Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles EP 84 May 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles May 2018


Topics Include:

*Update on gold markets

*New phase of financial warfare with Iran

*Financial system chokepoints

*US Dollar payments system

*SWIFT transfers and third party influence

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

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

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


Listen to the original audio of the podcast here

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


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


Alex: Hello. This is Alex Stanczyk, and welcome to another edition of The Gold Chronicles. I want to welcome the brilliant Mr. Jim Rickards.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That is completely false.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles EP 83 April 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles April 2018


Topics Include:

*There is not enough gold to support finance and commerce

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

*Gold has no yield

*Gold causes depressions and panics, particularly the great depression

*Gold has no intrinsic value

*Gold is a Barbarous Relic – John Maynard Keynes


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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alex: That’s a very good point.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jim: Right.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jim: Thank you, Alex.

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


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


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Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles EP 82 March 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles March 2018


Topics Include:

*Update on 3rd Great Gold Bull Market

*Proper portfolio allocation when it comes to gold

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

*Gold as insurance versus investment

*Currency Wars

*Trade Wars

*Moving jobs from outside the US, into the US

*North Korea Update


Listen to the original audio of the podcast here

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


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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

in the middle of the Olympics.” The U.S. kind of said in a very quiet voice, “Um, okay,” at which
point Kim Jong-un stopped firing missiles. His last missile test was November 2017, and his last
nuclear weapons test was September 2017.

We fell into a Freeze for Freeze, hitting the pause button as I described it, without anybody
losing face and with no formal announcement, but nobody said they wouldn’t start it up again.
That’s what happened. From December, January, February, now into March, we’ve hit the
pause button.

The question is, do we now have our popcorn and snacks? Are we ready to hit play and let the
movie keep playing out? The answer is, possibly, because the U.S. has scheduled military
exercises for April. Let’s see what happens.

During that, we had some Olympic diplomacy with Kim Jong-un’s sister, Ivanka Trump, Mike
Pence, and all these people showing up in Pyeongchang for the Olympics. Who knows who said
what to whom behind the scenes, but suddenly the South Koreans came out on the West Wing
driveway or lawn outside the West Wing and said, “By the way, we just met with President
Trump and told him that North Korea wants a summit, that they’ll meet with Trump.”
Two hours later, Trump gets in front of the press and said, “Yes, I’m willing to meet with Kim
Jong-un, and we’ll try to do it before the end of May.” That was hitting the pause button a
second time.

Where does that stand? No one knows, because the North Koreans have not responded to that.
The South Koreans said that the North Koreans told them they would have a summit, and
Trump agreed, but the North Koreans themselves have never said this publicly. That doesn’t
mean it’s not happening, but there’s something kind of strange about it.

It looks like Kim Jong-un might be in Beijing right now. He doesn’t travel by plane; he goes by
train, and he has a specially constructed armored train that he travels in. He doesn’t go far,
because how far can you go by train? Japanese satellite surveillance and media have reported
that his train is in Beijing. Is Kim Jong-un on the train? It’s hard to say, but there’s good reason
to believe he is, which means he’s meeting with Chinese leadership, so there’s some behind-
the-scenes diplomacy.

I doubt this meeting will happen in May. The reason I say that is it takes a very long time to
prepare. You can’t wing it. There’s a lot of intelligence collection, analysis, and game playing.
“What if they say this? What do we do? What if they say that? What’s our response?” You must
do this all in game theoretic space. You must debrief the president. That takes six months if
you’re lucky.

Then there’s the logistics. Where are you going to have this summit? Are you going to have it in
the demilitarized zone? It’s not exactly a Ritz Carlton up there. I haven’t been there, but I

studied it and there’s a lot of reporting about it. It’s a pretty spartan environment, and there’s
no way you could secure the safety of the president of the United States on the border with
North Korea. Maybe it will be there, but that’s a heavy lift.

It’s not going to be in South Korea, because the North Korean president doesn’t want to lose
face. It’s probably not going to be in China, because the North Koreans don’t want to appear to
be kowtowing to the Chinese. It’s not going to be in Japan for the same reason, and the
Japanese and the Koreans hate each other. It’s not going to be in the United States, and the guy
doesn’t fly.

Through a process of elimination, the most logical place is Russia, because they do stand back
from this a little bit, and you can go by train from North Korea to Vladivostok, Russia.
Imagine the impact of this on the whole Russia collusion story. I don’t want to get too far down
the trail, but this would vindicate every Russia conspiracy theory we’ve ever had. But hey, it’s
Russia, you have to expect that.

When someone says, “Jim, last fall you said March. It’s March, and there’s no war,” my answer
is, “Yes, but it’s a two-hour movie. Somebody hit the pause button. It’s still a two-hour movie,
but we’re on pause. Let’s see if somebody hits play and we get back to this scenario.”

It’s still on the table, but I’m a good Bayesian. A suitable quote that’s attributed to a lot of
people goes, “When the facts change, I change my mind. What do you do?” A good analyst will
update the forecast. It’s still on the table but on hold for the moment.

Alex: As you said, the two major takeaways from that are, number one, sometimes people
tend to look at a forecast as if it’s written in stone tablets by the finger of God when in reality
it’s a fluid situation. And, facts can change, so you have to update.

Jim: I just explained that in this podcast, but I’ve been saying it since January. It’s not like I
waited until March to update. We maybe even covered some of the same ground in earlier
podcasts and certainly on Twitter and other platforms.

A lot of what I do is for free in the sense that we make it publicly available, so I’m not trying to
sell subscriptions, but for regular listeners and viewers, you need to stay with the story. You
can’t come in in the middle and raise your hand about timing, because we updated this a while

Alex: The other part is that this story is continuing. It’s not done yet. This play button can be
pressed again at any time – as soon as they start weapon testing, basically.

Jim: That’s right. In one sense, somebody has a finger on the play button, because we are going
to have these military exercises in April. Kim Jong-un has said, “I kind of understand you have to
do that, so it’s not a trigger for me to go ahead and fire a missile.”

There is a lot of weapons development you can do without launching missiles or detonating
nuclear weapons. You can test what’s called ruggedization in wind tunnels or you can fly a
missile into a turbocharged jet engine exhaust. There is stuff you can do, and I’m sure they are
doing it and moving the ball forward in the way that Mike Pompeo described.

The last thing is that McMaster is gone. He’s been replaced by John Bolton who is more of a
hawk. And Tillerson, who was on the dovish side, is gone, replaced by Pompeo who is more of a
hawk at the State Department. And, his replacement at CIA is a very hard case. Gina Haspel is
very well-respected inside the agency. We now have more hardliners than when the pause
button was hit. If we hit the play button, it’s going to be a very tough case.

Alex: Very good. Jim, that does it for our time today. Thank you for being on with me. As usual,
I think this was a great discussion, and I look forward to doing it again next time.

Jim: Thank you, Alex.

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

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


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

Jim Rickards and Alex Stanczyk, The Gold Chronicles February 2018


Topics Include:

*How BLS jobs data largely being mis-read by financial media

*Why all current narratives in the financial media are missing the true causes of early Feb US stock markets correction

*Why Atlanta Fed analysis is more of a nowcast than a forecast

*Why exploding sovereign debt and debt to GDP ratio are critical to market stability in the next few years

*How student loans are a $1.5T problem with a significant default rate

*What the two critical confidence boundaries are, and how they might be crossed

*3 Yr playbook – not a forecast but a potential scenario

*Why the idea that Central Banks dont need capital would be challenged in a collapse of confidence


Listen to the original audio of the podcast here

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


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


Alex: Hello, this is Alex Stanczyk, and welcome to the February edition of The Gold Chronicles. I
have with me today Mr. Jim Rickards, the brilliant analyst and member of our advisory board.
Welcome, Jim.

Jim: It’s great to be with you, Alex.

Alex: Just briefly, let’s review some of the topics we covered in our last podcast, and then we’ll
dive into our topics for today. We discussed why we are potentially on the cusp of a new set of
rules for the international monetary system, why gold may be in the first stages of a new multi-
year secular bull market, and we talked a little bit about what the significance is of central
banks that had been buying gold – net buyers of gold. I think they started doing that around
2010, so this would be going on almost a decade now. You can find all our previous recordings

Our topic today is regarding a recent significant correction or meaningful movement in the U.S.
stock markets for the first time in almost two years. It’s been up for a very long time, and
starting at the end of January running into early February, we began seeing these corrections.
There are narratives all over the media as to the reasons this has occurred, but I’d like to get
your point of view, because I think you look at things a little differently.

Jim: You’re exactly right, Alex. A correction is conventionally defined as 10% down from any
high. That’s not an ironclad rule, but it’s the conventional wisdom on Wall Street and a good
rule of thumb. The last correction ran from January 1 st to February 10 th , 2016, in reaction to a
Chinese effort to devalue the Yuan. And they actually did devalue the Yuan.

What was interesting about that is it was the second correction in six months. There was
another correction that ran from August 10 th to mid-September, 2015, about four months
earlier than the 2016 correction, which was also in response to a Chinese shocked evaluation
on August 10 th .

For two years since these two corrections (August 2015 and January/early February 2016), not
only was there no correction, there was no significant drawdown. I don’t know the exact
percentages, but if you want to use a 2% benchmark, there were no 2% corrections. There were
no days for many days in a row where it was down more than 1%, then the number of days in a
row when it hit highs. These were all records and good reason for concern, because that’s not
how markets operate.

There’s a technical name for that, but basically it’s when things go up on a steady basis in more
or less even increments with no corrections, no down days, no volatility. When you see that
pattern, you know something is wrong, because it’s not normal or sustainable. That pattern is
what tipped off some analysts that Bernie Madoff was a crook, because those were the kinds of

results Bernie Madoff was producing. There’s no money manager in the world, no matter how
good – I don’t care if you’re Warren Buffet or Bruce Governor – who can produce returns like

That’s what the stock market was doing and very much cause for concern. All those chickens
came home to roost just a few weeks ago between February 2 nd and 8 th , 2018.

Wall Street loves a story, so when something like that happens, you need a story. You’ve got to
reassure people, you need something to talk about if you’re going on TV or writing or are an
analyst at Morgan Stanley or writing notes. The story went something like this: Friday, February
2 nd , was the first large down day when it was down about 500 points. The following Monday it
was down 1,000, and Thursday it was down 1,000 again.

It all started on that Friday, February 2 nd , at 8:30 in the morning when the Bureau of Labor
Statistics released the monthly employment report, nonfarm jobs, which in this case was the
January employment report released February 2 nd . There’s a lot of different data in that. The
economy created approximately 200,000 jobs which is normal and healthy growth. It’s been
that way for a long time, so there’s no real news there.

The news was that wages year over year had grown 2.9%. Everybody jumped out of their seats
and said, “Oh, my goodness. Look at that 2.9%. It looks like the Phillips curve is alive and well
and Janet Yellen’s notion that it was just a matter of time. Inflation was just around the corner
and all these headwinds were transitory and – boom – here we go. Here comes the inflation.

The Fed is going to tighten more than we expect and raise interest rates. A fixed income
competes with stocks, so dump your stocks, buy your bonds, etc.” That was the conventional

I’ve just recited the narrative, but I would poke holes in everything I just said. Let me point out a
number of flaws in that.

First, that 2.9% number is nominal, but people get used to seeing real numbers. When the
Commerce Department Bureau of Economic Analysis reports GDP, that’s the real number. The
wage number I just referred to is a nominal number, and you must subtract inflation to see
what the real wages were.

With inflation running, depending on your measure, if you use CPI, non-core, that’s about 2%.
Taking the 2.9% minus 2%, real growth was 0.9% year over year. That’s better than getting bit
by a dog, because up is up, but that’s not a big number. In strong recoveries, we’ve historically
seen real wage growth, not nominal, but real wage growth of 3%, 4%, and sometimes 5%.
That’s what a booming economy that’s pushing limits and maybe heading for inflation looks

Nine-tenths of 1% year over year is nothing. I acknowledge that it was bigger than it had been,
so it could be the beginning of a trend, but it was not a big, scary number.

Meanwhile in the same employment report, they also reported weekly wages. Weekly wages
went down. Year over year, wage growth went up as we just described, but weekly wages went
down. The amount that people were actually taking home in their paycheck went down,
because the hours went down. What good does it do me to get a raise if you cut my hours from
40 to 30? Maybe my hourly went up, but my weekly wages went down, because you cut my
hours or moved me from full-time to part-time, etc. So, that was weak.

The labor force participation was unchanged. It’s very close to 40-year lows, but in an economy
that was booming, drawing more people back, and creating more jobs, you might expect that
number to go up. It didn’t. There was a lot of weakness in that report that got overlooked by
the headline number.

There was another thing going on literally the same day. I happened to be on Fox Business that
day with Stuart Varney, a great guy and I enjoy doing that show. Stuart was pointing to this
2.9% number, but the other thing he and a lot of people were saying is that the Atlanta Fed,
which produces what they call the GDPNow cast (not a forecast, but a nowcast prediction of
the present) was estimating first quarter growth at 5.4%, which is huge. Maybe he had to go
back to the Reagan administration in 1983, probably not that far, but he had to go back pretty
far to find a 5.4% quarter. So, everyone said wages are growing 2.9%, economy is growing 5.4%,
and here comes the inflation.

I watch that Atlanta forecast very closely as one of the numbers I look at it, but a lot of people
don’t understand the methodology there. You have to read the technical papers behind it. A
typical Wall Street forecast looks like this because they’re estimating GDP for the quarter while
still in the quarter. The data comes in at different times, and some of it lags. They won’t tell us
their first estimate of first quarter growth until the end of April even though the quarter ends
March 31 st . That’s because some of the data is not in yet and doesn’t come in on a regular
schedule. Some is weekly, some is monthly, some is quarterly with a lag, etc.

A typical Wall Street forecast takes the data they have and estimates all the rest, the missing
pieces, based on extrapolations and their own estimates using whatever methodology they
have. That’s not what the Atlanta Fed does. The Atlanta Fed says go with what you’ve got; let’s
not guesstimate the rest. We’ll take what we’ve got and fill in the blanks with correlations and
regressions. In other words, we won’t look forward. We’ll look back, fill in the blanks, and then
update. This is Bayesian analysis, which I think it’s a good form of analysis, but you must know
what you’re looking at.

The point being, that time series is consistently high at the beginning of the quarter. Go to the
Atlanta Fed website (a very useful service) and look at the second, third, and fourth quarters of
2017 when they put all this data out there. Look at their quarterly estimates from the beginning
of the quarter to the end of the quarter. You’ll find that they always start up high and go down,
down, down, and at the end of the quarter, they converge pretty closely on a real number.

When the number was 5.4%, I said, “It’s only mid-February, so it’s going to come down.” Well,
it did, and guess where it is today? It’s closer to 3%, and I expect it to be lower by the end of the
quarter. The 2.9% was not what it was cracked up to be because it was nominal, not real.

Knowing Atlanta methodology, it was easy to say that the 5.4% was going to come down, and it
has, so it’s looking like the first quarter is not going to be particularly strong.

For all those reasons – inflation, real growth, higher interest rates, capacity constraints – I don’t
buy that story at all.

Let me tell you what I do think took the stock market down, because the stock market is smart.
It’s a lot of players out there, and not all of them are going on TV making up stories. The market
was shocked by what I call the debt bomb. This emerged very quickly. Remember, the Trump
tax bill did not pass until almost the end of the year. It was close to New Year’s Eve before the
President signed it, and it was so complicated that you couldn’t absorb it all overnight. I was a
tax lawyer earlier in my career, so I know how complicated these things are. It took people a
while to figure out the impact of that, and they were working on it in early January.

I remember the rap on the tax bill. Yes, we’re cutting taxes by close to $2 trillion if you do a
static analysis, but we want to do a dynamic analysis, because this is going to stimulate the
economy. We’re going to get so much growth out of these tax cuts that the extra taxes on the
growth will offset the statutory rate cuts and it won’t cost us very much at all. Free lunch, in
other words.

You heard this from Art Laffer, Larry Kudlow, Stephen Moore, and Steve Forbes. These are all
good guys, and I’m not disparaging anyone. I know Art Laffer really well. He’s a good friend, and
I’m a big admirer of his. This is their analysis, but it does not hold water for several reasons.

A tax cut – in other words, a larger deficit – can be stimulative in certain initial conditions, but
those initial conditions would be the following:
 You’re either in a recession or the very early stages of a recovery
 You have a lot of slack in labor and industrial capacity
 Consumption is low
 Velocity of money is low
 Your debt burden is not too high (i.e., you don’t have a lot of debt, you want to take a
loan, and you’ll get your credit approved immediately)

All those conditions – in a recession or early stages of recovery, a lot of slack in the economy, a
pretty good debt-to- GDP ratio in the case of a country – make a case for some Keynesian
stimulus, but none of those conditions are true. Today, we’re not in a recession or the early
stages of recovery; we’re in the ninth year of a recovery. Capacity constraints are real,
unemployment is extremely low, and, most importantly, our debt-to- GDP ratio is 105%.

Kudlow, Kramer, and Steve Moore are veterans of the Reagan revolution. They were in the
White House in the OMB or the Council of Economic Advisors or on Capitol Hill. They were in
various official capacities in the early ‘80s when Reagan did this, and we did get strong growth
under Reagan. In 1982, we were in the worst recession since the Great Depression and our
debt-to- GDP ratio was 35%, so not in 1981 or 1982, but in 1983 to 1986, we had that incredible
run of growth where the economy grew 16% in three years.

Remember, those are the conditions under which a little fiscal boost works. It did work and
produced growth, so these guys are trying to run the same playbook. The problem is, in 1983 it
was like playing a D3 college team, and today they’re playing against the New England Patriots.
In other words, the headwinds are enormous. Our debt-to- GDP ratio is not 35% as it was under
Reagan; it’s 105%. We’re not in a recession; we’re in the ninth year of recovery. We don’t have
a lot of excess capacity; we have capacity constraints.

None of those conditions exist now, so what you’re going to get out of this tax cut is just
deficits. Number one, you’re not going to get the kind of growth you need to make up the
deficit. Number two, in 2011 during a prior government shutdown, the Republicans and
Democrats actually agreed on something, that they were going to put some caps on spending
to take the continual debt ceiling and resolution budget debates off the table.

In terms of the federal deficit, entitlements are on autopilot – they’re statutory, there’s a
formula. Congress just has to find them, because they are what they are. For example, interest
on the national debt must be paid. You can’t say, “We don’t feel like paying the interest this
month.” Entitlements and interest on the national debt are a big part of the total government
expenditure, so what’s left that they can mess around with? Discretionary domestic spending
and defense are the only two things they can play with, so in 2011 they put caps on both. This
was called the sequester.

Here we are six years later. The defense budget has been bled dry, training is down, the cruise
missiles have been used up (we need to replenish those), all these vessels sadly are crashing
into each other because people are working long shifts, and there’s an absence of training and
new systems. We’re stressing our military to the breaking point, and everyone agrees we need
to spend more there, but the Democrats have veto power. This is not one you can jump to with
51 votes; you need 60 votes to do this. The Democrats are saying, “Okay, Republicans, you want
more defense spending? Give us more discretionary domestic spending.” The Republicans
didn’t like it, but they went along because they wanted the defense spending.

Congress blew off the caps on both, so now there’s no more sequester. They say this is going to
add $300 billion, but my estimate is more like $400 billion because of additional defense
spending in the immediate future.

Bear in mind that everything we’re talking about – $1.5 or $2 trillion from the tax cut, $300 or
$400 billion from blowing off the caps – is in addition to the baseline deficit. We have a deficit
anyway of probably $400 billion, but we’re piling all this on top of it.

The third thing I’ll give you that no one is talking about are student loans. Right now, student
loans are about $1.5 trillion. That’s bigger than subprime mortgages going into the mortgage
crisis in 2007. If you count what’s called Alt-A (a kind of subprime mortgage with low-doc, low-
credit mortgage), subprime and Alt-A together in the middle of 2007 before the crisis were
about a trillion dollars. Today, student loans are about $1.5 trillion, so it’s a bigger monster to
wrestle to the ground.

Here’s the main difference. Even at the worst part of the 2008 meltdown, default rates on
those mortgages were 6% or 7% which is quite high for mortgages. Default rates on student
loans are 20%, so 20% of $1.5 trillion is $300 billion. Most of that has not hit the budget yet,
because the Treasury doesn’t make the loans. Private banks and companies make and service
the loans, and the Treasury guarantees it.

When the student first gets in arrears, they do some kind of work-out. They have grace periods,
consolidation refi loans, and certain kinds of public service to get a deferral. There are a lot of
ways to put off the debt reckoning, but those have all been used and now we’re getting to the
point where a bad loan is a bad loan. There’s no more grace period, extension or deferral, and
the banks are saying to the Treasury, “Here’s the loan file. Pay me.” The Treasury must pay
them, and that’s when it hits the deficit. It’s starting to come in right now like a tsunami, so add
that on top.

Using low round numbers, $1.5 trillion for the tax cuts, $300 or $400 billion for the sequester,
blowing off the caps, and another $300 billion for student loans brings us close to $2.5 trillion
on top of $400 billion-a- year baseline deficits. These are trillion-dollar deficits as far as the eye
can see. That’s what I mean by the debt bomb the market suddenly woke up to. That was the
shock. Interest rates were going up, but it wasn’t this inflation story you hear about. That’s a
red herring. It’s this debt bomb that I just described, and that’s what shook the markets.

By the way, rating agencies are talking about cutting the credit rating of the United States of
America. They already did once. I believe it was Fitch in 2011 if I’m not mistaken. The others,
S&P and Moody’s, didn’t, but now S&P is making noises about that.

Once the market goes down, it feeds on itself. I analogize this to a mine field where the mines
are all buried, but it looks like a very nicely groomed lawn you have to walk across. You don’t
have a map or minesweeper, and you’re just hoping you don’t step on a mine. That’s the way
the stock market operates. Once the meltdown begins, what are the mines? Derivatives,
leverage, triple leverage, and inverse ETNs. As the volatility goes up and credit Swiss bonds are
triple, inverse, exchange traded note on volatility, that thing went to zero pennies on the dollar.
They had to suspend redemptions or suspend trading and liquidate that.

People say, “What’s next?” The answer is, “We don’t know.” A distress point causes that
counter party to sell other good assets to raise cash to meet margin calls, and then those good
asset sales hit somebody else’s trigger causing cascading stops. This is a densely connected
system that feeds on itself.

That’s why we saw those big thousand days. Remember, they weren’t just thousand-point days
in terms of going down; they were down 1500, back up 500, and back down again. Enormous

The first question is, “Is it over?” To answer that question, I tell investors to ask two other
1) What caused it?
2) What has changed?

We just talked about the things that caused it – the debt bomb – and that hasn’t changed. The
derivatives are still there as well, so nothing has changed. The market is very vulnerable to this
happening again, and it could be tomorrow.

Alex: We’re obviously looking at multiple trillions of dollars of new debt. I’ve heard economists
talk about how the U.S. can run unlimited deficits and unlimited debt, but is that really true? At
some point, will the sovereign debt load ultimately lead to a failure of confidence either in the
U.S. government or possibly, as importantly or maybe even more importantly, the Fed’s ability
to control the economy? That’s the narrative that allows everybody to sleep well at night. If
confidence in the Fed’s ability to control the economy goes away and the narrative changes,
that changes the whole picture for the entire global economy, does it not?

Jim: It does, and that’s a very good point, Alex. There are two separate confidence boundaries.
You mentioned both, but I think it’s important to separate them, because one or the other
could be triggered first.

The first confidence boundary is the ability of the Fed to control the economy. People have this
blind faith in the Fed. I’ve talked to Fed governors, Fed chairs, and Fed staffers, and privately
they’ll say, “Yes, we can do a little bit with money supply by giving it a slight boost, but we can’t
really create jobs or steer the economy. The most we can do is try to create some conditions
under which job creation can thrive and inflation doesn’t knock it out of control.” The dual
mandate is to help with job creation and avoid inflation. They feel confident in their ability to
avoid inflation or at least squash it if it appears, but they have no confidence in their ability to
avoid deflation.

If you ask a central banker what keeps them up at night, they won’t say inflation. They’ll say,
“We hope inflation doesn’t happen, but if it does, we can squash it like a bug.” Paul Volcker
proved that in 1981. “What we worry about is deflation, because we don’t know how to turn
that around.”

I know how to turn it around, which is devalue the dollar against gold. Take gold to $10,000,
and you’ll get all the inflation you want, but they’re not ready to go there yet. That’s what FDR
did in 1933. He didn’t devalue the dollar against gold because he wanted to enrich holders of
gold. In fact, he stole all the gold before he did it. It was the ultimate inside trade. He did it
because he wanted inflation, and it worked. The economy grew robustly from 1933 to 1937.

If you date the Depression from 1929 to 1940 – those are the conventional dates, and I think
that’s a pretty good frame – it wasn’t down every year. We had a severe tactical recession from
1929 to 1933, and we had very good growth from 1933 to 1937 off a very low base. Then, a
second severe recession occurred in 1937 to 1938, a weak recovery in 1939, and then in 1940
the war spending kicked in, and that worked. The economy started growing very strongly again,
because we had the second World War.

Looking at that pattern, the growth from 1933 to 1937 was because of the dollar devaluation.
That did create inflation and get the economy moving. 1933 was a great year for the stock
market in the middle of the Great Depression. Bear in mind, you had lost 80% of your money,
so if you were in stocks, you were down 80% from the 1929 high, but if you happened to come
in and buy at the 1933 low, you had a great ride in ’33, ’34, and ’35. Those were great years for
the stock market.

The point is, the Fed says they don’t know how to get out of deflation, but they do. It’s just that
they don’t want to go there, because that would mean going back to a gold standard. If gold is
$10,000 an ounce, there’s your inflation, and then you’d have $400 oil, $100 silver, and $20
copper. All those other things would fall into line.

Getting back to pure monetary policy, there’s no central bank in the world that’s ready for a
gold standard yet except maybe for Elvira Nabiullina, head of the Central Bank of Russia, so
they’re not going to do that. In terms of monetary policy, no, they cannot get out of deflation.

They feel that they can control inflation as part of the dual mandate. The other part is the Fed
doesn’t have a hiring desk saying, “Come here, sign up, and get a job.” They don’t create jobs in
that sense. They try to create monetary conditions under which confidence builds, employers
hire people, and it’s very inexpensive to invest. For example, you can buy a new plant and hire
some workers. That’s the best they can do.

Yet, look at what they had to do to get there. Once interest rates hit zero in 2008, how did they
continue to stimulate the economy when they couldn’t cut interest rates? The answer was QE1,
QE2, and QE3 beginning in 2008 running through the end of 2014. Six years of QE took the Fed
balance sheet from $800 billion to $4.2 trillion.

The empirical research is starting to come in, and there are people who are very skeptical that it
did much for growth. It didn’t seem to do much harm to growth, but it didn’t particularly do a
lot of good, because we had the weakest recovery in history. What it did do was inflate asset
values. The stock market tripled, no question about that, and real estate got off the floor and
has nearly doubled since then, so it did have that effect of inflating asset prices, but not very
much wealth effect, and velocity was still declining. It didn’t do nearly as much as they thought
it did, but it did get asset prices up; however, that was probably creating a danger in and of

Here’s the point. Is there an invisible confidence boundary in terms of the Fed balance sheet
that if they cross it, people could lose all confidence in their ability to help the economy? The

answer is undoubtedly yes. The problem is, you don’t know where it is. It’s not $4.2 trillion,
because they got there. Is it $5 trillion? Maybe. Is it $6 trillion? You’re getting warm. Is it $8
trillion? Almost certainly south of that.

That’s where I part ways with these modern monetary theorists, the MMT crowd. They’re nice
people. I met a lot of them – people like Paul McCulley from PIMCO, Professor Stephanie Kelton,
advisor to the Bernie Sanders campaign, and others. Again, they are smart people and good
analysts, but they say in effect that there’s no limit; all you really need to do is have larger
deficits, borrow the money, have the Fed monetize the debt, and you could just do that as far
as the eye can see to get the economy going. I don’t believe that for a minute.

Now you’re invoking both boundaries. I mentioned one boundary, which is the Fed balance
sheet. The other boundary is, how big can the deficit be? Deficits are annual concepts that
cumulatively add up to the national debt which you judge as manageable or not manageable by
using the debt-to- GDP ratio. $20 trillion of debt doesn’t mean anything unless you compare it
to GDP. $21 trillion of debt in a $20 trillion economy is 105% ratio, but $21 trillion of debt in a
$42 trillion economy is only a 50% ratio. If we had a $42 trillion economy, I wouldn’t fret over
the debt, because there’s enough growth to pay for that debt. But that’s not the ratio; the ratio
is over 100%.

How do we know there’s a limit? Look at Greece, Spain, Portugal, Ireland, and a lot of countries.
Look at Mexico in 1994, Argentina in 2000, and the southern tier of Europe in 2010-2011. All
these countries hit their limit.

Alex: The same economists who say that the U.S. can run unlimited debts and deficits are going
to point out that all those examples are not the world’s reserve currency.

Jim: Right, and I would point out that the world reserve currency status is not a gift from
heaven or a permanent state of affairs. World reserve currency can change. People have
alternatives and can vote with their feet. They can wake up one day and say, “You know what,
dollar? Nice job, nice run since 1914, but I’m out of here. Get me some art, some silver, some
gold, some land, or maybe some euros.” There can be what economists call repugnance to the

People say you can have unlimited amounts of debt, because you can print unlimited amounts
of money, and that’s actually true. The U.S. will never default on this debt for that reason, but
that doesn’t mean the dollar retains its value. The oldest joke in banking is, if I owe you a
million dollars, I have a problem; if I owe you a billion dollars, you have a problem, because you
have to collect it from me.

Looking at China versus the United States where China holds a trillion dollars of U.S. Treasury
debt, I would say China has a problem, not the U.S. We could just print the money, ship it over
there, and say, “Here’s your trillion dollars. Good luck buying a loaf of bread, because we
inflated the currency.”

The U.S. will always pay its debt, because it can print its money; the Fed can always monetize it.
All of that is true, mechanically speaking, but it does not mean that you maintain confidence in
the dollar or that you don’t have hyperinflation or that you don’t end up like former Germany
or Argentina in 2000, which you probably would. That’s all clear.

The more interesting question is: Where is that boundary? I’ve had Fed governors tell me,
“Central banks don’t need capital,” but that’s a quote I disagree with. In my view, it’s one of the
reasons the Fed has started balance sheet normalization and quantitative tightening, which is
the opposite of quantitative easing. They are on the record articulating that they know they’re
close to that boundary, but they don’t know where it is any more than I do. They’re thinking
maybe $5 trillion or $6 trillion.

What if they had a recession, a liquidity crisis or had to cut rates back down to zero before they
got them to 3.5%, and they were only starting at 1.5%? They’d hit zero in no time. History
shows that you must cut interest rates 3% – 4% to get the U.S. out of a recession. I’m not
forecasting that we’ll go into a recession tomorrow, but it could happen. We’ll go into one
sooner or later, because expansion is nine years old. In a recession, they have to cut interest
rates 3% – 4% to get out of it, but they’re only at 1.5%, so how do they cut 3%? They can’t.
They’d get to zero pretty quickly, and then what would they do? They’d go to QE4.

This is where the concern comes in. Starting QE4 at $4.2 trillion is pushing that invisible
confidence boundary. They’d be rolling the dice on a complete loss of confidence in the Fed,
the Treasury, and the U.S. dollar. They are desperate to get the balance sheet back down to $2
trillion so they can expand it to $4 trillion again under QE4 or QE5. They’ll say, “We’ve already
been to $4.2 trillion and the world didn’t come to an end, so that feels okay. If we can get it
down to $2 trillion, we can go back to $4 trillion without the end of the world.” If they’re sitting
at $4 trillion and try to go to $6 trillion, that may be the end of the world, so they have said we
need to normalize things so we can do this again.

The bigger question I ask is, will they get to $2 trillion on the Fed balance sheet and 3% – 3.25%
in terms of Fed funds target rate before the next recession. Or, will they go into a recession
with not enough dry powder – rates not high enough and balance sheet not low enough to run
that playbook again.

It’s very likely, in my view, that the Fed will not get to where they want to be before the next
recession. They’ll be hitting these boundaries, and that will be a very dangerous time. You just
never know, though. As I said, people may wake up. I just explained it and gave you a three-
year playbook. Now, if I can think of it, other people can think of it. They may look at that three-
year playbook and say, “Why would I wait three years for the end of the world? I’ll get ready
now and go buy some gold.”

Alex: Something that occurred to me when you mentioned central banks not needing capital is,
how much of this hubris? That statement alone says a great deal about perhaps the way they’re

thinking right now. If it is really true that central banks don’t need capital, why do they all hold

Jim: Well, they do, and they don’t. I think there’s a little bit of hubris in it. I talked about this in
chapter six of my last book, The Road to Ruin. Be that as it may, at dinner with a small group
around the table, I was seated next to a member of the Board of Governors. There’s no need to
mention names, but I said to her, “It looks like the Fed is insolvent on a mark-to- market basis.”

The key phrase there is “mark-to- market.” They had a lot of ten-year notes, and interest rates
were going up at the time. The balance sheet wasn’t quite at the $4 trillion level but was getting
there. If you were running a hedge fund instead of a central bank, the losses on your ten-year
notes on a mark-to- market basis would’ve wiped out your capital.

Bear in mind, the Fed runs a $4.2 trillion balance sheet with about $50 billion of capital. In
round numbers, that’s over 100 to 1 leverage ratio. 100 to 1 looks like the worst hedge fund
you ever saw. That sounds like my old firm Long-Term Capital if you count the derivatives.

When you have 100 to 1 leverage, which the Fed does, it only takes a 1% change in your asset
value to wipe out your capital. One percent of 100 is one, and if you have 100 capital, it’s gone.
The Fed doesn’t mark-to- market; they carry those assets – they use historic cost accounting. If
they were using generally accepted accounting principles and had to mark-to- market, they
couldn’t do it.

I said to the Governor, “It looks like you’re insolvent on a mark-to- market basis.” She said, “No,
we’re not.” I said, “I think so.” She said, “No one’s done that enough.” I said, “I’ve done it, and I
think others have done it.” She sort of harrumphed and said, “Well, maybe …”

I kind of stared her down a little bit. She looked at me and realized that I knew what I was
talking about. She was just putting up a good front, so then she said, “Central banks don’t need
capital.” That was her answer. I said to her, “Thank you, Governor,” and thought to myself, “I
bet they do when confidence is in play.”

Banks don’t need any capital when no one is questioning their solvency or confidence. It’s only
when confidence is called into question that people take a look. “Oh, you’re insolvent? Well,
I’m out of here.”

That’s when we get into phrases like “black swan” and “tipping point.” To me, they’re
metaphorical, because they don’t really tell the tale. The technical term for this is hyper-
synchronicity which is when people’s adaptive behavior is affected by other people’s behavior.

For instance, with a small run on the bank, people see the line and say, “Oh, there’s a line at the
bank. I’m getting in line, because I don’t want to be the last guy to get my money out.” Next
thing you know, the line is around the block, the bank closes its doors, and they’re insolvent. It
didn’t start out that way, but a couple of people lining up because of a loss of confidence very
quickly leads to a longer line and then a shut-down.

The technical name for it is “phase transitions.” It’s what a physicist would say or a
mathematician would call hyper-synchronicity, but it’s the same thing. It basically means that
everyone wakes up, and confidence is gone. That is definitely a threat.

The Fed has never said, “We’re doing this because we’re worried you’re going to lose
confidence in us.” A banker should never use the word “confidence.” He should always take it
for granted. But, they have said, “We want to normalize the balance sheet in case we have to
do this again,” which means that they were not comfortable doing it again from the old level.
This means there is a boundary, but we just don’t know what it is.

Alex: That wraps up our time for today, Jim. What a great discussion that I think we should
explore more. The entire two vectors of confidence thing, as far as whether it’s government or
the Fed, may be in future discussions. Thanks so much for being with me today.

Jim: Thank you, Alex.

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

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles November 2017


Topics Include:

*Understanding golds utility value
*First Principles regarding gold
*How wealth is created
*Why wealth can also be viewed as energy
*Defining money
*How money is a form of storing energy (wealth)
*How investments also store, but also leverage energy (wealth)
*Basic energy inputs which create a good or service that the market will pay for can all be calculated mathematically
*Gold is the only form of money or investment that is indestructible and completely immune to the forces of entropy
*How confidence and agreement is a key component of money
*Summary of theories of intrinsic value (total inputs), Marxist surplus labor theory, Menger’s subjective value theory
*Subjective value leads us back to confidence as a key component of money
*Why central banks are accumulating and stockpiling gold
*Greenspan on gold
*How to create your own personal gold standard
*Australia’s institutional market warming to gold
*Probability of Fed interest rate hike in December update
*Power consolidation in the House of Saud


Listen to the original audio of the podcast here

The Gold Chronicles: November 2017 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 I have with me today the brilliant Mr. Jim Rickards. Welcome, Jim.

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

Alex:  Today we’re doing another addition of our Gold Chronicles podcast. In our last podcast, we covered a wide range of topics from institutional allocations in gold to an analysis of how U.S. warfighting policymakers are looking at the North Korea situation, and much more. If you want to hear any of our previous podcasts, the entire archive is available at

Let’s dive into our topics. First, as we often do, will be a discussion on gold. Some of this material may seem a little remedial to some, but a lot of people ask me about these foundational concepts. I continue to find that in the financial professional space, gold’s utility value is widely misunderstood or isn’t understood at all. For purposes of hitting on some of the basic education concepts, let’s break it down into first principles basics.

When I say first principles, that is a method of reasoning where we’re going to start with what we absolutely know to be true. We start with the facts and go from there instead of theorizing about gold being a good investment or a gold standard or anything like that. We’re just going to start with what we absolutely know.

We’ll begin with how wealth is created at its most basic level. A person can expend their labor, i.e., they invest energy. From this, they’re creating either a type of good or service that has value in the marketplace and some entity is willing to buy. A person creates wealth or energy by doing this above and beyond what is required for basic needs. In other words, anything in excess of how we pay for where we live, what we eat, the clothes on our back – basic necessities to survive – that is wealth. One way to look at it is as a surplus of energy. That’s the first part.

Now that we’ve created some wealth, now that we have a little bit of surplus or excess energy, the second part is, what do we do with that surplus or excess energy? You can either invest it or store it in money.

What is money? This is all super remedial, but bear with me. We’re getting to the good stuff here in just a minute. Going back to the basic economics textbooks, money is essentially a few different things – a medium of exchange, a unit of measure, and a way to store value. That last one is what I mainly want to talk about for this segment. Money is a storehouse of value or energy, and this is where gold’s utility value comes into play.

Gold stores value, and that is in fact its utility value. Not only does it store value, it’s the way it does it. Gold stores energy in a form that’s basically indestructible, and that’s the key. I’ll say it again; gold’s utility value is the fact that it stores energy in a form that’s indestructible. Unlike anything else you can invest or store money in, gold doesn’t rely on any external force for that to continue to be true over time. It’s sort of like a battery with no expiration date.

Jim, what are your thoughts on these first principle topics I’ve just talked about?

Jim:  I certainly agree with your articulation of that, Alex. As you know, I covered a lot of the same ground, not everything you just mentioned, but some of the same ground in chapter 10 of my first book, Currency Wars, where I advanced the concept that what you call the battery theory, which I think is a good one, is that money is stored energy. I think we need to separate two things:

  • What is money or how can we think about the definition of money?
  • What is gold’s utility as money?

Obviously, there are many forms of money other than gold. I happen to think gold is a particularly good form of money that has been around for a long time, and I expect it will reemerge in the near future as a preferred form of money. Let’s talk about money first and then come to gold and its utility.

I think money is stored energy. The three things you mentioned are the classic economist definition of money. Economists don’t agree on much, they like to disagree, but this is one of the things they all agree on. I’ve never heard too much dissent. There’s a three-part definition of money:

  • One is store value, which you mentioned.
  • Another one is unit of account, just a way of counting things, “How much do we make? How much do we have?” etc.
  • The other one is a medium of exchange, meaning we can use it to get other things.

Of those three, the unit of account is probably the least important. It’s not unimportant, but anything could be a unit of account such as soybeans, jellybeans, baseball cards or Bitcoin for that matter. Bitcoin is a unit of account, it’s how many Bitcoins you have, and so forth.

Unit of account is an easy one, but medium of exchange and store value are really the heart of it and much more difficult. Medium of exchange really depends on confidence. I lecture quite a bit around the world on money, and one of my slide presentations shows ten forms of money. You’ll see gold and silver, but also digital, credit card, Bitcoin, beads, feathers, and shells. I make the point that all of those things have been money at one time or another, and some of them still are. People will say, “Well, it’s not backed by anything.” My point is, yes, it is. It’s all backed by one thing, and that is confidence.

Forget about intrinsic value and what’s behind it, we’ll talk about that in a second. It’s backed by confidence. Paul Volcker said something I completely agree with, and it goes like this:

  • I have something I think is money.
  • You also think it is money.
  • We both think that somebody else over there thinks it’s money.
  • I give it to you for goods or services.
  • You’re confident that you can give it to somebody else for goods or services.
  • They’re confident that if they take it, they’ll be able to spend it as well.

Again, it could be feathers as it has been in certain indigenous tribes around the world. Maybe it was a small community and it didn’t last too long, but there was a time when clamshells and feathers were money.

It’s all based on confidence. The question is, how do you gain confidence, and what could destroy it? That’s how I think about money. When I think about gold, it has gained confidence over thousands of years and is almost impossible to destroy.

I have some grandchildren in the five- to seven-year-old range. They’re great because they’re curious and inquisitive about everything. If I show them a gold coin, they have an instinctive, natural, “Oh yes, that’s…” They just get it. Picasso said if we grew up painting like children, we’d all be like Picasso. I think if a lot of our PhD monetary economists could understand the intuitive appeal of gold a little bit better, it would have a greater role.

Gold is a very good form of money in the sense that it maintains confidence. Right now, people have confidence in the U.S. dollar, but we’ve seen so-called fiat currencies come and go. I don’t know who’s that confident in Bitcoin. It’s an interesting speculation for a lot of people, but I’m not sure it has much confidence behind it when push comes to shove.

The third thing we mentioned is store of value, and that gets to your battery metaphor. I view it as a form of stored energy, and that’s important, because you can then use physics and dynamic systems analysis, energy equations, and energy mathematics to begin to understand money.

How do you get money? One way is by working. What do you do when you work? You don’t have to be out digging pipeline ditches in the winter. You can be a writer, a lawyer or any white-collar profession, but you’re spending time, effort, and energy whether it’s brainpower, physical power, gas in your car to get to work or electric lights in the office. Whatever it is, you’re expending energy, and they give you money, whether it’s fees, royalties, a paycheck or whatever it is.

Now you have money. You’ve in effect stored up the energy that you exerted in acquiring it. You can then release the energy by hiring someone to work for you. To get your house painted, you hire the painter, the painter comes in and works hard, and you give that person the money. The money that you have has stored up the energy you used to acquire it, and then you can release energy from third parties by spending or investing it.

It fits that battery metaphor. Energy comes from somewhere whether it’s burning oil, natural gas or the sun, it goes into a battery, it’s stored there, and then it’s released later on to run a light bulb or power a tool, whatever it may be. That’s more than a metaphor, it’s actually an exact parallel.

The store value is it stores up the energy spent acquiring it, and it can release energy for your own goods and services. The medium of exchange, basically spending it, depends on confidence, and the unit of account is a little less important, but yes, you can use it to account with.

With all those things said, what is the utility of gold as a form of money compared to other forms of money? Here, we get into the economic history of value. David Ricardo was one of the first – if not the first – economists in the early 19th century to really wrestle with the theoretical concept of value.

There have been big markets since ancient Greece and Rome, and for that matter in the Bronze Age, so markets are nothing new. People have been exchanging goods and value all along, but Ricardo wanted to understand it on a theoretical level. He said the way you value something is to figure out all the inputs. What were the raw materials? What was the energy used to acquire it? How much labor was involved, etc.? Add them all up, and that was the value. That’s the theory of intrinsic value. You hear that a lot when people are talking about money, saying it has no intrinsic value. Let me come back to that, but Ricardo was the author of this theory of intrinsic value.

About 30 years later, Karl Marx came along and agreed with Ricardo but believed that intrinsic value comes from labor and capital. The capitalists owned what he called the means of production (the factory, bank, railroad or whatever it might be), and labor worked for them to receive a wage.

Marx’s critique was that capital captures the surplus value of labor. In other words, labor doesn’t get its fair share; the capitalist gets more than his fair share. That surplus labor theory is his critique of capitalism. Of course, that led to communism, so basically, Marx took Ricardo’s theory of value, which was intrinsic value, and created the surplus labor theory of value, but it was still relying on intrinsic value.

Now come forward another 30 years, and we get to University of Vienna, 1870s, and Carl Menger, the father of Austrian economics. He said, “Nonsense. The whole intrinsic theory/surplus labor theory of value is all nonsense.” He created what’s called the subjective theory of value.

Menger said something is worth basically what other people think it’s worth. That’s a subjective thing that can vary over time and was the basis for markets and price discovery. Like I said, we’ve had markets throughout the history of civilization, but again, the theoretical basis for the role of markets, the benefit of capitalism and what we call price discovery, is that it allows people to explore bids, offers, and preference curves, and subjectively value things.

That’s been the prevailing view on economics ever since. Whether you’re a Keynesian or in the newer Keynesian consensus or a monetarist or an Austrian – all schools of economics – we now agree that Menger’s subjective theory of value is the right way to think about it. When people say a currency doesn’t have intrinsic value, I say, “Who cares? So what?” I compliment them on their firm grasp of Marxian economics, but I say it’s a completely irrelevant concept that’s been discarded as part of the theory of economic history. It plays no role in how we think about value each day, and the subjective value really prevails.

This brings us into the 21st century. When we talk about subjective value, we’re back to the first thing I mentioned, which is confidence. Currencies rise and fall because you lose confidence in the issuer, you lose confidence in the central bank or you gain confidence by its performance in a crisis.

This is one of my critiques of Bitcoin. I get beaten up on social media and Twitter all day long because of my critique of Bitcoin. People say, “You’re a Neanderthal, you’re a dinosaur, you don’t understand technology.” In my snarkier moments, I remind them that I was writing code before they were born, so I understand the code and the technology perfectly well. I’ve read the technical papers, and I’ve actually been at the IBM SLA private laboratories where they’re working on something that’s going to blow existing forms of blockchain away. It’s called Hyperledger Fabric version 1.0. It was released last summer and is now being adopted by the Linux Foundation

Putting that aside, I get the technology, but I wonder whether the techies understand money in the terms we’re talking about right now. One of the things I point out is that Bitcoin has never had a stress test. It was created in 2009 after the last crisis. I’ve lived through a series of crises, whether it’s the mid-’80s emerging markets crisis, the ‘87 crash down 22% in one day, the Mexican Tequila Crisis in ‘94, certainly the LTCM crisis in ‘97-’98, the dotcom crash, the mortgage crisis of ‘07, and the financial panic of ‘08.

When you see enough of these things, you get a feel for them and see them coming. Bitcoin hasn’t seen any of that, yet it’s had a lot of adoption from millennials. I love millennials, I have three millennial children. I think they’re some of the brightest, most creative people on earth, but we all know what we know – let me put it that way. If you’ve never lived through a panic as an adult or an investor or someone with something to lose, you’re not acquainted with that sick feeling in the pit of your stomach when you’re watching markets go down and they seem to have no bottom.

Bitcoin has never been through a panic, a recession or a liquidity crisis. I’ll leave aside all the many other technical difficulties, because we don’t have time today to go through them, but that’s one thing in particular I would caution the Bitcoin fans. You’re dealing with something where confidence in it has never been tested. All the other forms of money we’re discussing, despite their strengths and weaknesses, have been stress tested one way or another.

When you take everything we’ve just discussed, gold has enormous utility for the reason you mentioned. I’ve studied the amazing physical, chemical, and atomic properties of gold. First of all, it’s an element, atomic number 79. It’s practically indestructible. You can blow it up with high explosives, but even then, all you do is spread the atoms around, they fall to the ground, and someone will dig it up 10,000 years from now. You can’t actually destroy it.

Alex:  Right, gold molecules are still gold molecules, just in smaller pieces.

Jim:  Exactly. As you know in the gold refining process, historically they’ve used mercury, and now they use cyanide. The reason they use cyanide is because it dissolves everything except the gold. Through the milling process, you get a fine powder containing gold and other stuff. That’s reduced to a liquid, you pour in some cyanide, all the other stuff dissolves, and there’s the gold. Gold’s indestructibility makes it possible to extract it from the ore.

Gold has more than stood the test of time, and people have confidence in it. I say it’s not a form of money today in the sense that central banks and finance ministries hate it. You won’t find any international monetary elites who have a kind word to say about gold, but then I say, “If that’s true, why does the IMF have 1000 tons? Why does the United States have 8000 tons? Why does Germany have 3000 tons? Why have Russia and China tripled their gold reserves in the last ten years – China probably more so – if it has no utility as money?”

The answer is, of course it has utility, but the elites don’t want to talk about it. They want to scoop up the gold for themselves and leave everyday citizens and investors out in the cold.

Alex:  Yes, they hate it and they don’t hate it. It comes down to, “Watch what they do and not what they say.” They’re saying on one hand that it’s useless – think back to Bernanke’s testimony before the congressional panel when he was basically saying we keep it because of tradition – but at the same time, the facts are, central banks around the world are stockpiling it. They’re not getting rid of it.

Jim:  If I had a printing press that could print money and I had a monopoly position such as the Federal Reserve, I probably wouldn’t want people to look at the competition either. We’re not in that position, so we can be objective and analytical. Yes, do as I do, not as I say.

Interestingly, the one global leader who has been candid about this is Vladimir Putin who is acquiring gold hand over fist. Russia is an interesting case study. It’s a petro state, I think the number one oil exporter in the world. In 2014, the price of oil collapsed. That continued through 2015 into 2016 before it stabilized, and Russia’s reserve position crashed along with it.

I’ll use round numbers. Their reserve position went from approximately $500 billion to a little over $300 billion. They lost 40% of their reserves or $200 billion.  That entire time, they not only did not sell an ounce of gold, they continued to acquire it at a rate of 5 – 10 and sometimes as many as 30 tons a month, which you know is a lot of gold.

They were selling treasuries, euros, German debt, and whatever they needed to create liquidity in Russia and deal with their balance and payment outflows. They never sold gold, and they kept buying more. That was Elvira Nabiullina who is the head of the central bank of Russia and my favorite central banker. It was clearly greenlighted by Putin; that would not have been happening if Putin didn’t want it to. Despite the stress, they continued to buy gold, so clearly, it is a monetary asset.

The other case study is our friend Alan Greenspan. I think a lot of our listeners know that going back to the 1960s and early ‘70s, Greenspan was a strong, outspoken advocate for a gold standard, gold as money. He was a bit of an acolyte of Ayn Rand at the time, and since retiring as head of the central bank and head of the Fed in 2007, he’s been out on the speaking circuit saying kind things about gold. He occasionally shows up at gold conferences where I’m sometimes invited to speak, etc.

I said, “That’s interesting. Before you were a central banker, you loved gold. Since you retired as a central banker, you loved gold. It’s only when you put on your central banker clothes…” But even then, when all is said and done, you won’t really get this in Sebastian Mallaby’s biography of Greenspan. I like Sebastian’s kind of definitive biography, but you won’t get this in his book. If you look at the price of gold during Greenspan’s tenure as chairman of the Fed, it traded in a narrow range.

It started to spike up after ‘02, but that’s because of Greenspan’s famous episode between ‘02 and ’07 when he kept rates too low for too long. He did that because he was worried about deflation, and gold, as we know, had a fabulous run in those years. If you leave that episode aside and look at the ‘80s and ‘90s, gold traded in a pretty narrow range. It was between $200 – $400 an ounce with ups and downs, but did not break out to the upside or the downside outside of that range. It’s almost as if Greenspan was on a shadow gold standard saying, “If gold gets a little pricy, maybe I’ll tighten a bit. And if it gets a little low, maybe I’ll ease off a bit.”

My view is that he was operating on a shadow gold standard even when he was Fed Chair, but he just couldn’t say so.

Alex:  He understood it, right? I’ve got his quote right here in front of me. Fed Chairman Greenspan wrote in his article Gold and Economic Freedom:

“Gold and economic freedom are inseparable. In the absence of the gold standard, there’s no way to protect savings from confiscation through inflation. Gold stands as the protector of property rights. If one grasps this, one has no difficulty in understanding the status antagonism towards the gold standard.”

Jim:  I absolutely agree. That’s a brilliant and succinct statement. People lament the fact that we’re not on a gold standard today, and my answer is, “What are you waiting for? Put yourself on a personal gold standard. Why are you waiting for central banks in countries to reinstitute a gold standard or use gold as a reference for a monetary policy?” You can take dollars, euros or yen today and go buy all the gold or whatever allocation you want. I call that putting yourself on a personal gold standard. You don’t have to wait for governments to lead the way.

Alex:  Yes, very much so.

One more quick thing on the uniqueness and utility value of gold, then we’ll move on to our next topic. We were talking about how gold really doesn’t rely on any external force for it to continue to have value, basically because it’s indestructible. As long as humans agree that gold has value, it completely resists entropy and is indestructible. Something I was thinking of is this little Twitter exchange the other day when somebody tweeted at you, “Jim, AI systems won’t be using gold,” and you quipped back, “Gold won’t be using the power grid.”

I thought that was hilarious and precisely the point. I would even take it a step further than saying it’s not just good money. Let’s do a thought experiment. Here’s a little challenge for you. Can you think of any form of storing wealth, whether it be an investment in stocks, bonds, companies, real estate, Bitcoin or anything, that is not subject to entropy over time?

What I mean by entropy is everything else requires human effort and interaction in some way or another to maintain. Bitcoin requires electricity, the Internet, computers. Companies and fiat-issued currencies require maintenance. All of this requires human will and interaction to resist the forces of entropy, otherwise they slowly self-destruct over time. The only thing that doesn’t do that as far as I know is gold. Can you think of anything, Jim, to invest in that’s not subject to entropy over time?

Jim:  No. In fact I agree with that. Even silver. I’m a friend of silver and have it alongside of gold, because it has some form of utility. Think about a real crisis maybe where Kim Jong-Un has detonated an electromagnetic pulse weapon in the high atmosphere of the United States or the power grid goes down. The power grid could go down for reasons that have nothing to do with North Korea or EMP weapons as we saw in 2003. In that world, the ATMs don’t work, your credit and debit cards don’t work, you can’t do online banking payment systems, you can’t even fill up your car with gasoline because gasoline pumps require electricity, etc.

Civilization has a very thin veneer and lasts about three days. Three days is when you run out of food and water, and then society quickly devolves into looters and vigilantes as we’ve seen. I’m not talking about the Wild West, because we’ve seen this in the days after Katrina, in Puerto Rico very recently, and really all over the world. Gold will be money, there is no question about that. If you’re out to get a couple days’ groceries, an ounce of gold might be a year’s worth of groceries. If you don’t want to sit there with a file and chip off a little piece, a one-ounce silver coin is probably the right amount to go get your family a couple days’ worth of groceries. Some say, “People won’t accept it,” but I say, “Of course they will. Are you kidding?”

One of the ironies of the Puerto Rico tragedy after Hurricane Maria was that a lot of the shelves were stripped bare because people had bought stuff in advance, but there were some places that had stuff on the shelves –  water and food – but nobody had any money. Like I said, the ATMs didn’t work.

The Federal Reserve system is 12 regions, each of which have a certain piece of territory. Boston is the first district, and Puerto Rico is under the second district, which is the Federal Reserve Bank of New York. Bill Dudley, as President of the New York Fed, had responsibility for Puerto Rico, so he chartered planes and flew pallets of bills, like $100 bills, to Puerto Rico as fast as possible. They passed them out through tellers and loaded up the ATMs when the power came back, because they were literally out of money. Again, there were stores with provisions that people desperately needed, yet they literally didn’t have a way to pay because credit and debit cards didn’t work, etc.

I dare say, if you walked in with five ounces of silver and said, “Give me $100 worth” of whatever, that merchant would have gladly taken it. In even more dire circumstances, even more so. Having said that, silver is not as scarce or robust gold. Gold is the best, and so I think you’re absolutely right about the uniqueness of gold.

Alex:  Yes, and silver still interacts with oxygen, it oxidizes over time.

Jim:  Yes, which gold doesn’t. Gold is the most inert thing anybody can think of.

By the way, I just returned a couple of days ago from an extended trip in Australia where I did about 20 one-on-one consultations. It was a pretty grueling three days meeting with six or seven a day of the top hedge funds and institutional investors in Australia. I met with about half of the money in Australia in terms of big banks and insurance companies. I can’t mention the names of clients, but you get the point.

I detected kind of a warming up to gold, and you don’t usually hear that in the institutional investor world. Unfortunately, I can’t get a pulse in the United States, because Americans are going to be the last to know. Russia and China are easy. They get gold, they’re stockpiling it. The same is true in Europe, Austria, and elsewhere around the world. I think people have a good understanding of gold, but definitely not true in the United States or Canada.

I was finding in Australia people who might not have even wanted to talk about it before. In my consultations, I would cover U.S. politics and fiscal policy. When I go abroad and people say, “We really don’t understand U.S. politics,” I say, “Well, don’t feel bad, neither do Americans.” I take them through my main topics, and then people say, “Talk to me about gold.” I would, and I was definitely detecting some interest, so that’s another good sign.

Alex:  Very good.

On to our next topic. Jim, in our last podcast, you placed the likelihood of the Fed raising interest rates in December at about 20%. I think that call surprised a lot of people. Has your view on this changed since the last time we discussed it? And if so, why, or why not?

Jim:  I’m hanging in there, but let’s be fair to the other side. I’m no stranger to out-of-consensus forecasts, as you know. I was running around between March and June 2016 saying that the UK would leave the EU at a time when that was considered extremely unlikely, and that happened. I was running around in October 2016 saying Trump would win, and he did. The great thing about doing TV is you have the video tape, so if someone says, “You never said that,” here’s the tape, have a look.

Alex:  I remember that.

Jim:  Thank you. Beginning in December 2016, I said that the Fed would raise interest rates in March 2017 at a time when the market gave it about a 30% probability. That 30% probability prevailed all through January and February. I was saying they would raise, the market was saying they wouldn’t. The market didn’t believe the Fed, they were calling it a bluff, etc.

Suddenly, over the course of about three days at the end of February 2017, the Fed started to panic. They were like, “Hey, we know we’re going to raise rates, but the market doesn’t believe us, so we have to signal.” Yellen, Dudley, Fisher, and Brainard, the four horsemen, went out and gave speeches that were incredibly blunt. They said, “Wake up, we’re going to raise rates.” The market got the message, and the probability went from 30% to 90% in three trading dates and converged on my forecast. You can see this on a chart, it’s one of those hockey stick charts.

As I say, I’m no stranger to being out of consensus, and I’m not uncomfortable with it if I have confidence in the model. Having said that, I’ve never been more out of consensus, because I’m giving it a low probability. Maybe I’ve increased it from 20% to 30%, but I’m still way below 50%. The market is actually at 100%, not 90% or 95%. The market has 100% chance of the Fed’s raising rates in December.

Let’s see how it plays out, but it does have a lot of significance. I won’t belabor it, but let me just spend a minute on the analysis. My baseline scenario is that the Fed is on a path to raise rates four times a year. Twenty-five basis points every March, June, September, and December like clockwork through 2019 to get rates to 3.25%. They’re doing it not because the economy is strong or because there’s that much inflation on the horizon, they’re doing it to raise rates so they can be ready to cut them again in the next recession. The finesse is, can they do that without actually causing the recession they’re trying to cure?

I realize I ran through that quickly, but people can play it twice. That’s the big picture, the scenario. However, there are three pause factors. Many quarters – September 2017 was one of them, and the first seven meetings in 2016 were another example – there are many times when the Fed does not raise rates. So what are the conditions under which they do not raise rates despite the baseline scenario that they will?

First is a disorderly market decline. That’s what happened in January 2016 when the market dropped 10%. The Fed did not hike in March and June of that year in response to that. The second one is if job creation dries up. That’s not much of a factor, because job creation has been strong. It has come down from 250,000 a month to 100,000 a month, but that’s still more than enough to absorb new entrants into the labor force, and unemployment is 4.1%. As far as that’s concerned, it’s mission accomplished. The Fed’s not even thinking about employment except as it relates to the other part of the dual mandate, which is price stability. So market disruption is one, but it’s not present today, and evaporation of job creation is another, but that’s not present either.

The third pause factor that is present is disinflation. The Fed has a goal of 2% inflation as measured using very specific metrics, which is personal consumption expenditure deflator core year-over-year. I realize that’s a mouthful, but they’re all important. It’s PCE, not PPI or CPI, but PCE. It’s specifically core, meaning it excludes food and energy, and it’s year-over-year not month-over-month or quarter-over-quarter. The Fed told us that, so that’s not guesswork.

They have a 2% target. Last December and January, that number came in at 1.9, which is why I said they would raise rates in March even though the market didn’t believe them. Since then, it’s been flat or down nine months in a row. It’s come down .6% and is currently at 1.3%. That was the most recent reading. This is a flashing red light to the Fed saying, “Hey, Fed, you’re moving substantially and rapidly away from your goal. You’re causing the problem with your rate hikes and strong dollar which is deflationary.” There are a lot of voices saying, “Don’t raise rates.” Neel Kashkari, President of the Minneapolis Fed, Charlie Evans, President of the Chicago Fed, and Lael Brainard, who is on the Board of Governors, are all no votes coming up.

I didn’t break into a safe and steal any secret plans here. Based on that and the most recent readings and sticking to my model, I would say the Fed will not raise rates in December. Having said that, there’s one more reading before the meeting. The meeting is December 13th, and the next and final pre-meeting PCE core year-over-year comes out November 30th. For our listeners, 8:30 a.m. Eastern Time, November 30th, check it out and see what the number is. I’m a good Bayesian, so if I get new data, I’ll plug it into the equation. If the probability goes up, it goes up. I’m not going to ignore the evidence.

If it’s hot – and by that I mean 1.6% – 1.7% – that will first of all be close to two. Secondly, it will validate Yellen’s belief that all this other disinflation was transitory. At that point, I’ll join the crowd, throw in the towel, and say, “Okay, they’re going to raise rates.” But that’s not what I expect. If it’s weak, meaning 1.4% or certainly 1.3% or less, that’s going to be the last nail in the coffin, and my expectation is the Fed will not raise rates.

From a market perspective, this sets up a very interesting trading opportunity that I call an asymmetric trade. An asymmetric trade is when a certain outcome is completely priced. The market is not sitting there saying, “50-50, we don’t know, it could go either way.” The market expectation is so high that the event is completely priced into markets, which means that if it happens, nothing happens. If something is priced in and then happens, nothing else happens to the market, because you already priced it. That’s what markets are supposed to do, they’re supposed to discount the future.

On the other hand, if it doesn’t happen, you have a violent, sudden repricing as market expectations get adjusted. The beauty of that is, “Heads I win, tails I don’t lose,” meaning it’s not that you’re going to make money both ways, but you could make a lot of money one way and not lose or get hurt the other way. So, what’s priced in right now? As I said, there is a 100% expectation the Fed is going to raise rates on December 13th. What does that mean? It means strong dollar, weak euro, weak yen, weak gold prices, higher bond yields, and lower treasury prices.

What happens if the Fed doesn’t raise rates? What happens if that PCE number is weak, meaning 1.3% or less? What happens if my analysis if correct and they don’t raise rates? Suddenly, every one of those trades is going to reverse. Gold is going to skyrocket, the euro is going to go from 1.17 to 1.20, yen is going to go from 1.12 to 1.10, gold is going to go from 1270 to 1300 plus, and the dollar index is going to come down. All these markets are going to – probably within hours – adjust to this new reality of the Fed not being able to raise rates.

I wrote a column the other day and said if you were on Mars last week, you didn’t miss anything. Gold just went sideways and has been a little bit boring. There was a little activity over the course of the day Thursday when it ran up and then fell off a cliff with one of those paper gold dumps, but last week it started and ended the week around 1275. Right now, it’s a little bit higher than that, but not much. This is what I mean by gold is not doing anything right now, and neither is the dollar index or the euro. They’re all just sitting there waiting for Guido Menzio or more accurately waiting for Janet Yellen and the FOMC. They priced in an outcome. They can’t do it anymore, because they priced in a 100% chance, so they’re just going to sit there and go sideways absent some geopolitical shock. Now if that inflation number is weak and the Fed doesn’t raise rates, then it’s going to be a wild couple of days in early December.

Alex:  We are bumping up against our time limit, and there is one other thing I wanted to quickly cover. Moving into the realm of geopolitics, we usually like to talk about something that’s going on around the world, and more importantly how it affects global economics and markets. The most recent thing since the last time we talked, Jim, is the chaos going on right now over in the House of Saud. It appears to be chaos from the outside, but maybe it’s all very well under control.

About a week ago, we started hearing news of sweeping changes taking place in Saudi Arabia. Senior ministers were being fired, dozens of princes and other wealthy businessmen were being arrested, and assets from all of these people were being frozen. I saw one estimate as high as $800 billion USD’s worth of assets have been frozen.

Apparently, only hours before all of this started happening, King Salman decreed the creation of a new anti-corruption committee headed by the Crown Prince, heir apparent, Mohammad bin Salman. MBS is what a lot of people refer to him as for short. This committee has the power to investigate, arrest, ban people from travelling, and freeze assets of anyone it deems corrupt.

One article I read claimed that the purge against other members of the royal family is unprecedented in the kingdom’s modern history, and that family unity, which guaranteed the stability of the state since its foundation, has been shattered. Jim, what are your thoughts on this? What does this mean for regional politics, and how does that then go on to affect the rest of the world?

Jim:  Alex, that’s a very good, succinct summary. This is one of those topics we could spend hours on or could write a book on it. We don’t have that much time, but I’ll try to do the short version of it. Since the founding of the kingdom under King Abdulaziz, he had about 75 children by multiple wives. Forget the sisters, because women don’t play a role in their culture – unfortunate, but that’s just the case. Among the 30 or so brothers, who were mostly half-brothers, they had a succession.

The succession of the kingship in Saudi Arabia did not go from father to son but from brother to brother. The problem was most of them died or at this point they’re in their 80s and not mentally or physically fit, etc. They’re almost to the point where there are only a handful of possible kings, and it has to go to the next generation.

That begs the question, which son of which half-brother is going to be the successor versus some other son of some other half-brother? That jockeying, that sort of house of cards if you will, has been playing out for decades. It’s getting very intense now because of the demographics, because they’re all going to die, and so they have to do something.

It’s been decided by King Salman that his son, Mohammad bin Salman (bin means son of, so Mohammad, son of Salman), is going to be the new king, and they gave him the title of Crown Prince as the second in line. That doesn’t sit well with some of the other princes and their children. They also have all these kingdoms where you find multiple armies. There’s the regular army, then there’s like a national guard which is an internal army, then there’s a police force which is a paramilitary, and then there are personal bodyguards.

Who’s in charge of which? They not only arrested a lot of these princes, but one prince’s bodyguards decided to fight it out. They got in a firefight, and the son of former King Fahd was killed. It’s getting nasty over there. And of course, ice-nine, my theory of freezing accounts when you need to control a situation, is operative as it was in Cyprus, Greece, Catalonia, and a lot of other places around the world.

To cut to the chase, this is a pattern we’ve seen before in Putin’s Russia and Xi Jinping’s China, which is when you want to assert your power, you use the judicial system. This is not objective or fair at all, but it’s under your control to arrest your enemies on grounds of corruption.

The thing you must understand is that they’re all corrupt. Everybody in Russia, China, and Saudi Arabia is corrupt. That’s not the point. The point is, are you with me or against me? If you’re with me, I will ignore your corruption up to a point. If you’re against me, I will use the corruption to round you up and put you in jail.

The best statement of that was from Lavrentiy Beria who was the head of the NKVD secret police under Stalin. His motto was, “Show me the man, I’ll give you the crime,” meaning, as John Lennon said, “Everybody’s got something to hide except for me and my monkey.” You can pretty much bring up anybody on charges as Paul Manafort found out the hard way, so you use these corruption justice tools as a cloak to round up your enemies and disable them.

Will there be pushback? I think MBS may have pulled this off sufficiently fast and callouslesly to have done it successfully.

I was in Riyadh for a few days, and when I left, it was like getting out of jail. The Ritz Carlton there is probably the fanciest Ritz Carlton in the world, and they’ve turned it into the world’s most luxurious prison, because they needed a place to put all these princes. They couldn’t put them in regular jail, so they surrounded the Ritz Carlton with guards, put paramilitary men in black in the lobby, and put all the princes in the suites upstairs under house arrest. I guess if you had to be under house arrest, there are worse places to be.

Let’s see how it plays out, but he’s moved quickly and ruthlessly. That’s the way you have to do it. You can’t have half measures, because you’d give the other side time to rally their forces and push back. Meanwhile, we see escalating tensions with Iran, and Saudi Arabia has some cards to play on Lebanon. I think the best thing we can leave our listeners with is that this is not over, and it’s part of what’s giving a little bit of a lift to the price of oil.

Alex:  We’re out of time. Jim, once again, I greatly appreciate the discussion with you. It’s been invigorating. Until next time, thanks a lot.

Jim:  Thank you, Alex.


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The Gold Chronicles: November 2017 podcast with Jim Rickards and Alex Stanczyk


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

Jim Rickards and Alex Stanczyk, The Gold Chronicles October 2017


Topics Include:

*Bullion Bank Scotia Mocatta
*How the Chinese are assembling strategic LBMA and Gold industry focal points of control
*Allianz Chief Economic Advisor Mohamed El-Erian on gold
*Why Central banks cannot control market volatility forever, and gold will return as a key safe haven hedge
*Currency Market Volatility
*Typical institutional portfolio allocations in gold
*Why increased weighting of institutional portfolios to gold could have an impact on USD gold price
*Janet Yellen’s Legacy
*20pct Chance of a Fed Rate Hike in December, market is currently pricing in an 80pct chance of a rate hike
*How the Fed is making decisions based on broken models
*Next pick for Federal Reserve Chairman
*Analysis of 6 hrs spent with HR McMaster, US National Security Advisor to the President, and Mike Pompeo, Director of the CIA on topics of US National Security
*Determining probability of a kinetic war with North Korea
*Key quotes “Prevent…by military means if necessary”, “last chance to avoid severe consequences”, “we are running out of time”, “accept and deter, is unacceptable”
*20pct Probability of Regime change in NK, 20pct Kim Jong-Un backs down, 60pct United States goes to war
*Inside view of Trump – good or bad decision maker

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The Gold Chronicles: October 2017 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:  This is Alex Stanczyk, and I have with me today the brilliant Mr. Jim Rickards. Jim, welcome.

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

Alex:  In our last podcast, we covered a lot of different topics. We talked about everything from technical mountain climbing to training with Navy SEALs as well as the mindset required when making assessment of counterparty risk. For those who are interested, you may access our entire archive of podcasts on our website at

Let’s dive into our topics here. The first one we want to talk a little bit about is gold. There’s an interesting bit of gold industry news this morning. It turns out that Scotiabank is in the process of selling its bullion bank, ScotiaMocatta.

For those of you not familiar with it, ScotiaMocatta is a market-making member of the LBMA. There are five full market makers of the LBMA that include the usual suspects such as Citibank, Goldman Sachs, J.P. Morgan, HSBC and UBS AG.

There are another eight called two-way market makers of which ScotiaMocatta is one. These bullion banks handle OTC trades in gold valued into the trillions of dollars. ScotiaMocatta traces its origins all the way back to one of the first bullion banks. It was founded by a gentleman named Moses Mocatta in 1671.

The rumor floating around is that the Chinese are being courted for the deal. I found it interesting to note this morning that Zero Hedge called the Chinese the world’s dumbest money because of this. To me, however, it lines up with an ongoing, long-term pattern of Chinese state-run banks buying LBMA strategic assets.

For example, they bought some of the largest vaults in New York and more of them in London. If they buy ScotiaMocatta, it’s going to be the second market-making member of the LBMA controlled by the Chinese. What do you think about all that, Jim?

Jim:  I think it’s a very big deal and agree with you in terms of the implications. I hadn’t seen that particular news yet this morning, but I’m familiar with the LBMA, the institutions you mentioned, and the set up.

Yes, it’s a big deal. Step by step, China – if not taking over the gold market – is at least putting a pretty big stake in the ground in terms of its ability to not only compete but participate in the market making side-by-side with London. They’re going to steal the business from London.

I think they’re probably more than halfway there, because they have the Shanghai futures exchange, which includes a gold futures contract, and they have the Shanghai Gold Exchange, which is spot gold where you take gold in and get money or go in with money and buy gold. Their banks are among the largest gold dealers in the world.

I mentioned in a prior podcast that I was in Shanghai not long ago and met with two of the four biggest gold dealers in China, ICBC and another one of the top Chinese banks, and got some firsthand information from them. As the largest gold producer in the world, they generate more than twice as much as the next highest producer. They produce about 450 – 500 tons a year versus the next closest at about 250 tons a year. They’re also the largest gold buyer in the world as we’ve learned from our friends in Switzerland, the refiners who sell the gold. So in every respect, they’re the big foot.

It reminds me of the 1980s when I was in the U.S. government securities market as General Counsel and Chief Credit Officer at one of the largest securities dealers. The Japanese were the biggest customers. All the banks, the so-called primary dealers, were U.S.-owned with some owned by the UK or a couple of other countries, but the Japanese were the biggest customers. They did not have any primary dealers.

I said, “Wait a second. We’re the biggest customers, so we think we want to own some of the dealers. We want a front row seat. We don’t want to just be on the receiving end of bids and offers; we want to be actual market makers and insiders that deal directly with the Fed.” That was kind of understood, so within a couple of years, they ended up with five primary dealers.

China is similar. If you’re going to be the biggest customer, you don’t want to just be a customer; you want to be a dealer or a market maker. You don’t want to be disadvantaged; you want the inside price and don’t want to pay commissions, spreads, and so forth. That’s exactly what they’re doing.

Alex:  I have to agree. Another interesting item in the gold space is something Mohamed El-Erian recently went on record with. For those not familiar, El-Erian is the Chief Economic Advisor of Allianz, a multi-trillion-dollar global finance titan. Some of you may know him from PIMCO that manages about $1.6 trillion where El-Erian was the CEO and Co-Chief Investment Officer. Allianz is the owner of PIMCO.

In an interview, El-Erian said that central banks can’t stay in the business of repressing financial volatility forever, and that gold will return as a safe haven hedging instrument. I thought that was an interesting comment. Jim, what’s your take on that?

Jim:  I agree with that. You gave a brief overview of El-Erian’s resume, and you’re exactly right. As one of the largest financial institutions in the world, Allianz is a huge institution. They deal primarily in insurance rather than banking, but they have banking-like functions and own PIMCO, the world’s largest U.S. government bond investor. They also deal directly with the Federal Reserve.

But El-Erian is more than that. I put El-Erian in the category of the global super elite meaning he’s on G20 committees, he’s at the IMF World Bank meetings, and he’s a regular at Davos. He’s a really smart guy, but apart from having these important advisory roles in the institutions you mentioned, he is one of a handful of people alongside Christine Lagarde, Larry Summers, Bob Rubin, David Lipton, and others who really call the shots in the international monetary system.

I always date myself with these examples, but there was an old marketing campaign in the 1980s for a broker long gone called EF Hutton. The punchline was, “When EF Hutton talks, people listen.” Well, when El-Erian talks, I listen, because he is a true insider. He’s not just talking his book at Allianz; he’s actually conveying something that is no doubt in the air, as I put it, among the elites. So, I’d put a lot of weight on that. I think it’s very significant.

I think he’s right. Where are you going to go if they have to keep a lid on bond prices because governments are going broke and on stock prices because we can’t afford another meltdown?

I’ve actually observed the volatility in the currency markets. People keep saying, “Where’s the volatility?” I say, “Look at the euro/U.S. dollar cross rate.” The euro/U.S. dollar cross rate has had seven moves of 20% or more in the last ten years.

Again, people say, “Where’s the volatility?” I point them to the currency market, because the U.S. dollar and the euro are the two leading global reserve currencies. The U.S. dollar has the bigger share at about 60% and the euro is closer to 30% in terms of global reserves, but the two of them together are 90% of global reserves. They’re both supposed to be stores of value, and they both have PhD central bankers, so why should they be moving 20% against each other? There’s the volatility.

It is because central banks are fighting the currency wars but using bank policy to suppress volatility in the stock market, the bond market, and elsewhere. Something has to give. The best way to understand this – and this is a metaphor, but it’s also the same science – is to imagine two tectonic plates similar to the San Andreas Fault where a pacific plate and continental plate are butting up against each other.

You can see the San Andreas Fault and actually stand on it. I’ve done this out in the desert near Palm Springs where my guide took me to the San Andreas Fault. The point being, the day I was standing there, nothing was happening. Well, that’s fine, but it doesn’t mean it’s stable. It’s not moving that day, but it’s dynamically unstable. Eventually the pressure builds and builds until it snaps.

That’s what I see happening in financial markets and I think what El-Erian was referring to. When this snaps, there’s going to be an enormous run to gold. Based on what we talked about earlier with the Chinese acquiring dealer positions, exchange positions, and so forth, there’s not even close to enough gold to satisfy all the existing paper claims let alone future paper claims, so you would expect a very significant price spike.

Alex:  The idea of institutions moving into gold has always been interesting to me based on the amount of gold in the typical institution portfolio according to certain individuals who are professional money managers or pension fund managers, etc. Shayne McGuire owns a very large pension fund, and in his book called Hard Money, he says that amongst his colleagues, they’ve typically got less than 1% weighted allocation to gold. His opinion was that if institutions moved more towards even a 2% – 4% allocation to gold, that would significantly drive the price just from that alone.

Jim:  That’s exactly right. I know Shayne, he’s a great guy. He was part of a group that was instrumental and successful in getting UTIMCO, the University of Texas Investment Management Company, to do an allocation of gold. One of the big drivers who lobbied hard for that was Kyle Bass, a very well-known hedge fund manager and trustee at UTIMCO. They did buy $500 million worth of gold, which is a lot of gold, but it was still a tiny part of the overall portfolio. This is a huge, multi-billion-dollar portfolio involving the entire university system endowment and other state contributions.

I always recommend 10% gold for personal portfolio allocations and get a lot of pushback on that. People say, “Jim, you’re the guy saying gold is going to go to $10,000 an ounce. Why wouldn’t you have 100%?” The easy answer to that is you shouldn’t be 100% in anything, I don’t care what it is. That’s just not prudent. I think 10% is fine although some people say 5%, and that’s fine.  If nothing happens to gold, or it goes sideways or down a little bit, you’re not going to get hurt with a 10% allocation. If it goes anywhere near what I’m expecting, then that will be enough to in effect insure the rest of your portfolio.

You can debate 10% or 5% all day long, but in fact, the institutional allocation is about 1.5%, not even 3%, and that’s not evenly distributed. It’s not as if every large institution has 1.5%; it’s more the case that some have 5% and some have 0%. Most institutions have zero, so with any kind of move at all, there’s not enough gold in the world at these prices to meet that kind of demand. They’ll get their gold, but at much higher prices, and there’s no reason for investors and our listeners not to position accordingly today. You can definitely see this coming.

Alex:  Moving on, the next topic is going to be the Fed. Janet Yellen seems to be having a hard time coming to grips with the fact that inflation numbers in the U.S. are actually in a downward trend. Her response – besides blaming it on a series of different issues – is that all of this is transitory. It’s also not looking like she’s going to be reappointed, and that has to be weighing on her mind.

Jim, why does the Fed keep getting this wrong? And where do we go from here? Where do they go from here?

Jim:  It’s a great question, and you’re exactly right. Probably the hardest thing for any of us, whether your Janet Yellen, me or anyone else, is to admit you’re wrong. You have a model, you worked hard, you did the math, you studied, you went to school, you did all this stuff, and it turns out that everything you believed is just wrong. That’s the situation she’s in.

The biggest thing they’ve got wrong is the so-called Phillips curve. For the benefit of listeners, Phillips curve is just a curve, a relationship or a distribution between a couple of factors. The basic idea is that there’s an inverse relationship between employment and inflation so that as unemployment goes down, inflation goes up, or as unemployment goes up, inflation goes down.

The theory is that as unemployment goes down, labor markets get tight and it becomes more difficult for companies to find workers. If I’m putting up a construction site, starting a new company or expanding my plant, I want to hire people, but they’re all working already. I can’t find anybody, so what do I do? I bid up wages. I offer to pay them more, and they’ll come work for me.

The theory continues in that if the economy can only grow in real terms (historically, we would have said 3% – 3.5% or today under the new normal maybe it’s 2%) and we start bidding up wages 3% – 5% to get the workers, anything over the maximum real rate of growth has got to be inflationary. If I pay you more than real growth, then you’re going to go out and spend the money and bid up prices of other things. It’s inflationary.

That’s the theory, but it is complete garbage and nonsense. It doesn’t work that way and there’s plenty of evidence to the contrary. Going back to the late 1970s, we had high inflation but we also had high unemployment, and we had back-to-back recessions in 1980 and 1981. We had a worse one in 2008, but prior to 2008, the worst recession since The Great Depression was the one in 1981 – 1982.

Those were the days in the late ‘70s and early ‘80s of 13% interest rates and 15% inflation along with high unemployment. They had to come up with a new word for it called stagflation. Weak growth was stagnation and rising prices was inflation, but here we had both which wasn’t supposed to happen, so they called it stagflation.

We have the opposite situation today. Unemployment is extremely low. It’s the lowest it’s been in at least in 17 years, and maybe we’d have to go back even further than that. We’re down to about 4.2% which we haven’t seen in a very long time, and yet inflation is low. In fact, not only is inflation low, it’s falling. We have disinflation although we’re not quite to the point of deflation.

These two examples completely refute the Phillips curve, so you would think that Yellen would just throw in the towel and come up with a new model, but she can’t do it. She’s been doing this too long. She’s ideological, overly academic, and detached from the real world. If I want to put on my behavior psychologist hat, this is what’s called cognitive dissonance, and she just can’t come to grips with it.

You’re right, Alex, about her list of factors. I wrote a column recently called Janet Roseannadanna, and it was a reference to the TV character Gilda Radner played in the late ‘70s called Roseanne Roseannadanna. The schtick was she would have this long list of complaints like, “Oh, my stomach hurts. I can’t get out of bed.” The punchline at the end of it was, “It’s always something.”

I applied that to Yellen. When prices kept going down, she first said, “There’s a cell phone price war.” Then she said, “Medical costs are government administrators, so they’re not responsive to monetary policy.” Then she said, “The strong dollar is lowering import prices,” and on and on. She gave a long list of reasons, but all of it was to deny the fact that the prices were going down.

Having said that, the upshot of all this is my forecast that the Fed will not raise interest rates in December, which is very out of consensus but also very bullish for gold. Using hedge fund futures and implied probability, the consensus forecast right now is that there’s an 80% chance of an interest rate hike in December.

My model gives it about a 20% chance. What I expect is that as we move down the timeline over the next two months between now and the December meeting, the markets will get the wakeup call and converge on that 20% level. When you have an expectation of a rate hike and the Fed doesn’t hike, that’s ease relative to expectations. That kind of easing is very bullish for gold.

Alex:  Very good. You heard it here first. This is pretty typical of Jim Rickards. He looks at things and connects dots that typically the markets are usually catching up to a month or two after the fact. I suspect that this is probably going to turn out no different.

Another thing I was reminded of while you were talking about Janet Yellen basically being in an echo chamber coming from academia, etc., is the many conversations we’ve had regarding PhD economists. I don’t want to make it sound extreme, but it’s almost like a religion. It seems like a dogma to me.

I recall when you had spoken about Copernicus. All the scientists of the day believed a certain thing, but they were all wrong. Copernicus was right. Their models were wrong, but it was dogma they were clinging to because of the echo chamber they were in.

Jim:  I don’t want to be 100% categorical about PhD economists, because there are a few good ones out there. My friend Gail Fosler, based in Washington, is really good on business cycles. I thought the best economist was John Makin who was a friend of Gale and I. Sadly, John passed away a couple of years ago, but boy do we need him now. John had an uncanny ability to call business cycles.

That said, there are a couple of economists I’m fans of, but not many. Basically, I consider PhD in economics to be a disability when it comes to understanding the economy. Of course, right now as we record this, we’re in the midst of the final beauty contest for the next Chairman of the Fed.

I think our listeners know about the five finalists. Would Janet Yellen be reappointed? Would President Trump pick Jay Powell who is a governor now and already on the board? Plus, there are three outsiders: Gary Cohn, head of the National Economic Council, Kevin Warsh, former governor (he has a couple of appointments and is also Chief Economist to Stan Druckenmiller’s family office which was formerly Duquesne, one of the most successful hedge funds in history), and the last one is John Taylor, professor at Stanford University and author of the Taylor Rule, which is a formula for setting monetary policy.

I’ve said for the better part of the year beginning last January that it’s going to be Kevin Warsh, so I’m sticking with that, but they set up these betting markets. It’s an interesting horse race, because not a month ago, Warsh was leading, but then it’s like, “Here comes Seabiscuit.” Suddenly Jay Powell shot ahead because Steve Mnuchin, Secretary of Treasury, got on his side. Then John Taylor met with the president. The president interviewed all the candidates, and apparently it was a great meeting. Trump loves John Taylor, and that gets leaked by the West Wing, so all of a sudden John Taylor’s odds are up. Gary Cohn was ahead last summer but fell back after criticizing the president publicly – not a good idea if you’re looking for a promotion. No one really thinks Janet Yellen is going to be reappointed.

It’s a horse race. We’ll know literally within days, because apparently the president is going to make this decision before he heads off to Asia in early November. My forecast is Kevin Warsh. I’ve said this since last January, and there’s good reason to believe that’s true, but we’ll see.

One of the things I like about Kevin is that he’s not an economist, he’s a lawyer. Maybe I’m showing some bias because I’m a lawyer myself, but he’s also an MBA and an investment banker, so I’m not saying he walked out of a law firm. He’s got plenty of financial chops, and he was on the board of governors already. He was not the Chairman, but he was there in 2008 – 2009 during the worst of the financial crisis. He was part of Ben Bernanke’s inner circle in dealing with the crisis. Whatever you think of what Bernanke did, Warsh was there on the front line.

I know from my own experience in 1998 with Long-Term Capital Management when I negotiated that bailout, we were hours away from shutting every stock and bond market in the world. That’s how dangerous it was and how close it came. When you’re in that position, you actually get to see the whites of their eyes, so to speak. You know how dangerous it is, all the things that are going wrong or could go wrong or almost went wrong, and how close the world can come to hitting a wall at 70 miles an hour.

Warsh had that experience in 2008, not just as an academic or a market participant, but as a true insider. If it happens again – which we all know it will – I find that when lawyers turn to economics, they tend to be very good at it, because legal training is all about problem solving. It’s a benign form of brainwashing. I had six years of law school, because I got a second law degree, but no one goes through three years of law school without your brain coming out a little different at the other end. It’s kind of like a North Korean reeducation camp. They train you to look at both sides of every problem and force you to keep an open mind, and that’s valuable in economics.

The problem with Yellen is that she looks at things one way and is not good at balancing different views. I consider that a disability. I think Warsh would be a great choice or the others, too. I know Jay Powell from working with him when I was in Wall Street and he was at the Treasury. I don’t know John Taylor personally, but there’s every reason to believe he would be a great choice. Whether it’s Powell, Warsh or Taylor, there are three good choices on the table. Again, my expectation is Warsh.

Alex:  That brings us to our last topic which I’ve been looking forward to discussing with you, Jim. Yesterday, you attended a meeting with a select group of people where I understand you had access to H. R. McMaster, the U.S. National Security Advisor, as well as Mike Pompeo, Director of the CIA.

Among the topics the meeting dug into was U.S. national security interest issues. Jim, what are your key takeaways from this meeting?

Jim:  Yes, I was in Washington yesterday and spent six hours over the course of the day from late morning to late afternoon with Mike Pompeo, Director of the Central Intelligence Agency, and General H. R. McMaster, National Security Advisor to President Trump.

They’re two of the big four. I would say the other two would be Rex Tillerson, Secretary of State, and Jim Mattis, Secretary of Defense, who advise the president on matters of war and peace.

I talked a few minutes ago about the bailout of LTCM, and I’ve had other big challenges in my career, but I have to say that this is the hardest problem I’ve ever worked. I’m talking about North Korea and the prospects of war and peace; it’s absolutely the hardest problem I’ve ever worked. There are a lot of moving parts and partial information which is always true in intelligence work. You never have all the information. If you did, it would be easy. The challenge of intelligence analysis is reaching solid conclusions or estimates with partial information.

I concluded some months ago and did a series of interviews in August and September saying we would be in a war with North Korea by early to mid-2018. Whether it’s a preventative war, which means you’re trying to stop them from developing their program, or a preemptive war which means, “Hit them before they hit you,” that’s an interesting distinction. Either way, the U.S. would start it. We would attack North Korea, it would be bloody and messy, it would not be a walkover, it would not be shock and awe. It would be a really bad situation, and it was coming.

I subscribe to Bayesian statistics and mathematics among disciplines such as behavioral psychology, complexity theory, and others. One of the things you do as a Bayesian is to update, so as I went through the months of September and October, I said, “Okay, I have the hypothesis, I tested it, I’ve given it this probability,” but you get new information every day. The new information goes into the equation and updates it, so you have to keep an open mind. You have to do exactly what I said Janet Yellen doesn’t do, which is to be nimble and flexible and willing to say, “You know what? Here’s what it was, but new stuff came in. I’ve updated, I’ve lowered the probability, and I’m now in a different place.”

You have to be willing to do that. John Maynard Keynes famously said, “When I get new facts, I change my mind. What do you do, sir?” That’s a good rebuttal for people who call you a flipflop. I’m not a flipflopper, but I’m willing to update.

The point is, I said, “What if I’m wrong? What if I got this wrong? What if I’m missing something?” so I reached out to some CIA analysts and other people. It’s like you’re not quite sure if they handed in their badge or not, but as one guy put it, “They still send me pictures and ask me what I see,” so I reached out to people who are very plugged in including CIA operatives, subject matter experts, scholars, and people very immersed in the field. What I was hearing consistently is (to quote Steve Bannon), “They got us. It’s too late.” It would have been nice to stop this capability six or eight or two years ago, but they’ve got nuclear armed missiles. Whether they’re reliable ICBMs, they’re at least intermediate range missiles. Whether they have ten of them, they have at least one they can use, launch on warning, etc.

It’s too late. If we launch this attack, they’d lob one over Tokyo or Seoul. The poor Japanese, I don’t know why they’re the ones always getting nuked. We dropped two bombs on them, and North Korea is getting ready to shoot another one. The casualties would be too high, the costs would be too high, so we’re going to have to engage in a long, drawn-out policy of deterrents and containment not unlike what we went through with the Soviet Union during the Cold War.

I was hearing this a lot as well as updated information. One expert said, “They don’t have to test a missile in space to ruggedize it. They can put it in a wind tunnel with a rocket engine at the other end, and that gives you all the heat and vibration you want.” I said, “You know more about wind tunnel testing missiles than I do. That’s an interesting bit of information.” And I kept going.

Until the night before I went into this meeting with Pompeo and McMaster, I had come around and said, “Yes, maybe Bannon was right, they got us. There’s not going to be a preemptive war.” My takeaway was that there’s going to be a war, it’s just a different kind of war. If we don’t attack North Korea because they can nuke us, they’re going to attack South Korea and rely on their nuclear deterrent to keep us from doing anything. At that point, we might as well fold up our tent in the Western Pacific.

That’s how I went into the meeting with Pompeo and McMaster. Six hours later, I walked out and said, “We’re going to war,” because I heard it straight from the horse’s mouth.

I have to say as an aside, apart from the substance, I cannot tell you how refreshing it was to hear top policy makers speak in their own words for hours on end. It wasn’t being filtered by CNN or the Washington Post. They’ll cover it by throwing in a quote here or there and fill up all the space between the quotes with their own spin, fake news, and everything.

There’s another side worth mentioning. Both of them were extremely complementary to President Trump. They said, “He’s got our back.” When you’re a three-star general, that’s a major statement. When you say someone’s got your back, you mean he’s got your back. Same thing with the Director of the CIA. They’re running assets, paramilitaries, clandestine operations, spies, people in denied areas, and people risking their life every day, so when you say, “The president has got our back,” that’s a major statement.

They said, “He’s giving us all the authorizations we need.” That has to do with when you run cover ops, and you must get something signed by the president. They actually do it in physical copy. They drive it over to Langley, the director puts it in a safe in his office, and then goes and does all kinds of hair raising stuff. If he gets called out, he just opens the safe and says, “Look, that was authorized by the president.” They don’t want a replay of what happened with the Church Committee in the 1970s. Trump has been very willing to sign those authorizations, they’re conducting the ops, and they’re preparing militarily.

Getting back to our point, I’m going to read some exact quotes from when I was at the meeting and took notes. I have them in front of me. Here’s a quote from Mike Pompeo, CIA Director:

“The president has made it clear that he will prevent North Korea’s ability to hold America at risk, by military means if necessary.”

The two key parts of that sentence are “prevent,” meaning they’re not going to get there, and “military means if necessary,” meaning war.

By the way, Pompeo put a date on it of March 20th, 2018. Why do I say that? He said five months, and yesterday was October 19th, 2017. Those are his words, not mine. He didn’t say the war starts in exactly five months, but he said:

“It would be imprudent to assume it would take more than five months for North Korea to gain the capability.”

Waiting more than five months risks them having the capability we’re trying to prevent, and therefore, war would come on March 20th if not sooner.

Another exact quote from Pompeo was:

“Trump has instructed the CIA to ‘prevent Kim from having the capacity to threaten the United States.’”

Again, the key word is “prevent.” Now let me turn to McMaster, National Security Advisor. I’ll quote him as saying:

“This is Kim’s last chance to avoid severe consequences.”

That was a reference to the ongoing diplomatic efforts. He’s like, “If Kim wants to verifiably give up his weapons development program, or if diplomacy bears fruit, we can avoid it. Absent that, no, it’s coming.” I also quoted McMaster saying:

“We’re running out of time.”

That’s consistent with Pompeo’s five months. Here are the two most important quotes from McMaster. He said:

“Accept and deter is unacceptable.”

Just to shorten that, “Accept is unacceptable.” “Accept” meaning accept North Korea as a nuclear arm power, and “deter” meaning deter them from using their power. No, he said, “Accept and deter is unacceptable,” meaning we’re not going to pursue a policy of deterrence and containment. We’re going to prevent Kim from building the nuclear arsenal, which is what Pompeo said.

A final quote is in reference to the April 6th, 2017, meeting at Mar-a-Lago between Xi and Trump. Again, an exact quote:

“China has a great deal of coercive power on North Korea. What’s worse, that or war?”

In other words, China is really putting the screws to North Korea. That feels bad if you’re Kim, and maybe it’s uncomfortable for China, but the quote, “What’s worse? That or war?” means war is the alternative. I was stunned, because we’re so used to Washington figures’ elliptical speech, euphemisms, buzzwords, saying nothing. Here we have two serious guys.

Pompeo has had a military career. He was first in his class at West Point. You might say, “First in class at West Point, that’s pretty good,” but he was also first in his class at Harvard Law School and Editor in Chief at the Harvard Law Review. So, I’m like, “Wait a second. If you told me you were first in your class at West Point, I’d be impressed. If you told me you were editor of the Harvard Law Review, I’d be impressed. If you told me you were both, I’d be blown away.” Well, that’s Mike Pompeo.

McMaster has a highly decorated, distinguished military career. Again, as a three-star general, he’s been in the fight in more ways than one and is a totally serious player. They were blunt, they were candid, they were unambiguous. We’re heading for war.

The only other talk I heard that I found interesting and factored in was assassination. It’s not a funny topic, but Pompeo made a funny remark. Someone asked him, “Would we be engaged in the assassination of Kim Jong-un, a kind of regime change without a war?” Pompeo replied:

“I don’t want to comment on that, because in case an accident should befall him, I wouldn’t want anyone to think that was a coincidence.”

It was very elliptical. In other words, “I get it. It’s illegal for the United States Intelligence Services to assassinate anybody, but that doesn’t mean somebody else couldn’t do it if we asked for a favor.” So, you take my point.

I also talked to a CIA operative who told me that he’d been working on a program for a device to cause Kim to have an unfortunate accident. It was a device that is not being employed because it would have been too much collateral damage, but it told me that, as we say in Wall Street, “They were working the order.”

Here’s my lineup right now:  I would give a 20% probability to regime change, meaning Kim has an untimely death and some changes there. I would give a 20% probability (that’s probably high, but I’ll say 20%) that Kim gets the message, backs down, stands down, and we avoid a war because he gives up his program. I give a 60% probability to war started by the United States preemptively or preventatively before March 20th, 2018, and I give a 0% chance to, “We just live with it. They get the weapons and we don’t do anything, we just contain it.”

Again, four possibilities, and I would give them probabilities of 20, 20, 60 and 0 in that order:

  • A regime change including assassination
  • Kim stands down
  • We go to war
  • We accept a nuclear-armed North Korea

So, I’m back where I started, but at least I can credit myself for questioning my own assumptions and incorporating a lot of contrary views.

Alex:  Regarding the second category, Kim stands down, I read a really interesting article recently. I had not known this about North Korea, but apparently the entire country has this situation where they basically worship him and his now passed father. It was a really amazing article that indicated there’s one city over there – I think it’s Pyongyang – that’s essentially dedicated to the worship of these two individuals.

It’s kind of like the U.S. is the boogeyman that Jong-un has constructed as the great enemy of the people. They’re all unified behind that idea, so him backing down sounds like a tough scenario.

Jim:  I agree with that, Alex, and that’s why I put a 20% probability on it. I was like, “Eh, should it be 10%?” You never want to be 0% or 100%, because that’s just not good science, but I was stretching to 20%. The only reason I got there was because the likelihood of war that I was hearing was so clear and unambiguous that maybe even Kim gets the message? That’s why I gave it a little higher probability.

Maybe he will stand down, but I agree with you, that’s the hardest thing for him to do. They have an official ideology called Juche. It’s not quite communism, it’s kind of totalitarianism, but it incorporates exactly what you just described, which is the cult of the individual and the personal worship of the Kim family.

You referred to his father, and that’s right, but you really need to go back to the grandfather. Kim Jong-un is the third generation. It goes back to Kim Il-sung who is the founder of this Kim dynasty. What’s interesting is that Kim Jong-un reminds me more of his grandfather than his father.

If you go online and dig out some pictures of the grandfather when he was about 30 years old, there’s a striking resemblance to his grandson Kim Jong-un. He acts and looks more like his grandfather than his father.

The Korean War is not over. I’m talking about the war that was fought from 1950 to 1953. It’s not over, there was never a treaty. There was an armistice, which is just an agreement to stop shooting, but it’s not more than that. It’s an agreement to stop shooting, meaning you can change your mind and start shooting anytime you want, so this war is not over.

Kim Jong-un considers it unfinished business. I’d say his top priority is personal and regime survival, and the second priority is the reunification of the Korean Peninsula on his terms. He’s pursuing both, and he thinks the way to get both is with nuclear weapons. I heard it from the National Security Advisor, who sits right down the hall from the president, that it’s not going to be allowed to happen.

My expectation – and I would price and organize portfolio accordingly – is that we will be in a shooting war with North Korea before the end of March 2018.

Alex: Here’s a question about Trump. The sort of narrative going on right now in the mainstream media is that Trump is dangerous, he makes bad decisions, and the people close to him are always trying to contain him in his bad decisions. What feeling did you get about that when talking to Pompeo and McMaster? Did you get the impression that they’re trying to run around containing the president, or do you get the feeling that they are confident he is making good decisions here?

Jim:  It was more the latter. I was trying to pass along specific quotes that had to do with war and peace, but as I said, this was six hours. Pompeo said the president asks great questions.

By the way, Pompeo personally briefs the president every day. There’s a document called the PDB, the President’s Daily Brief, that is compiled overnight on a daily basis by the CIA and is top secret. I’ve seen them; they come in a nice leather binder. Someone gets in a car and drives from Langley to the White House which is a pretty short drive. They have copies for seven or eight people who get it. Obviously, that includes the Secretary of Defense and Secretary of State, but it’s not widely distributed because it’s highly classified. They walk in and brief the president.

The Director of the CIA doesn’t have to do that. If you’re on a career path in the CIA, one of the prestigious jobs is the briefer, meaning you’re the person who gets to brief the president. The president doesn’t have to take the briefing; sometimes they’ll take it once a week or twice a week. Obama was famous for not taking these briefings, for blowing it off.

Alex: Wow.

Jim: Obama did not get briefed by the Director. Trump is the opposite. He takes it every day, and he gets briefed by Mike Pompeo personally. We were in Langley in Northern Virginia just a few blocks from the White House, and Mike said, “I’m here every day, and I brief the president personally. The president asks great questions. He challenges us. If he has a doubt about something, he makes us go back and look at our assumptions. If there’s room for improvement, we make the improvement.”

I got the sense of a good dialog, mutual respect, good interaction, a process working the way it’s supposed to work. I didn’t get the sense that Pompeo did adult supervision in a daycare center which is how Senator Corker put it.

Same thing for McMaster. Again, when a three-star general says, “He has my back,” that’s an expression of confidence and a relationship of deep trust. That’s not an expression of someone who doesn’t think well of the person or feels he’s got to rein them in.

Trump is Trump, and Trump is not going to change. People say, “Why doesn’t he stop tweeting?” He’s not going to stop tweeting; 70-year-old guys don’t change. It’s not going to happen. To an exterior audience, Trump can be vulgar, shoot from the hip, ostentatious, name calling, a little bit egocentric, a little bit spoiled. Yes, that’s all true. I’m not going to dispute any of that, but so what? That’s not the substance of what we’re talking about.

We’re talking about war and peace. As I said, I heard from two of the big four, and what I heard were complements, respect, and a good, mutual working relationship. I did not hear an adversarial relationship or one where they felt they had to run a kindergarten.

Alex:  That’s good to know. Wrapping it up with this, the comment of, “He’s got our back,” is incredibly important and very close to my heart.

About a month ago I was doing some training in Colorado where I spent time with some former Navy SEALs, and we were talking about how a lot of people in the military think. During one of the downtimes, one of them said to me that they just didn’t feel like some of the former administrations cared. The military felt like they were expendable, that they were possibly going to be thrown into combat situations and torn to pieces, and that these administrations just didn’t really care.

He said something that struck me like a blow. He said, “What could be worse than a generation of Americans growing up, and the leadership of America doesn’t have their back; they’re willing to throw our lives away? What could be worse for a free nation than that?” That was like, “Wow, good point.”

Jim:  That’s very powerful, Alex. I’ll add to that briefly and say that I’ve traveled quite a bit in my career. I used to go to places that I would not go back to today without an armored car and a platoon or something. In the early 1980s, I walked unarmed by myself in the streets of Khartoum and Omdurman in Sudan. I walked the streets of Karachi in Pakistan, Lahore, which is in Northern Pakistan closer to the frontier, and I felt completely relaxed.

I knew there were bad people around, but Reagan was president, and I felt like, “You won’t mess with me, because I’m an American and Ronald Reagan has my back.” I wasn’t in the military, so it’s not like I could call in a helicopter evacuation. I just felt that in general they knew you were an American, and they weren’t going to mess with you because somebody was going to mess with them.

I haven’t felt that since. As we got into the ‘90s, and certainly during the Obama administration, I wouldn’t go back to Karachi without an entourage. It’s too dangerous, and I don’t think they do have your back. Having said that, it’s a new administration. You’re exactly right about the depth of feeling and importance of that and how it affects everything you do.

I’ll mention two more things on Pompeo and McMaster. Now I’m putting words in their mouth a little bit, but everything I said earlier were direct quotes. I heard disdain from Mike Pompeo for General Clapper, former Director of National Intelligence. To be clear, Pompeo did not use Clapper’s name. He used the phrase “formers,” meaning former Director of CIA and former Director of National Intelligence. We all know who they are, John Brennan and James Clapper.

I had some interactions with Clapper myself, and let’s just say I’m not a fan. I’ll leave it at that. Again, that’s something you don’t get from the media.; you only get it from being in the room. Pompeo made a disdainful remark, and I heard the same thing from McMaster. He said, “Wishful thinking is not a strategy.” Then in a separate part of the conversation – I’m paraphrasing here, because I don’t have the exact quotes in front of me – he said, “We didn’t have a strategy, we had a fantasy,” referring to our approach to North Korea.

I would add that to this clear message of no more wishful thinking, no more fantasy, no more hoping for the best. It will be Kim stands down, he’s removed or we go to war.

Alex:  Jim, I appreciate your time today. It’s been a great discussion, and I very much look forward to doing it again next month.

Jim:  Me too, Alex. Thank you.


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


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The Gold Chronicles: October 2017 podcast with Jim Rickards and Alex Stanczyk


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

Jim Rickards and Alex Stanczyk, The Gold Chronicles August 2017


Topics Include:

*Gold allocations according to some of the worlds foremost professional money managers
*North Korea Update
*How Congress is deadlocked and why it may affect the debt ceiling and budget
*Why “Wealth Management Products” in China pose a potential threat to global markets
*How liquidity can be frozen by governments at any time
*”The Myth of August”


Listen to the original audio of the podcast here

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


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


Alex: This is Alex Stanczyk, and I have with me today my friend and one of the smartest men I know, Mr. Jim Rickards. Welcome, Jim.

Jim: Thank you for that introduction, Alex.

Alex: Jim, with everything going on lately, gold briefly punched through the $1300 USD per troy ounce ceiling at the London Open. Ray Dalio, one of the world’s most respected hedge fund managers who manages money for governments as well as some of the world’s largest sovereign wealth funds, recently recommended a 5% – 10% allocation to gold. Do you have any thoughts on gold before we dive into the rest of our topics?

Jim: Gee, 5% – 10% allocation, where have we heard that before? Ray is the most successful hedge fund and alternative fund manager in history, certainly in the Hall of Fame along with George Soros, Bruce Kovner, Stan Druckenmiller and a relatively small handful of others.

I had occasion to meet him since we live nearby, and I have a lot of respect for Ray, but he’s come around to exactly what we’ve been suggesting to listeners all along, 5% – 10%. I personally recommend 10%, but that’s kind of season to taste depending on your risk appetite.

People say gold is risky or doesn’t have a yield or they’re nervous having it in their portfolio. I just look at people and say I would be nervous not having it in my portfolio. I can’t imagine going to bed at night, waking up in the morning, and not having an allocation to gold.

People disparage it in a lot of different ways, and in fact, they always want to put words in your mouth. I’m out there a lot giving presentations, doing podcasts like this one, with my book, The New Case for Gold, and people make comments like, “Jim Rickards says the world is coming to an end. Sell everything, buy gold.”

I have never said that, and I don’t believe that. The world is not coming to an end. We may go through some tumultuous changes with some severe stress in the international monetary system, but we’ve seen that many times over the last 100 years. It’s nothing new. When that happens, you’re going to want gold.

I wouldn’t go 100% in anything, including gold, cash or any other asset, but if you do 10% in gold, that leaves 90% in everything else. I’m often asked, “What about the ‘everything else’?” There’s room for cash as a good asset in tumultuous times as well as land, real estate, and museum quality collectibles. I invest in private equity, and I’ve invested in some technology startups and some natural resource startups, particularly in the water space.

Diversification is obviously important, but if you don’t have 10% in gold (I’ll echo Ray Dalio and say 5% – 10%), you’re driving without insurance. If things get bad, that’s the first thing you’re going to want to get, and you’re going to find that you can’t get it.

Alex: Indeed. Now let’s get into some of our subjects. On our last podcast, we discussed disinflation, slowing of the U.S. economy, Fed tightening into weakness, Fed’s new pet theory, and North Korea. That’s our first topic today.

We first started covering North Korea back in our April podcast, and since then it’s gone from being on nobody’s radar to what one whitepaper described as the world’s biggest tinderbox. As a quick recap for those not familiar with the back-story, we first started talking about North Korea’s weapons capability in our April podcast. If you want to hear it, it’s available on our podcast page at Physical Gold Fund Podcast.

Jim, you had been on a major news station and said that the North Korea threat was escalating and the U.S. would be at war with North Korea in short order. This was met with huge skepticism. An hour later, North Korea launched an ICBM test missile. Next, North Korea conducted a series of ICBM tests. U.S. intelligence has confirmed they can fit a miniaturized nuclear warhead into a missile-sized payload. Intel estimates that they’re sitting on up to 60 warheads at this time.

On Tuesday, August 8th, President Trump made the comment that North Korea had best not make any more threats to the United States or they would be met with fire and fury like the world has never seen.

On August 9th, North Korea revealed its plans to strike Guam with four nuclear missiles, and the green light to do so would come from Kim Jong-un. Current estimates are that it would be a 14-minute flight time for a North Korean missile to reach Guam.

For those who are not familiar with Guam, it’s a U.S. island territory in Micronesia used as a forward staging area for projection of U.S. sea and air power. It’s home base to a number of U.S. nuclear attack submarines. These aren’t the ones that fire nuclear missiles vertically. They hunt other submarines as their primary role, but they can also launch Tomahawk land attack missiles and provide insertion options for U.S. Seal teams.

Also located on Guam is Andersen Air Force Base, home to the U.S. 36th Wing. It includes Intelligence aircraft, fighter interceptors, and importantly, acts as one of only two critical forward airbases for U.S. long-range bombers in the Pacific. So, it’s a pretty important installation.

On August 10th, the U.S. Air Force, in an unprecedented move, transferred all three main bomber types in the U.S. arsenal to Guam. That included B1 Lancers, B2 stealth bombers, and B512 Stratofortresses.

As of now, North Korea has backed down on the threat regarding Guam, but the fact remains that they’re continuing to develop capabilities in defiance of the world asking them to halt their nuclear weapons program.

Jim, let’s game theory a bit. Where does it go from here?

Jim: First, Alex, that was a fantastic summary. As you know, I’ve been to the Pentagon many times for briefings on different topics. Your summary feels like I just sat through a Pentagon briefing, because that was very thorough. I don’t have a lot to add to that in terms of logistics other than to say I’ve been to Guam and Saipan on the Northern Marianas in the area you described, and yes, it’s U.S. territory.

Even before the ICBM test there was the Hwasong-12 and other tests more in the intermediate range. Then they made a big breakthrough with this intercontinental ballistic missile which has a much further range.

I was very disturbed when newspapers were publishing maps showing concentric circles from Pyongyang showing the range of the missiles to give readers an idea of how far they can go. I saw one that said, “We’re not worried, because it can’t reach Los Angeles,” but I looked at the map and saw that it covered Guam and Alaska.

The last time I looked, Alaska was a state and Guam a U.S. territory. I don’t understand this view that if it’s not a densely populated city – which of course we should care about – it’s somehow not a threat to the United States. It certainly is, and you’re right, Guam is U.S. territory with a lot of Americans living there.

The point is, this escalation has continued. Now, this has been going on for 25 years. We may have been warning listeners about it ahead of the pack, so to speak, months ago, but this threat has been escalating since the mid-1990s with Kim Jong-un’s father.

Bill Clinton did a deal with him in which we released some sanctions in exchange for promises to discontinue the program. They immediately broke that deal. Then George Bush did a deal with them whereby he also gave some section relief, and they immediately broke that deal. So, their track record is that they lie, they buy time, they get concessions, and they keep building the missiles.

The Obama administration essentially did nothing for eight years, so this thing’s been kicking around since the mid-‘90s. I do think the Trump administration deserves credit for clarity, saying, “Okay, that’s it.” The best line I saw was, “We’re not going to negotiate our way to the negotiations. If you want to come to the table and talk to us, we’ll meet with you, and we’ll tell you right now that what you must do is verifiably discontinue your weapons programs. What do you get in exchange for that? Let’s talk.”

Obviously, there would be sanctions relief and maybe even integrate the North Korean economy into the global economy. They’re actually very rich in natural resources. It’s an interesting country. They could be a commodity-driven exporter and have a decent economy, but they’re completely cut off.

That’s the back-story. For the recent sequence of events, let’s go back to August 8th – 10th when the stock market went down about 1.2%. That’s when this rhetoric was dialing up exactly as you described, Alex. Kim Jong-un was talking about attacking Guam, Trump was saying this’ll be met with fire and fury, Kim Jong-un was saying, “I’m waiting for the battle plans, we’re launching at Guam,” etc.

The weekend of August 12th and 13th, a lot of national security officials went on television. General H. R. McMaster, who’s the National Security Advisor, Rex Tillerson, and others gave interviews, but they dialed it back by saying war is not imminent. By the way, you have to agree with it; war is not imminent. If there’s a high probability it’s coming in early 2018, is that imminent?

Not in the sense that someone’s going to launch an attack tomorrow, but that’s close enough for investors to start thinking about it if they cared, and I certainly think they should. Yes, I’ll buy the fact that it’s not imminent. They dialed down the rhetoric, and then Monday, Kim Jong-un seemed to respond in kind. He said, “I’ve got the battle plan but I’m not ready to launch yet.”

By his standards, that seemed a little bit conciliatory. And then Trump made a statement saying, “We welcome this progress, and maybe we can do some basis for talking.”

Suddenly, stocks take off, it looks like the threat’s over, and everyone is dialing down, but that is not how I read it at all. Kim Jong-un actually said, “I will not launch at Guam if the United States engages in acceptable behavior,” or stated in the negative, if they don’t engage in unacceptable behavior.

That was a very specific reference to a joint U.S./South Korean military exercise that is conducted periodically. These military exercises have very long engagement periods. There’s a big one they’re going to launch on Monday, August 21st that lasts for about a week, I think August 21st to 28th. It has a lot of moving parts involving all branches of the military.

What Kim Jong-un was saying is, “I won’t launch at Guam if you call off that exercise.” That’s what he meant by the U.S. not engaging in bad behavior. You don’t have to read between the lines very much to see that’s what he meant.

Well, we’re not going to call off the exercise, because the U.S. is not going to be bullied or threatened. This exercise is long planned, and we’re going to go ahead and do it. The minute we do, we have now broken the condition on which Kim Jong-un was reframing, so, my expectation is he will test one of these systems.

Here’s where it gets really interesting. You talked about the miniaturization, Alex, and there are a lot of technologies you have to master to be able to do this. You have to get your hands on some uranium or plutonium and enrich it which is very demanding technologically. You have to build missiles to have a certain range which is demanding technologically. Then you have to miniaturize the warhead so you can fit it on the missile.

A nuclear device that would just detonate, create a chain reaction, and be a nuclear explosion could be the size of a truck. That’s called a device. It’s not necessarily weaponized, because it’s hard to deliver unless you get it small enough. And then finally, you have to ruggedize it. ICBMs go to space and come back into the atmosphere under a lot of stress, heat, and vibration, and it must survive all that.

One by one, Jong-un mastered all these technologies, and it looks like he’s getting to the final two: miniaturization and ruggedization. That comes from testing. But there’s one more thing he’s doing where I think he gets very dangerous. He has a submarine, and there’s reason to believe he will release a submarine-launched ballistic missile.

That’s different from an ICBM, because you can move submarines around. The U.S. has been betting on Terminal High Altitude Defense (THAD) defense, where we can shoot down these missiles with some degree of accuracy. No one wants to rely on that because it’s not 100%, but it’s better than nothing.

However, you can move a submarine to create a trajectory where you’re evading the THAD missile batteries, number one. Secondly, you can move that submarine within range to where it would support an intermediate range ballistic missile attack instead of an ICBM.

It’s a total game changer and possible that that’s what he’s going to do. He also might detonate a nuclear device to perfect that technology. That’s not a missile launch, that’s a nuclear detonation. Any one of these things is highly provocative.

My expectation is that the U.S. will go ahead as planned with this war game. Kim Jong-un intended all along to do the test knowing the U.S. would do this, and he’d put this marker down to make him look like the good guy. But of course, he’s not a good guy, and he’ll do something extreme. If he doesn’t aim a missile in the vicinity of Guam – which would practically be an act of war – it could be the submarine launch test or a nuclear explosion. That’ll get Trump going again, and then we’ll be right back where we were on August 8th.

This threat is not going away. People dialed it back a little bit last weekend, but I think it’s coming back at us, and the stock market is extremely vulnerable. You don’t have to reach hard to find people who think it’s overvalued, so we don’t have to belabor that. I’m not the stock market guy, but go to anyone from Robert Shiller to Warren Buffet or any well-respected voice on that topic, and you’ll hear universally that the stock market is overvalued and headed for a fall.

The question is, when? The answer is, it could be any time. It takes a catalyst, and this could be the catalyst. On top of the terror attacks we’ve seen in Spain on Thursday and Finland on Friday, there seems to be no end to it. That was enough to get the stock market heading in the wrong direction in the course of Thursday and Friday. Let’s see what happens, but I think stocks are vulnerable to this kind of shock. The market has not priced it in, and I do think it’s coming, probably next week.

Alex: This reminds me of many conversations you and I have had regarding complex systems and critical states, and that really is just a shift of psychology. It’s simply human nature. After a while, people become apathetic towards things, and sometimes it takes unfortunate events to shake and wake people up. That’s what we’re looking at.

We will continue to monitor what’s going on with the North Korea situation, and if there are important updates, Jim and I will probably discuss it again in a future podcast.

Our next topic is the debt ceiling and so-called government shutdown.

This subject has been discussed many times. Personally, I’m kind of disgusted with the fact that we have to do this versus proper fiscal management at the government level, and I know I’m not alone in this. The United States is now sitting on $19.974 trillion in debt. That is $165,851 per taxpayer. It’s a reality we must deal with on a regular basis now.

Treasury Secretary Mnuchin has written a letter to Congress asking them to raise the debt limit no later than September 29th. Jim, what’s your take on all this?

Jim: Good luck with that. You’re absolutely right, Alex, in terms of the backdrop.

Let’s sort it out for the listeners. There are two big but separate deadlines converging on September 29th. The way the media reports it is by throwing words around that tend to get mashed together in a lot of readers’ or listeners’ minds; however, they’re separate and they’re converging like two meteors hitting earth at once.

One is something you mentioned, which is the debt ceiling. This has to do with the borrowing authority of the U.S. Treasury. Is the U.S. Treasury authorized to borrow money to pay the bills of the United States covering everything from Social Security, Medicare, Medicaid, operations of government, military, you name it. The whole budget is around $500 billion a year. That’s the deficit.

The budget is well over several trillion, but that must be authorized by Congress. Until it’s authorized, the Treasury is running on fumes. It sounds strange, but the Treasury has a bank account at the Fed and other banks that is no different from your bank account or mine.

If we have money in the bank and spend it with no income, that account goes to zero. Your checks then bounce and you can’t spend any more money. Believe it or not, that’s the situation the U.S. Treasury is facing. It is running out of cash. They have new cash coming in all the time from tax collections, but it’s going out in terms of payments. They can run negative cash flow and draw it down.

That’s the situation the Treasury is facing. They need Congress to authorize an increase in the debt ceiling so they can borrow more money so they can pay the bills. It’s that simple. The problem is that Congress is not really functional right now and is not inclined to do so. This is because the Republicans have a majority of the House and Senate but can’t agree among themselves.

By the way, this is a replay of Obamacare. I don’t want to get into the weeds in terms of the healthcare debate, but I think a lot of listeners know that the Republicans came into Washington with control of both houses of Congress and the White House and said they were going to repeal Obamacare. They didn’t do it and they’re not going to do it, because they couldn’t agree among themselves. They didn’t need Democratic votes, but they did need to agree, and they couldn’t do that.

The same thing is playing out with the debt ceiling. There are members of what’s called the House Freedom Caucus that say, “We’re not voting for the debt ceiling increase unless we get some conditions.” They want to defund Planned Parenthood, there’s an issue around sanctuary cities, and around money for the wall. The White House wants money for the wall, and there’s an Obamacare fix. It’s not the repeal of Obamacare, but Obamacare was running out of money, and that is a separate appropriation that has to get through.

So, there’s a bunch of stuff standing in the way of this vote. Now, you could say, “Okay, to heck with Republicans. Let’s just get moderate Republican votes and some Democrats.” Well, the Democrats are sitting there, notably Nancy Pelosi, who said, “Why should we help you guys? You’ve run us out of town, you’ve ridiculed us, you’ve called us every name in the book, you don’t want to work with us on anything else, you don’t like our agenda. Why should we give you any votes?”

Even though the Democrats in general favor raising the debt ceiling because they like all these programs and spending money, they’re not inclined to vote for two reasons: 1) Why should they help Republicans? 2) They don’t want all these riders attached that I mentioned. If you put defunding of Planned Parenthood in a debt ceiling vote, you will not get one Democratic vote, so, it’s not clear where the votes are coming from.

Let me shift gears for a second and talk about another event, which is the budget. The budget is different than the debt ceiling. The debt ceiling is borrowing to pay your bills, whereas the budget authorizes all government spending that gives rise to having to pay your bills in the first place.

The U.S. is on a fiscal year running from October 1st to midnight on September 30th. While most of us are December 31st, New Year’s Eve, the U.S. government celebrates New Year’s Eve on September 30th.

This year, September 30th happens to be a Saturday when banks are closed and the government is not working, so it’s really September 29th which is a Friday. September 29th is D-Day in terms of keeping the government open, and there are two ways to do it:

  • You could pass a real budget which is kind of what you were saying, Alex. Are we mature enough to actually do that? The answer is no.
  • The other thing you can do is called a CR or continuing resolution. It’s basically a vote by Congress that says, “We agree that all the agencies can keep spending whatever they were spending before. We’ll get back to you later about new spending, new programs, terminations, and all those things, but for now, keep spending.” That’s what a continuing resolution is.

Here’s the thing. That’s a hard stop on September 29th for the reason I mentioned. The debt ceiling doesn’t have to happen at the end of September; it can happen at any time. In years past, I’ve seen this happen in March or other times of year. It just so happens by coincidence that it looks like the Treasury is going to run out of cash on September 29th this time.

As I said, you’ve got yourself two asteroids striking the earth. One is the budget authorization in the form of a continuing resolution, and the other one is the debt ceiling increase in the form of authorizing the Treasury to borrow money. They don’t have to happen at the same time, but they are happening at the same time and are subject to the same dysfunctions. In other words, the issues I mentioned, e.g., the wall, Planned Parenthood, Obamacare fix, and sanctuary cities, pop up in the debt ceiling debate and also the continuing resolution budget debate. There is no consensus on any of them. Again, it’s not clear where the votes are coming from.

Just to add another layer of intrigue here (or dysfunction is probably a better word), it’s not clear if the White House is so afraid of a government shutdown. In a government shutdown, nonessential workers stay home, the military is still on duty, the TSA still works at airports, the Post Office is still open, but there are a lot of government functions that do shut down including popular ones like national parks and monuments. They’re the ones that are going to be most visible.

The White House might like that. Remember, the White House is not exactly Republican. They kind of are and they aren’t. Jared Kushner, Ivanka, and some others seem more like Democrats, but Trump is very hard to categorize. I wouldn’t call him a conservative Republican at all. He’s a nationalist, a Trumpist, a capitalist. He’s a lot of things, but I wouldn’t call him a conservative Republican.

Trump is just as eager to fight with the House Freedom Caucus and Mitch McConnell as he is with Nancy Pelosi and Chuck Schumer. He might say, “What we need is a good government shutdown. Let’s show the American people just how dysfunctional we are, just how immature we are,” etc. Again, I don’t want to take sides in that debate. My role is simply to warn listeners that these two things are coming together. I don’t see how they’ll get resolved.

On top of everything we just mentioned, it takes time to do these things. There’s something called the legislative calendar. Don’t think for a minute that Congress works seven days a week or even five days a week. They tend to show up Monday night and leave Thursday afternoon to go back to their districts on the weekends, so they probably work about three days a week, not to mention holidays. Their idea of the Labor Day weekend is a ten-day recess. Most of us are happy to get an extra day off, but they’ll take ten days for Labor Day.

The point is, the legislative calendar only shows 11 working days between now and what we’re talking about, the September 29th train wreck. It takes members of Congress 11 days to find their way to the bathroom.

They have a lot of other stuff on their plate. They have judicial appointments, they need to reconfirm the new FBI Director, there is some cat and dog legislation on Obamacare, and we have a national security crisis with Korea not to mention all the sound and fury about racism in Charlottesville. Again, I don’t want to get into the weeds here, but that’s obviously adding to the dysfunction.

Put this all together with the possibility that the White House might not mind a train wreck. The fact that there is probably a train wreck coming anyway due to the shortness of time, degree of difficulty, and the lack of consensus, we could have a government shutdown. I think we will have a government shutdown on October 1st effective midnight September 29th, and I think this debt ceiling crisis is going to go right up to the deadline.

That doesn’t have a date certain; September 29th is an estimate for that. Imagine you’re running a bond portfolio – a big one, like a pension fund or something – and you’re saying, “Is the United States going to pay me the interest due?”

By the way, there is a big outflow on October 1st because it’s the first day of the month. With Social Security, welfare programs, and benefit programs, that’s one of those days when the outflows are greatly and excessively inflows. People tend to pay their taxes in April, and by October, you’re running on empty.

This is a mess on top of all the other serious national security, terrorism, and other problems we described. It’s one more reason, in my view, why investors should be over-allocated to gold right now and also have some cash.

Alex:  When you’re discussing the schedule of how these politicians work, I’m over here shaking my head thinking, “Ah, the good life.” Hopefully, someday we’ll be able to rein that situation in.

Moving on to our next topic, as you and I have talked about many times, the world economy is heavily interlinked, and many of our listeners are professional money managers, so oftentimes, we will discuss what is going on in other jurisdictions.

Today, I’d like to talk a little bit about China. There is this disturbing trend going on over there where the banks are slowly becoming the majority, or I should say, the larger share of the investor base plus these things called wealth management products or WMPs.

From our discussions and what I’ve looked at in the past, the entire scheme of the WMP structure seems questionable to me. What are the risks and the potential spillover effects for the global markets?

Jim:  The risks and the spillover effects are huge. We’ve had a taste of this a couple times recently. Just about two years ago on August 10, 2015, China did a shocked evaluation of their currency, the Chinese Yuan. The markets didn’t see it coming, and even the elites, the IMF, the U.S. Treasury, and others did not see it coming. China had their own reasons for doing it.

That caused a shock in U.S. stock markets. Go back and look at a chart from August 10th to September 1st when U.S. stocks fell about 11%, and it was worse than that. It wasn’t just that they went down 11%, but it looked like there was no end in sight. It happened to be from peak to trough an 11% drawdown, but when it was down 10%, we didn’t know that it was going to turn around at 11%. It could have gone down 20%. Think about where you were on August 31, 2015, maybe taking the kids back to school, on vacation or getting ready for Labor Day weekend. Investors had a sick feeling in the pit of their stomach. It felt like there was no bottom.

Then the Fed rode to the rescue, and that was when we were going to have the liftoff in interest rates in September. They pushed the liftoff back to December, got involved in forward guidance happy talk, and the problem went away, but it was pretty bad there.

The second time was December 2015 when China did a stealth evaluation. They learned their lesson on the shocked evaluation, so they were doing it in baby steps, but again, the U.S. market reacted badly from January 1st to February 10th, 2016. It again fell 11%.

There you have two examples of what is called in-state contagion. That’s a good word. The IMF uses the word “spillovers” when one bucket spills over into another bucket. Pick your metaphor, but to say that the U.S. markets are isolated, immune or pristine relative to the Chinese evaluation or the natural market events is false. We have two examples of stocks almost spinning out of control based on Chinese actions, so let’s come back to the WMP.

I’ll take a minute to explain what a WMP is. It stands for wealth management product and is a simple concept. As a middle-class Johnny saver, you’re not a Princeton or an oligarch, but you and your spouse have a good job and have some savings.

You walk into the bank and the bank officer says, “We have two products. You can make a bank deposit and we’ll pay you 2% interest or you can buy a WMP and we’ll pay you 7%.” Most people think about that for two seconds and say, “I’ll take the 7%, thank you very much,” and they do.

What gets lost in translation, even in Chinese, is that these wealth management products are not bank products. They’re not liabilities of the banks. They’re off-balance sheet special products very much like CDOs.

Banks take the money people put into the WMPs, bundle it, and buy junk bonds or equity in real estate, state-owned enterprises, bankrupt companies, speculative land deals, ghost cities, and you name it. They’re out there buying all this garbage, so they look like these Lehman Brothers CEOs from the 2006, 2007, 2008 period, which of course, almost brought down the world.

They don’t really tell that to the customer. I’m sure there is some disclosure somewhere in the fine print that no one reads. I’ve seen interviews with everyday savers, people walking out of a bank, and a reporter says, “What did you do with your money?” “I bought a WMP.”

They’ll say to the person, “Don’t you know that’s not the equivalent FDIC insured, that’s not a bank liability, and it’s not guaranteed by anybody?” Some people don’t know that, but some people say, “I know that, but Beijing will bail us out.”

Alex:  That is the attitude in China, absolutely.

Jim:  I’ve been to China several times. I’ve been out in the boondocks of China, I’ve met with provincial Communist party officials, and I’m very frank with these guys. I was having tea in an office near one of these ghost cities, and I said to one these guys, “Can you build seven cities here?” As I’m looking at them, they’re all vacant. Every building I’m looking at it is vacant, and he did it all with debt.

I said, “How are you going to pay back the debt?” He replied, “We can’t pay back the debt. That’s impossible. Beijing is going to bail us out.” You hear this over and over from government officials to a man or woman on the street.

Be that as it may, these WMPs are Ponzis, and I don’t just throw that word out there lightly. Let’s say I bought a two-year WMP two years ago, I go back to the bank, and it’s maturing. They say, “Okay, Mr. Rickards, we can roll your WMP over into a new two-year WMP.” I might say, “Fine, I’m collecting my 7% interest,” but Bernie Madoff investors collected their interest also. They just didn’t know that their money was gone.

But what if I say, “My kid is going to college in the States so I need the money,” and I cash out my WMP? They have invested in these junk assets, so they can’t really cash out the WMP. What they do is sell a new WMP to the next person who walks in the door, take that money, and give it to me.

The new person is happy because she’s getting 7%. I’m happy because I got my money back. Meanwhile, the money isn’t there. You must sell the new ones to pay the old ones, and what you really hope is that the old ones roll over so your net inflows are positive and you don’t have net outflows. This is a Ponzi.

By the way, the Chairman of the Bank of China in an interview said, “It’s a Ponzi.” I quoted this in my book, The Death of Money. It happens to be my analysis, but it’s not just my analysis; we have it on record from China’s officials.

That’s where we are. We know that all Ponzis fail eventually. They collapse and cause a panic. That’s coming, but it doesn’t have to be tomorrow. This Ponzi can walk for a long time. Madoff ran his Ponzi for 20 years. The guy is spending the money on himself, losing it in other things, but convincing investors that it’s all good. As long as you pay the coupon, sheep will feel good about it.

I saw an article, a chart, and analysis last week showing that the amount of WMPs is going down. This was taken as a positive by the analysts who said, “This is great. China is finally stepping up to the plate. They’re finally getting things under control. It’s good that the leverage in the system is going down. Isn’t this wonderful that the WMPs are going down?”

I said, “No, that’s a nightmare. That’s like Bernie Madoff saying, ‘My assets under management are going down.’” If you don’t have the money and you get into negative cash flows or net outflows in a Ponzi… If it was a real product that was wisely invested and you saw it going down, you might say to yourself, “That’s good. There’s more liquidity in the system. They’re reducing leverage. They’re not acting as crazy on real estate.”

It would be a good thing if it wasn’t a Ponzi, but people forget that it is a Ponzi. When you see assets in a Ponzi going down, that means the run on the bank has started and this fire is about to spin out of control. To me, that’s one of the scariest indicators I’ve seen and one more reason to expect that China is about to implode.

Just to be clear, nothing is happening in China until either the end of this year or early 2018. The reason for that has nothing to do with economics and everything to do with politics. There is a national Communist party, Congress, that hasn’t set the exact date, but it’ll be late October or early November when President Gee is going to be anointed, if you will, as the big G, the big man, the most powerful Chinese leader since Mao Zedong. He doesn’t want to rock the boat ahead of this party Congress, so no crises are going to break out in China between now and November. They can back that up because they still use firing squads if they have to.

Once we get past the party Congress and Gee has achieved his power goals, we’re into 2018, and yet two plus two does not equal five. I think you’re going to see some of these chickens come home to roost.

If you asked me, “How does this play out? What do they do?” I would expect a maxi-devaluation of the currency, because devaluation of the currency solves the capital outflow problem. You can reopen the capital account, because people are not as anxious to get their money out. Once you steal their money, you can’t steal it twice, so they say, “I might as well sit here. I’m not sure how to get my money out.”

I would expect a maxi-devaluation to boost exports and export-related jobs and cure the capital outflow issue. For right now, they’re squashing everything, so don’t look for drama from China before the end of the year. I would look for a lot of drama in the next year.

Alex:  You mentioned that they all believe the government is going to bail them out if there are problems. That reminded me of my many trips to China talking to money managers, government officials, and others.

Before 2015, I made a trip and talked to five of the largest fund managers in China. They all said the same thing – they weren’t concerned about the banks or the markets. Then in June of 2015, I’m sure you remember there was the Chinese stock market crash.

The government basically froze everything and told them, “You can no longer trade. You’re not allowed to sell.” They were even going so far as to making criminal investigations into fund managers who were selling positions during that time, and they locked down liquidity.

You’ve mentioned something like that in terms of Ice-Nine in your recent books. That’s a big deal right now. The prevalent question on the mind of every professional money manager I talk to nowadays is, “What’s the liquidity like?”

Adding to that, keep in mind that secondary markets, stock markets, etc. can get shut down by governments at any time. If things are going badly, it can happen, and if you’re frozen out of markets, be super careful.

Jim:  I had a conversation with an investor just the other day and pointed out that on October 19, 1987, the major U.S. stock market indices, which is now referred to specifically as the Dow Jones Industrial Average, fell 22% in one day. Not a month or a week, but one day.

In today’s Dow points, a 22% drop would be 4,000 Dow points. Not 400, which would be a really bad day. The other day it was down 275 and everybody was all spun up. Four hundred would dominate every headline. Imagine 4,000 Dow points.

The person I was talking to said, “Yes, but they wouldn’t let that happen. They’d change the rules. They have circuit breakers and would close the Exchange.” I said, “You’re right. They would close the Exchange.”

You tell me. Which makes you feel better: a 4,000 point drop or a closed Exchange? At least with a 4,000-point drop, I can still trade or get out at a price. I might not like the price, but things are still transacting. If you shut the market, that’s Ice-Nine.

My thesis was that when you shut one market, the demand for liquidity moves to another market, probably money market funds, and you have to shut that down. Then it moves to another venue, which would probably be a run on the bank, and you must shut the banks down, etc. It spreads, so, I wouldn’t be too glib or sanguine about the fact that you can close the Exchange, which you can, because then you should say, “What’s the next move?”

As far as the Chinese bailout is concerned, the fact is, Beijing will bail them out. What drives me crazy about Wall Street analysis is they’ll say, “Yes, but Beijing will bail them out,” and I’ll say, “But what does that mean?” It’s going to cost $1 trillion to do this bailout we’ve been talking about.

Chinese has approximately $3 trillion in reserves. About $1 trillion of that is illiquid. It’s real money. I’m not saying it’s fake wealth, but it’s in the stock market, it’s in hedge funds, it’s in private equity. Try getting your money back from Henry Kravitz. He’s not going to give it to you, at least not until your seven years or whatever are up.

Take $1 trillion off the board because it’s there and it’s illiquid. Then there’s another trillion that has to be held in liquid form as a precautionary reserve to do this bailout. If you use that money, then you don’t have the money you need to do the bailout.

That means there is really only $1 trillion in reserves in China that is not already spoken for either in the form of illiquid assets or precautionary reserve. When the reserves were going in 2016 at a rate of $50 billion a month, you’re broke in a year.

China is in a much more precarious situation than people realize. You can’t just throw the $3 trillion number around without thinking about how much of that is already spoken for (the answer is $2 trillion). That’s why I expect the devaluation would be the answer, because that does solve the capital account problem.

Alex:  If you’re the Chinese government, why would you blow your dry powder on trying to prop everybody up and bail everybody out? As they’ve already proven, you can just shut it down and threaten people with criminal investigation if they try to trade.

Jim:  I think that’s right.

Alex:  Obviously, you and I have been banging the table on why you need to take a hard look at physical gold for a long time. I think these are all reasons that you have some of the smartest money managers in the world, like Ray Dalio, talking about it.

Moving on to our last topic. Jim, in our private discussions, you’ve mentioned something to me called The Myth of August. For our listeners, would you elaborate on what that means?

Jim:  The Myth of August started as kind of a fun thing with me, although it’s not fun in the sense of the specific events I use to illustrate it. Here we are two-thirds of the way through August, so there isn’t too much time left but plenty of time for fireworks.

The idea is, August is a very popular vacation month. As the last month before kids go back to school, it’s a great time at the beach or the mountains, etc. From Europe to North America to around the world, a lot of people take their vacations in August. Everyone, at least in my part of the world, are in the Hamptons, the Jersey Shore, Cape Cod, or wherever. Offices empty out, whole industries, publishing is almost practically shut down, and nothing happens. It’s just quiet. We all come back to work and are rocking and rolling on Labor Day. That’s the myth.

The myth persists, yet the reality is quite different. Look at the things that have happened in August. They’re not just newsworthy; they’re among the most momentous events in history and financial history. Most famous, tragically, is what Barbara Tuckman, a great writer and historian, called the guns of August, which was the outbreak of World War I.

Even in more recent times, on August 15, 1971, Richard Nixon ended the gold standard. It was August 7, 1990, when Saddam Hussein invaded Kuwait and George Bush, 41, said, “This will not stand.” We sent troops to Saudi Arabia, airlifted them in to the Land of the Two Holy Places, as the Muslims say, literally the next day, which gave rise to Al Qaida.

It was August 1998 when we had the double embassy bombings in Kenya and Tanzania, and Bill Clinton responded with cruise missiles. August 1998 was also the famous Russian default which led straight to the global financial crisis meltdown involving Long-Term Capital Management. As their General Counsel, that landed in my lap, and I negotiated that bailout.

August 1991 was the Solomon Brothers trading scandal when Solomon, the largest U.S. bond dealer in the world, almost went bankrupt which would have started another financial crisis. Warren Buffet came in as a white knight, bailed them out, and the Treasury backed off in the threats against Solomon. The crisis did not go further, but it certainly had the potential to do so.

August 1991 was also a Russian coup. Some crazy KGB guys kidnapped Mikhail Gorbachev. Remember that one? I think the coup was busted because they got drunk on vodka, so their situation awareness was not the best, but they did kidnap the General Secretary of the Communist Party in an attempted coup. And we had Hurricane Katrina in 2005.

I don’t need to belabor it, but I’m very wary in August. A lot of very nasty things have happened. We’re in the home stretch here, just about ten days left, so hopefully it’s quiet, but given everything we mentioned at the beginning of the podcast about North Korea, I’m not so sure it will be quiet.

If the U.S. goes ahead with this military exercise, which I expect, and Kim Jong-un responds with some kind of test, whether it’s a submarine-launched ballistic missile, nuclear device or an ICBM aimed at Guam, which I also expect, then we’re not going to make it out of August without a financial earthquake. Let’s see what happens, but I wouldn’t put my feet up quite yet.

Alex:  I think these are all good reminders.

Revisiting the whole liquidity thing, many people are heavily invested in what you and I call paper products that require some kind of counter-party to perform. In a recent paper, the IMF said that gold is the only financial asset you can buy that does not require a counter-party for it to have and retain its value.

I wasn’t going to share this, but I’m going to mention that I had a conversation earlier this week with the head of a trading desk who has 15 people under him. They’re running a lot of money as one of the largest financial houses in the world. If I mentioned the name, everybody would immediately recognize it, so I’m not going to say who this person was.

In a candid moment of discussion, he mentioned to me that they are pretty nervous about this kind of stuff. They listen to our podcasts on a regular basis and don’t miss one, so thanks guys. We appreciate the support.

He mentioned that if it were up to him in regard to all the paper investments – in other words, the ones with the counter-party risk and the ones that rely on exchanges to trade, etc. – he’d sell it all right now.

Jim:  Personally, thank you if you’re listening, and thank you and your team for joining us.

The one thing I would say, Alex, is there is a name for restorative value that does not have counter-party risk. It’s called money. People say, “I have money in the bank.” No, you don’t. You have a bank deposit which is an unsecured liability of an occasionally solvent financial institution. Even a Federal Reserve note, if you read it, says, “Federal Reserve note.” Where I went to law school, that means it’s a liability, which it is.

People don’t think hard about what money is. They take a lot of things for granted and assume it’s money when it’s not; it’s something else.

Again, to go back to where we started, people say, “I’m nervous about buying gold.” I say, “I’d be nervous if I didn’t have any.”

Alex:  That wraps up today’s podcast. Jim, thank you for your time. The discussion has been invigorating. We covered some really great material, and I very much look forward to our next one.

Jim:  Thank you.


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


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

Jim Rickards and Alex Stanczyk, The Gold Chronicles July 2017


Topics Include:

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


Listen to the original audio of the podcast here

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


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


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

Jim:  Alex, how are you?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alex:  Yes, I totally agree.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alex:  Again, I totally agree.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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


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


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

Jim Rickards and Alex Stanczyk, The Gold Chronicles June 2017


Topics Include:

*In depth look at potential risks of cryptocurrency
*Why cryptocurrencies are still in their infancy and are not yet comparable to gold, US dollars, or other currencies
*Why ICO’s and crypto currencies are not protected from government regulation or enforcement
*How most cryptocurrency ICO’s are not compliant with international AML/KYC reporting frameworks
*Which tools regulators have for enforcement of breaches in regulation and why cryptocurrencies are not beyond regulatory reach
*How a distributed ledger works
*How Bitcoin mining works
*What is an Initial Coin Offering
*Trustless dis-intermediation still has chokepoints that regulators can act against
*SWIFT transfers
*Tax implications of cryptocurrency ownership
*G20 Update
*Syria Update
*North Korea Update

Listen to the original audio of the podcast here

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


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

Alex:  Hello, this is Alex Stanczyk. Today I have with me Mr. Jim Rickards. Jim, welcome back to the podcast.

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

Alex:  We have a number of different subjects today including cryptocurrency. We’re also going to talk about the G20, Syria, and North Korea.

Let’s start with cryptocurrencies. We have listeners who are interested in crypto but are not what I would consider seasoned crypto-enthusiasts. For the portion of the audience who are not highly technical, there’s a desire to know more about crypto in terms they can understand. We’re going to discuss that a bit today.

I would like to lay down a few thoughts to set a foundation for the topic. First of all, this is not about cryptocurrency bashing. I personally like the idea of a distributed ledger; it’s fascinating technology. The potential for the blockchain technology is quite interesting.

This also isn’t about whether gold is better than cryptocurrency or vice versa. The truth is, crypto is still in its infancy. It does not yet come close to gold in terms of practical application.

Gold’s market cap is in the neighborhood of $7.4 trillion as of the last estimates we received from our sources. Other currencies, Global forex for example, are multiple times this in size. All crypto combined is sitting at a market cap of about $112 billion. While the technology has great potential, cryptocurrencies themselves have a long way to go before global markets take them seriously as a money alternative with any depth and liquidity.

There’s been a lot of buzz surrounding crypto that, from my perspective, does not take into account the reality of the global regulatory landscape we live in today. For example, because it’s crypto or because it’s an ICO (Initial Coin Offering), if this ICO is in a country outside the U.S., there seems to be this belief that it’s somehow protected from regulatory reach.

One of the things I want to talk about today is that this is either a lack of understanding of how regulatory enforcement works on a global level, or possibly there may be a little bit of confirmation bias going on that’s blinding people to how things really work.

I want the listeners to keep in mind that I’m not pretending to be any kind of technical expert on cryptocurrency. What I’m addressing is what appears to me to be gigantic, gaping holes in the attention given to regulatory compliance and this idea that crypto is somehow beyond the reach of government.

Jim, I’m going to be asking you for your input on this in a moment. But for now, let me just add a little more foundation.

Right now, ICOs are popping up like crazy. It’s kind of like the Wild West. An ICO is a brand-new cryptocurrency people are pouring money into. My observation is that the majority of these ICOs may not understand the legal implications of what they’re doing in the area of what regulators could view as issuance of securities or, with a lot of them, being in noncompliance with international AML/KYC frameworks such as FATCA, CRS, and IGA. FATCA is the Foreign Account Tax Compliance Act, an intergovernmental treaty framework the U.S. has pushed. CRS is an OECD framework, and IGA is put forward by the UK.

These things all need to be taken seriously. There’s a host of regulatory bodies from several countries that are monitoring what’s happening in crypto. Even if they’re not aggressively pursuing enforcement actions, they’re well aware of activity in the space.

From the U.S. specifically, the regulators who have potential oversight are the SEC, the CFTC, and particularly the FinCEN. FinCEN stands for the Financial Crimes Enforcement Network.

All it would take would be for crypto to be classified as a primary tool for terrorist financing, and then all kinds of risks start to open up. I want to be clear here that I’m not suggesting crypto is a primary channel for these kinds of activities. What I’m saying is that if a regulator such as FinCEN claims that it is, that’s all it’s going to take for this to have serious potential repercussions.

At this point, some people who are familiar with crypto might make the argument that, just like gold, if it’s used in total isolation, it works, which I grant is true, but not for any serious liquidity. For example, you can bury gold in the backyard, but in serious quantity, who are you going to sell it to later and expect it to remain secret or safe during such a transaction?

With crypto, you can avoid digital exchanges by going point-to-point directly. You can try to avoid interfacing with anything that touches USD transactions. In doing so, your world of potential transactions and, importantly, options for liquidity and size diminishes substantially if an actor tries to take this isolation route.

Jim, considering that regulators could take the view that ICOs are acting as noncompliant financial services entities, what are your thoughts in this area in terms of the tools regulators bring to bear on U.S. dollar transactions in cryptocurrency or other risks you see here?

Jim:  Thanks, Alex. That was a great introduction. The first thing I would say is that this is a huge topic. We say, “cryptocurrencies,” “blockchain technology,” “initial coin offerings,” “safe contracts” or “smart contracts,” and the various uses and legal regulatory regimes which I’ll talk a little bit more about.

Each thing I just mentioned is a big topic in itself, and they all fall under the banner of crypto. For those not familiar, this all originates with a certain kind of technology, a certain protocol called the blockchain.

Blockchain is basically a recordkeeping, a ledger. Right now, certainly for hundreds of years but still true today, if you bought a property from somebody, you’d show up at the closing (or your lawyer would) and the seller would have a deed. They would sign it over to you, and you or more likely your lawyer or a clerk or somebody would go down to the town hall and hand that to the town clerk.

The town clerk would literally write it down. Maybe they’d type it in a ledger, a land record, and put a stamp on it. They would give it back to you or mail it back to you so you could put it in your safe-deposit box. That deed would be your legal document representing your title to that land.

Think about all the steps I just described. The fact that there’s paper involved and it’s got to go through many hands: lawyer, clerk, the town clerk, back to you, buyer, seller, etc. It’s legally binding and recognized by the courts. It’s the way things are still done today.

These are public records. You can go to the town hall on your own and pick out a lot number and a block number. (That’s usually how they’re categorized, e.g., Block 22, Lot 15.) You could look it up, find out who owns it today, and who they bought it from all the way back to whoever, maybe the Revolutionary War for that matter. That’s an example of a ledger and a recordkeeping method to establish title.

The blockchain does a couple things. First, it’s completely digital, so forget the paper side of it. Second, it’s heavily encrypted with what’s called military-grade encryption, which is (at least as far as I know) unbreakable. If there’s any way to break it, I promise you, it is the most closely held secret of any government in the world.

People are certainly working on it all the time, but for all practical purposes – again, as far as I know – it’s unbreakable unless you give away your key. You have a certain alphanumeric code that is your key. As long as you keep that private and don’t give it away, then you’re the only one who can unlock the encryption.

It’s heavily encrypted; it’s digital; it’s virtually free to move it around. Most importantly, it’s distributed. ‘Distributed’ means that this ledger resides on thousands, millions, or potentially tens of millions of computers and servers all over the world.

That’s a big deal, because if there were a fire in the town hall and all those paper records I just described were destroyed, you’d have a heck of a time recreating all that. But if you literally blew up a computer that had this ledger on it, it wouldn’t matter. The same ledger exists on all these other computers. It’s the community as a whole that verifies it.

If one party says, “I own this certain asset” (it could be Bitcoin or any other asset which we’ll talk about in a minute) and the whole community says, “No, you don’t. We all have the same ledger, and we see that this went to a certain party from A to B, and Ms. B is the owner,” that’s that.

You have the benefit of digitization, encryption, and distribution. These three very powerful tools are the blockchain technology. Now, what can you do with blockchain technology? One thing – and this has been done – is to create a cryptocurrency. Bitcoin is the most famous or best known, but there are many of them out there.

I was involved with one working group, and we identified 90. That was some time ago, so I am sure there are many more than that. Some of them have larger amounts in circulation, larger followings, if you will, than others. Greater liquidity is the way I think about from an economic perspective, but they’re all out there.

How do you get some of this currency? How do you get a Bitcoin? Well, you can sell something and accept Bitcoin payment. I have a store on my website, The James Rickards Project, that accepts Bitcoin. You could pay me in Bitcoin for one of our goods, etc.

You can sell things for Bitcoin, and you can go buy a Bitcoin. You can take dollars or euros for that matter and go to a Bitcoin exchange (exchanges are popping up all over) to buy Bitcoin.

You can also mine them. The word ‘mining’ obviously is a reference to, or at least an analog of, gold mining. Of course, it’s nothing at all like gold mining. I’ve been in gold mines, and it’s one of the grittiest, most physical business you can imagine.

You have to drill cores and walk around in remote areas that are either freezing, equatorial swamps, or deserts. It’s a nasty business with all kinds of machines, backhoes, and all that stuff. Gold mining is a very hands-on, gritty business.

Mining Bitcoin or any cryptocurrency is quite the opposite. It takes massive computing power. To simplify it, the Bitcoin protocol is basically solving very difficult math problems that take a lot of number crunching, a lot of computing power, and a lot of energy.

By the way, one of the criticisms of Bitcoin is that the amount of energy being sucked up to create Bitcoin, to do this mining, is itself a waste. We’re burning a lot of coal somewhere in the atmosphere, or nuclear power or some other things people don’t like, to generate electricity so Bitcoin miners can go about their work. I’ll just leave that as an aside.

Some big Bitcoin mines are, at this point, a very large warehouse-sized facility with lots of servers and processing power going on. Some are being put in Iceland, because it’s cool in Iceland, and you generate a lot of heat with that much computing power. Also, energy is relatively inexpensive there, because they have geothermal and a couple other things. That’s the kind of Bitcoin mining.

These math problems I described get harder. Every time somebody mines a Bitcoin, the next problem gets a little bit harder. It grows exponentially to the point where the last few Bitcoins that ever get mined, the amount of processing power that goes into it, is going to be enormous.

As a miner, if you solve the problem, you get Bitcoin. That becomes your reward. I haven’t verified this myself, but I heard from third parties that today it costs about $1,000 to mine a Bitcoin. Bear in mind, we’re pretty far down the road with these things. Originally, it would have been far less than that. Now the Bitcoin are selling on exchanges for between $2,000 – $3,000. It’s volatile.

I guess it’s like gold mining. If I can mine gold for $800 an ounce and sell it for $1,200 an ounce, I can make some money. If I can mine Bitcoin for $1,000 and sell it for $2,000 – 3,000, obviously I can make money doing it. That’s the currency part of it.

Now, let’s talk a little bit about Ethereum and ICOs. I said there are many cryptocurrencies other than Bitcoins. These initial coin offerings are groups of developers not unlike any Silicon Valley startup. In San Francisco, San Jose, Silicon Valley, New York or anywhere in the world associated with Silicon Valley, you can find teams of developers. Maybe some of them have experience at one of the big, successful startups whether it’s PayPal, Uber or some of these new apps they’re working. You name it, there’s an app for it, of course.

They need to fund themselves, because they have salaries, overhead, rent, equipment costs, etc. no different than any other startup. The traditional way is to meet with venture capitalists, ask your mother or family and friends, knock on doors or do a private placement. There are traditional ways of funding any startup.

More recently, we’ve seen what they call crowdsourcing or crowdfunding where you throw it out there on a certain Internet site and get people to give you money. With original crowdfunding, they’d give you a T-shirt, a ticket to a movie if they could produce a film, whatever it might be.

These ICOs are really nothing more than crowdfunding or crowdsourcing. Here’s how it works: If I choose to subscribe to one of these, I send in hard dollars, $100 or $1,000 or whatever. In return, I receive one of these coins. They also call them tokens or some name like Dow and Mastercoin, for example.

I’ll get one of these coins or maybe a bunch of them because I put a lot more money in. What do I get for my coin? Here’s where it gets interesting. In a normal startup, I’ll sign a subscription agreement, send my money in to the promoter, and I’ll get shares, units, limited partnership interest, LLC member’s interest, stock, or something.

It goes on the ledger (a capitalist will say a cap table). From then on, I’m an equity holder. If the company fails, my equity goes to zero, tough noogies. If it succeeds, maybe I just bought into the next Google at $1/share and someday it’s at $1,000/share. That’s why people do it hoping for those big gains.

With the coin or token I get, it’s not really a share. I don’t get any voting rights or dividends. That’s where I’m jumping ahead a little bit to the regulatory regime you talked about, Alex, and where the securities laws get tricky.

If I’m the creator, the programmer, and the developer of this, I can define the token any way I want. It’s certainly possible that a token could walk and talk like a share of stock. The minute you tie the value of the token to the success of the enterprise, it’s probably a security.

For purposes of application of the ’33 Act and ’34 Act securities laws (the ones we’re familiar with in the U.S.) and similar securities laws in Europe, the UK, and Japan, the definition of a security is a little bit technical. It’s usually tied to some stake in the success or failure of the enterprise and defined as the earnings of the enterprise.

What if my token says, “No, Jim, you don’t get any stock. You get no votes. You have no equity in this thing. What you do get is to use the app for free,” or “You get to sell it to somebody else,” or “If the app is successful, you’re going to get certain privileges,” or “You can intersect something you’re doing with what we’re doing so these things are compatible in certain ways.”

I realize I’m being a little vague right now, but the area is vague, because there are a lot of ways to do this.

I might create a token that looks just like a security, in which case, unless I follow the private-placement rules 506(b), 506(c) and some other laws, I could be breaking the securities law if I’m not careful.

On the other hand, if the token is not much more than a token and the person buying it is hoping for the best – that the token becomes more valuable because they’ve got a front-row seat on the next new app and can sell it to somebody else – it might not be a security. It’s some kind of property right, it’s some kind of speculation, but it might not be a security. This is very new, very grey.

I can imagine traditional securities lawyers pulling their hair out over this trying to figure out what it is. I was involved in the very early days of the swaps market. Swaps and derivatives are commonplace today, but going back to the late ‘70s and early ‘80s when these things were literally being invented, I was international tax counsel at Citibank. We knew how to write them, but we didn’t know how to treat them in terms of tax treaties.

If you paid a swap payment, was that interest? Was it a dividend? Was it insurance premium? You could argue that it was any one of those things. We were operating in a grey area and have a lot more clarity around that today, but it’s the same thing with these ICOs.

What are these apps you’re funding used for when you buy a token in an ICO? One of the big applications today are what are called safe contracts. Because transfers through a distributed ledger are both encrypted and irrevocable, if not un-hackable or at least sufficiently widely distributed that they’re reasonably safe, it’s considered to have the potential to solve a trust problem in any transaction.

Go back to cavemen and cavewomen and imagine you just killed a mastodon. You’ve got some fresh meat, and I just picked a bunch of berries. We want to barter. I want to give you some berries, and you’re going to give me some of the mastodon meat. Well, what if I give you the berries first and you run away or you give me the meat first, and I run away? It might start a war or whatever.

It’s the “who goes first?” problem that applies even in modern times. Maybe in the 19th Century I’m going to buy something from you, I hand over the money, and you don’t deliver the goods. You keep my money and don’t deliver the goods, or vice versa.

This happens on a much larger scale when you’re doing multibillion-dollar corporate takeovers. How do you handle all that? The answer is that through centuries of law and contracts, precedent and court cases, enforcement, and other things, we have developed tried and true ways of dealing with all these problems.

If the buyer and seller are remote and not face-to-face for a simultaneous exchange, you can use an escrow agent. You can use insurance, a third-party bank or a lot of different trust counterparties to solve that problem.

I worked on one of the biggest problems like this in history when we were obtaining the release of the Iranian hostages in 1979/1980. Iranian militants broke into the U.S. Embassy and took a bunch of Americans hostage around the time of the Ayatollah Khomeini and the Iranian Revolution after the fall of the Shah.

Because it was sort of spontaneous, they hadn’t really thought through where a lot of their money was. It turned out that a lot of it was in U.S. banks, so all that money was immediately frozen.

After a year or so of negotiations, the U.S. obviously wanted the hostages back. Iran had gotten enough propaganda value out of it, and they wanted their money back. The U.S. was not going to pay ransom, but took the attitude that, “It’s not really ransom; it’s your own money that we’ve frozen. We’ll just be giving it back to you if you give us back our citizens.”

That was the deal, but the problem was neither the Iranians nor the United States (there were other Western banks involved, but I’ll just say the United States) trusted the other enough to go first.

The U.S. said, “If we send you the money, you guys are going to take it, keep the hostages, and poke a stick in our eye.” The Iranians thought the same thing, “If we release the hostages, you Americans will never give us the money. How can we trust you?”

We solved that by saying, “The obvious way to solve it is to get an escrow agent.” You give the money to the escrow agent, he sits on it, observes the release of the hostages, and when the hostages are released, the money is forwarded to, in this case, Iran. They’re no longer trusting the United States; they’re trusting the escrow agent.

Then the problem was, who in the world was trusted by both sides? Who could the U.S. trust enough to send the money to in the first place, and who could the Iranians trust enough to know that they would get the money if they released the hostages? It turns out, the answer was Algeria, the Central Bank of Algeria. They were sufficiently Western and sufficiently Islamic that both sides were happy.

It’s a long story and an interesting one, but my point is, that’s how difficult it can be to solve this “who goes first?” problem in any exchange. With Ethereum and some of the apps being developed under some of these initial coin offerings, that problem is solved through the protocol.

That is, if I pay you, there is going to be some verification that you ship the goods. When that happens, you automatically get paid. You’re no longer relying on me to send you the money. You know the money is waiting for you once you ship the goods.

These are called safe contracts. A lot of people are working on apps for those. I question whether they’re not solving a problem that doesn’t exist in the sense that Amazon does quite a bit of business. When I use my credit card to buy something on Amazon, I don’t really worry that I’m not going to get my merchandise. If I don’t, I know I can get the credit card charge reversed.

It would be rare if that were not true, so I don’t consider there to be much of a problem. If there’s an improvement on that, maybe Amazon would buy the technology. Who knows? This is just an example.

I realize I’m going on at length here, but I’m trying to make the point that there’s the blockchain technology, there are cryptocurrencies, and there are ICOs issuing coins or tokens that could be currencies but are really property rights of some kind, hard to define, in a new app. The apps themselves are performing these kinds of ledger or safe contract role.

I don’t want to mush it all together, because I think there’s too much of that. People are kind of glib in the conversation, but I think it’s important to make all these distinctions so we’re not just throwing the word crypto around without a lot of content. We should know exactly what we’re talking about.

Alex:  I think the idea with the whole trust lists thing is that it removes intermediaries. In particular, it removes banks as intermediaries and the focal point of control of the transactions.

That’s one of the things I was trying to get at here. Any of these cryptocurrencies you’re transacting in are cross-rate or cross-currency. In all forex, there’s a cross-rate. Either it’s USD/RMB, it’s USD/CHF (Swiss francs) or it’s USD/gold, for example. That means you’re converting these cryptocurrencies in and out of other types of currencies, and this is where your risk is at. This is where there is potential for regulators to control that.

Jim, talk a little bit about how SWIFT works and how anything that’s done, really in U.S. dollars, how that happens and how regulators can use that.

Jim:  Let’s say I’m Deutsche Bank, the biggest bank in Germany. A lot of my business is in euros, but I deal in all major currencies. You’re sitting in New York and are Citibank, one of the biggest banks in the United States.

I have to send you $2 billion, because my dealers bought foreign exchange from your dealers or we had a bunch of transactions or customers wanted a little money. Whatever it is, I want to send you $2 billion. How do I actually do that?

One thing you don’t do is go to the ATM, get a bunch of cash, put it in FedEx, and send it. That’s obviously ridiculous, so we can cross that off the list. I could send you some kind of commercial paper, negotiable instrument, by courier, but that’s slow and pokey. It wasn’t so long ago that that’s the way things were done.

The way they do it now is to send a message through SWIFT (Society for Worldwide Interbank Financial Telecommunications). They don’t consider themselves a payment system, and they’re certainly not a bank or a financial institution. They compare themselves to the phone company and say, “We handle message traffic. To get in SWIFT, you must agree to abide by all the protocols of SWIFT.”

As Deutsche Bank, I want to send Citibank $2 billion. I would do that by sending a message through the SWIFT system. Think of SWIFT as a giant digital switchboard. They have forms that can all be done online that go by the name MT (Message Traffic). There’s an MT101, MT102, 202, etc., lots of different kinds.

Here’s the thing about SWIFT. Assuming I’m an authorized participant, you’re an authorized participant, we both have the right protocols and passwords, we go on and fill out this MT form, somebody hits “Send” and Deutsche Bank just sent you $2 billion. That’s irrevocable. I can’t say, “Whoops, sorry, I pushed the wrong button,” or, “Oh, gee, I filled out the form.” Too bad; that’s on me now. If I actually do that (mistakes do happen), the bank must call the other bank to explain what happened. Maybe they can sort it out, maybe they can’t, maybe there’s a lawsuit. Who knows?

SWIFT says, “We have nothing to do with it. We’re not your referee or your escrow agent, we’re just the phone company. We connect the switchboard, and the message goes through.” That’s the way things are done today. It’s rather efficient and certainly a lot better than the way it used to be, but it still takes a lot to maintain SWIFT.

SWIFT is subject to government intervention and government control. It’s rare, and they don’t like it, because they like to keep out of politics. Obviously, there could be all kinds of squabbles among all the SWIFT members. They don’t like to get in the middle of that. However, there have been several instances most famous of which was in 2012/2013, right in there.

As part of U.S. sanctions on Iran because of the Iranian nuclear weapons and uranium enrichment programs, Iran was kicked out of the SWIFT system. The board of governors or the supervisory board of SWIFT said that Iran could not use the system. SWIFT didn’t really want to do it, but there was pressure put on them for that reason.

That was a big deal. Iran could ship oil, which they do, but they could not get paid in dollars, euros or any other hard currency through the SWIFT system, and they had no other way of doing it.

They could get Indian rupees deposited in an account in an Indian bank if they wanted rupees, but it’s kind of limited in terms of what they could do with that. They couldn’t transact in dollars, euros or anything else anybody really wanted.

Iran did workarounds, such as barter, and gold was a big part of it. They could put a bunch of gold on a plane, fly it to somebody and unload it, and there’s payment. There’s nothing digital about it and no way to interdict it other than shooting the plane down, but then the gold would just land on the ground. That’s the great thing about gold – it’s pretty much indestructible.

The point is, that was a real burden on Iran. It brought them to the negotiating table and led to an agreement under the Obama administration. I don’t want to do a deep dive on the agreement, but those financial sanctions were very effective. Today, North Korea is the one that’s kicked out. Again, it is rare and SWIFT doesn’t like to do it, because they like to keep out of politics.

The blockchain – particularly for applications created on the Ethereum platform –  offers the kinds of transfers I’m describing with no trusted counterparties, no heavy infrastructure.

A lot of people are looking at this. JP Morgan is working on it, Blythe Masters (formerly head of commodities trading) is in a joint venture or enterprise with some other founders looking at it, Marc Andreessen, the Winklevoss twins, other major banks, the IMF, and Russia are all looking at it.

There’s good reason to be enthusiastic about the technology. I’ve voiced a lot of concerns, reservations, and some criticisms of various things going on in crypto and immediately get branded as, “You’re a Neanderthal, you’re from the Stone Age. What’s wrong with you? Baby Boomers, you don’t get it,” etc.

The fact is, I’ve been studying this for years. I’ve read the technical papers, and I do keep up with it. I’ve been involved, for example, by working with the U.S. Military in interdicting the use of cryptocurrencies by ISIS. I’ve seen ways this stuff can be interdicted, which I can’t really discuss in any detail since some of this information is classified. The point is, there’s more there than maybe some of the fans want to believe or tell themselves.

I’m not technophobic at all. Like you, Alex, I find it fascinating. I try to learn about it, but I’m not a cheerleader, either. I don’t get the pompoms out and say, “Go buy this stuff.” I think for people who do, it’s maybe self-interested, because if you own some, you probably want the price to go up. I would say Bitcoin doesn’t have a price; it has a cross-rate to other forms of money.

That aside, there’s a lot of self-interest and trolling involved. There are people who are a little overly enthusiastic and don’t see the dangers in all this. That’s why I think it really does pay to be thoughtful.

Alex:  I agree. At the end of the day, what it comes down to is that any cryptocurrency that’s going to interface with another currency, for example if it touches the U.S. dollar ecosystem, that’s the chokepoint. Any wire transfer or transfer that’s sent in U.S. dollars around the world goes through an intermediary bank in New York City. Well, that is on U.S. soil, and they have complete control of that.

There’s a big difference between regulation and enforcement. Ultimately, lawmakers can pass any law they want, but if it can’t be enforced, it doesn’t really have any teeth. The reason banks and financial services entities all over the world are complying with extra-sovereign regulatory oversight is that the enforcement tools regulators have at their disposal do have teeth. Anyone who thinks that cryptocurrencies are outside the reach of that, aside from these direct transactions we talked about, are fooling themselves. By the way, this oversight compliance is costing them billions of dollars.

Jim:  Right.

We’ve touched on securities law, counterterrorism, any money laundering, the Financial Crimes Enforcement Network (FinCEN), and all the things you mentioned, but there’s another 500-pound gorilla in the room, which is our friends at the IRS. A lot of people don’t realize that if you could go out and buy a Bitcoin for $200 – it’s shot up so much, but it wasn’t long ago you could get one for $200 – and today it’s worth $2,000, you can use it to buy something. You don’t even have to cash it in for dollars. You can buy a plane ticket or just about anything with Bitcoin.

In my example, you just had an $1,800 gain you have to put on your 1040 income tax return. Bitcoin is some kind of property. I query whether it’s a capital asset or not, but it doesn’t matter. It could be an ordinary account or capital gains, but you have a $200 basis, $2,000 of value of proceeds, and an $1,800 gain. You must put it on your tax return and pay the tax.

How many Bitcoin users are actually doing that? I don’t know the answer, but I’m guessing it’s not that many. All those who are not are tax evaders, at least if you’re U.S. citizens. If you’re a citizen of another country, that may be different, but for U.S. citizens at least, it’s got to go on your tax return. That’s the law. If you don’t do it, it’s intentional, willful, and possibly a felony. They didn’t get Al Capone for murder or bootlegging but for tax evasion.

Now, is there enforcement? I haven’t heard of much, but the IRS is a funny organization. They’ll see things like this and lie in wait. They’ll sit there and say, “Why chase after a couple of little guys? It’s all new. Why don’t we just wait and let it build up for years. Let the amounts involved get into the billions and then go scoop them all up at once.” They’d need a test case or some probable cause, but they’d serve a subpoena on the major Bitcoin exchanges and demand all their books, records, and identities of all counterparties. It would be resisted and end up in court where they’d probably get a court order enforcing that.

Well, suddenly the exchanges are giving up all this information. The Bitcoin fans might say, “So what? I’ve got a digital wallet. All they’re going to do is get a code they can’t crack.” Maybe, maybe not. The point is, you can kind of go from there. They can start to find purchases or they can subpoena the sellers. If it happens to be Amazon, they’re not a rogue organization, so they’re certainly going to comply with a subpoena. On and on it goes.

I’m not saying this is easy or happening tomorrow morning, but I’m saying we’ve seen this before. I was a tax lawyer, and one of my favorite cases in law school was when the IRS tried to impute the income of a house of ill repute, but the brothel didn’t keep any books and records.

Their defense was, “You can’t prove how much income we had, so you can’t assess us.” The IRS got the laundry bill, looked at how many times the sheets were cleaned, figured out the going rate, and came up with an income. The judge said, “That’s good enough for me in the absence of anything else.”

The IRS does not let the absence of information stop them. They will come up with the worst set of facts for you and put the burden of proof on you to prove otherwise. They’re pretty resourceful in that way. That’s another pitfall for the young crypto community to bear in mind.

Alex:  We have a little bit of time left for a couple of other subjects, so let’s move into geopolitics. The G20 has a meeting coming up on the 7th and 8th in Hamburg, Germany.

There was a recent article that portrayed Germany and China linking up as globalization partners. I’m going to read a quote from a professor at the Chinese School of Journalism and Communication who is a Fellow for the National Academy of Development and Strategy of Renmin University:

“In the global context of increasing uncertainty due to the U.S. and Britain’s actions of antisocialization, isolationism, and nationalism, the G20 can forge ahead for more stable, more sustainable, and more responsible global economy only if the two groups of countries unite.”

Jim, what’s your take on this, and is there anything else happening regarding the G20 that you think is important to note right now?

Jim:  Yes, I do, Alex. As you mentioned, it is coming up July 7th and 8th in Hamburg, Germany. G20 stands for “G” or “group” of 20 nations although it’s more like 24. They invite Norway, Spain, and a couple other hitters plus some multilateral participants: the IMF and the European Union. I call it “G20 and Friends.” They get about 30 key players at the table.

The leaders meet once a year. They used to meet twice a year, but as we get further away from the crisis, they’ve dialed that down to once a year. There are G20 meetings throughout the year at levels below the leadership or the President, if you will. The central banks, finance ministers, and other technical working groups meet a couple of times a year. The G20 never sleeps. Their work goes on around the clock even though these big summits only happen once a year.

A lot of people shrug and say, “What the heck does the G20 mean? It seems like a boondoggle.” I disagree. I have a long section in my book, The Death of Money, about the G20 where I make the point that it’s really the board of directors of the global economy. Think of the highly integrated, connected, densely networked global economy we have because of globalization and some of the things we talked about earlier such as digitization and so forth. It has a central bank, which is the IMF, and the IMF has a board of directors, which is the G20.

It’s actually a very powerful organization even though they don’t agree on every little thing. They have a rotating presidency. This year, it’s Germany, so that’s why the meeting is in Hamburg. Last year, it was China with the meeting in Hangzhou in September. The year before that was Turkey and so forth as it moves around.

This one in July is a very important one. You mentioned China and Germany. President Xi Jinping of China and Chancellor Angela Merkel of Germany are probably the two leading globalists, or pro-globalist, figures. They don’t have much else in common since China is communist and Germany is a pretty healthy democracy, but at least they are the two leaders who still espouse a traditional globalist view.

It’s funny, because they claim to love free trade, yet Germany and China have the largest trade surpluses relative to GDP of any major economy – embarrassingly large. The point being, they say they like free trade, but truthfully they like a rigged game that favors their exports whether it’s the GP or the GP1 at various points in time.

Anyway, we’ve got these two big globalists, Merkel and Ji, holding hands, and we also have the two most powerful nationalists, who are Trump and Putin. I think that’s going to be the big story coming out of G20.

This is the first face-to-face meeting of Trump and Putin. Of course, you can’t go online, turn on the TV or radio or pick up a newspaper without hearing, “Russia, Russia, Russia,” “Russian collusion,” “Russian interference with the elections,” “Hillary lost because of Russia,” and all this other nonsense. America seems to have a Russia paranoia or fixation going on.

Some of that, at least in my view, is attributable to the fact that if you’re a globalist, you really want to keep Trump and Putin separated. You really want these guys at each other’s throats, because they are the two most powerful nationalist leaders in the world. If the two of them ever do set out a common agenda or strike up a good working relationship, that’s going to give a powerful boost to the anti-globalist nationalist forces.

You’ve got the two leading globalists, Ji and Merkel, and the two leading nationalists, Trump and Putin, who are going to be meeting on the sidelines. The G20 has a formal agenda and formal plenary sessions with a class photo and all that stuff, but a lot of the most important action happens on the sidelines in these little bilateral and trilateral meetings where two or three leaders go off to the side and work on some deals.

These are busy people. It’s not like they see each other all the time, so this is a good opportunity for that. BRICS (Brazil, Russia, India, China, South Africa) always have a minisummit on the sidelines of the G20. They do have their own BRICS summit at a different time of year, but since they’re all in the G20, it tends to be a good opportunity for a little BRICS summit.

The other bilateral relationship I’m watching is called Mackerel, after the fish, involving Emmanuel Macron and Angela Merkel. Macron and Merkel mashed together gets Mackerel. Despite some early warnings, it looks like Merkel is in pretty good shape for the election on September 24th and appears to be cruising to reelection as Chancellor. Although he’s a lot younger, Emmanuel Macron was just elected as the President of France in a very convincing way.

Their mantra is More Europe. I think this is the friendliest, most productive, potentially most important period of Franco-German relations going back almost to Konrad Adenauer and Charles de Gaulle. You’d have to go back to the ‘50s and early ‘60s to find greater Franco-German cooperation.

Alex, you know from prior podcasts that I’m very bullish on Europe and the euro. I have been and still am. When a lot of economists – Paul Krugman and others – were running around with their hair on fire saying Europe is falling apart, I was the one saying, “No, they’re going to stick together. Greece is not getting kicked out, and Spain is not going to quit. The euro is strong and getting stronger.” Things have played out exactly along those lines, but that doesn’t mean it’s all good.

There are some problems and reforms needed in the European Union. They need unified banking regulation, which they’re getting, but above all, they need unified fiscal policy. They’ve had unified monetary policy since the Maastricht Treaty in 1992 and the rollout of the euro in 1999/2000, but they need unified fiscal policy.

Germany has not wanted to backstop that until Merkel saw some kind of fiscal discipline. It goes by the name ‘austerity,’ but she would call it ‘prudence.’ She’s saying, in effect, “Germany is not going to underwrite Greek debt, Spanish debt, Italian debt or Portuguese debt unless we see some evidence that all you countries are getting your house in order in terms of debt-to-GDP ratios and deficits as a percentage of your GDP.”

That’s been happening in a very positive way, so now I think Germany is ready to take the next step. There’s been some talk about a fiscal parliament, common fiscal policy, a euro-zone finance minister, and a unified budget.

These are all very significant advances that will solve the problem of the euro once and for all, because you’ll be combining fiscal and monetary policy the same way we do in the United States. It looks like Macron is in favor of all that, and he’ll find a willing partner in Merkel. That’s a big deal too.

So, I’m watching the Trump-Putin relationship, China and Germany, which you mentioned, always keeping an eye on the BRICS, and I think Mackerel will be another thing well worth watching.

Alex:  It’s going to be interesting to see how this all plays out. We have just a few minutes left for two quick topics we want to hit. Let’s move on to Syria. A few days ago, a U.S. F/A-18 Hornet, which is a first-tier fighter bomber, shot down a Syrian Su-22 that had dropped some bombs near the American-backed fighters south of Tabqa.

The American commanders on site indicated that the aircraft was shot down in compliance with standard ROE (Rules of Engagement) and that they had notified Russian forces prior to engaging the aircraft. They do that to mitigate any chances of accidental escalation.

Afterwards, a statement from the Russian Ministry of Defense warned that any aircraft or objects in flight west of the Euphrates, which includes Coalition and American aircraft, would be followed by Russian air-defense systems as targets.

I reckon the whole situation over there is confusing to most. There are so many forces in place, so many different factions, so many different motivations. I know this is a huge topic, but just in a few minutes, would you talk about your view on the events, the players, and possible outcomes?

Jim:  Obviously, this is serious. During the Cold War, Russia (the Soviet Union at the time) and the United States were armed to the teeth with thermonuclear weapons and intercontinental ballistic missiles and also commanded control systems that could have completely destroyed life on the planet. Somehow, we got through that time with no Russian or American ever firing a shot at each other.

Sure, there were lots of other wars with allies, proxies, and so forth (Vietnam, Angola, Cuba) and there were revolutions and assassinations. I’m not saying there wasn’t bad stuff going on. There was, but there wasn’t a single time when Russians and Americans shot at each other. That was not by accident. It was because the two sides knew that the first shot could escalate and end up destroying the planet. Nobody wanted to go there.

I think those lessons are still understood, but what you’re describing, Alex, is a little scary and dangerous. There’s good reason to believe that some of this is posturing. Shooting down a Syrian jet is not posturing – somebody got blown out of the sky on that one – but the Russian complaints may be just to hold up their end and show some support for Syria.

This is going to get worse, though. Right now, Russia and the United States have a common enemy, which is ISIS. The Russians support Assad, we support the rebels. We support the Kurds, the Turkish want to destroy the Kurds. There are a lot of conflicting cross-currents, but the one thing everyone agrees on is to destroy ISIS.

What happens when ISIS is destroyed? The threat will never be completely wiped out, because they’ll just go underground and conduct terror. However, in terms of a state or holding territory, they’re not quite mopping up in Mosul, but that’s getting close to being done. Then Raqqa is next and then cleaning up the Euphrates River Valley.

At some point, ISIS won’t exist as a state. Then the U.S.-backed rebels and Kurds on the one hand and the Russian-backed Syrian army on the other are going to be face-to-face in the battle for Damascus.

This is a good example – North Korea is another one; Ukraine is another one – of why the Russians and the U.S. should be talking to each other, improving relations, building bridges, and opening lines of communication. Instead, we’ve got this Washington DC beltway circus of Hillary’s whining about why she lost the election, which is nonsense, and for some reason, if you talk to the Russians, you’re colluding to beat the Democrats.

We should be talking to the Russians every day. I like to say that it’s smart to talk to the Russians, but it’s dumb to lie about talking to the Russians. I don’t know why Jared Kushner couldn’t fill out his forms correctly. There’s been a lot of amateurish work and inexplicable bad behavior by some Trump administration officials for no good reason, because we should be talking to the Russians.

Hopefully, we’ll get past some of this hysteria, build bridges to Russia, and help to alleviate some of the tensions you’re describing.

Alex:  Yes, I very much agree.

Our last item is North Korea. Recently, there were exercises in South Korea involving over 100 F-16 fighters. Also, U.S. F-35s have been deployed to South Korea, and there have been several defense briefings in Guam where they station a lot of the B-52s for power projection in that theater.

On our last podcast, you said something that really struck me. You expect that the U.S. will be at war with North Korea by 2018. What are your current thoughts on what’s going on in North Korea?

Jim:  There’s no change in that assessment. I pointed out that in March 2003, we jumped off on the road to Baghdad and invaded Iraq. I’ll use General James Mattis, today’s Secretary of Defense, as an example. At that time, he was commandant of the 1st Marine Division. In 2002, he was told, “Get ready. We’re going into Iraq. Get your guys ready.”

The point is, you don’t go to war overnight. There’s at least a year, perhaps longer, of preparation. Now, just because you start the preparation doesn’t mean you pull the trigger. To me, 2017 looks like 2002 in Iraq. We’re going to try sanctions, diplomacy, and engaging with allies.

Notwithstanding that, the orders have been passed to get ready, particularly the Navy, the Strategic Air Command, certainly other special operators, and others. We’re on the path to war, and I expect it in 2018.

The only question is, what could change that outcome? There are really only two things:

  1. Kim Jong-un gives up his nuclear programs and missile programs in a verifiable way. I don’t expect to see that happen, because he thinks that’s essential to his own survival.
  2. Somehow Russia and China put enough pressure on North Korea to get them to do it anyway. I don’t see Russia doing that partly for the reason we just discussed, which is that the U.S. is barely talking to Russia. That’s too bad, because there are issues of war and peace at stake.

As far as China is concerned, Trump sent a tweet the other day. I sent a tweet in response saying, “This is the most important tweet the President has ever sent.” I’m paraphrasing because I don’t have it in front of me, but he said, “It looks like China is not having much success changing North Korean behavior. Too bad, but at least they tried,” or words to that effect.

He wasn’t overtly, blatantly criticizing China, but in a pretty clear way he was saying, “Okay, I gave you guys a chance. You didn’t do anything, so time’s up. Now we’re going to turn on North Korea ourselves.” That’s how I read it, and I think that’s the right interpretation.

China has not been able to do anything, we’re barely talking to Russia, and Kim Jong-un will not be deterred. We’re not going to risk Los Angeles, based on his good intentions, if he ever has any. The only thing left to do is to go in and take it out.

Some people have pointed out that they have a lot of antiaircraft capability. The significance of Guam is that long before fighter attack aircraft and other forces get into theater and long before the Nimitz-class aircraft carriers get within range of North Korean anti-ship missiles, we will have suppressed all of that with our long-range bombers, the B-52s and the B-2s.

I think the war will start out of Guam using very heavy bombing before we then come in with carriers and some of the smaller, nimbler aircraft.

Alex:  Unless doctrine has changed since I was in the military, that’s standard procedure. They’ll gain control of the battle space, particularly the air space, first, and then move from there.

Jim:  Right.

Alex:  Jim, I appreciate the discussion today. It’s been very insightful, as always, and I look forward to doing it again next time.

Jim:  Thank you, Alex.

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


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

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles May 2017


Topics Include:

*Forecast for June 13th, 14th FOMC Meetings
*Cryptocurrencies – bubble or bull market?
*Update on IMF SDR’s
*Fed’s plan to normalize the balance sheet
*Expecting confluence of rate hikes and tightening monetary conditions to create recession and force easing by end of 2017
*Why North Korea has to be taken seriously
*Forecast for war with North Korea by 2018
*Trump, Russia, and media bias
*Physical gold market flows Q1 2017
*Dangers of the mirage of portfolio diversification and conditional correlation (Scholes)
*Why todays portfolios are at risk in the same way as LTCM
*Gold price behavior during liquidity crisis
*Liquidity in the gold market


Listen to the original audio of the podcast here

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


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


Alex:  Hello. This is Alex Stanczyk and I have with me today Mr. Jim Rickards. Hello, Jim, and welcome.

Jim:  Hi, Alex. How are you?

Alex:  Excellent. Thank you.

We are recording this podcast heading into the Memorial Day weekend. For those of you not from the United States, Memorial Day is a U.S. holiday honoring those who have fallen during military service going all the way back to the American Civil War, so we want to take a moment to acknowledge soldiers who have fallen on the battlefield.

Now let’s dive right into our podcast with an area our listeners are always interested in. We have another series of FOMC meetings coming up on June 13. In the event that I don’t talk to you on a podcast before then, would you make some comments about that and what you think you see happening there in terms of rate raises, etc.?

Jim:  The Federal Open Market Committee (FOMC) is the subset of the Federal Reserve Board members and Regional Reserve Bank presidents who set interest rate policy.

They always hold two-day meetings with the next one being June 13 and 14. The second day of the meeting, the 14th, is when the fireworks happen, so they’ll be in a conclave locked in the boardroom at the Fed Building on Constitution Avenue. When they come out, they’ll issue a kind of press release or statement that covers whether they raised rates or not. I’ll tell you right now that they’re going to raise rates 25 basis points, so we can already see that coming.

This is a significant meeting because it’s one where Janet Yellen has a press conference. The FOMC meets eight times a year, but only four of those have a press conference associated with it where she’ll sit sometimes for two hours and take reporters’ questions. That gives her an opportunity to expand on the statement with the new ‘transparency.’ They say we like to do communications, and obviously they overcommunicate, but be that as it may, this is her chance to signal whatever she wants about the economy and what the Fed is doing.

A lot of these questions are planted. I’m not denigrating the press; I think they do a great job, but reporters like Steve Liesman, CNBC, and others – I shouldn’t pick on Liesman – have certain questions they know the Chairman wants to hear because it gives her a platform to explain what they’re doing. This is one of those press conference meetings where they tend to do big things such as announce new policies or reaffirm existing policies.

We know they’re going to raise interest rates. I guess a different way to put the question is what would it take for them not to raise interest rates? Bear in mind it’s less than three weeks away at this point, so it’s really hard to imagine. When the May Jobs Report comes out next Friday, June 2nd, it would have to be below 75,000 or even negative or something to throw the Fed off their game. No one expects that. I don’t know what the number is going to be, but whether it’s 200,000 or 100,000 (that’s a big range and a lot of jobs), any of those numbers north of 75,000 puts the Fed on track to raise.

There’s not much inflation data coming out. Even if we saw a bad print in the inflation data, meaning it was disinflation, these inflation numbers are coming in below expectations. I do expect that and think disinflation leaning towards deflation has the upper hand now causing those numbers to get weaker, but that’s not going to be enough to throw the Fed off because they’ll use the word ‘transitory.’ Even if we get a weak number, they can say, “It’s only one month. We think it’s going up for all these other reasons like unemployment is slow, Phillips curve, etc., so we’re not going to pay much attention to it.” Even that won’t throw them off.

The only other thing in the model that would cause the Fed to ‘pause’ – that’s the operative word – on their rate-hiking path would be a severe drawdown in the stock market that looks disorderly and scary. Even if the stock market went down 5%, let’s say 1,000 Dow points or 100 S&P points, the Fed absolutely would not care. Even if it went down 10% or 15% over three or four months, the Fed wouldn’t care about that.

If it went down 7% or 8% like in three days’ trading sessions where it looks scary kind of the way it did in August 2015, that might be enough to get them to pause, but even then, I would say it would have to be a pretty rough ride. Ruling that out, I think they’ll dismiss weak inflation numbers as transitory, and job creation doesn’t have to be great, it just has to be good enough, and that’s really the important thing. They’re going to raise rates in June.

The model I just described is what I’ve been using for several years with very good results. Last December, we forecast that they would raise rates in March. By March, everybody knew they were going to raise rates in March, but if you look at the Fed Fund Futures implied expectation of a rate hike through the months of January and February up until the last couple of days of February, the considered wisdom of the market crowds, all the participants, were giving it a 28% to 30% probability. We were at 80% and 90% and indeed, they did raise it.

The model we’re using is the one I just described, which is the Fed will raise rates four times a year, 25 basis points per time from now until the middle of 2019, to get rates to about 3.25%. It will be like clockwork unless one of three things happen: a disruptive stock market, a severe disinflation that looks persistent and not transitory, or job growth well below 75,000 or even negative. If you don’t see those three things, they’re going to raise, so it’s an easy forecasting model.

Alex:  The model and forecasts on what the Fed is going to be doing have been really great. We’ve had some feedback and commentary from professional money managers on that as one of the things they always like to pick up on in particular from this podcast.

Jim:  One thing that’s unique about the model is that it’s completely different from what you hear from Wall Street economists, mainstream economists, commentators, bloggers, you name it. It’s a very different model. It’s not a complicated model; it’s very simple as I just described. The reason it’s different is that people are looking at the Fed raising rates and the minutes of the May meeting released a couple of days ago making it clear that they’re going to raise rates. The market is assuming that raising rates is related to a stronger economy – they equate that to a stronger economy. It’s one of the reasons stocks are going up, because they rely on regressions and correlations. They think that in the 38 business cycles since the end of World War II, every single time the Fed raised rates was because the economy was getting stronger.

That data is true and that correlation exists, but it’s not true this time. For the first time since 1937, the Fed is raising rates into weakness, and they know it. Why are they raising rates? The answer is they must get rates to 3% or more before the next recession comes so they can cut them 3%, because that’s how much it takes to get out of a recession. If you don’t have interest rates at 3% – 3.25% before the next recession starts, you’re not getting out of the recession, because they can’t cut them enough. They would have to have to go back to QE4, and they know it.

This is all a long-winded way of saying they should have raised rates in 2010 – 2011. They didn’t because of Bernanke’s cockamamie QE experiments, which is evidence that they didn’t help at all. What it did do is prevent the Fed from normalizing interest rates. That brings us to where they’re going with this. Just because they’re raising rates, I don’t take that to mean the economy is strong. In fact, there’s a lot of evidence that the economy is weak, but they’re doing it anyway for different reasons.

Alex:  Let’s move on to cryptocurrencies. This is a controversial topic in some circles right now, because some people I consider to be very smart believe that cryptocurrencies are in a huge bubble right now. What do you think about this?

Jim:  They’re definitely in a bubble, there’s no doubt about that. If you do have any doubt about it, I recommend something you can do at home. Just get the latest bitcoin chart. Ethereum is another one that’s performing the same way, but bitcoin is the leader in this. The bitcoin chart is going vertical right now from $1,000 per bitcoin to $2,000 per bitcoin in about a week or less.

Now get a NASDAQ chart from 1998 – 2000 and a Nikkei 225 chart (a Japanese stock index chart) from 1988 – 1990. Take the Nikkei chart, the NASDAQ chart, and the Bitcoin chart and overlay them. It’s the same chart. They look exactly the same with one difference, which is that the other two – Nikkei and NASDAQ – both crashed and lost 80% of their value in a very short period of time, most of it in months and then all of it within a year. Bitcoin hasn’t crashed yet, but this pattern of increases and the rate of increase, the second derivative of the rate of increase skyrocketing, is completely characteristic of bubbles.

Having said that, there are two things I know about bubbles. Number one, they can go on a lot longer than you think. It’s easy to say, “It’s a bubble; it’s going to crash.” What’s not so easy is knowing when it is going to crash. I have no interest in owning them or being part of this madness, but I wouldn’t short it. I don’t know if you can short bitcoin. Maybe Goldman Sachs would write you a derivative, the new big short, but I don’t think you can short it, which is interesting.

It just occurred to me that one of the reasons it’s going up so much is because there’s no short interest. If the stock market behaved this way, there’d be somebody, Jim Chanos or Kyle Bass or somebody, who would be shorting the heck out of it. There’s no short interest in bitcoin as far as I know unless someone’s extending credit, which makes this even crazier. That’s one of the reasons it’s kind of feeding itself.

I just arrived back east this morning from San Francisco. As always in San Francisco, you end up meeting with engineers and the Silicon Valley crowd. I talked to one very seasoned guy who has a young team of engineers working for him doing some apps and things. He said, “One of my guys came in the other day and said, ‘I went out and I bought some bitcoin. I paid $1,000.’ He bought four or five, and maybe put $4,000 or $5,000 into this. ‘It’s already up to $2,000, I doubled my money.’” He couldn’t be happier although he probably never heard of bitcoin until a few weeks ago, but that’s the kind of mentality you get.

Here’s the point. You can say it’s a bubble, that’s easy, but you don’t know when it’s going to end. It can go on a lot longer than you think. The other side of that is when it cracks, it cracks hard and fast, and you’re kidding yourself if you think you can get out. If you bought it for $1,000 and sold it for $2,000, lucky you, nice job and well done. But that’s no way to invest, it’s no way to make a living.

The reason is you have to think of these things on a risk-adjusted basis. You can’t just look at returns. Let’s say you had a whole bunch of money, hired me as major money manager, and I said, “Okay, leave me to it.” I go to Las Vegas, go to the roulette table, and I put all your money on red. It comes up red, I double the money, and I come back to you and say, “I doubled your money, I’m taking my 20% management fee or performance fee, and here’s the rest.” You think I’m a genius, “Jim’s the smartest guy in the world. He’s got a 100% return, and net of fees, I got an 80% return.”

No, I’m not. I’m an idiot. The point is, I could have lost all your money. If you don’t know how I do it or if you just look at the return (in my example, I doubled your money) but you don’t know how much risk I took, you think I’m a great money manager because I doubled your money. But on a risk-adjusted basis, I’m a complete idiot because I could have lost all your money.

When you get into bitcoin, yes, it could go up. Could it go up to $4,000? Just to be clear, I’m not predicting that at all, but I’m not going to say that can’t happen. It could happen. When is it going to crack? $2,500? $3,000? $3,500? $4,000? I don’t know, but I do know it will crack. It will crack hard, and I wouldn’t want to be around when it happens.

Alex:  Let’s dig into another topic area. I understand you recently had some new insights into IMF special drawing rates. Another way of saying that is SDRs. You plan to include these insights in your next book that’s upcoming. By the way, this is the first hint. I knew you were probably working on another book but recently had a first hint that this was going to be coming, so I’m looking forward to that. Without giving away the secret sauce of what this is all about, can you share anything about this?

Jim:  Yes, it will be in a new book. I’m not talking much about it because the publication date right now is October 2018, so we’re more than a year away, which is good, because it’ll take me that long to write it. As you know, Alex, you don’t just write a manuscript, hand it in, they print it up, and they send it to the bookstores. With my publisher, and this is one of the things I like about them because they’re very high quality, it takes four or five months, sometimes longer, for not just proofreading and normal editing where there’s a back and forth with your editor, but also for what they call copyediting. Copyediting is the person who decides what’s capitalized and whether it’s a comma or semicolon and all that stuff. I just keep writing and hope someone else can figure it all out. Then comes legal and then binding. There’s a lot to it.

This book is going to come out in October 2018, so there’s not much to talk about right now, but I did have a one-on-one conversation at an apartment in New York with former Treasury Secretary Tim Geithner. I had some quotes from him in my second book, The Death of Money, indicating some very favorable impressions of SDRs. Geithner is one of the people who knows more about SDRs than anybody.

We went to the same graduate school, the School of Advanced International Studies in Washington (SAIS), which is intellectual boot camp for the IMF. About one-third of each class goes to work for the IMF, for the World Bank, so there’s a very close affiliation there. We received similar training although my class studied gold because I was the class of ‘74. Gold had been abandoned by the time Geithner came along, but we had the same background and training. Unless you have that specialized training, it’s hard to really get your mind around SDRs.

He said some very favorable things, and I quoted him on that. In the last crisis that started in the spring/summer of 2007, it peaked and backed off and peaked and backed off, and then finally it went completely thermonuclear on September 15, 2008, with Lehman Brothers. There was an emergency issuance of SDRs for the first time in 30 years. The last time they had issued SDRs was in the early 1980s and then none at all until August of 2009.

It went pretty much unnoticed, because you have to be a bit of a geek to see that happening. I was certainly attentive to it, but in analyzing a future financial crisis, which again, is kind of like the bitcoin bubble, you can see it coming and estimate the magnitude, but timing and specific catalysts are more difficult.

What are the central banks going to do? When we talked about the FOMC raising interest rates in June, one of the things we didn’t talk about that was in the minutes of the May meeting is normalizing the balance sheet. The Fed did not just take interest rates to zero and hold them there for seven years. They expanded their balance sheet from $800 billion to $4.5 trillion basically by printing money and buying bonds.

They still have the $4.5 trillion on their balance sheet. Not only did they not normalize interest rates, they’re about a third of the way to normalizing interest rates. Using the Taylor rule, interest rates should probably be 2.5% – 3%. They’re at approximately 1%, so they have a little way to go. At least they’ve started, but they haven’t taken any steps to normalize the balance sheet, so they’re now talking about that also.

The way they’re going to do it is not by dumping bonds. The Treasury bond market is big but it’s not that big. They’re not going to sell a single bond. What they are going to do is let them run off, let them mature. Let’s say you bought a five-year note five years ago. Sometime in the next month or so it’s going to mature. The Treasury sends you the money and, just as when the Fed buys bonds, they pay for it with money that comes from thin air. The same is true in reverse. When the Treasury sends the Fed money to pay off the bonds, the money disappears. It reduces the money supply.

The Fed is just going to sit there. This happens now anyway, these bonds mature all the time, but the Fed then takes the money and buys a new bond. They’re not expanding the money supply; they’re maintaining the money supply and buying new bonds all the time to maintain the balance sheet. What they’re going to do is stop that reinvestment. They’ll take the money, the money will disappear, they won’t buy a new bond, and little by little, the balance sheet will run off. They’re going to do this very gradually. They have all this jargon and use words like ‘background.’ They say this is going to run on background, and steady Eddie, and we’ll be transparent about what we’re doing, and no one is going to notice. It’s just going to happen, and over my estimate of seven or eight years, the balance sheet would get back down to $2 trillion. Arguably, that’s a normalized balance sheet.

Again, that assumes no recession, which is a false assumption. We are going to have a recession in the next several years, but the Fed doesn’t really deal in reality. In Fed world, there’s no recession, there are no recessions, and they’re going to run the balance sheet off over seven or eight years.

This is called QT. Everyone knows about QE, quantitative easing, and this is QT, quantitative tightening. That’s what happens when bonds mature, the money supply is reduced, you don’t buy new ones, and the balance sheet shrinks. It’s like watching paint dry or holding an ice cube in your hand and watching it melt. It happens very slowly, but it does happen.

The interesting thing about this is the whole time the Fed was doing QE to the tune of taking the balance sheet to $4.5 trillion, they told us that this was stimulative. By buying intermediate-term securities, they were keeping a lid on the middle of the yield curve, it helped mortgage rates and that helped stock prices and home prices and all that wealth effect, and they let people borrow because that’s all collateral and they’d spend more money. This was the story, but none of it was true. The wealth effect was weak or invisible or maybe even negative this time around. They did create asset bubbles, so they were good at that, but not much good at stimulating the economy or at least returning to trend growth on a sustainable basis. That did not happen.

We were supposed to believe that it was somehow stimulative and when they do it in reverse, it’s not supposed to be contractionary. I don’t understand that at all. If you reduce the money supply, that’s a tightening of financial conditions, that’s contractionary. I’m not saying by itself it’s going to put the U.S. economy into a depression. We’ve been in a depression since 2007, so they’re kind of hitting the economy with a double whammy. They’re raising rates, which we already talked about, and I’m guessing probably before the end of the year, they haven’t said but maybe as early as September, they’re going to start reducing the balance sheet. My estimate is for every $50 billion of balance sheet reduction, that’s equivalent to one 25-basis-point rate hike. Like I say, you can’t have it both ways. You can’t say printing money is expansionary but making money disappear is not contractionary. Sure it is.

We’re going to get hit with rate hikes and tightening monetary conditions, reduction of the money supply. The economy is weak to begin with, so my estimation is that this will cause a recession later this year, probably by the summer. It will become apparent, but the Fed will be the last to know. A lot of people will see it before the Fed, but maybe by August/September when that happens, the Fed is going to have to pivot and do a 180.

I said earlier that they’re going to raise rates four times a year – March, June, September, December – like clockwork for the next three years unless something bad happens. The bad things are what I mentioned – the stock market falls out of bed, job creation dries up or you see disinflation. I think you might see all three.

We might see strong disinflation. The PCE core deflator is the Fed’s preferred inflation metric, which after about six years has finally gotten to 2%. They were hoping the whole time to get it to 2%, it finally got there, and it immediately headed south down to around 1.7%, give or take. If you see that going to 1.5%, 1.4%, 1.3%, and job creation falls below 75,000, maybe we even start to lose a few jobs or get a negative GDP print, and then the stock market wakes up and says, “Whoa, we’re way out over our skis here. We invested in this Trump trade, and we thought the Fed raising rates was a sign of a good economy. It turns out the economy stinks, we’re in recession, and Trump’s not delivering on any of his promises,” boom – there goes the stock market.

We could see all this. Everything I’m describing is based on I’ll say a conditional forecast. My expectation is that some of these conditions will fail and that by September, they’ll have to go back to easing mode. How do they do that? They’ll probably still be reducing the balance sheet, so I estimate they’ll stop raising rates in September, and they’ll use forward guidance to take a pause, so you’ll be hearing about ‘pause.’ They’ll raise in June for sure, pause in September, and then we’ll see about December and how it plays out.

This is what happens when you manipulate the economy for eight years. You can’t get out of it. You can’t un-manipulate the economy, because the economy is completely dependent on Fed policy and signaling and expectations and herd behavior and everyone following the Fed. They just can’t get out of it.

Alex:  It sounds to me like 2018 and 2019 are shaping up to be pretty interesting. As you mentioned, the Fed has announced it’s not going to be reinvesting government debt. It’s basically going to let that roll off the balance sheet. From 2018 to 2019, I think that number is going to be close to $1 trillion. In addition to that, I’m going to share some information in a little bit when we start talking about the physical gold market that will dovetail into that. It’s going to create some interesting conditions for our space in particular.

Jim:  I completely agree with that and am interested in hearing more on your analysis, Alex, but 2018 is when we will go to war with North Korea. That’s not on the calendar for 2017 unless Kim Jong-un is even crazier than we think. The story is well-known, so I don’t know why people are not more attentive to it. He’s out to build an intercontinental ballistic missile (ICBM) capable of reaching Seattle, Los Angeles, San Francisco, not to mention all of China, Japan, South Korea, and Taiwan. They’re not there yet, but they’ve tested more complex intermediate-range ballistic missiles that have some of the multi-stage technology and liquid fuel that you need to have in an ICBM, so they’re getting there and are making steady progress.

Sometimes these missiles go off course, they wobble or they blow up on the launch pad and people laugh them up like ah, they’re idiots, they don’t know how to launch a missile. But they don’t think of it as failure; they think of it as a learning experience. Every so-called failure is a way to learn something to make the next one better. Recently, the tests have been succeeding and have produced better results, so they’re making progress in miniaturization.

They have the fissile material, the uranium, and the plutonium. They’ve mastered the enrichment cycle but need to weaponize that, because you can’t just put a truck-sized device on a missile. You have to get it down to the size of a grapefruit or a basketball, but it looks like they’re just about there on that and a couple of other pieces of technology. All this is coming together faster than analysts estimated. The four-year estimates I was reading about six months ago have now turned into three-year and in some cases two-year estimates. That’s what he’s doing.

It is crystal clear that the United States will not let this happen. We are not going to sit here and let him perfect this technology, put a warhead on a missile, test it in some credible way, and say, “I can now nuke Los Angeles. You guys better hope you can shoot it down. I’ll send up 10 and your success rate in shooting down or intercepting ballistic missiles is probably 50% if you’re lucky (which is pretty darn good, by the way), but that means five of them go through and I just killed 10 million Americans. Don’t mess with me.” That will be his message. We’re not going to let that happen. We’re not going to put ourselves in that position. We’re not going to gamble with Los Angeles.

One or two things must happen: Either he must voluntarily give up this program or we’re going to destroy it militarily. I see no signs that he’s voluntarily giving it up, because he thinks differently about it. What he’s saying is that the guys who had nuclear programs and gave them up – Muammar Gaddafi and Saddam Hussein – are both dead. Libya and Iraq had a nuclear program. They gave them up and they both got killed. One was shot in the eye, and one was hanged. The guys who didn’t give up their program are the Iranians, and they’re still standing.

Kim Jong-un looks at this and thinks, “Well, this is simple. If you give up your program, you get killed, but if you don’t give up your program, your regime survives.” From his point of view, he’s going to keep the program. The other reason he wants to keep it is he sells the technology to Iran for gold. They’re not moving dollars through the global payment system. They’re putting physical gold on planes and shipping it either to North Korea or some of it is held in custody in Russia. The point is, he’s not giving up the program, and we’re not going to let him go too far; therefore, war is inevitable.

President Trump, Defense Department Secretary Mattis, and Secretary Tillerson are now conditioning the battle space. You don’t just go in guns blazing; you prepare. That involves diplomatic efforts and preparing the American people. When Trump basically invited the entire Senate, 100 Senators, to come over to the White House a couple of months ago, they boarded buses up on Capitol Hill and took them down to the White House. A lot of people made light of it, but that was getting buy-in from the Senate. Trump is saying, “We’re getting ready to do this when I share what we see and how we’re thinking about it,” Nikki Haley is bringing it up at the United Nations, and Trump’s talking about it with our NATO allies.

All the pieces are in place. This feels like Iraq in 2002. We invaded Iraq in March 2003, but the preparation was in place in 2002. I look for that war in 2018 after a year of warning and preparation, last clear chance, etc., so we all know what that’s going to do to the price of gold.

Alex:  I thought it was interesting the comment you made about when they’re developing this weapons programs and have failures, that people tend to laugh about it and say it’s not a serious thing.

A lot of people don’t know that the same technology needed to fire an ICBM, an intercontinental ballistic missile, is essentially the same technology that’s necessary to put objects into orbit. You talked about the rate of success for shooting down things like that. They’re moving at about 6.951 miles per second. These things are really cruising along, and to figure out how to do that is no easy thing.

People forget that even in the U.S. space program, it wasn’t like success after success. There were a lot of failures on the road. I think you’re right, there’s an incredible threat that they are continuing to develop and move along.

Jim:  I remember in the late 1950s and early 1960s when the U.S. was trying to catch up with the Russians. We had the Mercury Redstone program, then the Gemini program, then Apollo, and then the Space Shuttle and all that. In the early days of testing rockets for Mercury Redstone, the American rockets used to blow up on the launch pad. One didn’t work and they would try it again, but as I say, these were all learning experiences. You’re exactly right.

Not to pile on, but the Pentagon announced yesterday that they’re considering shooting down a missile with a missile as a test. What we would do is fire one of our missiles, then there’d be an antimissile battery, and their job would be to shoot that missile out of the sky as a demonstration that we can do it. The message to Kim Jong-un is: “Don’t waste your time.” Now that’s a high-stakes gamble, because what if we shoot our missile and our antimissile misses? We’re controlling the whole thing, so hopefully they rig it in our favor, but even if it hits, which hopefully it does, I think anyone who is fair-minded about it would say, “Your success rate is never going to be north of 50%.”

Alex:  Continuing in this vein of geopolitics, there is a hot topic I don’t really consider a hot topic, but the media seems to be making a big deal out of it. There’s this idea that Trump improperly shared intelligence with the Russians. Is this an issue? Is it a nonissue? Is the media blowing this up or is there real substance here? What do you think?

Jim:  The media is definitely blowing it up. I’ve heard people saying, “Trump leaked information to the Russians.” First of all, the President can’t leak anything. The President can reveal information or share information. He’s the Commander in Chief and can do whatever he wants with that intelligence. The President has the last word on what’s classified or declassified or shared with anybody. The President revealed information, but he didn’t leak information.

You do see the word “leak” used a lot, but that’s just incorrect and in the fake news category. Let’s come back to what he did do, which is he revealed some sensitive intelligence to the Russians that would otherwise have been classified. Good idea, bad idea – that’s debatable. A lot of people say that’s a horrible idea, he gave up sources, we can’t trust the Russians, they’ll tell the Syrians, etc.

That’s an argument I’m not dismissing, but the other side of the argument is, if we’re getting ready to confront China and getting ready for war with North Korea, we better have the Russians at our side. We better make friends with the Russians, because there are really only three countries in the world that count. I hate to break it to the Brits and Germans and a lot of others, but China, Russia, and the United States are the only three countries that really count. They’re three of the five biggest by land mass, among the five or six biggest by population (Russia is a little smaller by population), and the biggest in energy output, but most importantly, in military capability and nuclear arsenals, they’re the three superpowers in the world.

In any three-handed game, be it poker or Risk, it’s always two against one whether that’s explicit, implicit, behavioral, whatever. The oldest joke in poker is if you’re at a poker game and don’t know who the sucker is, you are the sucker. In the old board game, Risk, you’d start out with five or six players, quickly get down to three, and then two of them would one way or the other gang up on the third one, wipe them off the board, and then turn around and fight each other to see who won. That’s just how you play a three-handed game.

If we’re going to confront China, which we are, we better be friends with Russia. We don’t want to be confronting Russia and China at the same time. We don’t want to be in a war in North Korea and some kind of shooting match in the South China Sea without having a relationship with Russia, because they’ll just roll through Ukraine, parts of Central and Eastern Europe, maybe roll up the Baltic. You want to fight a war in Korea and the Baltics at the same time? The Pentagon’s worst nightmare is the two-front war. Going back to the ‘70s, we used to be able to fight what we call two-and-a-half wars. Two-and-a-half wars meant we could fight a war in the Pacific or Asia, a war in Europe, and a half a war somewhere else, maybe Africa or Cuba or someplace like that. Today, we’re lucky if we can do one-and-a-half wars, but we can’t do two wars.

This was the thinking behind Trump’s people. Jeff Sessions, Jared Kushner, Mike Flynn, all of them reaching out to the Russians during the transition and meetings with the ambassador was about getting relations with Russia back on track so we can prepare to confront China.

Where it blew up is they all lied about it. This is idiotic in my view. I don’t see why you have to lie about it. What I just described can be taken right out of Henry Kissinger’s book, New World Order. This is balance of power politics 101. If you’re going to mix it up with China, you better have Russia. So, we should have been talking to the Russians.

My view is that talking to the Russians is really smart and lying about talking to the Russians is really dumb. The reason Flynn got fired and Jared Kushner is now reportedly under FBI investigation and Jeff Sessions had to recuse himself is because they all lied and misrepresented one way or another their contacts with the Russians. That was just stupid, in my view, and I don’t know why they were hanging their heads about it. I would have been up front and say, “Hey, it’s a dangerous world. If you think Putin’s a thug, well, meet President Xi Jinping of China.”

China has more human rights abuses, they have firing squads, they have slave labor, they have child labor, they killed 25 million girls in the one-child policy. None of these people are particularly nice. If you want to pile on Putin, fine. He’s a bad actor, he’s a killer, but that’s the world we live in. All I know is if you’re going to confront China, you want to build bridges to Russia. I think that was a smart policy by Trump.

It’s blown up for two reasons. Number one, his people mishandled it by hiding in the shadows, in the bushes, and lying about it. Then, two, it fed into this separate, completely ridiculous narrative that somehow Putin won the election for Trump. Did the Russians use sources, methods, operatives, hacking, and other tools to influence public opinion in the United States maybe in a way that disfavored Hillary and favored Trump? Of course they did, absolutely. We do that to them. You don’t think we were in Ukraine working actively to depose the pro-Russian of Ukraine? This is how the game is played.

That comes as no surprise, but beyond that, the idea that we were seeking to improve relations doesn’t strike me as odd or problematic or uncalled for, but boy, did they mishandle it. Now they can’t even be seen in public with a Russian, which is too bad.

What’s interesting is that coming up on July 7th and 8th in Hamburg, Germany, is the G20 meeting. That’ll be the first face-to-face meeting between Trump and Putin, so that’s certainly going to get a lot of attention.

Alex:  Basic diplomacy is what it comes down to.

Jim:  Yes, basic diplomacy. With intel sharing, again, he’s the Commander in Chief if he wants to tell the Russians something. By the way, this faux outrage is laughable. You and I have a background in intelligence. Intelligence gets shared all the time. The Jordanians pick up some pocket litter from a prisoner and give it to the Israelis, the Israelis share it with us, or we get something from the Turks and we slide it to the Israelis. Intelligence operators trade intelligence the way kids trade baseball cards. They swap it around all the time, usually for some quid pro quo, because intelligence is usually a two-way street. This idea that somehow he uniquely and clumsily revealed some hypersensitive stuff is just nonsense and a good example of media bias.

Alex:  Yes, I agree. Now let’s discuss physical gold for a little bit. I’m going to give a brief snapshot on what’s going on in the physical gold markets for the year up until now. After that, we can get into some material from your last book, The Road to Ruin. I want to ask for your commentary on how that dovetails into gold.

Right now, gold flows are still going west to east. This is no news to anybody on this podcast, but it’s continuing. U.S.-based gold funds have been pretty flat as of late. In Q1, Germany and the UK actually led the investment in gold funds. We’re talking as much as six times as much capital was invested in gold through Germany and UK as was coming from the United States in Q1.

In addition to that, export data has shown us that India is basically back on top of the stack in terms of gold flow from Switzerland, so they’re taking more right now than Hong Kong and China combined. We’re talking from Switzerland, not all sources. They’ve been the top destination from January through April.

Overall though, Asia is accounting for about 74% of Switzerland’s total gold exports, which means it’s still a one-way street in terms of physical flow. If we look at China specifically, in Q1, Chinese gold imports were up something on the order of 64.5%, and their domestic production is actually dropping. The premiums so far this year have skyrocketed unlike anything in the last two to three years.

And then finally, here’s something I found to be quite interesting. Our sources are projecting that mining production is going to start dropping off after 2018. This is sort of a combined consequence of very sharp cuts in capital expenditure for new production.

Total CapEx for companies in the HUI index, for example, declined by about 65% between 2012 and 2016, and there really haven’t been any new significant discoveries. Adding that to what we were talking about a little while ago in terms of the Fed balance sheet rolling off, the deflationary effect, and the fact that it looks like mining capacity is going to start dropping off, is an interesting scenario.

Let’s talk a little bit about systemic risk. I’d like to read an excerpt from your book, The Road to Ruin. For those who don’t know, Jim was the chief counsel for Long Term Capital Management and negotiated the Long Term Capital Management bailout with Wall Street and the Federal Reserve at the time. This excerpt is about that time during the crisis period and looking at how things were constructed:

“LTCM had 106 trading strategies involving stocks, bonds, currencies, and derivatives in 20 countries around the world. From the outside, the trades seemed diversified. French equity baskets had low correlation with Japanese government bonds, Dutch mortgages had low correlation with Boeing’s takeover of Lockheed. The partners knew they could lose money on a given trade, yet the overall book was carefully constructed to add profit potential without adding correlation.”

In the next paragraph it says:

“This diversification was a mirage. It existed only in calm markets when investors had time to uncover value and cause spreads to converge. However, there was a hidden threat running through all 106 strategies that Scholes later called conditional correlation. All the trades rested on providing liquidity to a counterparty who wanted it at the time.”

Jim, what are your thoughts on what you’re seeing and how portfolios are constructed today? Do you see similar risks that apply? Maybe not necessarily the exact same vehicles but in terms of how the portfolios are constructed versus systemic risk. And what are your thoughts on gold and how it factors into this?

Jim:  I absolutely do, and let me expand on that briefly. By the way, the Scholes you mentioned in that excerpt is Myron Scholes, winner of the Nobel Prize in Economics in 1997, and one of our partners at Long Term Capital Management. I worked in the same office with Myron for six years.

Yes, that conditional correlation was meaning it’s not normally there, but it’s there when you least expect it, and it’s what takes you down. I definitely see this happening again. Having lived through the Long Term Capital experience in 1998, I had a front row seat. I saw the PNLs every day, I knew all the positions, I negotiated the bailout, I talked to the banks, the Treasury, the Fed, so really, almost no one knew about it better than I did. Not because I was the head trader, the risk manager, but because I wrote all the contracts and then had to unwind them all and do the bailout.

I was a lawyer and am still a lawyer technically, but at the time I was acting in a legal capacity. That’s why I did the bailout. For years afterwards, I was very unsatisfied with my understanding of what had happened from a risk management point of view. I spent a decade studying physics, complexity theory, network theory, graph theory, applied mathematics, behavioral economics, every field I could find to help explain what happened, which I ultimately did, and then was able to move forward from there and build new models that worked much better.

Beginning in 2005, I ran around warning about the next crisis. I didn’t say, “On September 15th, 2008, Lehman Brothers is going to file for bankruptcy.” I wasn’t that granular, but I didn’t need to be. I could just look at the macro and see the size of the balance sheet, the fact that they had gotten rid of derivatives regulation so you could trade derivatives on anything, the fact that Basel II had basically gotten rid of serious capital constraints and banks could do valuate risk as their capital measure, the FCC getting rid of the 15:1 leverage ratio on certain assets, they repealed Glass–Steagall so banks could act like hedge funds.

Every single thing they did between 1999 and 2005 was the opposite of what you would have wanted to do if you wanted to make the system safer. I was lecturing at the Kellogg School at Northwestern at the time and the School of International Studies, and I did a lecture with the Applied Physics Laboratory. I have all those old lecture notes, and I said this system was going to blow up and it’s going to be worse. Sure enough, that’s what happened.

I see the same thing happening again. Now, it’s always the same and it’s always different. Let me explain what I mean by that. Every financial panic is the same. The best description I’ve ever heard of a financial panic is everyone wants their money back. People think they have money that’s not really money, so you’ll hear them say, “I’ve got money in the stock market. I’ve got money in the bond market. I’ve got money in real estate.”

No, you don’t. You have stocks, bonds and real estate. You don’t have money. If you want money, you must sell that stuff and get the money. And guess what? When you do, everyone else is going to be selling at the same time, the prices are going to be plunging, there’s going to be fear, blood in the streets, and your so-called money is going to be disappearing.

That’s what happens when people want to liquidate assets and get out. They want to do it all at once. It feeds on itself and they want their money back – real money, not dollar-denominated assets that are melting before their eyes. That’s what a financial panic is, and that’s what I mean when I say they’re all the same behaviorally.

But they’re all different, because there’s a different catalyst every time. In 2007, there were the subprime mortgages. I can’t imagine subprime mortgages being a problem now. We barely even have subprime mortgages.

There were $1 trillion of them in 2007, and then $6 trillion of derivatives on the subprime mortgages, slightly better but still pretty junky mortgage. So, it’s not a problem now. The banks are tough, the regulators are tough, the down payments and credit standards have gone up, so the next problem is not going to come from the mortgage market.

Could it come from Chinese credit? It probably won’t come from bitcoin, that’s too small and will get ugly when the time comes. It could be emerging markets, currency crisis, a Chinese credit crisis or the U.S. stock market suddenly crashing because they wake up and realize that none of what Trump said he was going to do has actually happened. Look at how the stock market went up between November 8th and March 1st: 15%. It has gone sideways since then with a couple of highs, but pretty much sideways. But 15% on those three months based on Trump’s promises of tax cuts, Obamacare repeal, the wall, infrastructure spending – not one of those things have happened and may not happen this year or even next year, because it’s an election year. Let’s see how it plays out.

I understand the difficulties, and I’m not blaming Trump. I’m just saying that the market priced a lot of good things that haven’t happened, meaning it’s very vulnerable to repricing, and that could get disorderly. So, it could come from a lot of different sources.

There’s $100 billion more leverage in the system, or more debt, I should say. There’s leverage all over the place when you count derivatives. So, the scale of the system, the concentration of assets, the use of leverage, the use of nontransparent derivatives, all of those things are worse than they were in 2008. That by itself would tell you that the next crisis will be exponentially worse and beyond the ability of the central banks to cure, because as we said earlier in the podcast, they haven’t normalized the balance sheet yet.

But there’s something worse than that. Worse than saying this is a bigger, badder replay of 2008 is the rise of robo-investing and passive investing, indexing in ETFs. I’m not talking about high frequency trading. That has its own dangers, but passive investing. Here’s why.

You have passive and active. Passive is just, “I’m going to buy the index and go take a vacation.” Whatever the index does, it does, because you can’t beat the market, you never have better information, you’re never fast enough or smart enough, so just track the market. Even if it goes down, it’ll come back and I’ll make money in the long run. This is the Warren Buffet, John Bogle, Jeremy Siegel mantra.

But there are a certain number of active investors who wake up. Whether they’re hedge fund mavens like Stan Druckenmiller, Kyle Bass or Ray Dalio who have incredible track records or even others who maybe don’t have such good track records but they’re trying, these are the people who engage in what’s called price discovery. They’re taking money, committing capital, taking a view, engaging in transactions to see where the value is by buying, selling, holding, and seeing how it works out. Maybe they have tight stops and they buy something, it blows up in their face and they get out of it, but that’s what’s called price discovery.

Think of price discovery as a healthy body. Active investing is a healthy body, and passive investing is a parasite that jumps on the back of the healthy body and sucks it dry, because that’s what passive investors do. Well, a small parasite on a large creature will carry on. The creature won’t die and the parasite will thrive. What happens when the parasite gets to be bigger than the creature? You have more and more passive investing on less and less active price discovery, active capital commitments. That is an inverted pyramid and is a highly unstable situation. That’s what’s new – the passive investing piece is now I believe larger than the active investing piece and getting larger all the time.

What that means is that when the psychology changes and people want to bid, the number of active traders out there will say, “Yes, I’ll take them, I’ll buy them,” the way the old New York Stock Exchange specialists used to do. As a specialist, your job was to buy when everyone else was selling and sell when everyone else is buying. You took the other side of the market, and that’s how markets maintained some liquidity. It wasn’t foolproof, but it worked pretty well for almost 200 years.

That’s gone. It’s long been gone in the stock market. I talked to Steve Guilfoyle, his nickname is Sarge, and he’s the Head of Floor Operations at the New York Stock Exchange. I was down on the floor of the stock exchange with Sarge when he said, “Jim, there is no liquidity down here. Don’t let anyone tell you otherwise.” I said, “I kind of thought that, but hearing it from you, I know it’s true.”

Even for the upstairs traders and the hedge funds, there are fewer and fewer of them, so things are going to go “no bid” so fast it’ll make your head spin. That’s going to make this crash worse.

Gold is where you want to be, but not 100%. The listeners know I recommend 10% of your investable assets in gold. There’ll be a flight to quality that will start out in treasuries. In the early stages of a panic, a lot of people sell gold. The reason they sell it is interesting. It’s not because they don’t want the gold, because they wish they had more. They sell it because it’s liquid.

Alex:  Yes, exactly.

Jim:  That’s contrary to everything I said. I said everything becomes illiquid. Gold can go up and down, but I’ve never seen it go illiquid or “no bid.” People sell gold not because they want to but because they have to.

But that passes quickly, and then it’s just, “Hey, get me some gold. Where is the gold?” Gold goes up, and Treasury bills go up. There may come a time when Treasury bills hit the wall because you’re like, “Wait a second, I’m getting out of everything else into Treasury bills, but is that a smart idea?” If the central bank is tapped out and people are losing confidence in the United States and the dollar, then maybe not. So, then the demand for gold goes up even more.

It’s obvious that’s how it plays out. A lot of people say, “Call me when that happens, Jim. Call me the week before, and I’ll sell some stocks and buy some gold.” My answer is twofold. Number one, I’m not going to know the week before. I’ll see it coming using the models I’ve developed, and I’m actually warning you about it right now on this podcast, but it’s not like I’m going to know the exact minute or the day. I won’t; I just prepare for it in advance.

What I say to those people is, “What are you waiting for? You know this is coming.” Beyond that, even if I could pinpoint it a little bit, when this hits and you go out to get your gold, you might not even get any. There might not be any available. There’ll be a price, you’ll be able to watch it on TV, but you won’t be able to get the physical gold. Again, one more reason to get it now.

Alex:  Let me add a little bit to that, and then we’ll wrap this up. One thing I found interesting in what you were just saying is that the common thread there is always liquidity. I was in Minneapolis recently meeting with some money managers, and it’s interesting how often that question comes up. “How liquid is it? How liquid is gold?”

I’m saying this for the benefit of our listeners who don’t understand how deep the gold markets are. It’s basically a $7 trillion market cap. If you took all the above-ground gold in the world, it’s worth about $7 trillion. Annually, we see tremendous liquidity and depth. For example, China and India alone are consuming close to 3000 tons a year, and the amount of liquidity that’s available is pretty high.

The other thing you mentioned is that gold will initially drop down because of its liquidity properties. It’ll sell off a little bit. That’s exactly what happened in the 2008 financial crisis. It went down initially with everything else, but it ended up 6% on the year, which was the only asset in the world that did that.

Jim:  Right.

Alex:  That about wraps up our time. Do you have anything you want to add about that last part there?

Jim:  My advice is pretty much unchanging, which is to allocate 10% of your investable assets to gold. In defining investible assets, I always say take your home equity and your business equity. If you’ve got a pizza parlor or an auto dealership or you’re a doctor, a lawyer or a dentist, whatever, you’ve got some business equity. Put that and your home equity to one side, because you don’t want to be betting with that. Whatever you have left are your investable assets. I recommend 10% of that for gold. If nothing happens to gold, you’re not going to get hurt with a 10% allocation, but if the kind of scenarios I’m describing do happen, it may be the winner that protects your losses against the entire rest of your portfolio.

Alex:  Jim, I appreciate your time. This has been a great discussion as always. I look forward to doing it again next month. Enjoy your weekend, and thank you for being on the podcast.

Jim:  Thanks, Alex.

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


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