the banks for eight days. I’m not saying those exact things are going to happen, but I’m saying that’s how you have to think about this in terms of what’s going on right now.

There is one big difference, however. The difference is that everything I just described about 1929 played out over about three to four years between 1929 and 1933. What we just saw played out in about three weeks.

Alex: Everything right now is accelerated.

Jim: Right. There’s never been anything like this.

Alex: Speaking of that, let’s talk about what’s happening in logistics supply chains.

There are all kinds of small to medium businesses throughout the U.S. economy and the world economy, but I’m talking right now just about the U.S. as an example. Most of the U.S. is in voluntary lockdown. Everybody’s doing the stay-at-home thing, small businesses are closed, and nothing is being moved around unless it’s essential services, etc. I don’t know how many small and medium business are closer to bankruptcy every day this continues.

A lot of these businesses will not be starting up again when people are back to moving around. We’re going to lose huge portions of logistics supply chains throughout the entire economic system in the United States. What’s the worst-case scenario with all of that?

Jim: There’s a worst case and slightly better case, but I think the worst case deserves a lot of consideration.

I saw an interview the other day with Wolfgang Puck and another famous chef. Of course, they’re pleading on behalf of the restaurant business. They said that what you have to understand about restaurants is it’s not just the bartenders and the servers and the people in the kitchen. Yes, they all get laid off, they close the doors, and revenue goes to zero, but it’s that supply chain – the farmer, the fisherman, the butcher, the truck driver.

All the people who supply the restaurants have gone to zero because the restaurants closed. That’s an important part of the economy, but that’s just one slice. Doctor’s offices are closed, dentists, lawyers, accountants, manufacturers, on and on. There’s no need to recite the list, because the list is basically everything you can think of in the economy.

Alex: Everything and everyone.

Jim: That’s the bad part. Now, here are the questions everyone needs to think about. Number one, how much will it drop? The answer is unprecedented in U.S. history. Number two (and this is important), when will it come back, i.e., how long will this last? That’s a big question. And number three, what will the recovery look like? Will it be the famous V where it goes down sharply but comes back sharply, or will it be what they call a U where it goes down, pokes along at the bottom, and then comes up? Or the worst outcome maybe is the L where it goes down and just stays there so you have some growth but not much and you don’t get back to trend.

Thinking about that, you have to ask yourself further questions. We have huge losses, got it, but are these permanent or temporary? Let me make that distinction.

My wife and I usually go out for dinner on a Friday night. We didn’t go out last Friday, and we’re not going out next Friday, so those dinner bills are lost to the economy. Who knows, but hopefully by May or June or something, things will get back to normal and we’ll feel like going out to dinner. But when we go out to dinner, we’re not going to have three dinners; we’re going to have one dinner. The two dinners are permanently lost. That’s a lost economy that never comes back.

If I was out to buy a car and I decide to put that off until August when things look better, that’s a timing difference. That’s a temporary difference. The GDP still got the car, but it was shifted from the second quarter to the third quarter.

So, what’s the mix? Well, 70% of the U.S. economy is consumption and 70% of that is services rather than manufactured goods. So, 70% of 70% is 49%, 49% of the U.S. economy. Those losses may be permanent. Not all of them will be, but I would weight the losses more to the permanent side than the temporary side even though some of it will be timing differences. That’s the first thing.

Now, the second thing. I love talking to people who are twice as smart as I am, and I just got off the phone with somebody in that category.

Alex: Is that even possible? I didn’t know that was possible.

Jim: They’re around, and I try to find them. You always want to be the dumbest guy in the room if you can.

They’re working on what’s called continuity of the economy, which is a little bit more on the national security side. I was explaining on the phone the same thing we’re explaining to our listeners now in terms of permanent.

Remember 2009 – 2010 and what we were hearing from the government, Larry Kudlow, CNBC and all that. Remember the famous green chutes? We never saw the green chutes. It was more like brown weeds. The U.S. economy never got back to the pre-2008 trend. The trend growth in all recovery since 1980 (which is a particularly favorable period) is 3.2%, but trend growth in the last 11 years since 2009 to 2020 is 2.2%.

This is not Trump versus Obama. There’s actually very little difference between the Obama economy and the Trump economy in terms of what we’re talking about. The 2.2% growth is a full percentage point lower than the pre-2008 trend. We never got back to trend. Yes, we grew, but it was a recovery that was technically the weakest recovery in U.S. history.

If you think a percentage point is not a big deal, try applying it to a $20 trillion economy compounded over ten years, and it’s a very big deal. With one percentage point, we’re talking about $5 trillion of lost wealth. That’s the difference between 3.2% and 2.2%.

Alex: That is nothing in comparison to what’s just been lost and what will probably continue.

Jim: That’s my point. Even when we have a recovery, what do we hear now? They’re not using green chutes anymore. Secretary Mnuchin and Larry Kudlow, who’s now a government official, are now talking about pent-up demand. There is no pent-up demand. Again, use the car example maybe but not the movies, the restaurants, and the concerts, etc. that were skipped.

There’s no pent-up demand for that. You’re not going to get two or three, you’re going to get one when you get back to normal. We could be looking at the kind of recovery where we’ll hit bottom and start growing again, but the growth could be sort of 1.8% or 1.9%, not even the old 2.2%.
We’ll coin a phrase on this podcast: this is the new new normal, which is not great. As far as stimulus is concerned, we’ve seen the Fed blow past the old benchmarks.

Alex: Actually, let’s come back to the Fed balance sheet in the CARES Act, but I want to cover that towards the end of the podcast. We’ll also talk a little bit about what people can actually do, because I know people are really interested in that right now and are very concerned. Some people are angry, some people are frightened, so we’ll get to that.

There are two things I want to cover when we hit all that. One of them is I saw a really cool interview the other day with a guy by the name of Jeff Booth. I believe he’s a technology billionaire of some sort who wrote a book called The Price of Tomorrow: Why Deflation is the Key to an Abundant Future. In this interview, he stepped through some socioeconomic consequences for the way the Fed and the government have been operating; the fact that every time we have a problem, instead of just letting capitalism do its thing, we basically inject all kinds of money and blow the bubble even bigger.

I know you do Twitter, and lot of people who follow us do Twitter. I’ve heard a term coming up more and more on FinTwit called financialism instead of capitalism. The moral hazard of that is basically crony capitalism where central banks print, the people closest to the money get richer, and everybody else gets poorer. That’s step one.

Step two, this further drives the wealth inequality gap and causes a greater divide.

Step three, people end up voting for those politicians who are saying, “It’s not your fault, it’s their fault,” whoever they are. It ends up breaking society because of the polarity, and it leads to possibly revolution or war because people are that upset. Do you have any thoughts on that?

Jim: I think that’s a very good analysis, and I think that is next.

I spent a lot of time working with complexity theory. I didn’t invent it, it was invented in the 1960s, but I’m one of the pioneers in applying it to capital markets where it has not been used. In a complex dynamic system, they’ll throw up what are called emerging properties; things that surprise you. Even if you knew everything in the system – which you never do – you couldn’t infer what comes next.

Sometimes complex systems crash into each other. My model for that is March 2011 and the Fukushima event in Japan. What happened? Tectonic plates are one complex dynamic system, and there was an underwater earthquake. It caused a tsunami, and that energy was transferred to hydrology, which is another complex dynamic system.

It could have hit an isolated island, but it didn’t. It crashed into a nuclear power plant. That’s radioactivity, another complex dynamic system. In that Fukushima plant, there were three meltdowns and two hydrogen explosions. What happened next? The Tokyo Stock Exchange crashed, because they were worried about the shutting down of the Japanese economy at the time.

My point is, tectonic plates or seismology, hydrology, tsunamis, radioactivity in a nuclear power plant, and capital markets are four separate, normally uncorrelated complex dynamic systems, each one of which is extremely challenging to analyze. But here, you had four of them crashing into each other in rapid succession.

We’re seeing something like that right now with the pandemic. Epidemiology is an interesting science. It’s like half biology, but once you get past the biology, it’s really just applied mathematics. I don’t claim to be a biologist, but I can do the math.

That one complex dynamic system crashes into the economy, which is a complex dynamic system, but now that’s affecting politics. This will have an impact on the presidential election, and beyond that.

What’s next? Then you get into social disorder and social collapse. I’m seeing signs. I tell my national security colleagues to watch South Africa and Mexico. They’re big countries with important economies. They’re emerging markets, but they’re important economies uncomfortably close to being failed states.

Venezuela and Syria are failed states, but what about Mexico? It’s already more than halfway there with the cartels and the collapse in the price of oil which they’re utterly dependent on. Now throw in a coronavirus.

Alex: And overwhelmed hospital systems.

Jim: Throw in overwhelming migration from Central America. Now, where are you? There are geopolitical aspects of it, not to mention the whole China/U.S. relationship, which I would say is beyond fractured. I would say there’s a new cold war. There already was, and now that’s made that.

Alex: There are verbal war drums going on right now.

Jim: Correct. Of course, you have to look at the economy, but you can’t stop there. You have to go beyond that. I’ll give a funny-sounding example. I grew up in New Jersey and have a lot of family I go back to visit often. Anyone who’s from New Jersey knows that there are two states, North Jersey and South Jersey, and they’re completely different. They don’t like each other, and everyone’s okay with that.

Coronavirus showed up in Cape May where my family lives, which is as far south as you can get. They did the forensics and found patient zero. Patient zero was a New Yorker who had a summer house and wanted to get out of New York. He went to his summer house and started to spread the virus in an otherwise remote part of the state.

Well, they’re just about ready to get out the pitchforks. They’re like, “Hey, you New Yorkers stay where you are. Don’t bring the virus down here.” They want to close the Egg Harbor Bridge. Now, hold on. You’re talking about different states worried about border-type issues, so I don’t want to overstate it. Maybe it’s partly humorous at this stage, but not really.

Alex: I saw a video where there are all these Syrian migrants moving through Turkey trying to penetrate the Greece border. It looked like a scene out of a medieval movie. Under cover of smoke, they were carrying siege ladders to the wall in groups. When you said Mexico, the image that came to my mind is Mexicans trying to cross the border en masse.

Jim: We’re not that far from that. What’s interesting is that the Syrian migration through Turkey into the European Union predates the coronavirus pandemic. Not by much, kind of contemporaneous, but it wasn’t caused by that. It had to do with Turkey being upset at NATO for not backing them up against the Russians in Syria.

They said, “Okay, if you don’t want to support us clamping down on the Kurds and all that, we’ll just turn on the immigrant faucet.” Now, the Syrians are going to get into Turkey if Turkey lets them, but then Turkey abuts Greece, Bulgaria, and the European Union.

The European Union has the Schengen Agreement that says once you get into an EU state, you can go to any other EU state without border controls. It’s not about getting into Greece; it’s about getting into Germany. Once you get to Greece, you can go to Germany, no questions asked.

It starts out that Turkey wants to threaten to flood the European Union with Syrian immigrants because they’re not happy with the treatment vis-à-vis the Russians. But all of a sudden, hold on. Who’s doing coronavirus tests on the Syrian refugees? By the way, Europe is breaking down in the sense that nationalism is back. The French are saying they’ve got to close the border with Spain, or Germany is saying they’ve got to close the border with Austria.

They’re putting up border walls, at least legally, inside the EU. Leave alone what you’re talking about, which is the way of us here. It’s getting nasty out there. Again, it’s an example of how these response functions and complex dynamics start crashing into each other, and that’s exactly what’s happening.

 

Alex: Switching gears, over the years you and I have talked a lot about Full-Spectrum Warfare. For those not familiar with that term, Full-Spectrum Warfare means financial, biological, cyber, social engineering, and one might say, kinetic warfare – the whole spectrum.

I’ll run a quick scenario by you that’s been bothering me. The United States is in a very vulnerable situation, I’m just going to be straightforward. I know I’m not the only person thinking about this, and I’m sure in the Pentagon, they’ve gone through all these scenarios already.

You’ve got a virus that’s crippling the American population, we’ve got the financial crisis which is crippling America financially, and we’ve got a prolonged shutdown of businesses which is going to wipe out substantial portions of the U.S. logistics system, because once those companies are bankrupt, they’re just out of business.

If I were to create a worst-case scenario, the Russia/OPEC oil war drops the price low enough and the U.S. shale industry is underwater, so they all start going bankrupt. That’s how the U.S. is oil independent, so then the U.S. would no longer be oil independent. Hospitals are completely overwhelmed because of coronavirus, the economy has crashed, and logistic systems are busted.

If I was China, Russia, and maybe even Iran, would that not be a perfect time to go kinetic or maybe even wait until U.S. service members are infected and sick as dogs and then go kinetic? There have been reports of Russian Navy activity near the UK. There’s a lot of heightened movement of troops and whatnot.
It’s a perfect opportunity. It’s probably the weakest the United States has ever been in my lifetime. What are the good reasons China or Russia wouldn’t want to do something like that? Are there good reasons they would or are there good reasons they won’t?

Jim: Kind of both, but a lot of good reasons why they would, and it’s already happening. For example, the other day there was a report about one of our aircraft carriers. This means an entire aircraft carrier group that has all kinds of support vessels, destroyers, cruisers, and submarines, and all kinds of stuff with it.

Forgive me if I get the name wrong, but I think it was the Theodor Roosevelt. If it was another vessel, so be it. We don’t have that many, about 11 aircraft carriers in the Nimitz class. Now we’re getting the new Ford class carriers, although I think there’s only one in service.

We only have about 11 of these aircraft carrier groups. Alex, you’re from the Navy, so you know this better than I do. At any point in time, two or three of them are getting maintenance, in dry dock, laid up or getting maintenance. One or two are on kind of R&R, because you’ve got to give the crews a break.

There are really only about four of them deployed at any one time. You always have one in the Western Pacific, one or two in the Persian Gulf, and one somewhere else, maybe in the Med.

The one that’s in the Western Pacific (I believe it was the Theodor Roosevelt) had a huge outbreak of coronavirus. They sent it first to San Diego and then said, “No, we’ve got to get out of here.” That vessel is going to Guam and is out of service, it’s offline. They have to test the entire crew and clean the entire vessel. Again, these aircraft carriers are so big, you can put the Titanic in the hold.

The point is that our primary aircraft battlegroup for the Western Pacific is offline. I’ll leave it to the Navy to get something else out there, but if you were China, what better time to mess with Taiwan? And you say, why would you do that?

It’s the case that the Chinese have been lying about the impact of coronavirus in China. In economics, but applicable here, is something called Goodhart’s Law that says when a metric becomes the object of policy, it loses meaning as a metric. In other words, once you have a number and that number becomes important to how people perceive you, you start manipulating the number and analysts can no longer rely on it.

That’s the case right now. If you use the John Hopkins Dashboard, China has about 81,000 reported cases of coronavirus. The U.S. just passed them and is around 83,000. I trust the U.S. number. Everyone agrees we have more infected than we know because we haven’t tested everybody. That’s fine, but I think the U.S. number is highly accurate. The Chinese number is just a lie. There is very good reason to believe that that number could be ten times higher; they might have 800,000 cases.

Alex: Sure, or 100 times higher.

Jim: Right. There’s some basis for that, so it’s not just speculation. When you squash the truth in one place, it tends to pop up somewhere else. You just have to be looking.

Take the Chinese Ministry of Telecommunications. You might say, “Who cares? What do they have to do with coronavirus? They report monthly cell phone use.” It’s been reliably reported that Chinese cell phones online went down. Last month, 21 million cell phones went out of service, and the Chinese said, “That’s because people weren’t paying their bills.” No. Those people are either dead, disabled, in hospitals or they’ve been rounded up.

One way or the other, that gives you a better idea of the order of magnitude of this. China has come up with a number, and curiously, it doesn’t go up much. They knew the U.S. would pass them, and now they can point a finger at the United States and say, “Hey, we did a better job than you guys.”

Alex: I don’t know that anybody believes China’s numbers.

Jim: No one believes it. This is how taking intelligence training and bringing it into capital markets can be very valuable. I always say if you had to solve a problem and you had all the data, a smart high school kid could do it. The hard problems are the ones where you don’t have all the data and you have to use inferential methods and other techniques.

The week of February 23rd to the 29th was the first week the stock market really crashed. It went down 3000 DOW points that week. Since then, we’ve seen it go down 3000 in a day, but that was the first shockwave, if you will.

The Sunday before the Monday opening, I sent a Tweet and said, “The stock market has been holding up and going up, which it was prior to that, based on improvement in the Chinese data. But everyone knows the Chinese data is a lie. Which is it?”

Since the data was a lie, it meant the stock market had to crash. I said the stock market is going to have its day of reckoning based on the fact that we were getting good data out of Italy, and it was horrific. I trust the Italian data, not the Chinese. All this to say the market was rallying on Chinese lies, but the lies were being revealed by reliable Italian data. Once that sank in, the market was going to crash, and that’s exactly what happened.

MIT economists don’t like to use anecdotal data. Sorry, but there’s another name for anecdotal data, which is the truth, as in here’s what’s happening at street level. It’s eyewitness data, and just because you can’t put it into an MIT closed-form equation doesn’t mean it doesn’t count.

Alex: It’s not a peer-reviewed paper; it’s somebody who’s seen it with their own eyes.

Jim: Right. That’s what we have to do in highly uncertain times with very imperfect data. Let’s get back to the original thread, which is that China is in much worse shape than anyone realizes or they admit. It’s a tried and true technique of dictators that when you’re in trouble, go start a war, because it gets everyone’s mind off it. Since the U.S. aircraft carrier battlegroup has just been disabled, what better time to start a war?

Alex: Our next topic is the CARES Act. I love this thing. Have you read it?

Jim: They throw these names around. Is this the big $2.2 trillion package?

Alex: Yes. It seems like it’s full of pork, but I’ve only seen parts of it. I haven’t read it.

Jim: It’s 1100 pages. Just to be clear, I haven’t read the actual bill, but I’ve read some very good expert summaries and have a pretty good idea what’s in it. There’s a fair amount of pork, but here’s what I would say: First of all, just a quick footnote. It’s $2.2 trillion, but in that $2.2 trillion is $425 billion to recapitalize the Fed.

In one of my books, The Road to Ruin, that came out in 2016, I describe having dinner with one of the members of the Fed board of governors. I said, “I think your bank is insolvent,” meaning the Federal Reserve, which it was at the time because interest rates were a little higher and meant they had mark-to-market losses on their ten-year notes. They don’t mark-to-market, but if they were a hedge fund that did, they would be insolvent.

This board member said, “No, we’re not. No one’s done that work.” I said, “I’ve done it, and I think others have done it.” She kind of harrumphed and said, “Well, central banks don’t need capital.” Here’s a governor of the Federal Reserve, we’re sitting next to each other at a small dinner, and she said central banks don’t need capital. I said, “Well, tell that to the American people.”

It turns out they do need capital, and they’re getting $425 billion from the Treasury. Here’s the point: because they’re a bank, if you pop in $425 billion of capital, they can leverage it 10:0. That’s $4.2 trillion of additional balance sheet.

Take the $2.2 trillion, knock it down to $1.7 trillion for the Fed money, then add approximately $4.5 trillion for the Fed money printing. This is a $7 trillion helicopter drop, not $2.2 trillion. This is $7 trillion of new money.

Forget stimulus. There’s nothing about this that stimulates. This is just to keep the lights on. It’s filling holes.

The Fed has sequentially guaranteed, propped up or bought out commercial paper, money market funds, corporate bond market, muni market, primary dealers, central bank currency swaps with the ECB, Bank of Japan, etc. They’re doing what they need to do to keep the lights on, but none of it is stimulative. It just keeps it from getting a lot worse.

As far as the money the Treasury is spending under this bill, there’s $50 billion to the airlines and $10 billion to the Postal Service. Go down the list and you’ll see cruise ships, theme parks, auto industry, etc. They’re all getting some money, but it’s just to make up the losses. There’s no stimulus, there’s no net new spending in this. This is, “Oh, well, you closed your business. Here’s some money.”

The Small Business Administration is just handing out money, but there’s a condition. If I give you the money and you fire your workers, you have to pay it back, but if I give you the money and you don’t fire your workers, you can keep the money. It’s a grant.

That makes up for a couple weeks of payroll or maybe so you can pay your rent for the next two months. I’m not saying that’s unimportant, but it’s no more than one to two months of makegood pay. None of it brings the economy to a higher level. It just keeps the economy from sinking to an even worse level.

What happens when that runs out? The V people say it’s down and up, but I don’t see it. One of the reasons I don’t see it is, first of all, what we talked about before, which is a lot of these losses are permanent, not temporary. You’re never going to make them back.

Secondly, and this is where the economists fall down, they don’t take into account the psychological aspects, meaning you can give people money, but what if they don’t spend it? Some people have a high marginal propensity to consume, but a lot of people are going to put the money in the bank. They’re going to save it or pay down debt, which is the same thing. It improves your balance sheet.

What they’re saying is, “Thanks for the money. If I haven’t lost my job, how do I know I’m not going to lose it next month? How do I know there’s not going to be another epidemic? How do I know there’s not going to be a rebound of this epidemic? I better save it.” If they save it, velocity is zero.

I like to remind people that $5 trillion times zero is zero, meaning if you don’t have velocity, you don’t have an economy. All this Austrian, NeoKeynesian Multiplier stuff does not apply. There are also other reasons why it doesn’t apply.

Alex: In that effect, we’re probably looking at L shaped with a really slow recovery after that.

Jim: Maybe an L with a little downward slope. Best case, you’re looking at a recovery maybe in the third quarter with a lower compound annual growth rate than we started with. Call it the new new normal. It’s not good.

Alex: There are two potential scenarios: a really bad deflation depression-like scenario. What happens to gold? The other option is hyperinflation, but let’s talk about that after what happens to gold. You and I have talked about this before, but for people who haven’t heard it before, if they just can’t rescue the thing and have to get inflation, what does the government do? What is the last resort?

Jim: I know the answer. I can get you all the inflation you want in about 15 minutes. The government doesn’t understand how and is not desperate enough to do it, but it can be done.

Before this podcast, I was on a call with my friends in the national security community. We’ve gone through some of the things we’re talking about regarding Taiwan, South Africa, Mexico, and the Great Depression. They’re all relevant. I said the greatest threat to national security might be deflation, because what does deflation do? It increases the value of debt. The real value of debt goes up.

We’ve got $22 trillion of national debt starting out. If they throw on $6 trillion of additional national debt, we’re expanding the national debt by 25% in a matter of months. That’s all the debt since Washington up 25% in a couple of months. Debt to GDP ratio is going up.

Deflation increases the real value of debt. Cash is actually one, because the real value of cash goes up. Now, what about gold? Everyone says, “I understand gold goes up in inflation. Show me some inflation, and I’ll show you a higher price of gold, but surely, the opposite must be true – deflation means a lower dollar price for gold.”

That is not true. The greatest period of sustained deflation in the United States was 1927 to 1933. The price of gold went up 75% from $20 an ounce to $35 an ounce. Gold performs very well in deflation. It obviously does well in inflation, but people don’t understand why it performs well in deflation.

There are two reasons for it. One is if you’re on a gold standard, and the other one is if you’re not on a gold standard, which we’re not at the moment. If you’re on a gold standard when deflation overwhelms you and people are saving, they’re hoarding cash. They’re not spending, they’re not lending, so there’s no velocity. You’re desperate to get prices up, you want prices to go up and they won’t go up, so you can devalue the dollar against gold.

That’s what Franklin Delano Roosevelt did in 1933. When I said the price of gold went up from $20 to $30, it did because he said so. He was the president and we were on a gold standard, so that’s what we did. But that was not a gift to people who owned gold. In fact, he actually confiscated all the gold before he did it.

Alex: Yes, he took the gold first, then he raised the price.

Jim: That’s the ultimate inside trade. Nice going, FDR. The point is, nothing happens in isolation. When the price of gold goes up 75%, guess what? Corn, oil, wheat, energy, agricultural goods, produce, wages, and everything else goes up, because it has to be a blanket across. It worked, by the way. During the middle of the Great Depression, 1933 was one of the best years in the history of the stock market, because what FDR did worked.

He did it on purpose and it worked. Richard Nixon did it by accident, but it also worked. When Nixon broke the convertibility of the dollar to gold on August 15, 1971, the price of gold went from $35 to $800 an ounce by January 1980. In nine years, we had roughly a 2500% increase.

What happened? The price of oil quadrupled, the price of housing doubled, and interest rates went to 15%. In other words, FDR and Nixon – one purposely, one accidentally – grossly devalued the dollar against gold, and we got massive inflation as a result. It wasn’t a response to inflation; it was actually intended to cause inflation, and that’s what happened.

We’re in the grip of deflation right now. The data hasn’t shown up yet, but it’s happening all around and is going to get a lot worse. If we were on a gold standard, somebody would go to the president and say, “You need to devalue the dollar against gold.” Bingo.

We’re not on a gold standard, so what happens? The price of gold also goes up, not because the government is forcing it but because people are looking at the dollar saying, “Get me out of here.” You don’t have a PhD in economics, but the Fed’s balance sheet went from $800 billion to $4.2 trillion between 2008 and 2014. Try $5 trillion, $6 trillion or $7 trillion. That’s what’s happening in front of our eyes, and people are going to say, “Get me out of here. Get me a house, land, commercial real estate, gold.”

Alex: Hard assets.

Jim: “Get me out of the dollar and get me into hard assets. I don’t know what’s happening next, but I don’t want to lose my money.”

Alex: I saw an article from Goldman Sachs where their head of commodities globally was banging the table calling gold the money of last resort and telling everybody to buy it. It’s amazing what’s happening.

Jim: You and I were suggesting people buy it at $1100, so we’re about four years ahead of Goldman.

Alex: It’s amazing. Everything we’ve talked about over the years is all happening right now.

Okay, so practical applications. What can people do? Let’s break this down into chunks. The first chunk is the average person. They’re living paycheck to paycheck and have no assets. All this stuff comes down, everybody is recommended to stay home, and they’re probably thinking, “How do I pay rent? How do I buy food?” Do you have any thoughts for those people?

Jim: Yes. Go down to your local bank and get a Small Business Administration loan right now. They’ve got on the order of $100 billion through the Small Business Administration for small business.

Small business is defined as anyone with less than 500 employees. You don’t have to be a local shipping company. You can be a flower shop or a pizza parlor. A lot of people either don’t know this because they haven’t heard about it, or they don’t think they somehow qualify. You qualify. There’s a little bit of paperwork, but this is literally happening in real time. There are two criteria for it. One is to maintain payroll and two is to pay the rent; the two most important expenses that businesses have. Here’s the deal: you get the loan; if you don’t lay anybody off, you can keep it; you don’t have to pay it back; it’s a grant. If you lay people off anyway, you have to pay it back.

The interest rate is rock bottom. It’s a long-term loan, but as long as you keep your employees, you can keep the money. What are you waiting for? Make sure your bank is an SBA approved lender, but they all are.

Just to be clear, the banks get a 5% origination fee. If you take a $1 million loan from the SBA, the bank gets $50,000 as origination, so they want to give you the money. The government wants you to have the money. People are afraid about it, because it is not like a normal loan. They say, “Oh, they hate me. I’ve got to fill out all these forms,” but they want to give you the money and they want to do it as fast as possible.

Alex: I saw this crazy article last week about a guy who started an airline he called Bailout Flights, and he requested $10 million. There were like 25 new airlines started just last week.

Jim: Look, some people have better lawyers than others, but I’m telling you, I don’t care if you’re a flower shop or a pizza parlor; you qualify based on payroll and rent. And if you don’t fire your employees, you can keep the money. It’s the only kind of loan where the bank’s actually on your side. The banks are guaranteed by the government, so they don’t care about your credit, because they’re backstopped by the government.

Alex: Is there anything else the average person can do? The one living paycheck to paycheck wondering about paying rent and buying food.

Jim: Have a look at your 401-K if you have one. I don’t think the stock market’s hit bottom. A lot of people are nibbling, we’re off the bottom. Of course, your typical financial advisor who’s usually thinking about themselves, not you, is saying, “Hey, ride it out. It’ll come back.”

In 2008, it went down by about 60% or 70%, about two thirds. Did it come back? Yes, but it came back by 2014. Six years is a long time to break even, which is what happened, and there were opportunity costs associated with that, because you could have been in other asset classes.

I said at the beginning of this that this is more like 1929 when the stock market crashed. Do you know when it regained the 1929 level? 1954. It did come back, but it took 25 years, and I guarantee you that a lot of those people in 1929 were dead by then.

You can get out, go to cash, and maybe a slice for gold. I’ve always recommended 10%, so don’t go all in. What if the stock market starts to go up again? Well, watch it. If you really see that and it’s not just a two-day bounce or something, you can still jump in. If you miss a little bit at the beginning, think of it as the price of a put option. You avoided a worse outcome.

Alex: That’s people with some assets, hard assets. Now, small and medium business owners that are not in the USA and can’t go get a loan. Any thoughts?

Jim: SBA loans, yeah, good luck. It depends on the country. Canada is mailing out checks. Some have nothing, and others have programs as good or maybe even better than ours.

Alex: Closing up with our last thoughts, I’m going to open the floor to you. What do you want to talk about?

Jim: People say I’m a doom and gloomer, but I’m not. I’m a realist, a pragmatist, and I have pretty good analytic models. I’ll mention a couple of things.

Number one, you have to reset the outcome of the presidential election at 50-50. That’s a reset. I had Trump as a 74% favorite about six weeks ago, which he was based on the model. I don’t make it up, but it was conditional on no recession. The odds of a recession at that time were less than 20%, so Trump’s odds were 80% or higher or somewhere in that neighborhood.

Well, now the recession’s here. Actually, we’re in a depression. Does that mean Trump has zero chance? No, the reason is that no one blames him for this.

Alex: Some people are blaming him for this.

Jim: Okay, but they were not going to vote for him anyway. Most Americans are a little more fair minded. They’re not going to judge Trump by the fact that this happened, because it wasn’t his fault. They’re going to judge him by his response, by his leadership. I reset at 50-50 and I’m watching it, but that means Biden has a 50% chance.

Number one, the market has not repriced for a President Biden. They’ve kind of repriced for coronavirus, and they’re trying to reprice for the economy, but it’s a moving target. The market has not even had time to think about a President Biden, but that’s another leg down if that gets a little traction, which it is.

Number two, just be wary of what they call sucker rallies. They said the stock market was up three days in a row last week, the greatest three-day rally since 1931. That’s true, but the market bottomed in 1932. Your three-day rallies don’t get you off the bottom necessarily.

Help your neighbors. That’s probably the best thing we can all do. We’re all in this together. It’s a cliché, but it’s more than a cliché; it’s an important reality. Maybe I’ll leave it at that.

Alex: Do you think Biden has dementia?

Jim: Biden has pretty clearly exhibited a cognitive slowdown. That’s not a good thing in a presidential candidate.

Alex: The optics are not good on that, no.

Jim: You can’t think of a more stressful job, and he’s not fit in my view. I’m not a doctor, but it’s pretty obvious.

What’s going on is the democrats didn’t want him, but he powered through against a much weaker field. Then they had to want him because they needed to run Bernie Sanders off the road, which they did. You can’t have a communist as your democratic nominee. Mission accomplished as far as destroying Sanders, but now they’re like, “Oh, this is who we have?”

Here’s a wildcard, but maybe not so wild. Of course, everything on the democratic side is highly manipulated by the Democratic National Committee, superdelegates, and changing the rules. That’s why Tulsi Gabbard couldn’t get on the stage, etc.

This is what they’ll do: they’ll keep Biden on his resuscitator or whatever, but they’ll let Bernie get just enough delegates that, combined with Elizabeth Warren for example, he won’t get the nomination on the first ballot. He’ll have more delegates for sure but fall short of the first ballot.

Once you get to a second ballot, it’s jump all. All the pledged delegates are released. So, 700 superdelegates come in from the sidelines to do whatever they want, and they’ll pick Andrew Cuomo.

Alex: You heard it. Jim, as always, thanks a lot. I really enjoyed today’s conversation. Stay safe up there.

Jim: Thank you, Alex. You, too.

 

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Transcript of EP. 6 Global Perspectives: March, 2020 Interview with Alex Stanczyk and Special Guest Duncan Cameron

EP. 6 Global Perspectives March 2020 with Alex Stanczyk and Special Guest Duncan Cameron

Topics Include:

*Covid-19 Coronavirus and Global Financial Crisis II Update

*How do discern where to find truth

*Why when living history is lost, it is on the current generation to make the same mistakes

*Physical gold and silver metals complex globally is sold out

*Making sense of what assets still make sense

*The current economic meltdown is not because of coronavirus – the system was already in a state ready for an event to cause the meltdown

*Younger people may not have seen real capitalism for the duration of their entire lives

*Kondratieff Wave

*Roughly 50 year crash cycle and debt forgiveness ‘jubilee’- no sowing and reaping and people return to their families

*Socialist policies being put forward during crisis

*World is going into compulsory lockdown

*Why purchasing power of fiat currency goes down over time

*What is hyperinflation

*US Treasury yield curve has dropped below 1pct for first time in history

*Global coordinated central bank easing

*VIX (Fear index) spiking

*Oil price wars, Russia vs OPEC

*Disconnect between gold price and price of gold

*US Treasury Secretary announces checks cut directly to US citizens

*Trillions of USD stimulus announced by the US Federal Reserve

*DOW/Gold Ratio

*Defense Protection Act – US Factories On Wartime Production

*Why US Oil Shale producers will be going bankrupt

*Covid-19 in 148 countries

*Implications of Swiss refineries shutting down for two weeks

*Gold anchoring a portfolio

*Fabrication bottlenecks are not metal shortages

*Swiss refinery shutdown impacting gold availability globally

*Gold/Silver Ratio

*Why people will seek gold and silver to preserve purchasing power as the USD crashes in value

*The velocity at which people realize USD losing value will start out slowly and then increase rapidly

*How the residual anger over covid19 and the GFCII can lead to war

*How the financial system was already in a critical state waiting for a catalyst to set off the chain reaction

*Why capital is rushing into USD and US Treasuries, and will eventually flow into gold

*What is Exter’s Pyramid

*MMT and infinite money creation

*How the entire global financial system is constructed on a base layer of gold

*What could lead to permanent breakdowns in the supply chain of all nations

*Practical steps people can take

 

Listen to the original audio of the podcast here

EP. 6 Global Perspectives: March, 2020 Interview with Alex Stanczyk and special guest Duncan Cameron

 

Physical Gold Fund presents Global Perspectives with Alex Stanczyk and invited guests exploring international markets and the complex forces that drive them including geopolitics, economics, and the global monetary system.

Alex: Hello, I’m Alex Stanczyk, and welcome to Episode 6 of Global Perspectives. Today is March 24, 2020. I have with me my colleague and friend, Duncan Cameron. Duncan is a member of our research team and is a precious metals industry veteran of many years. Duncan, how long have you been in the industry? How long have you been aware of precious metals?

Duncan: I started to acquire it in 2005 back when the price of gold was $450 US and around $650 NZD where I live. I was accumulating through ’05 and got to meet Simon Heapes. He really introduced me to it in a big way, and then I just started to ramp up. In fact, by 2007, I could see we were heading for a big-time crash, so I exited all leverage. I exited my property, I sold things off, I went into gold and silver, and I started to preach the gospel of a crash coming about a year out. People laughed and ridiculed me like they do. I was well prepared for 2008, to be honest, but of course, that has curveballs.

Alex: I had the same experience.

Let me finish introducing you so people know who you are, because this is the first podcast we’ve ever done with you. You’ve been part of our research team, part of our core group, for many years. We’re good friends and have known each other for a long time. I personally very much value your opinions and the research you do.

In addition to working with Physical Gold Fund, Duncan is also a successful entrepreneur. From my understanding, he has launched a handful of companies and currently owns three substantial companies in his home country of New Zealand. So, Duncan, welcome to the podcast.

Duncan: Thanks, mate, I’m looking forward to it. We’re ranting and talking so much, there’s only one way to really do this, and it’s actually to enshrine it in a bit of recorded history. The great thing about being our age – I’m 56 now – is that we’re actually living through history. We’re not just reading it anymore. You’re not reading it or looking at it, but you can remember back in 1981 when Margaret Thatcher took the fleet down to the Falkland Islands. Also, we remember the Berlin Wall coming down and Chernobyl like it was fresh, and we can certainly remember the ’87 crash. I got dealt to; I was a young guy, but I got dealt to. And then of course, we had 2000 and 2008.

It’s interesting as you get older in life, you start reading it and become part of living history. We don’t listen to our older people too much, so I try and tack on to elderly people. I gravitate a lot more to them, because when living history is lost, it’s left over to everyone else to screw it up and do it all over again, isn’t it?

Alex: Yes, it is. Your video is just a bit choppy, and I think that has something to do with the Internet right now because everybody is basically at home because of the coronavirus. The other day I saw a plea bfrom ISPs in the United States to Netflix asking them to start streaming lower quality videos, because everybody is at home watching Netflix and the available bandwidth is just crushed.

Duncan: In our country, when the prime minister announced two days ago that we’re going into level four lockdown, the phone network just crashed, because people were calling each other. You’d have to try ten times to get a phone call out, so people were getting on landlines calling mobiles.

Two of my companies were deemed essential. We own a courier business and an ISP. We do rural broadband Internet, and I’m telling you, everybody is having trouble. The whole world is having trouble.

Alex: For those of you who are watching, now you understand why the video is kind of freezing up a little bit now and then. So, don’t be too critical. If you don’t like it, stop watching Netflix, and we’ll have freer Internet for bandwidth.

A couple of quick things before we dive in. Something I’ve noticed is that right now there’s a lot of misinformation going on around the world both in regard to coronavirus as well as financial matters and what’s going on in the economy. There is all kinds of really strange advice out there.

There’s a saying that in today’s day and age with so much information, people are drowning in information and starving for wisdom. All I’m going to say about that before going any further is that discernment is really important right now. When I was a young man, I heard a saying, and it was that if the person you’re listening to doesn’t have anything you want in their life – they don’t have the finances you want, the spiritual life you want, the relationships you want – don’t listen to them. I mean, listen to them, but you need to take it with a grain of salt and understand that maybe the advice they’re sharing with you isn’t necessarily going to get you where you want in life.

Duncan: This is right. We talked the other day about people stocking up on toilet paper to last them sometime into the next century. Their great-grandchildren will have a special ceremony when they use the last toilet paper roll that their great-grandparents bought. But they’re not buying gold or silver. Well, the doors are closing all over the world.

I have a colleague and associate who is a client of ours, and he has a small amount of gold. He sold his house last year, and while everyone else is buying toilet paper and stocking up on flour, he’s been trying to buy gold. We have two very big dealers in New Zealand, and both of them access Perth Mint, so he managed to get in yesterday and buy the last of the gold.

He wanted about 40 ounces of physical gold as well as the gold he has with us. He couldn’t get what he wanted, but he managed to get about 10 ounces of gold. The rest is on order from Perth Mint, but that is the last order they will be getting from Perth Mint. These are the two biggest dealers in New Zealand, and there’s a queue behind him trying to buy gold.

Maybe you can talk about what’s happening at the Swiss refinery level, but around the world from the farthest of the North Pole down to the penguins in the South Pole and every country in-between, just as we saw in 2008, people are trying to stock up on the wrong thing. They don’t understand that this modern monetary tier that’s creating so much money is a genie that’s out of the bottle and can’t go back. The effects of that, once we’re all through COVID, can’t be unwound.

This is obviously related to a lot of various subjects, but let’s talk about the physical gold stuff for a moment. As I said, people cannot buy it now, because we are running out.

You and I have been to Perth Mint and watched the bars being poured. They can’t get it, so Australians can’t buy it. They’re all going to turn up late, and that is the problem with wisdom and discernment. People tend to stock up on the wrong thing, because they’re more worried about having their grog supply when the country locks down so they can stay happy for the next 12 weeks.

They’re more worried about if they’ve got enough toilet paper to wipe their bottoms than what happens when we’re through COVID and they have to resurrect their businesses or buy assets.

Alex: Something else that’s super important is that the economic consequences unfolding right now are not going to stop. Once we get through the coronavirus issue – even if it were to stop right now and completely disappear from the face of the earth – the economic damage has already been done.

We’re feeling the effects of that now. The point I want to make is that these economic consequences are not because of coronavirus; the system was set up to do this a long time ago. This situation was already baked into the cake in the 2008 global financial crisis when central banks came in and basically subsidized everything.

The funny thing is, there are so many people out there right now in the millennial generation and younger who just don’t believe capitalism works anymore. What they’ve seen in their entire lifetime is not capitalism, so I don’t think they even know what capitalism looks like. True capitalism would be to let those systems and companies fail. Don’t bail them out, and then the market will readjust to that. That’s what capitalism really is. Instead, what they’ve done is bail out those big companies.

Duncan: When I was first trying to gain wisdom in this area, I could feel within my bones from a biblical perspective the concept of Jubilee. I was trying to work out if we can just override big cycles in history. Is there any such thing as boom and bust? Is everything just managed, and we work everything out? How do young people ever get on to a property letter? How do young people get out of debt? Do we just find different ways to leverage them all up?

Simon showed me the Kondratieff wave. Anyone can look it up from the Longwave Group, blow it up into a large PDF or download the PDF. It says essentially that every 15 years, we go through this major crash. The irony is that in the Jubilee cycle of ancient Israel going back thousands of years, debts were cancelled and slaves were set free. Look at students around the world with massive student loans, and they’re supposed to support us as we get old. In ancient Israel, property ownership not paid off during the non-Jubilee years was returned to the original owner. We saw that with jingle mail in 2008.

During Jubilee, there’s no sowing or reaping. Everyone rests, and people return back to their own families. As we speak, airports are shutting down all over the world. The last people are coming back right now to our country, otherwise you’re not coming back and you’ll be stuck wherever you are. In a Jubilee cycle, people went back to their own land and lived off what they had and what they’d saved. Who saves now? This new generation doesn’t save anything, because they figure someone’s just going to give it to them.

The idea is of saving during the years of labor so that you have something left over or something to eat in the year of Jubilee or a period of time when you would rest and reestablish your value system. Well, right now the world is going into compulsory lockdown, and many people are finding out they’ve lived in this perception that there are no cycles in history; there’s no more big booms and busts; that the people who run the Fed, the Bank of England, the European Central Bank, and all the central banks can just come to the rescue of us all.

Guess what? We’re finding out that they can’t. You could almost argue that the Kondratieff cycle downturn in 2000 with .com morphed into an even bigger crisis in 2008 and culminated where we are today. As you pointed out, it’s baked in anyway. That is all the hallmarks of the current wealth season which bottoms out.

Historically, springtime is when countries go to war. Looking back to 1812, the American Civil War, you can go right back through history and see that when people come out of a depression or a recession with nothing, they’re angry, so they turn to socialism. You see very extreme divergent views, countries get angry, and they go to war.

Alex: That’s happening right now. In the United States, there’s a huge push towards socialist policies. It’s part of this trend with the younger generations who are looking at it and saying, “Well, the government’s just going to give us all money.” Secretary Mnuchin, the chairman of the Federal Reserve, announced that they’re going to be cutting checks directly to Americans.

We’ll get into that in a little bit, but the view is that the government will simply give everybody money. People don’t understand the basic economics behind that, so we should probably explain that. For those who have never watched any of our podcasts or studied the kinds of things we’re talking about, I’m going to give you a very basic analogy. There are going to be PhD economists who look at this and say, “It’s a lot more complicated than that,” and that’s true. This is a simple analogy for people to basically understand what inflation is and what it does to money.

The example I was taught that made the most sense to me was if you pretend you’re on a little island and the island is the whole world. It’s got all the world’s people, economy, money, goods, and all the world’s production on this teeny little island. On this island, let’s say there are three dollars, and that’s the whole money supply in our little world, and the whole productive capacity is three loaves of bread.

So, there’s $3 and three loaves of bread. How much does a loaf of bread cost? It costs $1. If there was $1 and one loaf of bread, it would cost $1. If there were $2 and two loaves of bread, each would cost $1. If there were $3 and three loaves of bread, each would cost $1.

Let’s add money to that equation and double it so there is $6 and three loaves of bread. How much is a loaf of bread? Now it’s $2. If you double it again, there’s $12 and three loaves of bread, and each loaf costs $4.

Looking back over the arc of the United States, for example, you might not remember that movie tickets were $1.50 when I was a kid. How much are they now? Quite a bit more than that in the range of $15 – $20. The same thing goes for everything across the spectrum whether it’s homes, cars, clothes, etc. That is the effect of inflation.

There are other factors such as velocity and all kinds of other things, but the point is that right now, we are having the most massive expansion of the money supply possibly in the history of mankind. The end result is that the value or purchasing power of each diminutive currency plummets, and you end up with situations like very rapid inflation. The technical term for it is hyperinflation when you start to see increases in the cost of goods and basic things happening very rapidly. We’ve always known this could occur, because it’s happened many times throughout history. This is not conjecture or theory; we’re not pontificating.

Duncan: No, it’s just what happens. The Sumerians were doing it since the birth of money even with clay tablets. It was easier to bake clay tablets, inscribe the local ruler’s name, and swap them with somebody who was making the real bread. They could just print as many tablets as they needed until eventually nobody wanted them.

Central banks’ increasing of the money supply is best seen as you age and get older. As a child, we had one-cent coins, and I can vaguely remember buying four Jaffas – little chocolate balls – with my one-cent coin. Then it became two Jaffas, then it became one Jaffa, then two cents for one Jaffa, and then four cents for one Jaffa.

Alex: You could actually buy something for a couple of cents.

Duncan: Yes, but then they got rid of the one-cent and then the five-cent in New Zealand. We have a ten-cent, but it won’t even buy you one Jaffa, because the pack of chocolate Jaffas that have been around since I was a small child is no longer a unit that is easily seen. It’s now just a number.

That’s the creation of money at a central bank level. It’s what the world is doing right now; they’re creating trillions. Europeans are dumping €1 trillion, and The Bank of England is doing the same. The Fed, obviously $1.5 trillion went in, but they were pumping hundreds of billions every year into the repo market before Christmas. It started mid-September and escalated.

Fed governor Jerome Powell pumped a pile of money in just before the end of the year, because he didn’t want a crisis during Christmas. It doesn’t matter what pricks the bubble; it matters how big the bubble is. COVID has pricked the bubble, but like Lehman Brothers or Bear Stearns before that – the mortgage-backed securities, the odorous excrement of death – was building up long before we ended up having a crisis.

Something will always prick the bubble, but that is not the cause. The problem is the passing from honest money. The world’s gold supply goes up about 3.5% every year in terms of inflation, and that’s healthy. Back in Roman times, interest rates were 4.5%. That rewarded the borrower and the lender. There was an equilibrium of sorts.

But we live in zero interest rate policy (ZIRP) and negative interest rate policy (NIRP). A third of the world’s bonds are all negatively returned, and all over the world, we’re seeing big problems such as corporate bonds being dumped and the Fed having to buy municipal bonds. The rates for those bonds are climbing up in price.

Alex: Let me run through some of these really interesting events. Ever since around the 9th of March, I began taking notes on things that were happening, because I’ve never seen this stuff in my lifetime. I’m going to read through some of these, and then we can continue our conversation.

The first was that on March 9th, the U.S. yield curve on U.S. treasuries dropped below 1% for the first time in history. Since then, some of the really short-term ones have actually gone negative.
On the 9th of March, the S&P futures limit down started hitting circuit breakers. That’s when PPL started really catching on to what was happening, and we were seeing global coordinated central bank easing. That never happens. What usually happens is that one central bank will ease, then another will do it over here after a bit, and another one over here will do it after a bit. This is coordinated easing; they’re talking to each other and saying, “We need to do this all at the same time.”

On the 12th of March, we started seeing spikes in the VIX. For those who aren’t familiar, the VIX is a measure of volatility also known as the sort of fear index. It’s gone through the roof. Intraday trading was as high as 75 and maybe even higher on some days.

Duncan: Yes, it was definitely up in the 70s.

Alex: On the 13th of March, a number of different things were announced. The Fed announced that it was going to inject $1.5 trillion into the system, and there was a series of coordinated central bank ‘money bombing’ going on. The USA, $1.5 trillion; Sweden, $15 billion; Japan, ¥2 trillion (basically $20 billion); Australia, $5.5 billion; China, $79 billion. That was on the 13th, and since then, it’s completely off the hook.

Duncan: Australia has just literally talked of $300 billion. These numbers are exploding, because they can’t get enough money into the system.

Alex: I’ll get to that here. On the 16th, nations began closing borders because of the coronavirus, COVID-19. I have these trackers that track planes and flights – it’s just a curiosity of mine – and I started noticing that planes in the air began diverting from their filed flight plans. They were literally in the air, changing direction and landing, because nations started closing borders.
In the United States, we began seeing schools, restaurants, and nonessential businesses starting to close. At the same time, European markets were crashing. There’s way more than this. I have three pages, but I’m only going to cover some of the unique highlights here.

Duncan: When I look at the news, I follow a particular website in our country that produces basic facts every day of what’s happening in the market. I had to reread this article twice, because it’s just the world in total panic. Every single line is, “U.S. fires up unlimited monetary action as Congress fiscal action stalls; U.S. still not on lockdown; Germany readies huge fiscal package; long recession feared; Aussie job losses projected to go to 300,000; U.S. ten-year drop point at 7; oil sinks; gold jumps.” And they’re talking about the unemployment lines as people file for unemployment in every country in wave after wave.

In 1929, oil was parked up on the side of the pier. Nobody needed it. Look at the price of oil these days.

Alex: Yes, and there’s a massive glut of gasoline and oil.

Duncan: The oil/gold ratio is at 70. It’s a vertical line, so either oil is underpriced, gold is overpriced or something is overpriced.

Alex: Let me get through the rest of these, and then we’ll continue our discussion. On March 16th, we started to see a disconnect between the gold price and the price of gold. What that means is that the gold price is basically a futures price, and the price of gold is what you have to pay to actually buy physical gold. Those are two different things.

We have talked for years about starting to see disconnects, and lots of people were saying, “That’s just goldbug nonsense; that’s not real.” Well, it’s happening. On the 16th, the disconnect was looking like the futures spot was $1478, but you couldn’t buy an ounce of gold at the retail level for less than $1800, and it’s only progressed since then. We’ll get into more of that in just a minute.

On the 16th, nations were closing borders to noncitizens. On the 17th, Secretary Mnuchin announced checks are going to be cut directly to U.S. citizens. On the 17th, the Fed announced that it was going to do $1 trillion of overnight repo funding every night for that entire week.

Duncan: Behind the scenes, it got to $13.45 within no time at all. No one counts that money or regards that money. They say, “Well, I just care about the Fed balance sheet. It was 4.5, we mail every American $1000, that’ll take it to $5 trillion. We’ll worry about it the following week.”

But behind the scenes, what needs to happen to keep that working is in exponential numbers, and it’s been repeated by every central bank. Your example of bread is bang on about the gold disconnect. If everybody has $1 to buy one loaf of bread and there are three loaves of bread, you can print as much money as you want as long as nobody all wants their bread at the same time.

When everybody wants their bread at the same time, that increased money supply all competes for that bread. That is your gold disconnect right now in the early days. At Physical Gold Fund, we have access at a very high level, but around the world, people are finding out that their money that has been sent to them in the mail to go and buy gold instead of whatever it is that the government would like them to buy (food or something else to stimulate the economy and increase the velocity of money), they’re going to find that whilst the world has created lots of money, we have not managed to somehow magically conjure up 8% or 10% gold production for the year because we’d had a crisis. It doesn’t work like that. More money chases less gold, and that’s your point.

Alex: That is the point, and interestingly enough, in hyperinflation scenarios. We can look back at history, but we can look at current ones. It’s going on in Venezuela right now. What ends up happening is that the value of each unit of currency – in my case the U.S. dollar – drops so quickly that people just try to get rid of it as fast as they can. Like right now, there’s capital destruction on a global level that’s absolutely unprecedented, and people are rushing into U.S. dollars, into U.S. treasuries, etc.

Duncan: Every currency has gone down. We’ve had a currency that sat at 65 NZ and is now down to 55. Australia is the same, they’re down. Every single currency has been depreciating against the USD, so they’re all trying to buy U.S. dollars as if that’s going to save them. You guys are going to print trillions of dollars, but then what happens?

Alex: That’s what I was just getting to. With all of the current stimulus being injected, especially when they start sending money directly to American citizens, this has the potential to accelerate inflation in a way that we have not seen in the United States maybe ever.

Duncan: Right. What happens when people decide they want to take some of that money and buy gold and silver – tangible assets that are in short supply where the futures market is disconnected because nobody has ever stood for delivery? What happens when people say, “You know what? I don’t want to buy food. I think I need to buy some silver coins. I need to buy some gold.” They’re going to find out very quickly what is a store of value.

In Venezuela, it’s 120 million to an ounce of gold. It’s so far removed that you have to do a math equation and start removing all the zeroes off each side of the equation to try and work out the ratio. That is hyperinflation.

Alex: The other thing that happens in a hyperinflationary scenario is not just regarding metal prices. What metal is really doing when you see the price skyrocket is that it’s telling you that the value of currency is plummeting in terms of purchasing power, because gold doesn’t do anything. People get confused about that. They’re looking at gold thinking, “Is that something to invest in?” You invest in things that are going to give you a return. Gold is money and doesn’t do anything; it just sits there.

If you took an ounce of gold and stuck it on your desk, it’s not going to do anything. It’s just going to sit there as an ounce of gold. It’s a stable measurement, and that’s the point we’ve been getting at the whole time. The only thing that happens in hyperinflation is that in the nominal currency terms of the currency, everything starts to go up.

Now, that’s everything – clothes, food, etc. The price of everything skyrockets in that currency, but interestingly enough, against one ounce of gold, what you can buy shifts in the opposite direction. The purchasing power of gold skyrockets. That’s what’s happened in history, and that’s probably what will happen in another hyperinflation if we see it in the U.S. dollar.

The best way to see that is to look at the DOW gold ratio. We have seen and talked about how the ratio goes down to where you can buy the entire DOW, and the measure of the index of the top stocks of the U.S. eventually gives a ratio where the price of the entire DOW will equal one ounce of gold.

People have laughed at that for the last 20 years and said, “We can never get back there. This time, it’s different.” Well, I’ve been tracking the DOW gold ratio as we head back down again. The other day, it was 25,000 then 24,000, and it’s going down 1000 points a day. I know it’s up today at 20,700, but it always has a bounce and then lurches back to the neck.

So we have a day in-between each 1000-point drop. It was 19,173, and gold was $1498 a few days ago. That made the ratio 12.79, and it’s been steadily coming down. Opening up on Monday, the DOW was 18,576 and gold was $1552. That’s 11.96. As it heads down, you get to a point where how do you decide where the DOW will be and how do you decide where gold will be? I can tell you that if gold is $5000 and the DOW is 8000, your ratio is 1.6.

Who can tell me right now that gold couldn’t be $5000? Who can tell me now with absolute certainty like their life bet was upon it that the DOW couldn’t end up at 8000? That would make the ratio 1.6. If I talked to a money manager or anyone on CNBC when we were sitting up there not long ago at a ratio of 20 or 20 plus and tried to say that we could have 1 literally within a few months, I would have been laughed out of the studio.

Some people say, “Coronavirus is a one-in-a-hundred years or one-in-a-thousand years event.” Well, no. Spanish flu was 100 years ago, and it killed between 50 and 100 million people. World War I killed 20 million when the population was 1.5 billion, so that’s roughly 8% of the world’s population.

Tell me, what would happen in the modern world if a virus mutates and kills one in eight? Where will the DOW be, and where will the arrogance and total hubris or disdain for cycles in history be? Five hundred million people got the virus 100 years ago- one-third got the virus 100 years ago.

We’ve had plagues and things all through mankind’s living history where great pestilences wipe out. We haven’t had anything like this for 100 years, and now the world at 7.7 billion is absolutely frightened. They are scared, because they’re watching all their leverage, all their funny money, all their 401k, investing, managed funds, managed indexes, passive indexes, they assume it’ll just go up. There’s no one even making physical trades. This is a dumb idea; we need to get out. It’s a Quantbox doing it.

When we get something like this nonlinear event that comes from nowhere and really changes the landscape, I look at the DOW. If we really start seeing lots of deaths all over the world or we see the virus mutate, we’ll see gold at $5000 or higher or the DOW at 8000. We could see gold at $10,000 just based on monetary creation, because this genie is out of the bottle now and can’t be put back.

If we come right, the monetary inflation that central banks have done will then start to chase assets, so the poor can’t buy food because the assets cost more, and the wealthy that were wise and unleveraged get to reinvest back into inflating assets. That gives rise to socialist-type anger amongst all the poor. Read Andrew Dixon White’s Fiat Money Inflation in France. You can download it on the Internet for free. It’s the history of what happened in the French revolution and the times around that.

As Gerald Celente has often said, when people lose everything, they lose it. Sorry, mate, I’m getting into a rant mode.

Alex: That’s all right. That’s what I want you to do, because that way, people are going to hear things they wouldn’t have heard otherwise.

Okay, on to the next couple of items, and then I’ll be through this list. On March 18th, the president of the United States invoked the Defense Production Act that allows the president to order factories in the United States to produce what the government thinks is important to produce. It’s basically wartime production, so the U.S. is currently under what’s called wartime production.
On the 18th, FEMA (The United States Federal Emergency Management Agency usually called on for natural disasters) was activated nationally at Condition One, which is the highest threat level.

On March 18th, crude oil closed at $20.83. For those familiar with U.S. oil production complex, it’s a great deal of U.S. oil. The thing that got U.S. oil dependent was the shale industry. Shale doesn’t work below – even $35 is breaking the back of the shale industry – so at $30, it’s completely underwater. We’re probably going to see those companies filing for bankruptcy over the next year. Not all of them maybe, but quite a few of them.

As of the 20th of March, COVID-19 was in 148 countries. As of the 21st of March, factories in the U.S. started to convert production lines to making sanitizer, N95 masks, ventilators, and what they call PPE, which is what hospital doctors and healthcare staff wear when they’re dealing with people who have something like the coronavirus.

Here’s the big one, and this is the last thing I’m going to read. Like I said, there are tons more, but we don’t have time to cover them all. On March 23rd, there was an announcement by the big refineries in Switzerland that they’re shutting down operations for two weeks. I’d like to point out that this is completely unprecedented and has not happened even during wars or the London Gold Pool of 1961. There’s never been a time that I’m aware of that the factories in Switzerland shut down.

The timing of it is actually kind of amazing. Goldbugs have been saying, “What if this happens and what if that happens?” There are always really out-there scenarios, but you couldn’t make this up. All at the same time, we have a global virus that’s a lot worse than people thought it was going to be and we have a price war in oil occurring between Russia and OPEC. This is basically the Global Financial Crisis II. We might as well call it what it is; this is GFC 2020.

Duncan: They’re trying to call it a recession like they called 2008 a recession – the COVID recession – but historians will not call this a recession.

COVID-19 is nice and PC, but I’ve seen humorous e-mails go out warning about shutdown procedures and they want to call it as it is; they want to say the Chinese Wuhan bat virus. That’s how they want to refer to it. It may be humorous, but people are going to get angry when the dust settles, and we’re going to see very fervent nationalism. People are not yet thinking through the consequences of how people react when their family members have died. A propaganda war is going on now as China blames the rest of the world for what they are getting back as they quarantine people and try to keep it from coming back. They’ve already accused the U.S. by saying, “It’s a biological weapon.”

The rise of nationalism and nationalist socialism in Nazi Germany happened in a hotbed of the reparations of World War I that left many German people unable to feed themselves. Once again, you saw the hyperinflation of Germany and those who had gold. This is why we’ve been saying for all these years that you should own a store of gold. You should own something, because seasons and times come in a way that you can’t predict. You should just have it. Sit it there. It’s insurance. Just keep it there for when things go really bad. One day, you’ll be able to use that to buy something that will literally be lifechanging for you. It will propel you forward while others are going backwards.

As you said about the Swiss refineries right now, the time to buy that is even becoming in question.

Alex: That’s the whole point, it’s not possible to do it right now. The entire retail complex in precious metals globally has been completely cleaned out. This was happening as much as a week and a half ago. That’s when the whole blowup in the price happened where you have the futures price and then you have the real price. That was happening, and the whole complex got cleaned out. Then I started seeing a backlog of multiple months before any new inventory was going to come in.

This is all old news to us as we’ve seen this happen before. We saw it happen in 2008, and goldbugs were jumping up and down saying, “There’s a metal shortage. You can’t get metal anywhere.” That wasn’t really true at the time. It was a fabrication bottleneck meaning if there’s gold supply sitting there in, let’s call it 400-ounce bars or large form factor or whatever you want to call it or maybe it’s scrap but it hasn’t been converted into small bars or small coin, that’s where the shortage is. It’s a manufacturing process bottleneck that has nothing to do with actual availability of raw metal.

Now it’s different. We’ve never seen this.

Duncan: It’s different. With the price of gold, as the market starts to sniff out value, where can they redeploy money when you sell your U.S. treasury or your share to try and buy something? We’ve got people lining up getting cash out of the banks all over the world. It’s happening here in our country in big, long queues. Trust me, there’s plenty of cash. I’m trying to explain to people to not worry about the cash. You’ve got your eyes on the wrong target, mate. You’re looking at the wrong object.

There’s plenty of cash, because banks are very liquid at every level. But people will start to wake up that there is a physical disconnect, and this is where you look at the gold/silver ratio. The gold/silver ratio hit 128 the other day. I thought we would get to 100, and I’ve written about it through newsletters for years. I’ve covered it off, I said I’d be surprised, and now we’re here, it’s blasted through it.

Silver is a very good look into people’s psyche that they’re not yet moving into this in a manner that we will see when people want to protect their purchasing power and actually want to have a store of value. When they realize their money can’t buy the same bag of Wheaties or bread, they’re going to eventually want to have something that protects that purchasing power.

At the moment, gold is first starting now to sniff it out. In the future market, it’s starting to go as people realize, “Wow, we’re seeing rising prices here.” When that really starts to take off and climb, then silver starts to rise, because people realize silver is too cheap, and then silver starts to rise. Silver will be telling you that inflation is starting to really hit the marketplace. It hasn’t hit the marketplace yet, so people are still living in that bubble of, “Well, look, we’ll get through this. We’ll all get back to normal.”

Alex: Some are, and some are not. My observation is that awareness happens on a curve. If you watch the awareness level of coronavirus, there were people studying this thing back in early January. I started catching on to it towards the end of January and noticed more and more people catching on to it over time.

The thing that bothered me and got me turned on to it was that I couldn’t reconcile in my mind why this country, one of the largest economies in the world by some arguments and the largest depending on how you measure it economically, is willing to lock down close to a billion people and sacrifice their entire economic output. It kept bothering me. Why is that happening?

For the longest time, people were saying, “It’s just another flu. It’s no big deal. It’s just in China.” It started changing in February when more people were catching on to it. I think at some point in February, I had gone out and started making preparations, because I thought this might be a real thing. We went out and stocked up on food, got our respirators, our filters, and all that other kind of stuff.

Even then, people who were ahead of the curve were catching on. We got these half-mask N95 respirators made by 3M, and I called every major 3M distributor in the Northwest United States to get filters. They were all either sold out or were told they weren’t allowed to sell them anymore. That was really interesting to me. That’s when I started catching on, like, “Man, this is really a thing.”

Rolling into March, we saw more and more people catching on. I would say that even as far as a week and a half ago, probably half the population in the United States thought it was a hoax or just a flu. They weren’t really taking it seriously. As the hospital reports catch on that they’re being flooded with new cases and are starting to become overwhelmed, that’s when everybody’s going to realize this is really happening.

I think the exact same pattern is going to play out in terms of currency and people realizing what’s going on with the U.S. dollar. In terms of realizing what the dollar’s going to buy, that is when you’re going to see velocity of money go vertical. I think it’s going to happen very quickly. Velocity of money is going to go vertical, and you’re going to see people spending dollars to buy hard assets, anything that they can get their hands on, real things, whether that be gold, silver, whatever it may be.

Duncan: There are all sorts of permutations, Alex. When I look at what’s been going on in the Spratly Islands, the South China Sea at the moment and for the last year or so, warships kind of bump against each other and sail around each other. But wars have started when people are angry. When people become angry and highly nationalistic, they want to take it out on somebody.
I don’t think many people are starting to factor that we’ll eventually get over COVID, but the residuals will still be left. There are a lot of scenarios to play out in the coming months and years ahead, because this will redefine how people think about borders and control and rights.

Alex: That’s already happening. You’re seeing the whole conversation playing out over social media right now. There’s always been arguing in what we call FinTwit on Twitter. Some of the smartest financial guys in the world are on there talking to each other on a pretty regular basis, and you’re starting to see it play out as we speak. You’re beginning to see all these socialist policies being put forward, and it’s changing everything. It’s almost like a BC kind of date format. There’s going to be before GFC II and after GFC II. BC – before COVID, after COVID. COVID was just the catalyst.

Duncan: The system was already broken. We’ve not fixed a thing.

Alex: It was already in a highly energetic state looking for something to set it off to go into a phase transition. It’s kind of like the snowpack on the mountain is already set as you’ve heard us talk about with Jim Rickards.

Duncan: Jim’s talked about it a lot, and you guys have written articles.

Alex: When I was trying to wrap my brain around complexity theory talking to Jim years ago, I would always be asking him the question, “Do you think this is going to set it off? Do you think that’s going to set it off?” His response was the same at different times until I finally caught on. He said, “It doesn’t matter what snowflake sets it off. What you have to focus on is the state of the system and that it’s in a highly energetic state and on the verge of a phase transition.” That’s a physics thing where like if you have water, it can go from standing water to a boil or it can go to freezing. Those are phase transitions into a different energetic state.

Duncan: Here’s a left field thought for you. I took my family up to stay with our good friends who have a batch up at Big White out of Kelowna. We went skiing, and the kids loved it. They learned how to ski over the week. We got back two weeks before they announced the lockdown, so we were technically inside, because it was at the end of the third week that you had to go into quarantine.

The snowflake thought is that when I’m on the mountain with my family, it’s a controlled environment. They snow groom the slopes and set off managed charges at night to blow up the perceived places where avalanches can form. They basically figure out how to keep everybody safe on the mountain and having a good time. That could be described as the financial system.

Fast forward a month when everyone has left and the ski fields are closed all over Europe and the world. The season’s been canceled. Avalanches are going off randomly now because no one’s there to manage it. They can’t be managed, and no one’s even around to ski the slopes of what’s around should the natural avalanches occur.

You could say that the system is now going back into its natural environment, its natural state. When we figure we’ve got things sorted, we’ll go back up onto the mountain and try to manage it all over again. We’ll try to use it and fashion it to be what we want it to be.

In your snowflake theory, right now you’re looking at everyone having deserted the mountain, because you can’t be there or even be around it. Every week this goes on, every week that countries go into lockdown, you could argue that the cure is greater than the disease.

At some point, countries will have to go, “You know what? If you’re elderly and infirm …” I have elderly parents and they’re all quarantined, but eventually, society has to get on with things. They’ll get on with it, but what will the financial landscape look like after this when we all get back up to the mountain with our snow groomers and try to manage it all again?

For example, I thought I might like to try and buy a little condo up at Big White. That’d be really nice. It’s a very nice place with prices through the roof. I’m guessing I should be able to buy us one of those small condos at a pretty good price, because in 2009 and 2010 when my mate bought his, it was a fraction of that after the GFC.

Reorder happens at every level, everywhere, all through society, all over the place. The new financial landscape is going to look very different. People are leveraged up. They have rental properties, they have this, they have that. They think they’re absolutely in control of everything, but what if one tenant can’t pay the rent? The banks are now saying we can have a six-month mortgage holiday, and they’re announcing all these measures to try and control how everyone can stay at home. We can all just stay still.

Well, even if you do that successfully, at some point, you have to start up again. When that happens, the financial landscape will be completely different under MMT. They said under Modern Monetary Theory that we can print as much money as we want, but now they’re going to find out what happens when you print as much money as you want.

Alex: Exactly. Take a look at Exter’s Pyramid. John Exter was a gentleman who worked with the Federal Reserve and had this pretty famous chart. I know you’re familiar with it, Duncan. It shows that during times of crisis like this, liquidity and capital goes from the top of the pyramid where you’ve got all kinds of derivatives and plows down through those levels of financial instruments eventually reaching treasuries and sovereign bonds, and then ultimately down into cash. Gold is at the very base of the pyramid, because that’s how the whole system is constructed. It’s all constructed on top of a base of gold.

A lot of people have forgotten this. Most people in modern finance today have never heard this stuff, because gold isn’t taught anymore as the base of the pyramid. Everything was constructed on top of it. They have forgotten this, so what’s happening is that globally, as capital destruction occurs and forces its way down through the layers of the pyramid towards gold, it reaches the bottom into cash, U.S. dollars and treasuries for example. People will start to realize that the massive devaluation of the U.S. dollar is going to force down even farther into gold.

Duncan: Yes, that’s correct.

Alex: And that’s just starting. Very few people have caught onto it. The amazing thing is that the gold price is up almost $70 a day with only a small fraction of the population understanding this stuff. As that awareness starts to grow, just imagine global currencies alone. The last time I checked maybe a year ago, so it’s probably larger now, we’re talking $210 trillion U.S. dollars’ worth not including all of the other financial layers of paper instruments that we’ve created and allowed Wall Street to magically produce.

Duncan: They talk in quadrillions now for the total. I did a newsletter years ago where I likened the Twin Towers to the Exter Pyramid, because we know there was a lot of gold in the vault at the base of the Twin Towers. I liked the derivative, the pyramid of unfunded government liabilities at the top floor, and as you worked your way down through nonmonetary commodities, corporate muni bonds, securitized debt, government bonds, treasury bills, finally, you’ve got paper money, and lastly, gold.

When the tower came down, everybody and everything in it was gone but the gold. They went and pulled every single bit of gold out of the basement once they’d taken away all of the rubble above. I likened that pyramid and did the math calculation with my dad’s help, because he’s a very good mathematician. I needed my father to help me in trying to do the derivatives, and I worked out that the pile in the modern world would be somewhere around about the moon if you had to build the Twin Towers again using the derivative example and the gold at the bottom in terms of its percentage to the actual amount of nothing money.

In other words, it’s so tall and so big that it’s not really comprehensible. Even if you’re trying to picture a skyscraper into the sky, what sort of skyscraper goes to the moon?

Alex: The last thing before we start wrapping this up is that you’re a business owner. You’ve got three companies that I’m aware of, and I know you’re wrapping one up now because of everything that’s happening.

Duncan: That’s right. You’ve talked a lot with Jim over the years about complexity theory, chaos, and all the rest of that. So, here’s chaos and complexity theory in action.

One of my businesses is a courier business. Believe it or not, our business is being deemed an essential service by the government as we lock down, because we deliver all sorts of things.

Our customer base is primarily the automotive industry. We look after some very big companies, good companies, public companies. They pay their bills, but many of these automotive companies we look after are not deemed essential even though they supply everything from gaskets to you name it. They are going to be shutting down.

My ISP is also deemed an essential company. Yesterday they needed to buy screws, but they need to buy them from a company that is not deemed essential. So how do we get the screws to keep the tower operating that keeps the Internet going that you and I are streaming over right now?

Everybody is connected to everyone. There is no island, so it’s just a question of how far down the chain. When people say, “We’re going to keep essential services running, like food,” well, food comes from farmers. From the farmer to the table, everybody is involved in the supply chain solution. I’m watching our entire courier company get laid off. Many of those people live hand to mouth week to week. Now they’re going to the government to bail them out, and the government will give them a subsidy.

Other people own cafés and businesses. They’re not going to be able to start up again, because they were reasonably leveraged when they had a café. They’re about to find out that unless someone gives them a whole pile of money, they’re not going to be able to reopen.

I’m talking to you while we’re sitting at home via a Zoom connection on our IT business. There are guys in Australia and New Zealand working virtually for big public companies that use us. When talking with my peers about continuing to look after them, the expression on their CEO’s face was a palpable facial relaxation, because they’re terrorized about what happens if their IT company can’t be supported. But if my IT worker, even in lockdown, for whatever reason, becomes sick …

Everybody is part of a supply chain solution. There’s the stuff at the beginning, the stuff in the middle, and the stuff at the end. You’re just somewhere along the line.

Alex: The interesting thing about that is that the companies in the middle go bankrupt. They have to shut down because they don’t have cash and they don’t have any runway. These are permanent closures, right?

Duncan: Yes, they are.

Alex: That will affect the entire supply chain from start to finish.

Duncan: Absolutely.

Alex: It’s not going to be the same. Everything’s changed. That being said, let’s wrap this up with a couple of thoughts I’ll break into two parts.

What would you say to the average person right now in terms of what they might be able to do to prepare? Actions they can take, like actionable items. After that, let’s talk about somebody who’s got some savings, some dry powder. Maybe they’ve sold some of their assets and now they’re in cash. What are the kinds of things those people can be doing? Talk about the full spectrum as far as preparedness for what’s happening. What are your thoughts on that? Start with the average person first.

Duncan: Right now, the average person in the middle has already been locked down. They’re obviously allowed to go buy food and essential supplies, but they need to be thinking about what the landscape is going to look like after all of this. They now need to be thinking about what assets they have, how are they exposed, and how are they leveraged.

Alex: Most people don’t have assets. This is what I’m talking about.

Duncan: No, they don’t.

Alex: This is that chunk of the population living paycheck to paycheck. When the government says everybody stay at home, the first thing that comes to their mind is, “Okay, how am I going to buy food and pay rent?” Talk to that population first, and then we’ll get into if somebody can actually invest in something. Let’s cover both.

Duncan: All right. If you’re at that extreme end of the spectrum, I’ve got to be very blunt and say you’re going to need to rely on friends and family. You’re going to have to restore relationships with people that maybe for whatever little gripe, you don’t talk with very much. Family and friends are going to be needed to help each other at an intimate level.

If you’re at the far end of the extreme spectrum, you’re going to need help and relationships. Think about if you’ve got poor relationships, broken relationships with people for whatever reason. I phoned someone the other day that I haven’t spoken to for a long time to see how they’re going. I had a little bit of a tiff with them. I imagine they’re actually about to go through a tough time, so I thought, look, I need to be a bigger person and call them, because they could be in trouble.

At a basic level, people are going to have to help each other. If you’re at that far end of the spectrum living paycheck to paycheck, you need to give up your flat and go live with your parents. This happened back in ’08 when we had housing shortages here, because everyone wants a house. I can sell a house to anybody on a demand basis. Go ask all the teenagers at school, “Would you like a house?”

There’s not a supply shortage, because people have lived in close quarters through centuries before. People lived in tight family units, and they’re going to have to be doing that sort of thing. Obviously, when you live tight together, all sorts of families that didn’t have much can’t make it on their own, and they’ll suddenly find they can make it around people that care about them or they care over.

That’s what they’re going to have to do at the far end of the spectrum, because they’re too late to the party now. If they’re living paycheck to paycheck, they’re going to have to think more about their relationships and the people they can help and that can help them.

Now to the middle of the spectrum. It’s amazing how many middle class have rental properties and things and think they’re okay. The government will give them a mortgage holiday, so they’ll be able to keep their rental property. There are articles coming out right now still trying to talk up the property market, and I’m very concerned that people already have too much leverage, because they’ve been used to borrowing at zero interest rates.

Rates are not going to stay zero forever. Regarding the cost of money, you can go back to the Roman empire and see how from the crisis center of Diocletian, you can have peace during Julius Caesar and then have total destruction. They’re going to have to think about realigning their assets and cut down all these things they thought they could make lots of money on by borrowing at zero rates forever.

They probably still have time, because a lot of people think the world’s going to get better quickly. You and I know, however, that there’s a lot more carnage. Once the monetary supply’s being changed, things are going to change.

I’d say to the middle class, if you’re leveraged and own properties, residentials, and things like this, you need to pull your horns in big time. And you need to do it while you still can.

Alex: And people who are in a position where they can invest? What do you think?

Duncan: I shifted money out of a revolving facility I have and put it in a securities account two days ago. I’ve started buying shares. I’ve got six screens and every one is open around the world. It looks like NASA at my office at work. People just walk in and go, “Oh my god.”

Exxon Mobile is paying a dividend. They’ve paid a dividend through all sorts of times, so this is just an example. We’re not stock pickers or anything like that, but do you think the price of oil is going to stay at $20 forever under monetary inflation when all these other shale producers start to die on the vine and they don’t have the money to start up?

What does President Trump do? Nationalize all sorts of industry? They’re talking about nationalizing, so you need to be buying assets that will appreciate. Obviously, people like you and me own precious metals, but there’s also an opportunity. I can see a world in which assets inflate. There are all sorts of equities that are attractive, but they’re going to become even more attractive.

Precious metals have to be the cornerstone. If you can still purchase some through any means possible, you need to take a position in it. You need a core position of gold, and in the future, there’ll be a place for silver as well. Obviously not yet, because we’re still in the fear of deflation, but gold has to be the cornerstone. It is the bottom of the Exter Pyramid. It’s the part that came out of the Twin Towers when all the rubble went off to some landfill. All the gold went out. Every single ounce. They got it all.

People need to be thinking that if they can still buy when the refineries open and COVID passes, they need to be calling people like you and putting in orders. That’s at every level, because they’re going to need to have a cornerstone, and it won’t be the U.S. Treasury. It won’t be some debt instrument from the Bank of Japan or the BoE or the European Central Bank. They’re going to need gold. It’s going to be better than treasuries, because the treasuries are going to be compromised.

People accuse China of being partly behind this at a conspiratorial level. Well, whether you take that view or not, one thing is for sure: the whole world’s financial system including the U.S. dollar hegemony, total power, control, is going to be realigned in the times ahead. Countries are going to have a different form of value.

Alex: Yes, I reckon that’s about true. If you watch the behavior of central banks around the world, they’ve been stockpiling gold for a number of years now. Very few people talk about that or are even aware of it. You’ve got to ask the question, why? It’s because they’re not dumb. They saw how the system was set up, they saw how the debt levels were set up, they saw all the leverage we had in the system. If an event like what is currently unfolding right now happened, it would fundamentally change the way the global monetary system works, and we’re on the doorstep of that right now. We’re on the dawn of that.

Duncan: That’s right. It sounds all very apocalyptic, but society has survived through famines. I still keep coming back to the Kondratieff wave that Simon pointed out to me at all those years ago. Summer, autumn, winter, spring. Cycles go through history. People lived generationally through history, and things will recover again. Things will go forward. Although there are all sorts of subjects we could delve off to in that, the reality is that the world will look different in two years’ time. It will look very different in one year’s time.

People need to be thinking that with what they’ve got now, how can they position themselves to be at the front end of the effects of this monetary inflation? They may have missed the previous wave. I’ve spent many an hour out there in the water, but there are other waves coming through. We have another wave coming through, and you can get on that wave and ride it.

The key thing is, precious metals have to be the cornerstone. You need an amount of precious metals. You need gold. Gold is the money of kings, and the kings have stored it all up lately, big time. The kings have their gold. The question is, do you who are out there in ordinary Internet land? Do you have any gold?

Alex: Duncan, I think that about does it. I appreciate you taking the time today. You take care and be safe down there in New Zealand.

Duncan: All right. It’s nice chatting, and we’ll talk more. As I said, I’ll be in touch with you in the evolving situation.

You have been listening to Global Perspective with Alex Stanczyk presented by Physical Gold Fund. Recordings may be found at PhysicalGoldFund.com/podcasts. You can register there for news of upcoming interviews with Alex Stanczyk and other thought leaders in the fields of geopolitics, economics, and the global monetary system.

 

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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

AN INTERVIEW WITH PHILIP JUDGE AND GERRY SCHUBERT

INTRODUCTION AND CAREER BACKGROUND

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.

 

MIDDLE EAST TRENDS

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.

 

RECENT GOLD PRICE MOVEMENT

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.

 

CENTRAL BANK GOLD PURCHASES

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.

 

SUPPLY AND DEMAND IN THE PHYSICAL MARKET

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.

 

SHARIAH STANDARD 57 FOR GOLD INVESTMENTS

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 EP 89 November 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles November 2018

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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 PhysicalGoldFund.com/Podcasts. 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 EP 88 October 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles October 2018

tgc-youtube-splashpage-rev-1920x1080

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 PhysicalGoldFund.com/Podcasts. 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 EP 86 July 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles July 2018

tgc-youtube-splashpage-rev-1920x1080

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
PhysicalGoldFund.com/Podcasts. We also have a YouTube channel. If you’re watching this on
YouTube and like this content or material, please take a moment to Subscribe and Like as well
as feel welcome to comment in the area below.

Diving into today’s podcast, Jim, you recently mentioned you have accumulated some evidence
that there is already an existing gold standard pegged to SDR 900 per ounce. Talk about how
you came to this evidence and why you think this.

Jim: The evidence was interesting, Alex. I look at the U.S. dollar price of gold continually. I buy
and hold gold, but I’m not an active buyer and seller. I’m not looking to make quick profits; I
consider it part of my permanent portfolio. I buy it, put it away, and that’s that. Sometimes the
price goes up, sometimes it goes down, but that’s not most relevant to me.

What’s relevant is getting a percentage of my portfolio into physical gold. I cap it at about 10%
leaving 90% for everything else such as alternatives, fine art, private equity, real estate, stocks,
bonds, cash, whatever.

Having said that, I look at the dollar price of gold multiple times a day, because I talk about it
and write about it a lot. I obviously like to know what it is, see what the trend is, and see what
we have to say about it.

I’m enough of a geek that I look at the dollar price of the SDR. It’s not a secret; the IMF
publishes it once a day. It’s not actively traded. If you want to buy or sell large blocks of SDR-
denominated notes, you do that through the IMF. They have what I’ll call a secret trading desk.

It’s secret in the sense that the results are not known, but it’s there and people use it, and SDRs
do move around.

We only know that because we can look at the reserve position of countries that publish their
reserve positions – which is most countries; not all but most – and we can see the SDR line. It’s
usually small in relation to total reserves, but it’s there.

We know what they’ve been allocated by the IMF, because there has only been half a dozen or
so allocations. That’s over 50 years, so it’s a very long period of time, and most of those
happened in the early days, late 1960s, early 1970s, with the last one in 1980. It’s been radio
silent ever since, all the way to 2009, so almost 30 years at that point.

Then they came up with a recent allocation. We have that information as well. The recent
allocation was quite large compared to the older ones, but inflation more or less accounts for
that.

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
members.

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

 

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By listening to this podcast or reading its associated transcript (collectively, this “Podcast”), you agree with the following.

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 EP 85 June 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles June 2018

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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

EP. 86 The Gold Chronicles: July 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 PhysicalGoldFund.com/podcasts. 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 PhysicalGoldFund.com/podcasts. You may also register there for news of upcoming interviews with Jim Rickards and other world-class thinkers.

 

 

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