Transcript of Alex Stanczyk – The Physical Edge March 2016

Dear friend and client of Physical Gold Fund,

We are pleased to release this next episode of the Physical Edge with Alex Stanczyk. In this episode, Physical Gold Fund’s Managing Director explains the importance of jurisdiction choice for vaulting, as well as why vaulting outside the banking system is a prudent safe-guard in today’s financial environment.

Please enjoy with our compliments.

Topics include:

  • According to the IMF, gold is the only Case of a financial asset with no counter party liability
  • Gold will not default like some other financial assets could during a liquidity crisis
  • Over 30% of the bond market is now negative interest rate bearing, with over $7.9 Trillion at negative yield and gold is looking more attractive
  • The meme that gold is a bad investment because it produces no yield does not stand up under scrutiny, all forms of money generate no yield unless invested
  • A modest allocation of a portfolio to gold acts as a diversifier and a truly non-correlated asset
  • Gold is not subject to hacking or cyber warfare
  • Gold is truly non-correlated
  • There is a physical market for gold, regardless of what financial markets are doing
  • Gold protects against sovereign risks such as rapid currency devaluations, examples Russian Ruble, Brazilian Real
  • It’s a hard asset with no counterparty risk, and it has excellent liquidity compared to other hard assets, such as real estate. Gold has almost a 24-hour, very deep, and highly liquid market
  • Criteria when evaluating vaulting jurisdictions
  • Political stability, economic stability, rule of law, history of confiscations, precious metals industry infrastructure, strategic defenses
  • Switzerland as a vaulting jurisdiction
  • Long standing relationships in the precious metals industry in Switzerland
  • Switzerland is the core of the precious metals industry, and is a solid foundation for liquidity globally
  • Reasons for electing non-bank vaulting
  • Rule of Law matters regarding gold as a financial asset or physical property

Listen to the original audio of the podcast here

The Physical Edge Episode 3: March 2016 Interview with Alex Stanczyk


March 2016

Jon:  Hello. I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to the third podcast in a series we’re calling The Physical Edge.

In these interviews, I’ll be talking with Alex Stanczyk, Managing Director of Physical Gold Fund. Our focus will be the fund itself and related questions about the physical gold market. This series is primarily for non-U.S. investors who are considering participation in Physical Gold Fund.

Alex Stanczyk has been involved in Physical Gold Fund since its inception by providing core aspects of the fund design and structure as well as coordinating strategic relationships required for launching the fund.

Prior to this, Alex played a key role as designer and advisor to the world’s first non-bank, private-custody precious metals fund, the Luxembourg Precious Metals Fund. For the past eight years, he has served in a range of capacities for the Anglo Far-East group of companies focusing especially on the logistics of gold acquisition, transportation, and vaulting.

Throughout this time, Alex Stanczyk has lectured globally to family office, institutional, and government audiences on the role of gold in a portfolio, and the international monetary system.

Hello, Alex. Welcome.

Alex:  Hello, Jon. It’s great to be with you again.

Jon:  Today we’re going to discuss a critical aspect of the physical gold market, and it’s the question of jurisdiction; that is, the location you choose to purchase and store your gold. Would you first explain why jurisdiction matters when an investor or institution is dealing with significant amounts of physical gold?

Alex:  Let’s begin by laying a foundation for what gold is. According to the IMF, gold is the only case of a financial asset with no counterparty liability. In other words, gold is not going to default on you like some other financial assets could or might under situations like a liquidity crisis, institutional failure or anything of that nature.

Another aspect of gold that investors are finding interesting, especially at this time, is that in a negative interest rate environment – right now some $7.9 trillion in government bonds is giving a negative yield – gold is looking more and more attractive. Some argue that gold has no yield, so it’s not a good investment, but the particular argument that gold has no yield is actually true of all forms of money including the USD.

However, as I just mentioned, in this negative interest environment, owning gold is now no different than cash or bonds for many people around the world, only it doesn’t have the risk of default.

In our view, a modest allocation of a portfolio to gold acts as a diversifier and a truly non-correlated asset. I’ll explain what I mean by that in just a moment. It acts as insurance versus paper and digital assets in the portfolio.

Here are some reasons why gold makes sense as insurance:

First, it’s not subject to hacking, cyberwarfare, and disruptions in a particular exchange. Any kind of financial asset a person or institution might possess, obviously if they want to have liquidity, they must be able to buy and sell and trade that instrument on an exchange, unless of course they’re dealing directly with a fund like ours.

Second, during a liquidity crisis, gold is not going to fail as an instrument holding value. It will maintain its liquidity, because there’s a global market for physical gold regardless of what’s happening in financial markets. Gold is truly non-correlated. What I mean by that is it protects against failures in banking or financial services counterparties because it ensures liquidity even when other things may become locked up or perhaps are crashing in value.

For example, if we look back at the 2008 global financial crisis, there were many hedge funds that were completely unable to trade because their primary broker or primary dealer had stopped trading. Gold is not correlated to financial systems at all. There is a physical market for gold regardless of what financial markets are doing. If you’re dealing with the right counterparties, as Physical Gold Fund does, you may not be subject to those kinds of things.

Most gold funds are buying and selling their gold directly through banks. Under a liquidity crisis, the banks could have those kinds of problems. If you’re dealing directly with refineries, as Physical Gold Fund is, then you’re bypassing banks and bypassing that potential risk.

Thirdly, gold protects against sovereign risks, for example, changes in currency values. Recent examples are the Russian ruble, which basically crashed in value. If a Russian citizen or institution had invested a portion of their portfolio in gold, it would have protected their position, because the value of gold in that currency went up substantially as the currency crashed. The Brazilian real is another recent, similar case where exactly the same thing happened.

In summary, gold is in an asset class all its own because of its physical properties and use. It’s a hard asset with no counterparty risk, and it has excellent liquidity compared to other hard assets such as real estate that may take you a while to sell. Gold has almost a 24-hour, very deep, and highly liquid market.

Some jurisdictions provide a better framework than others to take advantage of gold attributes, and that’s what we’re going to talk about today.

Jon:  The question of jurisdiction is clearly important for Physical Gold Fund, of which you are Managing Director. The fund has choices about where it manages its gold operations. What criteria have you used to select the optimum jurisdiction, and which location did your review of those criteria eventually lead you to?

Alex:  We have looked at a number of different jurisdictions and have chosen Switzerland as our primary jurisdiction for vaulting as of now. We also reserve the ability to add additional jurisdictions in time if it becomes warranted to do so.

The criteria we used when evaluating the jurisdictions we could choose from included, first of all, political stability. Obviously, we wanted to make sure there was a stable government system in any jurisdiction we were considering, that it had longevity, and that it wasn’t subject to continual regime change and those types of things.

Next, we looked at the economic stability of the jurisdiction. This was clearly an important criterion. Another thing that we looked at was the proximity of the jurisdiction to global precious metals markets for refining, transport, security, etc.

Next we looked at the precious metals infrastructure and history in that particular jurisdiction to determine what they had in place in terms of financial markets supporting gold, physical markets supporting gold, and physical operations supporting gold.

Further, we looked at the rule of law. Does the law in practice in a particular jurisdiction provide for the protection of assets and provide for recourse? In particular, we looked at how that works when it comes to gold, because gold is looked at differently depending upon where it’s stored whether in a bank or not and whether it’s considered a financial asset or physical property by a particular country.

The next thing that we looked at was if the jurisdiction had any kind of history of confiscation of gold. A lot of people think this may not be that important or they don’t take it very seriously. While we don’t necessarily think the likelihood of something like that is high, it is something we weighted into the equation nonetheless. We tried to take as many factors into consideration as possible. Some jurisdictions have a history showing a willingness to confiscate gold, so that was something that concerned us and was part of our criteria.

Finally, gold is a strategic asset. This means that during wartime, gold actually becomes the money of sovereigns. I’m not talking small, perhaps regional wars. I’m talking about in a world war scenario. Countries typically stop accepting each other’s paper and go to gold. In that kind of situation, countries start looking at gold as a strategic asset. There’s a reason that the CIA fact book listing of strategic reserves of a country talks about cash reserves and gold. For any jurisdiction we were considering, we wanted to look at its defensibility during wartime.

Jon:  In that context, let’s talk about Switzerland itself. What are the attributes of this jurisdiction that make it especially attractive for a gold investor?

Alex:  The values of the Swiss people regarding freedom and ownership of private property were very interesting to us. This stems from their history as a fiercely independent and free people. Switzerland, in particular, is politically stable. The Swiss have resisted efforts to bring it under the euro system. Many Swiss feel that doing so would jeopardize their freedoms and sovereignty.

Switzerland is economically resilient. It has done fairly well considering the morass of debt and solvency issues facing much of the euro system today. Aside from gold, Swiss currency is still considered globally as one of the safest assets a person can own. It retains a strong rule of law. We consider this to be extremely important for the protection of physical private property such as gold.

Finally, although not everybody knows this, Switzerland is the global hub of precious metals refining. Unlike some other jurisdictions that are new to gold, Switzerland has a substantially developed precious metals infrastructure. They have over 200 years of experience doing it, the largest refineries in the world reside there, and they handle a tremendous amount of precious metals flow.

Speaking of gold as a strategic asset, I want to emphasize this to highlight the way the Swiss think since it became part of our consideration. As I mentioned before, during large-scale war, gold becomes money between sovereigns, so we looked at this from a gold-as-a-strategic-asset standpoint. What many do not know is that the Swiss have a longstanding military history and have not been successfully invaded for almost 700 years. They have maintained neutrality through several world wars.

There’s a story about a German military attaché during World War II who approached the Swiss Chief of Staff right after the surrender of France and basically said to him that it was time to accept a German-led Europe and that the Swiss should allow German troops access to Switzerland to come through.

The story goes that the general looked the attaché up and down and simply said, “No one comes through here.” Then he went on to explain to him that if Germany invaded, the first thing they would hear would be the simultaneous demolition of every strategic rail system leading into the country.

This belligerence to invasion and determination in resisting affronts to their freedom is really deeply rooted in their culture. To this day, in Appenzell, Swiss men still carry swords when they turn out to vote to symbolize their willingness to fight for their freedoms. They have a very martial or military culture. National sports that are highly revered in Switzerland are things like wrestling and rifle marksmanship. They have hundreds of years of experience in military science. They were known to field the best soldiers available. This goes back all the way to the 1300s.

There’s another story from 1315 about 2,000 heavily armored Austrian knights that tried to invade Switzerland through the Morgarten Pass with the intention of imposing taxation and territorial control, etc. The Swiss peasants defended that pass versus these 2,000 heavily armored Austrian knights. As these knights came through the pass, the peasants came down on them with tree trunks, halberds, axes, used rock slides, and basically destroyed these knights almost to the last man.

Today there’s a saying: “The Swiss don’t have an army; the Swiss are an army.” What that means is that every Swiss citizen is part of a standing civilian army in which they’re required to serve for 30 years. Every military-aged male is required to keep a well-serviced military grade firearm in their home and are trained in how to use it. All 650,000 members of the army are prepared to mobilize for war and be at their mobilization points in less than 24 hours.

One Swiss army officer is quoted as saying, “The foremost battle is to prevent the war by making the price of victory too high. You must understand that there is no difference between the Swiss people and the Swiss army. There is no difference of will. The people are prepared to fight, even against their own government if the government where to capitulate.” This tells us something about the Swiss mentality, and these types of things were part of what we looked at.

There are some other things that are interesting to know about Switzerland. While doing our research on Switzerland and other jurisdictions we looked at, one of the books we came across talked about geographical, tactical, and strategic considerations.

Switzerland, in particular, is basically ringed by mountains that form a natural geographic defense system. All of the roads, bridges, rail systems, and valleys leading into Switzerland are intentionally pre-staged with explosives. The reason they do this is that if Switzerland were to ever be invaded, it allows for the Swiss to intentionally destroy all access moving into the country. They will blow up every road, every bridge, and every mountain pass if necessary in order to prevent anyone from invading. The officially printed number is over 3,000 points of demolition, although some experts think this number is higher, possibly even twice as high.

There are over 12,000 pieces of artillery stationed in the mountains around Switzerland that are manned around the clock. These pieces of artillery are actually aimed at their own infrastructure such as tunnel mouths, bridges, rail systems, etc. All of these guns are pre-gridded for fire. For example, if they did demolish bridges or rail lines coming into the country and anyone were to try to repair them, these guns are aimed, pre-gridded, at those locations, so you can’t approach them anymore.

Whole mountains in Switzerland have been hollowed out and can hold entire divisions of soldiers. They store munitions to fuel and supply a fully mobilized army for over a year. Every public building in Switzerland doubles as a bomb shelter or a fortified military facility and over 95% of the population has access to bomb shelters designed to withstand nuclear blasts.

I’m emphasizing these points to highlight the way the Swiss think and the way they approach matters of security. It’s simply a part of their culture. The vaulting security for valuable property, such as gold, diamonds, and art, in Switzerland is considerable.

When reviewing other popular jurisdictions for vaulting, none of these jurisdictions come even close to comparing to these factors. For example, Hong Kong is a very popular destination for people vaulting gold and so is Singapore. While there’s nothing wrong with these jurisdictions – we may in fact vault there at some point in the future – the point I’m trying to make is that none of these countries have a history of defending against invasion and they’re very close to, for example, China. If I’m going to store gold, Switzerland stands head and shoulders above the other options.

Jon:  Thank you. That’s an extraordinary portrait of the country. I’m curious now to know if there are any particular advantages of Switzerland as a jurisdiction for Physical Gold Fund in particular.

Alex:  Yes, there are. For Physical Gold Fund in particular, we have longstanding relationships we’ve developed in Switzerland with some of the largest refineries in the industry and with what we consider to be some of the best vaulting operators in the industry.

Another thing that is important as far as Physical Gold Fund is concerned is that the vaults and refineries are very close to each other, so we can transport metal back and forth between them in very short distances. One reason why this may be important, which many people don’t realize, is that these Swiss refineries process around 70% of the world’s annual metal refining capacity. We consider Switzerland to be at the core of the precious metals industry, and it’s a really solid foundation for liquidity globally.

What stands on the other side of these refineries are all of the bullion banks and largest jewelry manufacturers in the world. Because of that, regardless of what’s happening in financial markets, there’s demand on the other side of these refineries. That’s a really important aspect to us, because it gives us an extra degree of resilience to potential crises in terms of liquidity crises or fluctuations in market stability. Finally, it also helps us reduce cost of operations.

Jon:  One last question. Whenever we discuss the vaulting of gold, I notice you and your colleagues at Physical Gold Fund always place a huge emphasis on vaulting outside the banks. Why is this so important?

Alex:  This is a great question and something we’ve emphasized in the way we’ve structured products for many years now. There was a time when we said that it was important to vault outside of the banks to protect against liquidity crises, and people would look at us without really understanding what we meant by that.

It has become more and more clear today that if you have your assets held with the bank and there is some sort of a liquidity crisis, then there may be some issues in terms of those assets being locked up or unable to be traded or whatever the case may be. We saw that in 2008.

Another important reason for this is that, in many jurisdictions around the world, bail-in legislation has already been passed. This allows banks to seize assets of depositors to recapitalize the bank in the event of a failure. While this may or may not apply to physical gold now, it’s still a really disturbing trend and something we are concerned about.

In Switzerland, in particular, gold in banks is considered a financial asset versus physical private property. That’s a really important distinction for us.

According to the Swiss Bank Act and Swiss Bank ordinances, banking business activities are defined in the Swiss Bank Act. The Swiss Bank Act does not govern private storage of gold bars. We’re talking about non-bank vaulting in Switzerland. Private property, including precious metals that are stored with private security storage companies, is protected under the Swiss Private International Law Act and also the Swiss Civil Code.

Under Swiss law, there is no difference regarding what physical property is stored. It could be precious metals, fine art, wine, etc., but those things are not considered financial assets. They’re considered private property, and that is one of the key reasons to store outside of a bank.

This is one of many things we’ve looked at that in our view makes Physical Gold Fund a leader and innovator among the gold funds and ETFs in the world today.

Jon:  Thank you, Alex Stanczyk, Managing Director of Physical Gold Fund. And thank you to our listeners. We look forward to joining you again soon.


Listen to the original audio of the podcast here

The Physical Edge Episode 3: March 2016 Interview with Alex Stanczyk


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Transcript of Jim Rickards – The Gold Chronicles February 18th, 2016

Jim Rickards, The Gold Chronicles February 18th 2016:

*Negative Interest Rates leading to a fresh round of currency wars
*Fed on the path to raise interest rates in March and again in June
*Markets are currently assuming the Fed is not going to raise rates
*The S&P would have to be sub 1650 and the jobs report would have to come in under 100k for the Fed to not raise rates
*Still seeing consistent below trend growth
*Inconsistency in policy is causing a loss of confidence in the Fed
*Gold is currently acting like money, similar to USD, Yen, Euro
*In Jim’s new book he addresses common falacies and myths in regards to Gold
*The New Case for Gold can be pre-ordered on Amazon at
*What a move to a cashless society looks like
*May see negative interest rates in the US in 2017

Listen to the original audio of the podcast here

The Gold Chronicles: February, 18th 2016 Interview with Jim Rickards


The Gold Chronicles: 2-18-2016:


Anglo Far-East’s Global Insider is pleased to be able to make available the following transcript. AFE has used this transcript with permission from the copyright owner. Copyright Physical Gold Fund © 2015 all rights reserved. AFE would like to thank Physical Gold Fund for making this transcript available.

Jon: On the behalf of the Physical Gold Fund, we’re delighted to welcome you to the latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.

Let me remind those of you who know Jim Rickards and introduce him to those of you who are new to the webinar. Jim is a New York Times bestselling author and the chief global strategist for West Shore Funds. He’s the former general counsel of Long-Term Capital Management, a consultant to the US Intelligence Community, and to the Department of Defense. He’s also an advisory board member of Physical Gold Fund.

Hello, Jim, and welcome.

Jim: Hi, Jon, how are you?

Jon: Very good, thanks.

We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Hello Alex.

Alex: Hello, Jon. It’s great to be here.

Jon: We’ll be looking for questions from you, our listeners, so let me say that your questions for Jim Rickards today are more than welcome. You may post them at any point during the interview, and as time allows we’ll do our best to respond to you.

Jim, I’d like to begin with a recent statement made by John Paulson. He’s highly respected and well known within the financial community as a hedge fund manager. Mr. Paulson said pointedly that we are not facing an imminent financial crisis. Obviously, he had a reason for wanting to say that in the current climate. Let me contrast this statement of John Paulson’s with a recent bulletin from the Royal Bank of Scotland advising its clients to “sell everything.”

My question to you is simple: How near are we to a really cataclysmic breakdown in the world’s financial markets?

Jim: I’m certainly one of those who see a cataclysmic breakdown coming, but I would say not yet. I’m with John Paulson on this as I look at the landscape today.

1987 was an example of a financial panic with no recession, 1990 was an example of a recession with no financial panic, and 2008 was an example of both in which we had a very severe recession, the worst since The Great Depression, and a very severe financial panic. The point is they’re different things; they can run separately or they can run together.

While I certainly anticipate a financial calamity in the years ahead, I don’t see that happening right now. However, I do see a recession and a stock market decline, and that’s the way to reconcile a lot of what we’re hearing. So, when Paulson says we’re not facing an imminent financial crisis, I agree, but that’s not the same as saying we’re not facing a slowing economy or a recession or a declining stock market. I think we are facing all three of those things.

When an entity like the Royal Bank of Scotland sends an advisory to clients saying sell everything, they’re really commenting on the markets and the recession, not a financial catastrophe.

To expand on that, we could talk about the Fed, monetary policy, the impact on gold, and some other things. Basically, I would say we’re not facing a calamity, but we are facing recession, further declines in stock markets, and a lot of volatility in exchange markets and gold. There is a lot going on, but not quite the big one, as they say in California.

Jon: Let’s look at one aspect that is purely financial but, of course, has economic implications. I want to talk about negative interest rates.

Negative interest rates have become something of a craze among the world’s central bankers. We’ve got the European Central Bank, Japan, Switzerland, and Sweden among others all piling in with this strategy. By some estimates, that’s about $6.5 trillion in sovereign debt trading below zero.

Even in the United States, the Fed has asked banks to test the possibility of negative rates, and yet at the same time, Janet Yellen continues to insist that the Fed is on course for raising rates. This all seems a little bit like Alice Through the Looking Glass.

Can you help us make sense of the signals here?

Jim: Yes. When you say Alice Through the Looking Glass, that’s a very good metaphor, because once you cross zero, you’re really through the looking glass in more ways than one.

There are several reasons for negative rates. The main reason is to try to manage exchange rates of currencies. In other words, this is an extension of the currency wars.

Central banks will say this is for stimulus. The theory is with the negative rate. Let’s say I’m the central bank. I’m actually charging banks to have a deposit with me. Banks in my system – in the case of the European Central Bank, we’d be talking about Deutsche Bank, Credit Suisse, UBS, and other large European banks – deposit money with the European Central Bank. The ECB is saying, “Fine, you deposit with us, we’re going to give you less at the maturity of your deposit. We’re going to take away part of your deposit.” That’s a negative interest rate. Instead of paying you interest, we’re going to take something away.

Superficially, they say this is an incentive to go out and lend. That is, you can do one of two things with your money:

1) You can lend it to some business or enterprise or do trade finance, commercial finance, any commercial loan, or anything you like, or

2) You can leave it with us, and we’ll take it away from you little by little in small increments. Therefore, that negative rate is an incentive to go out and lend.

In fact, that’s really not different in kind than the incentives we’ve had in place for the last eight years. In other words, if I could lend money at 1% or 1.5%, how much does it matter to me if the rate is zero or negative 25? I guess if you go negative 25 or negative 50, negative 1% at some point might matter. Maybe we’ll get there since things certainly are moving in that direction, but the reason banks haven’t loaned out the money is because nobody wants to borrow it.

Take corporations or regulators imposing strict credit standards. The big ones have plenty of cash and the small ones are perhaps not creditworthy or they’re looking at below-trend growth and saying, “Why would we want to borrow money to buy a plant and equipment or expand our capacity? Why would we want to do any of those things? We’re worried about growth, we’re worried about leverage, we’re worried about a new recession. We don’t want to borrow.” It’s the same thing with consumers. When they get their hands on money, the tendency is not to spend it but to either save it or pay down debt.

We have an excess of savings over investment. We have deleveraging in the form of paying off debt. We have banks that don’t want to lend and consumers and businesses that don’t want to borrow or spend. The system is jammed up, the transmission mechanism between central bank money and commercial bank money and lending and spending is very badly broken. Going down another 25 or 50 basis points isn’t going to change that.

The impediments are psychological, they’re structural, and they’re long-term. It’s not because interest rates are too high and they need to be lower. Interest rates have been very low – too low – for a long time. As I said, the impediments are elsewhere, and lowering rates is not going to change that.

On the surface, they will say the purpose of negative interest rates is designed to have a stimulus, but there is no stimulus. If zero didn’t do it, 25 basis points negative won’t make much difference. However, there is a reason – at least in the minds of central banks – for lowering rates, including negative rates, and that’s to fight the currency wars. It is designed to cheapen currency.

If you are a major institution, a sovereign wealth fund, or a very large asset allocator like BlackRock or PIMCO, or even a bank, or the aggregate of all the savings in the world and you’re deciding where to park your money, you have several choices. You can park it in Europe or the United States or Japan, et cetera.

At the margin, you’re going to park it where you can get the highest rate. If the US is positive 25 or maybe soon to be 50 basis points and slightly higher for banks, and Europe is negative, then you’ll put your money in the United States. This means that at the margin, you’ll be selling yen, selling euros, and buying dollars. That has the tendency to cheapen the euro.

There is an agenda, if you will, but the agenda is not normal stimulus through lending and spending; it’s a backdoor stimulus to currency wars, cheaper currencies, and importing inflation. That’s why Europe is doing it, Switzerland has done it, and others are doing likewise – Japan, Sweden, and the other countries you mentioned.

The US is not doing it. In fact, the US is moving in the opposite direction. The US is in a tightening cycle. This combination of tightening in the US and negative rates in Europe has driven the dollar at this point close to ten-year highs and has driven the euro quite low.

That’s the dynamic going on. The question is where do we go from here? What’s next for the Fed, what’s next for Europe? If you’d like, Jon, I can expand on that and do a longer-term central bank forecast.

Jon: I think it would be helpful, because the sense of “What’s the future of this?” is a question on all our minds.

Jim: The Fed is still on a path to raise interest rates. I expect the Fed will raise interest rates by 25 basis points in March and again in June. I’ll watch June carefully and may update the forecast between now and then. In fact, I update my forecast on a regular basis.

You hear that the Fed is suddenly going dovish. They did one rate hike in December, and the markets nearly collapsed in January. We went well into correction territory, or depending on the market, into actual bear market territory. It wasn’t quite as bad as the drop last August, but almost as bad.

The Fed came out with a statement released at the end of January, and then the minutes from that meeting were released yesterday. These were taken by the market to strike a very dovish tone.

The market has now formed an expectation that the Fed will not raise interest rates in March. I’m saying that they will, so that’s a bit contrary and outside the consensus. Let me explain my view and what it looks like the market is thinking.

When I say “the markets,” it shows up in the Fed funds futures markets. Based on where they’re priced, the markets are showing that they don’t expect any rate hikes in 2016 at all, with only a very small probability perhaps of one rate hike late in the year, and stock markets have started to rally.

By the way, go back to December when the Fed raised rates. I said earlier that they would not raise rates until December, and by the time they did, the market certainly expected it. I don’t know anyone who did not think the Fed was going to raise rates in December. The rest of the year is history, but by December it was clear that they were going to raise rates. It was very well advertised.

I also said that would be a blunder. I was not in the group who said, “A 25-basis-point hike is not a big deal. It’s only 25 basis points. Who cares?” I said at the time that they would raise rates but that it would be a huge blunder on par with what they did in 1929, and it would produce very average results. That’s exactly what happened in January. We all know what the stock market did in January and early February – it went down quite a bit.

The market was saying to the Fed, “Look, you have made a mistake. You’ve tightened in a weakness.” The Fed is not supposed to do that. They’re supposed to tighten when things are strong, labor market conditions are tight, and inflation rates are ticking up. That’s when they’re supposed to tighten. When you’re in economic weakness, you’re supposed to ease.

But here was the Fed tightening in weakness, because there was a lot of weak data from trade and manufacturing output, credit losses, a strong dollar, energy prices, commodity prices, shipments out of major ports, retail sales, inventory skyrocketing. It was a long list of data that said the US economy looked like it might be in a recession or heading for a recession. Why on earth would you tighten in that environment?

The Fed was tightening based on models that told them growth would be okay and inflation was right around the corner. Meanwhile, the real world was seeing weakness all around and seeing the Fed tighten and believed that was a blunder, so the stock markets collapsed over the course of January. But then, a funny thing happened in the last couple of weeks. The January minutes came out, as I mentioned, and were interpreted by the market as striking a very dovish tone.

What was the basis for that? If you look at the language, the Fed acknowledged the financial stress we were all seeing in the month of January. They said Chinese markets are going down, the US market is going down, markets are volatile, financial conditions are tightening, growth appears to be slowing. They listed a litany of things that would indicate they recognized that the US economy is fundamentally weak.

So the market said, “Good, the Fed got the message. They tightened in December which was a mistake, the markets went down, but the Fed heard us, and now the Fed is acknowledging that the economy is weak, and they won’t tighten in March.”

Here’s where I disagree with the markets. Markets are wonderful price signals, they’re wonderful aggregators of information – I follow them very closely – but they’re pretty bad forecasters. I don’t rely on them for forecasts, but I do rely on them for information. Of course, the art of the exercise is to interpret it correctly.

When the market looked at first the Fed statement, then the minutes, and went down this list of weak factors, I think they ignored something else the Fed said. The Fed said, “Yes, we have weakness here, volatility there, tightening financial conditions. We’re watching it very closely.” That was the key phrase, because “watching it” means they haven’t changed their minds.

They set out on a path to raise rates, certainly in March, but some unexpected things happened. They acknowledged the unexpected things and said they’re watching it, but that tells me they haven’t seen enough yet to change course. If they had, they would have said that, but that’s not what they said. They said, “We’re watching it, we’re going to keep thinking about it.” That means they’re not changing course, and whenever you answer one question, it should always pose another question.

What I said to myself was, “Okay, the Fed is still on course to raise rates.” The market has kind of looked at the dovish part of the statement, but I looked at the part that said, “Yes, there are some dovish factors out there, but we still haven’t made up our minds.” That tells me they’re still on course to raise rates. Then I said, “What would it take? If they’re watching this data, what would it take for the Fed not to raise rates? They said it’s not bad enough yet, but how bad would it have to be?”

We do have some information on that, which is the collapse last August, particularly the last week of August, and the fact that the Fed did not raise rates in September of 2015 when they were widely expected to do so. Certainly all year by a lot of commentators, but in the run-up to September 15th, it was very widely expected, until the last two days, that they would in fact raise rates, but they didn’t.

That is an example of when the Fed did change course based on market. Now using that, applied to today’s markets, where would the S&P have to be for the Fed not to raise rates? That was the question I asked myself.

The answer is about 1650. That’s an estimate, and it could be a little bit higher or lower, but you would have to see the S&P crash from where it is now – around the 1920 level as we’re speaking – all the way down to 1650 for the Fed not to raise rates.

What about jobs? We’re going to get the February jobs report on March 4th. That’ll be the last big piece of data before the Fed has to make their decision on March 16th. The January jobs report that came out in February was decent. It wasn’t huge; it looks like monthly job creation actually peaked in November of 2014 right around the time the stock market peaked, by the way. That’s when the trouble began. There was a delayed or lagged reaction to the Fed tightening, beginning in the spring of 2013. Anything above 100,000 is not a blockbuster report, but it’s good enough.

My estimate for the Fed not to raise rates would be a February jobs report on March 4th of less than 100,000 new jobs, and you’d have to see the S&P tumble down to the 1650 level over the next couple of weeks. If both of those things happen, the Fed would not raise rates in March, but I don’t see either one of those things happening. I think the jobs report will be okay – not huge, but good enough – and there will be counter-rallies in the stock market. Even 1700 would be a shock, but I don’t see it hitting 1650.

With 1650 on the S&P and sub-100,000 jobs in the February jobs report being my benchmarks and neither one of those things happening, I don’t see the Fed being deterred from raising rates in March.

Beyond that, the market has made the Fed’s life easier because of what’s called a recursive function. That’s just a fancy name for a feedback loop. Go back to the December-January-February sequence. The Fed tightened in December, the market decided the economy was weak, that tightening in weakness was a mistake, the market went down, the Fed acknowledged the market’s concerns, the market interpreted that as being dovish, and the market rallied.

The irony is that the market rallying makes it easier for the Fed to raise rates. Because of a statement, markets are rallying in anticipation that the Fed won’t raise rates, but the market rally itself makes it easier to raise rates, because it eases financial conditions. It’s the exact opposite of what the market may be expecting.

All of that is a setup for possibly a shock on March 16th where the Fed tightens as I expect, but the market is looking for no action. Certainly nobody thinks the Fed is going to ease, take back the 25 basis points they raised, but even doing nothing would be sort of dovish from the market’s perspective.

If the market expects the Fed to do nothing and the Fed tightens, that could be a shock. We could see much bigger declines in the stock market between now and then and perhaps even very much concentrated on March 16th if the Fed actually does tighten, which I expect.

Jon: Thanks, Jim. Let me take a moment to ask a broader question about investor confidence. I’m not talking about confidence in the market or in companies, but confidence in the monetary system. Do you see any kind of erosion of trust in the financial elites and in central banks in particular – not only the Fed, but central banks around the world?

Jim: I do. In 2008, central banks rode to the rescue, bailed out Wall Street, bailed out the banks, bailed out the economy, monetary market funds, bank depositors, you name it. There were tens of trillions of dollars of rescue packages put together. It did have the effect of preventing something much worse than what happened, but unfortunately it did not solve any of the root problems, and those problems have manifested themselves in two ways.

Number one, persistent below-trend growth. I think most economists would have said, “We went through a bad patch in 2008 and 2009, but maybe by 2010 or 2011 at the latest, we should have seen the economy getting back to consistent 3%, 3.5%, and occasional 4% growth.” That never happened. There were some individual quarters where that happened, but on the aggregate, no and certainly not globally, not in the United States, and not for any sustained period of time.

That being the case, just the passage of time itself would be enough to cause some loss of confidence in the central banks. Beyond that, and making it even worse, is the inconsistency in policy, the blindness of the Fed raising rates in December, and what happened in January. Would you have raised rates in December if you knew the market reaction would be so bad?

A few people, myself included, predicted that market reaction, but the Fed certainly missed it. Investors are now well aware that the Fed missed it, so they’re losing confidence in the central banks.

It’s one thing to describe this, but when you look for concrete evidence, I see it in the price of gold.

The reason I say that is there are a lot of reasons why the dollar price of gold might go up or down. I think our listeners are familiar with many of them. There’s inflation, deflation, negative real rates, positive real rates. There are a number of factors such as normal supply and demand that we’ve spoken about and will talk about on future calls as well, but for now I want to focus on one very particular important aspect, which is until November 2014, the dollar price of gold was very highly correlated to the commodity price index.

There are a couple of big commodity price indices out there. I’m using the Goldman Sachs composite, but the same would be true for other commodity indices as well. They were very tightly correlated. That makes sense; it should be correlated. First of all, gold is in the index, so a single component should be somewhat correlated with an index that includes that component, but beyond that, they respond to a lot of the same forces, including inflation, deflation, and interest rates.

Beginning in November 2014, they very sharply diverged. The commodity index continued to collapse driven mostly by the price of oil. We all know the oil story, but gold went up and then came down again. It was volatile, but it found a floor right around that $1060 an ounce level. It bounced off that floor a couple of times, and it’s had a very strong rally of about 14% over the last three weeks as I’m sure our listeners are well aware of.

What does it mean when commodities are still going down, bouncing around the bottom, but gold has broken away from the pack and started to move up? That tells me gold is no longer trading as a commodity; it’s trading as money. I’ve written a couple of columns where I called it a chameleon. You put a chameleon on a green leaf and it looks green, you put a chameleon on a tree trunk and it looks brown. It changes color to adapt to the environment just as gold changes its characteristics.

It’s always gold. In my view it’s always money, but in terms of broader markets and the perception, sometimes it trades like a commodity while other times it trades like an investment. If there’s a flight to quality and people are dumping stocks and bonds, they might buy gold, because gold is another asset class, another investment, but sometimes it acts like money.

Right now gold is acting like money. It’s in the horse race between the dollar, the euro, the yen, the yuan, and all the other major currencies. People are starting to look at gold as an alternate currency, an alternate form of money.

That explains why gold is going up, and it also explains why it’s broken away from the commodity index. Some people call it the fear trade. Maybe there’s a little bit of that in there, but I see it as gold is a form of money.

That, by the way, is very symptomatic of a loss of confidence in central banks, because what’s the competition? If you say gold is a form of money, what’s the competition? Bitcoin is in a small way, but the real competition is central bank money. It’s the dollar, the euro, the yen, and the yuan. If people are losing confidence in all the central banks and they’re looking for a form of money, the only thing left is gold, and to me, that accounts for why gold is going up.

The short answer to the question is yes. As a result of the central bank’s inability to see the stock market collapse in January caused by their blunder (it’s very tightly compressed between raising rates in December and sinking markets in January), there’s a generalized loss of confidence in the ability of central banks to steer economies.

I never had much confidence in them in the first place for that ability. I don’t feel it’s their job to steer economies, but most people think the central banks know what they’re doing, which of course, they don’t. I think confidence was lost, and that’s showing up in the increase in the price of gold, which people are turning to as a form of money that’s not printed by central banks.

Jon: Speaking of gold, Jim, last month you shared with us exciting news about your latest book called, The New Case for Gold. May I ask you something about that book? As you were working on it, did you make any new discoveries for yourself about either the historical role of gold or its future potential in the global monetary system?

Jim: I did, Jon. When you set out to write a book, you have a topic and an outline in mind, so you start out sort of knowing where you’re going. Then you actually do the research and start to look at a lot of different threads and just think about it. The writing process itself is a creative process, and sometimes you get into what psychologists call the flow. You start writing and you just keep going. That’s the source of a lot of creativity.

One idea that emerged really draws on my background in the bond business and in government finance. Today I write and speak about gold a lot. I’m on the board of advisors of the Physical Gold Fund, I have this new book coming out on gold, and it’s something I’ve done a lot of in the last ten years, but before that, I was in banking, hedge funds, and government finance, and I have the bond market background. I’m very familiar with open market operations.

I started going down a list of objections to gold. I think we all know what I call the litany of reasons not to own gold. You run into people who say that gold is a barbarous relic, gold has no yield, gold is not part of the money supply and never will be, there’s not enough gold to have a gold standard.

Every one of those things is wrong. They’re either factually wrong, historically wrong, or analytically wrong. I write about that in the book. I take them one by one, rip them apart, and leave the reader with a very good historical, factual, analytical foundation on which to rebut the gold bashers.

If anyone picks up this book and reads it, and then whether they’re on television, at a cocktail party, dinner party, among friends or just behind the wheel listening to the radio and they hear some of these arguments against gold, I hope they will be well armed with the rebuttal, because that’s all in the book. I hope the readers enjoy that.

One particular objection you hear is that people say there’s not enough gold to have a gold standard. Look at the current price and the total volume of bank assets, trade and finance, capital flows, the size of the world economy, the amount of gold, and the price of gold. Could you have gold backing up the global economy today? The superficial answer and the incorrect answer is no, but the correct answer is that there is enough gold; you just have to change the price.

There may not be enough gold at $1200, that may be deflationary relative to the money supply, but there’s plenty of gold at $10,000 or $20,000. Particularly, the same quantity of gold can serve for any amount of money supply or any economic size simply by raising the price. To say there’s not enough gold is nonsense on its face, because there’s always enough gold; it’s just a question of price. There are some historical antecedents for getting the price wrong going back to the 1920s, and if you ever had a gold standard in the future, you’d have to get the price right.

Beyond that, another idea occurred to me that had not earlier. I’ve never seen it in print or discussed anywhere. One of the things I explore in The New Case for Gold – one of many that I hope the readers find new and interesting – is that the critics who say there’s not enough gold fail to distinguish between official gold and total gold.

The estimated total amount of gold in the world is about 180,000 tons; it could be a little higher or lower. The amount of official gold in the world owned by central banks and sovereign wealth funds (basically owned by governments) is a much smaller amount. It’s about 35,000 tons.

When I’ve done any of my calculations or spoken about $10,000 gold, and whenever people question whether there is enough gold to support the global monetary system, etc., the calculations are done with reference to that 35,000 tons. Mining output is about 2,500 tons a year give or take, so that grows about 1.5% a year relative to total stock.

If you’re a central bank and want to ease monetary policy and you’re on a gold standard at a fixed price and you say “I don’t really have enough gold,” all you have to do is buy some. You can go out and buy gold from the floating supply of non-official gold. The answer is you’re not limited to 35,000 tons. You’ve really got 180,000 tons. Official gold is only about 20% of the total gold supply. There’s 80% out there waiting to be had.

As a central bank on a gold standard, it’s called an open market operation when you print money and buy gold. That’s exactly what central banks do today in the bond market.

What do they do when they want to tighten monetary policy or when they want to raise interest rates? They sell bonds back to the banks, the banks pay for them, and then the money just disappears. It’s as if it went into a black hole.

Buying bonds from the market with newly printed money and then selling bonds back to the market with money that disappears is called open market operations. That is how central banks control interest rates and try to regulate inflation, deflation, and economic growth.

You can do exactly the same thing with gold. If you think there’s not enough gold at a certain price and you want to ease monetary conditions, you can print money and buy gold. Likewise, if you think inflation is getting out of control and you want to tighten monetary conditions, you could sell gold and be paid for it.

If you’re trying to target a price – and as I said before, you have to get the price right – that would be a way to do so. If you set your gold standard at let’s say $10,000 an ounce and had a side-by-side free market in gold and gold started going up to $10,500 an ounce or $10,700 an ounce or some significant move like that, that’s a price signal to the central bank that their monetary policy is too easy, so they could actually sell gold into that market to try to lower the price. Start dumping gold and you lower the price. Conversely, if you see the price of gold going down to say $9500 an ounce when your target is $10,000, you can go buy gold, print money, and bid up the price.

They can treat gold exactly the way they treat bonds today. They can buy it and sell it in an open market operation, and they can do that to target the price for any combination of monetary ease or tightening they want.

That’s a technical way of saying this objection to a gold standard on the basis that there’s not enough gold, leaving aside that there’s always enough gold at a price, indicates a deeper objection to that, which is that there’s plenty of gold on the sidelines in private hands. You can buy it and sell it through open market operations and hit any target price of gold you want and create or destroy money exactly the way it’s done today.

There’s no inconsistency between a gold standard and discretionary monetary policy just as there’s no inconsistency between a gold standard and open market operations. When you throw in the entire private gold side by side with official gold, the idea that there’s not enough gold just falls away. It’s one of those clichés people throw out at you, but you can understand the ins and outs.

By the way, PhD economists, monetary economists, and central bankers would perfectly understand everything I’m saying, so why do they not say it? It’s because they don’t want to talk about it; they don’t want a gold standard; they don’t want to say anything positive about gold.

You can see that there’s plenty of gold and that gold standards are feasible. You do have to get the price right, but that target price would be $10,000 an ounce or higher.

Jon: Thank you, Jim. It’s an intriguing picture and certainly new to me.

Alex Stanczyk is here with questions from our listeners. I’m sorry time is a little short, but we’ve got some minutes left. Alex, would you take over here and share with us some questions from our listeners?

Alex: Sure, Jon, thank you. We encourage people to always give us questions however they like. They can send it in by e-mail, we have an interface here for you to ask questions this way, and you can also ask questions on Twitter using the hashtag #AskJimRickards. We’ll always monitor for those, and if we don’t pick them up in this webinar, we can possibly pick them up in future webinars.

A question that’s coming in right now is: How do we get Jim’s new book, The New Case for Gold? You can go to and follow a link that will take you to Amazon. Otherwise, you can just go straight to Amazon and search for it. It’s available for preorder now. Our special edition is not available on Amazon; that’s going to be done completely separately, but you can order the standard edition that way.

Some questions we receive have to do with asking for what amounts to financial advice, investing advice, tax advice, or legal advice. Just to let you know, we typically try to stay away from those kinds of questions for obvious reasons.

A fairly common question right now has to do with the cashless society. One comment is, “Will cash be even more valuable in the black market if they try to go cashless?” Another question is, “There’s so much eagerness with bankers to ban cash. How would you see that play out?” There’s another one from Nathan that says, “Regarding recent news about elimination of the €500 bill and the $100 US bill, can you talk about this a little bit?”

Jim: Yes, I know there’s a lot of interest in it. Harvard professor Larry Summers had a report on this and blogged about it, and I spoke a little bit about it on Twitter. It’s generating a lot of interest, so let’s just hit this one head-on.

First of all, we are moving in the direction of a cashless society. There’s no question that governments around the world would like to go cashless. They know there will be some resistance, and they don’t want there to be a political issue in that way. The more homogenous the society is, the more likely you’ll see it. I think we may actually see this in the next year or so in Sweden since they’re pretty far down the road, and Europe would like to do it, so we are moving in that direction.

Another quick point is that a lot of people associate a cashless society with negative interest rates. Negative interest rates are already here in Japan, Europe, Sweden, and Switzerland. They may be coming to the United States just not right away.

I don’t think we’ll get to negative interest rates in the US until the middle of 2017. That’s because we’ll have a couple more rate hikes, and then I think the Fed will pause. Before they get to negative, they have to cut, because once you get up to 75 basis points, you’ve got to get back down to zero. That means two or three cuts.

If they raise in March, raise in June, pause in the fall, cut in January, February, March of 2017, you’re going to be all the way out until April 2017 before you see negative rates in the US. Having said that, I think we may see negative rates in the US before they do QE4. They’ll also try to do helicopter money side by side. So we are moving to negative interest rates, and we may see them in the United States next year.

A lot of people say, “Aha, I know a way around negative interest rates.”

That’s actually not feasible. I think the war on cash is over and the government won. People who think they can get a lot of cash are fooling themselves.

Corporations can’t do this. Apple has maybe $1 trillion of cash on its balance sheet, an enormous amount of cash. You’re not going to get $1 trillion in $100 bills and stick it in your back yard in Cupertino, California. The large buyers such as BlackRock, PIMPCO, Apple, and any company with large cash balances are not going to get currency, so we’re only talking about individuals.

Individuals are actually not that big of a piece in the puzzle, because the real impact of negative rates is going to be indirect through mutual funds, corporations, and stocks that you own.

It’s just not feasible for the big players to get cash. Even for everyday citizens and a lot of our listeners, you can’t go to the bank today and get $20,000. Call your bank tomorrow morning and tell them you’d like to withdraw $20,000 in cash. You’ll hear silence on the phone, then they’ll say “Come back in three days, because we’ve got to get the money,” and you’d better bring your birth certificate and 20 forms of federal ID, because they’re going to want your whole life history. It’s what they call a CTR, currency transaction report. It doesn’t make you a criminal, but you’re on some radar screens. You can’t access large amounts of hard cash without being treated like a criminal, a tax evader, or a terrorist. In fact, you will be treated like a criminal, a tax evader, or a terrorist even though you’re a perfectly honest citizen.

People can say, “I’ve got this figured out. As soon as they go to negative rates I’m going to march down and get some cash,” but they can’t get it. For that matter, you can withdraw $5,000 a week for a couple of months and say, “Well, they won’t file the currency transaction report,” but they’ll file something else called a suspicious activity report, SAR. You’re on the radar screens, so as a practical matter, you can’t get your cash.

You might say, “Maybe I’ll do it anyway and let them file a report, who cares? I pay my taxes, I’m an honest citizen, I have nothing to hide. If they want to send in a report to the Treasury, that’s fine, but it doesn’t really matter. I’m going to get my cash.” You can do that, but the question is would it possibly be worth more on the black market in the time of a cashless society? The answer is no, because if they go cashless, I can tell you what they’re going to do. They’re going to call in the money.

There’s going to be a public announcement that says, for example, you have 90 days to come down to the bank with your cash, hand it in, and we’ll give you credit in a digital account, your bank account, basically. Anybody who doesn’t do it within the 90 days, their cash will no longer be valid; it’ll be like confetti or newspaper.

I say these things and people look at me like, “Wait, Jim, you’re writing science fiction here,” but it happens all the time. How do you think they got to the euro? In 1999, you didn’t have the euro; you had Italian lira, Spanish pesetas, French franks, German Deutsche marks and others among 14 different currencies at the time.

They said “Hey everybody, you have X number of days to come down with your Deutsche marks or Spanish pesetas or whatever it is, cash them in, and we’ll give you euros.” You could get paper money because there’s still a paper euro, but if you have Deutsche marks today, they’re worthless because you’re past the time that they gave you to come and cash them in.

I would say two things. Number one, the cashless society is already here in effect, because it’s just not practical to get your hands on very much cash. Number two, even if they did make it a matter of law so that it was literally illegal and impossible to get cash, you’d have a certain amount of time to hand it over. In doing so, you would also be reported to the government, and therefore your cash isn’t going to do you any good. There’s not going to be a black market because it’s simply going to be worthless.

However, notice that everything I just said does not apply to gold. If you’re worried about the digital society, the cashless society, the government calling in $100 bills and writing down the names of everyone that comes in with a stack of 100s, if you’re concerned about all that, you ought to buy physical gold, because that will always be valuable. The government can’t make it go away. That’s really the alternative.

I wouldn’t be trying to load up on $100 bills. You might be trying to load up on physical gold, because that’s really the answer to being stampeded into digital accounts, which the government can then steal from.

Alex: I know that’s been on the mind of a lot of people, so thanks for covering all of that, Jim. We still have quite a few more questions, but unfortunately we’re out of time. Thanks, Jim, we really appreciate your insight as usual. With that, I’m going to turn it back over to Jon.

Jon: Thank you, Alex, and thank you, Jim Rickards. It’s always a pleasure and an education having you with us. Most of all, thank you to our listeners for spending time with us today. Let me encourage you to follow Jim on Twitter. His handle is @JamesGRickards.

Goodbye for now, and we look forward to joining you again soon.


Listen to the original audio of the podcast here

The Gold Chronicles: February, 18th 2016 Interview with Jim Rickards


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

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Transcript of Alex Stanczyk – The Physical Edge January 27th 2016

Dear friend of Physical Gold Fund,

We are pleased to release the transcript of the most recent interview with Physical Gold Fund Managing Director Alex Stanczyk.

Please enjoy with our compliments.

Topics include:

*About the London Bullion Market Association (LBMA) – What is it?
*LBMA Standards have been used globally as the benchmark standard for gold and silver bullion
*Details on members of the LBMA, Bullion Banks, Refineries, Security Logistics
*The role of the LBMA, and the importance of understanding what it does
*LBMA is a standards body that establishes uniformity in purity and form factor to provide a framework for global trade in gold
*Understanding the Good Delivery lists
*How refineries become LBMA accredited refineries
*What are LBMA referee refineries
*Where the members on the Good Delivery lists are located
*Understanding the Chain of Integrity
*How gold enters the system
*Advantages of having the entire history of custody for gold
*Understanding “clearing risk” in gold funds
*Unique positioning of the Physical Gold Fund

Listen to the original audio of the podcast here

The Physical Edge Episode 2: January 27th 2016 Interview with Alex Stanczyk



Jon: Hello. I’m Jon Ward on behalf of Physical Gold Fund (PGF). We’re delighted to welcome you to the second podcast in a new series we’re calling The Physical Edge.

In these interviews, I’ll be talking with Alex Stanczyk, Managing Director of Physical Gold Fund. Our focus will be the Fund itself and related questions about the physical gold market. This series is primarily for non-U.S. investors who are considering participation in Physical Gold Fund.

Alex Stanczyk has been involved in Physical Gold Fund since its inception by providing core aspects of the Fund design and structuring as well as coordinating strategic relationships required for launching the Fund.

Prior to this, Alex played a key role as designer and advisor to the world’s first non-bank private-custody precious metals fund, the Luxembourg Precious Metals Fund. For the past eight years, he has served in a range of capacities for the Anglo Far-East group of companies with a focus on the logistics of gold acquisition, transportation, and vaulting.

Throughout this time, Alex Stanczyk has lectured globally to institutional and government audiences on the role of gold in the international monetary system.

Hello, Alex, and welcome.

Alex: Hello, Jon. Thank you. It’s nice to be chatting with you once again.

Jon: Today, we’re going to talk about a central player in the physical gold market, and that’s the London Bullion Market Association (LBMA). Would you tell us first, what is the LBMA?

Alex: LBMA stands for the London Bullion Market Association. This organization was founded back in 1987 by the Bank of England, and its purpose was to maintain the so-called Good Delivery Lists, which we’re going to talk more in detail about shortly.

If you look at the LBMA website, it is described as an international trade organization or a trade association representing the London market for gold and silver bullion. This is interesting, because while London by volume has the largest paper trading gold in the world, the reality is that more physical gold trade is occurring outside of London, and this trend is continuing, moving towards the east.

While the purpose of the LBMA is to be a London-focused organization, in actuality the standards it has created have been exported and used all over the world. There are some people – for example, some non-institutional commentators in the precious metals space – who often refer to the LBMA as some sort of nefarious cabal with ill intentions. I don’t think this is an accurate portrayal of what the LBMA really is. It may just be due to not knowing who’s involved with it or what they really do.

In practice, the LBMA is a working group of institutions that trust each other. Because of this, they form a core network that provides the foundation for global wholesale trade in gold and silver bullion.

Jon: Tell us a little more about this network. Who participates in the LBMA? What organizations make up this important association?

Alex: The LBMA is made up of a number of participants spanning across several industries. First are the bullion banks. These are some of the largest banks of the world and settle over-the-counter trades, or OTC trades as they’re called in the bullion markets. These banks include UBS, Barclays, Scotiabank, JP Morgan, and HSBC. Those five major banks make a market for numerous other smaller entities that trade in the bullion markets.

Most of their trading occurs on an unallocated basis, meaning they do not actually settle in physical metal but rather net out a day’s trades and settle them on their books. On occasion, trades are settled in physical, but due to costs involved in armored transport, auditing, vaulting, and the volumes that are transacted, these banks seem to prefer to settle trades on the ledger versus constantly sending armored trucks back and forth, which does make some sense.

The next major category of participants is the security logistics firms. These are firms such as Brink’s, Loomis (which used to be VIA MAT), Group 4 Securicor (which is out of the UK), and Malca-Amit. These security companies have a global footprint and provide a global network of secure transport and vaulting. This allows for large-scale physical gold and silver transactions. Essentially, they’re the conduits by which physical gold moves around the world.

For example, some of this gold might be coming from mines or some of it might be coming from scrap sales – those dealers who offer to buy old jewelry or scrap jewelry. Other transport might include going from refiners to jewelers or to and from refineries to the vaults and end customers.

The gold is typically transported by aircraft and armored vehicle, and they have the appropriate armed escort to go with that. The vaults being operated by these logistic companies include some of the most secret and secure storage facilities in the entire world.

I have personally been to some of these as part of my due diligence in my capacity with previous organizations I’ve worked with and also with Physical Gold Fund. I can tell you from personal experience that the security is very impressive. Some of these organizations go so far as to work with governments around the world to secure vaults in facilities that were prior military installations, some of which are rated to withstand nuclear attack, etc., so they go to quite the extent.

The third major category is refineries. We refer to these as the core of the industry. The LBMA is controlled primarily by bullion banks, but those banks can’t really do anything without the assistance of the refineries. The refineries refine the metal, cast it into acceptable forms, and are, in my opinion, the most important link in the entire system.

Finally, there are a number of dealers and other associated businesses that play a smaller role but are still important to the overall global ecosystem in the LBMA.

Jon: Looking at this from the point of view of investors in physical gold, why is the London Bullion Market Association important to know about? What purpose does it serve?

Alex: For most gold and silver investors, the LBMA may not ever come up on their radar. In fact, many smaller investors may never have heard of the LBMA, and that’s because the LBMA is not really visible at what we call the retail level. Most small bar and coin investors can access gold and silver through their local coin dealer, or maybe they’re ordering it through some kind of wholesale coin dealer, and they may never deal with a member of the LBMA.

However, once you start dealing in six- and seven-figure and larger sales in gold, then it’s likely you’ll be dealing with an LBMA member. If not directly dealing with an LBMA member, you’re probably dealing with a business that is dealing directly with an LBMA member, even if that’s not apparent to the customer. Because of this, knowing what the LBMA is and does is really important for some investors.

The role the LBMA plays in the global market is that of a standards body. What I mean by that is the LBMA maintains an industry standard for purity of gold and the form factor that’s produced by LBMA member refineries. This is no different than any other industry standards body in the world.

Every industry will have standards bodies that set rules for global businesses to achieve uniformity. An example would be for the shape of your electrical outlet or the USB port on your computer or laptop. The shape of that and the standards by which it operates are set globally so that manufacturers, no matter where they are in the world, can produce technology that meets the same standards for interoperability.

It’s this industry standard that sets the stage for compatibility and trust in the market. If it weren’t for these standards, you might have gold arriving in unrecognized form factors. Anyone might create gold in whatever shape they want and/or the purity may or may not be questionable. This would obviously create delays in trade plus additional complications. The LBMA standards allow a well-orchestrated and fully free-flowing trade on an institutional level in gold.

Jon: The LBMA produces something you mentioned called the Good Delivery Lists. What are those?

Alex: The LBMA’s main purpose is to maintain the Good Delivery Lists. There is one list for gold; there is one list for silver. These records are detailed listings of the names of the refiners that meet stringent assaying and quality standards for what they can produce in terms of gold and silver bars. They’re accredited to refine and produce these bars that meet the LBMA standard.

The good delivery standard has become the de facto global accepted standard for purity and form factor around the world, although this has recently been reshaped a little by China, who is the world’s largest gold customer.

The original specifications for good delivery bars required a minimum gold content of 350 fine troy ounces up to a maximum gold content of 430 fine troy ounces. (By “fine” we mean “pure.”) These are approximately 12.5 kilo bars. Also, there are specifications for the kind of dimensions they have to have. They can only be so long, so tall, they have to have a certain luster, they can’t have sharp edges, and things like that.

As far as the purity is concerned, the old standard is that the minimum acceptable fineness or purity is 995.0 parts per thousand of fine gold. In other words, if you were to divide the content of a gold bar into 1000 parts, 995 parts out of 1000 have to be pure gold to meet that fineness standard.

China, however, prefers a new standard and has created their own. They require 999.9 parts per 1000 pure. This is called “four 9s” in the industry. They also prefer to have bars in one-kilo size. This isn’t news – the gold market has been talking quite a bit about this over the last couple of years – but that is the direction all of this is headed in terms of what standards are acceptable.

In order to become an LBMA-accredited refinery, that refinery has to submit what are called dip samples. These are small specimens of gold that it has refined. These samples have to be submitted to one of the five global referee refineries.

Referee refineries are identified by the LBMA as the refineries that are able to certify other refineries around the world to meet LBMA standards. The current list of refineries includes: (1) Argor-Heraeus, located in Switzerland, (2) Metalor, located in Switzerland, (3) PAMP, located in Switzerland, (4) the Rand Refinery, located in South Africa, and (5) Tanaka Kikinzoku Kogyo, located in Japan.

These referees are among the most technologically advanced and reliable refineries in the world. They test dip samples and certify them for purity in order for every refinery who wants to be on the good delivery list to be accredited and placed there.

The reason why all this exists is that when a gold bar is issued by a refinery on the Good Delivery List, it’s accepted at face value for purity and the weight that’s marked on the bar by the refinery at the time of fabrication. This, along with the strong custody history we have because of the security logistics firms, is what provides the basis of trust on which global trade in gold is built.

Jon: Although the London Bullion Market Association has the name “London” in it, it’s clearly not restricted to that one location. Where are the organizations on the Good Delivery Lists located?

Alex: That’s actually a really good point. Most of the refineries on the Good Delivery Lists are spread throughout the world and not located in London at all. You can find them in Russia, Canada, Australia, the United States, and China. There are good delivery refineries in over 28 countries.

Very few outside of my industry know, however, that the majority of gold refining each year passes through Switzerland. This is because that’s where the largest refineries in the world reside. It’s also no surprise because three of the five LBMA referee refineries are all located in Switzerland.

Switzerland, from my perspective, is the core of global gold refining. The way I think of it is if you liken the world’s physical gold flow to many small tributaries and streams that eventually create a river, Switzerland is the deepest part of the river.

Because of that, we believe that if there are any kinds of major air pockets in the gold market on the physical side, Switzerland refineries will be the least impacted. In other words, if there is some kind of buying panic, Swiss refineries are going to be the least affected. This is also why we have established relationships with the refiners and vaulting partners there in Switzerland.

Jon: Would you explain another LBMA phrase, the “chain of integrity”?

Alex: That really isn’t an LBMA phrase. I started using that phrase many years ago to describe the closed network of refineries and security transport companies that make up a trusted system and provide these large-scale physical bullion services. Since then, it’s been picked up by others in the industry. What it really means is that as long as the gold stays in this closed system of the chain of integrity, it provides us with specific advantages.

Number one, the gold only enters this system by coming in through the refineries. Now, it may come to the refinery in the form of doré from mines, which is basically refined ore, it might come in the form of scrap, or it might come in the form of older gold bars that are being re-melted and re-refined. But because it comes from a good delivery refinery and enters the system, we can be confident of its purity and its origin.

The second part is that as long as it stays in this closed system, it’s transported by accredited security logistics firms. It’s always insured while in transit, and these firms are trusted in the network.

Finally, for us, it is stored in private, non-bank vaults operated by these accredited security logistics firms.

So we have the complete history of the gold’s refining, fabrication, transport, and vaulting. Because of this, we’re able to easily sell this gold to another LBMA-trusted party. In PGF’s case, we’re selling directly to the refinery, and this provides a really deep well of global liquidity for us.

Jon: Alex, there’s one last phrase I’d like to ask you about, and that is “clearing risk.” What does “clearing risk” mean in the context of physical gold transactions?

Alex: Clearing risk is a phrase I use to indicate the risk of a fund or the risk an investor has if they’re required to clear physical gold trades through a bank. This is what happens if markets hit an air pocket and counterparties are unable to trade.

For example, there were hedge funds that cleared trades through various prime brokers back in the 2008 global financial crisis. If their primary dealer/primary broker became insolvent or were frozen, these hedge funds were completely frozen out of the market at that time. In my view, that is the Achilles’ heel of gold funds in the industry today. It’s because they buy and sell their gold through banks.

There are many who feel that bullion banks will never have a failure or insolvency or anything like that, but to me that’s just wishful thinking. It’s the same “unicorns and rainbows” mentality that has the entire world’s financial system in complete chaos right now with everyone literally depending on the omnipotence of central bankers to save us all. It’s not realistic, and it’s not practical.

The facts speak for themselves. These banks are now more consolidated, more leveraged, and have larger derivative books than they did before the 2008 global financial crisis. This reminds me of underbrush that’s been built up and concentrated in a forest just waiting for a stray campfire spark or lightning to strike a fire and set it ablaze.

If a gold fund or an investor is relying on clearing trades through a bank, that is not a position I would like to be in when the next liquidity crisis hits.

Jon: We’ve looked at the LBMA, the Good Delivery Lists, the chain of integrity, and, lastly, clearing risk. They’re all obviously important factors in the market for physical gold. What I’d like you to do now is give us a snapshot of where your organization, Physical Gold Fund, is positioned in relation to this market system.

Alex: In order to structure our fund, we’ve leveraged some exclusive and longstanding strategic relationships with members of the LBMA framework. The relationships we’ve developed in the industry have become the basis for what we call our chain of integrity.

That essentially means the ability to purchase gold reliably at the core of the industry, the deepest part of the river. We know that it’s pure, we know that when it’s being transported, it’s safe, it’s insured, and we know that it’s being vaulted outside of the banking system.

This has been important in the way we’ve structured products for many years now. I recall back five or six years ago talking to some investors who did not really understand that part. They looked at vaulting outside the banking system and were like, “Well, I don’t really understand why this is important.” Today, it’s obvious why this is important, and this has actually become the de facto standard for how private allocated services are now vaulting gold.

PGF clearing is done directly through the refinery. In other words, we’re buying and selling directly through the refinery instead of going through banks. This is reducing our clearing risk in light of what I talked about before, and this gives us access to liquidity both on the buying and the selling side.

There are some people, including experts, in the industry who believe that if there is any sort of buying panic, physical gold will become very hard to obtain. I think this may be true. We obviously have yet to find out if that’s going to occur or not, but because of our relationships with our refineries, we feel more confident in being able to access liquidity.

Next, Physical Gold Fund has options for physical delivery and options for subscription in kind. On the physical delivery side of things, this means if someone wants to redeem their shares with the fund, they can request to have either cash or, if they prefer, we will deliver their gold anywhere in the world. There’s a cost to it that the redeeming party will pay, but that option is available.

Also, we have an option for subscription in kind. This allows an investor to place physical gold they already own into the fund and, in exchange, that gold is now part of a regulated vehicle. This is really important in the future.

In our view, this is going to become more and more important because we believe this is the direction gold ownership is going. There are governments around the world that are becoming increasingly more aggressive in the way they regulate individual private assets, etc. We think this is something that’s going to be strongly looked at by government regulators moving forward.

Another unique point is that we have contingencies in place to cover things like riots, wars, and governments trying to interfere with the Fund’s access to gold. Ultimately, we believe that this is the most thoughtfully constructed and robust gold fund in the world today, and we fully expect it to become one of the largest globally in the years ahead.

Jon: Thank you, Alex Stanczyk, Managing Director of Physical Gold Fund. And thank you to our listeners. We look forward to joining you again soon.


Listen to the original audio of the podcast here

The Physical Edge Episode 2: January 27th 2016 Interview with Alex Stanczyk


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Transcript of Jim Rickards – The Gold Chronicles January 11th, 2016

Jim Rickards, The Gold Chronicles January 11th 2016:

  • Jim announces his new book, The New Case for Gold, now available for pre-order on Amazon:
  • Cyberwarfare didn’t exist 35 years ago. There are new reasons to buy gold today
  • Explaining the “Impossible Trinity” of a pegged exchange rate, open capital account, and independent monetary policy 19:20 22
  • Expect a global recession 2016
  • Fed will reverse course and loosen monetary policy by end of 2016
  • House of Saud going through major, generational changes which lays the groundwork for what could lead to World War III
  • The world is facing a global dollar shortage. 20 Trillion in USD denominated debt has been created in recent years and not enough dollars to pay the debts
  • Alex Stanczyk shares the story of how Physical Gold Fund began its relationship with Jim Rickards
  • The USD has not yet topped. In the short term the USD will continue to strengthen. The Fed will ease perhaps beginning in November 2016.
  • Oil / Gold Ratio – gold is now trading like money compared to other commodities
  • The world is facing a global dollar shortage. 20 Trillion in USD denominated debt has been created in recent years and not enough dollars to pay the debts

Listen to the original audio of the podcast here

The Gold Chronicles: January, 11th 2016 Interview with Jim Rickards


The Gold Chronicles: 1-11-2016:

Jon: Hello, I’m Jon Ward on behalf of Physical Gold Fund, and we’re delighted to welcome you to the first webinar of 2016 with Jim Rickards in the series we’re calling The Gold Chronicles. Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management and is a consultant to the US Intelligence Community and Department of Defense. He’s also an Advisory Board member of Physical Gold Fund.

Hello, Jim. Welcome and Happy New Year.

Jim: Happy New Year, Jon. Good afternoon. I’m glad to be with you.

Jon: We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Hello, Alex.

Alex: Hi, Jon and Jim. It’s great to be here, as always.

Jon: Alex will be looking for questions that come from you, our listeners, so let me say that your questions for Jim Rickards today are more than welcome. You may post them at any point during the interview. You’ll see a box on your screen for typing in your question, and as time allows, we’ll do our best to respond to you.

Jim, there has been a lot happening since we last spoke. I’m sure our listeners will be keen to hear your take on the travails of the Chinese stock market, volatility in the US markets, the crisis around Saudi Arabia, and other hot topics. We’ll get to as much about that as we can today, but I’d like to start closer to home with some exciting news.

As I mentioned in my introduction, Jim is the author of two books, and both of them are hugely successful. Jim, in April of this year, you’ll be publishing your third book titled, The New Case for Gold. This book had a rather special inception I’d like you to share with our listeners and, perhaps more important, why you felt impelled to write about gold at this time.

Jim: Thank you, Jon. I am very, very excited about this new book. It has a publication date of April 5th and right now live on this call is the first time I’ve really spoken publicly about it. The book is available for preorder on Amazon, so it’s not like it’s some secret, but I haven’t done much in the way of publicity or interviews yet.

Of course, I’ll be doing all of that in the weeks and months ahead. People will probably be tired of hearing about it at some point! But this is quite literally the first time I’ve spoken about it, so I’m very happy to share with this audience.

The book, called The New Case for Gold, does have a distinctive origin. There will be some special editions I’d like to talk about, but first let me just say a word about the title. The title is a bit of a tribute to an earlier book of 35 years ago called The Case for Gold from Ron Paul and Lewis Lehrman.

It wasn’t long after President Nixon had gone off the gold standard when Ronald Reagan was elected president in 1980. President Nixon went off the gold standard in August of 1971, so in 1980, with Ronald Reagan as the first Republican President elected since then, there was a very strong movement at the time to go back to the gold standard. We look back now over 40 years since Nixon did what he did, but when Reagan came in, it had only been nine years, and so it was still fresh in people’s minds.

President Reagan didn’t want to endorse the gold standard in so many words, but he did agree to a commission to study it. That’s a typical Washington solution. When you want to kick the can down the road, so to speak, you have a commission. So a commission was appointed, the commission studied it, and they came back with a report. The conclusion of the commission as a whole was that the United States should not go back to the gold standard.

However, as is often the case, the commission was divided. There was a very strong vocal minority that thought we should go back to the gold standard, and they were allowed to write a minority report. The leader of that group was Congressman Ron Paul – Dr. Ron Paul at the time. He, along with Lewis Lehrman and some others, wrote this minority report arguing that we should go back to the gold standard.

This became a public record because it was a public commission. As with Shakespeare, anybody can print an edition of something in the public domain without having to pay royalties, so this minority report was turned into a book called The Case for Gold.

My book is called The New Case for Gold. It’s obviously a little tribute to the original minority report, but I put the emphasis on the word “new” because there are arguments in the book in favor of investing in gold that transcend or go beyond the same old arguments we’ve been hearing about for years.

I’m sure we have a lot of gold investors on the webinar today. People like gold or they don’t like it or they can see the logic for having some gold in their portfolio or perhaps they don’t. These debates have been going on and on and get a little tired. I do cover that in the book, but there are things in the book that are new and were not discussed 35 years ago because they didn’t exist.

One example is cyberwarfare. Today people say, “I’m wealthy, I have a certain net worth, here are my assets.” You say, “Well that’s interesting. Your house is real; I can go up and knock on the door. If you have some physical gold, that’s real. You can touch it and keep it in a secure place. But stocks, bonds, other money market accounts, bank deposits, those things aren’t real. Those are digital. They are electrons in some system that can be erased by Vladimir Putin’s cyber brigades.”

Digital wealth is extremely vulnerable. I’m not saying sell all your stocks and buy gold, but what I’m saying is just be aware of the risks. When you talk about having those assets, bear in mind that they are electrons, they are digital, and they can be erased.

That’s something people weren’t talking about 35 years ago, because cyberwarfare and the Internet didn’t exist. Yes, there was electronic recordkeeping, but you got paper statements, paper confirmations, and a lot of things to back it up. Today, many people are 100% digital.

There are threats out there that didn’t exist 35 years ago that add to the argument in favor of gold. I discuss some oldies but goodies, several things that some of us may be familiar with, others less so, and some new 21st-century arguments in favor of gold. That’s why I call it The New Case for Gold.

The origins of this project are right here on this call. I’ve been on the Advisory Board of the Physical Gold Fund, now into our third year. It’s been a great relationship. Along the way, we’ve always thought about new and better ways to reach out to interested parties, whether it’s through education or communications. How can we at Physical Gold Fund do a better job of getting the story out, reaching out to interested parties and helping people either learn more or actually invest in gold if they would like?

That was also the origin of this podcast series. We decided to do a monthly call, invite people to join in, post it as a podcast, and make the transcripts available. We’ve been doing this for a couple of years now, and we realized in looking at the transcripts that we had a lot of material, well over 100,000 words. Well, a good, long book is about 80,000 or 90,000 words, so we said, “Why don’t we turn this into a book?”

Believe me; it’s not as simple as taking a bunch of transcripts, sending them to the printers, putting a nice cover on it, and calling it a book. We had to do a lot of rewriting. One of the things I discovered in the process is that the way we speak is not the way we write, or at least not the way I write, so things that sound like perfectly normal, conversational English on a call like this can look a little clunky when the words are in a row on the printed page.

We smoothed out the rough edges, removed the redundancies, and added some completely new material. There’s material in the book that none of our listeners or colleagues have seen because it’s completely new. We’re happy about that, because this is not just a retrospective; we want to stay on the cutting edge.

Candidly, it’s got information in it that when it comes out will make a few headlines, some things I’ve never heard before. I’ve been very involved with gold, but in the course of doing research and thinking about this, we developed some new things that I think will shake the gold world up quite a bit.

On top of that, Physical Gold Fund has arranged with my publisher, Penguin, for a special edition. I’ll leave it to them to describe the marketing channels for that, but I’ve contributed some material that will only appear in the Physical Gold Fund edition. Whether you want to preorder from Amazon right now or wait until it’s in your bookstore or wait to hear more from Physical Gold Fund about how they intend to distribute their special edition, I leave all that to the listeners. But I’m very, very excited about the book.

Although the publication date is April 5, not that far away, some channels may receive a couple of copies early, depending on how they work. I’ll leave that to my publisher, but it’s coming, it’s new, and it’s a very exciting project. I’m very happy with the way it came out. I thought my publisher did a great job with the cover. It looks like a nice bar of gold, so hopefully it will catch readers’ attention.

Jon: Thanks, Jim. I’d like to say thanks to our listeners as well, because your participation in these podcasts, your great questions, your involvement and presence keep us going and has actually made the whole thing possible. You should see yourselves as participants in this new book project.

Now turning to China, the last time we talked about a sudden crash in the Chinese stock markets, you warned us on this podcast to not expect it to end here. Those were prescient words. Chinese markets continue to be in turmoil, and now the US markets seem to be losing their nerve. My question is: Are we simply seeing more of the trends you’ve outlined for us before, or is something new emerging here?

Jim: It’s truly both. Just to talk about the trends a little bit, we see the Chinese stock market and the US stock market both going down. There are things that international economists call spillovers or complexity theorists call contagion, so there are certainly linkages between these markets, but I don’t want to suggest that’s just a reflex reaction as if they go down and we go down. It’s not as simple as that. Let’s look at the fundamentals first and then come back to some of the more technical factors.

The fundamentals are that world growth is slowing down rapidly. I would not rule out a global recession in 2016, but even if it’s not technically a recession, this slowdown feels like a recession. What’s the difference? If you go from 4% to 2%, or go from 2% to 0%, maybe one of them is technically a recession and the other one isn’t, but both of them represent a very sudden slamming on of the brakes and a very significant diminution of global growth. Even if you’re in positive territory in terms of growth, when you slow down that much, it feels like a recession around the world.

The US may actually be in recession. If not, we’re uncomfortably close to one and maybe heading for one. We have something called the National Bureau of Economic Research in Cambridge, Massachusetts, and they’re the referees. Much like the umpire in a baseball game who calls balls and strikes, this bureau decides officially when we’re in a recession or not.

The problem is they’re eggheads – PhD economists by and large – who don’t usually tell you you’re in a recession until you’re almost out of it. In other words, a year from now, the National Bureau of Economic Research may say, “You know, we studied things closely and decided that the US economy went into a recession in January 2016.” Well thank you very much, but you’re a year late. As analysts and as investors, we need to operate a little closer to real time.

I’m not waiting for them to call strike three here. It looks like a recession to me. Certainly, there’s a lot of data indicating that, so it should come as no surprise that the stock markets are going down. That’s what stock markets do. Stock markets discount the future. They go down in advance of a recession, generally speaking, so if we’re heading for a recession, which I believe we are, the fact that stock markets are going down now makes perfect sense. It’s not the end of the world or some awful unprecedented thing.

Because it’s been eight years since the last recession and since the stock markets went down in any kind of sustained way, people forget. Memories are short, there’s a lot of wishful thinking, a lot of denial, and people forget that these things happen.

Let’s talk about expansion for a minute. This expansion that began in the summer of 2009 has been going on for six and a half years. The point is this is one of the longest expansions ever. Granted, it hasn’t been a great expansion. We’ve had sort of 2% growth, which is a far cry from the 3% or 3.5% growth or even sometimes 4% or 5% growth that we’re used to in expansions, so it’s been a very weak, anemic expansion, but an expansion nonetheless. And it’s 79 months old. The average expansion since 1980 is only 76 months. The average expansion since the end of World War II (a longer timeframe) is about 38 months. This is a grandfather-type expansion in terms of its longevity. That by itself doesn’t say you’re in a recession – expansions don’t die of old age – but it should come as no surprise if it does die because it’s been around so long.

Combine that with all of the other factors we’re seeing such as world trade contracting, manufacturing contracting, commodity prices collapsing, China slowing down, Russia in a recession, Japan in a recession, Brazil in a recession, and Canada looking close to one. This is a global story, and it does look like the US is heading into a recession. Therefore, I look at the stock market and say it’s doing what it’s supposed to do. I’m not a stock picker, I’m more of a global macro analyst, but this should really come as no surprise. That’s the first thing I would say.

Now as far as the technical linkages are concerned, the Chinese have their own problems. I gave a couple of interviews last week and said that people forget they’re communists. I don’t say that as a name-calling or finger-pointing exercise. They are communists – the Communist Party of China runs the country.

Everyone says, “They’re really capitalists.” Well no, they’re really communists who have a quasi-modified capitalist system. They’ve got some markets, but at the end of the day, those markets exist under an umbrella of communist top-down central planning and control.

I like to say when you put communists in charge of a market economy, it’s like handing a loaded gun to a three-year-old; somebody is going to get hurt. In other words, they don’t actually know what they’re doing. They think they do and they’re kind of stumbling and bumbling their way through this. For a concrete example of that, look no further than the Chinese devaluation of last August, which was a complete shock.

Anyone who knows anything about international economics or the international monetary system knows that when you’re going to do something like devaluation, you don’t shock people, you don’t spook people. You indicate it, you leak it, you do it in baby steps, and you do it in such a way that it doesn’t shock or disrupt the markets. But that lesson seems not to have sunk in with the Chinese.

And look at the circuit breakers they had until last week. They were binary circuit breakers, so if the Shanghai Exchange Index went down a certain amount, they closed the market. Boom, just like that, for the whole day.

That’s not what circuit breakers are designed to do or how they work in the United States. In the New York Stock Exchange, if it goes down a certain amount, they will close for a short period of time. Then they reopen it and see what happens. If it bounces back, great; if it goes down again by another amount, they will close it again for a certain period of time and so on. If after a certain number of times and it’s sufficiently late in the day, they will close it for the rest of the day, but that doesn’t happen until it’s already shut several times and you’re much closer to the end of the day.

The point is the circuit breakers are not designed to keep the market from going down, because if it was going to go down, it’s going to go down. Circuit breakers are a timeout so that people have time to think, to break that cascade or panic reaction of everyone selling and it drives it down, they sell more and it drives it down, – it just cascades out of control. By calling a timeout, it allows people to think, “You know, maybe I like it here. Maybe this is a good level. Maybe it’s not going to go down more. Maybe somebody can say something reassuring or Fed Governor can give a speech, whatever it might be.” That’s why you have circuit breakers. It’s a timeout.

The Chinese weren’t really using it as a timeout. They closed the market for the day and that caused more panic and, of course, the same thing would happen the following day. They got rid of their circuit breakers, but they’ll probably come back with new and improved ones.

Looking at how they bungled the currency devaluation in August and bungled the circuit breakers in January shows you that they don’t really understand how markets work. They’re amateurs at this, and, as I say, it’s like a child playing with a loaded gun. There’s going to be some damage and, indeed, we are seeing damage.

Jon, you started the question with a comment about trends. As far as where these trends are going, China is facing something that international monetary economists call the Impossible Trinity. I don’t want to spend a whole lot of time on it but will explain it briefly.

The Impossible Trinity says there are three things you cannot have at the same time. You can have one or two, but you can’t have all three. The three things are 1) an open capital account meaning people can get money in and out, 2) a pegged exchange rate, so you’re targeting trying to preserve some value for your currency relative to something else, and 3) independent monetary policy, which means you’re preserving the right to raise or lower your interest rates as you see fit.

According to the Impossible Trinity, if you try to have all three, you will fail. Whenever you see a country trying to do this, you can be sure they’re going to fail, and then the only question is how will they fail and when. Up until last summer, China was trying to do the Impossible Trinity. By the way, there’s nothing new about this theory. It was articulated by Robert Mundell, a Nobel-Prize-winning economist, in the early 1960s, so this theory has been around for 55 years.

I don’t know what the Chinese have been reading, but they tried to peg to the dollar at 6.2 to 1, they tried to have an open capital account so they could get in the SDR basket for the IMF because that was one of the conditions, and they wanted an independent monetary policy so they could cut interest rates if they needed to stimulate their economy. The theory says it can’t be done, and sure enough, it wasn’t. They broke the peg in August, they slapped on makeshift capital controls, and the one thing they have hung on to is independent monetary policy. They are reserving the right to cut interest rates and will probably do that.

As I said, you can have one or two of these, but you just can’t have all three. As a result, I would expect the Chinese devaluation to continue because they have no other choice. Their reserves are running out the door at the rate of $1 trillion a year. When you start with $4 trillion and are losing $1 trillion a year, guess what? In four years you’re broke. I think that if they don’t do anything, the tempo will accelerate, so I estimate they’ll be broke by the end of 2017 if not sooner.

They’re not going to sit there and let that happen. They’re not going to let all that money run out the door, so they’re devaluing the currency, and then they may put on some capital controls, they may cut interest rates, or they may deal with all three legs of the Impossible Trinity.

What does it mean for us if they continue to devalue? It exports deflation to the United States. What does that do? It makes it harder for the Fed to reach its inflation goals. What does that mean? The Fed is going to raise rates? The Fed wants inflation, but raising rates makes the dollar stronger and imports deflation. China is cutting the exchange rate, which imports more deflation, so all the trends are deflationary, but the Fed says they want inflation, so how does that play out?

My estimate is that the Fed is not going to be able to stay on track in terms of raising interest rates. I think they will raise in March or possibly June. I’m fairly confident they will raise in March because they’re not listening to this call. I don’t think Janet Yellen is on the call. My point being the Fed doesn’t look at the real world; they look at models that tell them inflation is right around the corner and growth is robust. Meanwhile, back in the real world, all we see are signs of deflation and probable recession. The Fed will be the last to know, but they’ll probably wake up by the summer.

Let’s say they raise in March and in June. I definitely expect March and I think June is likely. At that point, the target Fed Funds Rate will be 75 basis points putting them in a position to cut by September. By then, even the Fed should understand how weak things are, but there’s another problem, which is that it is 45 days ahead of the election when the September FOMC meeting comes around. So what are they going to do? If they cut interest rates 45 days before the election, Ted Cruz will go burn down the Fed! That would be such a blatantly political move favoring the Democratic nominee that I don’t think the Republicans will let them get away with it, and the last thing the Fed wants is political crossfire because they’re already under a criminal investigation for insider trading.

I think that if we get to September, the economy is as weak as I expect, the Fed has raised interest rates in the face of weakness (which is a blunder), and they then decide to reverse course, they actually won’t be able to for political reasons. They may go to some kind of forward guidance.

These things are all connected. China has its problems with their capital account being depleted, the Impossible Trinity, and the need to devalue. The US has its problems with a central bank that doesn’t live in the real world and is raising rates into weakness. The US and China together are a little over one-third of the global economy. If they’re both slowing down, what does that mean for the global economy? Look for a global recession in 2016.

Jon: Turning to one corner of the globe familiar to these conversations and the news cycles – the Middle East. The execution by Saudi Arabia of a leading Shia cleric has further raised tensions in the Middle East, in particular between Saudi Arabia and Iran, and the uproar has focused the world’s attention on what looks like an increasingly fragile Saudi regime.

From an economic and monetary point of view, what are the implications of this crisis?

Jim: A very important question, and you’re right about the increasing tensions. There are a couple of things going on. One, we have a fairly new king, King Salman, of Saudi Arabia. He’s doing something that is really shaking up the House of Saud.

For this you have to go all the way back to the 1930s and the first king of Saudi Arabia, Al Saud. That’s where the name Saudi Arabia comes from. I’m estimating a little bit but will try to get the numbers right. I think he had about 40 wives and 75 children, something like that. These children are, for the most part, half-brothers because the women don’t count. They count in my world but not in Saudi Arabia, so we’re really only talking about the men in terms of the line of succession.

There is this huge ‘herd’ of 35 or 40 half-brothers. Some of them are full brothers because they came from the same mother, but a lot of them are half-brothers, so there are these little mini clans of maybe four or five or seven full brothers from a single mother and then their half-brothers are the other 35 or 40.

A lot of them are dead now having been born in the 1930s, some of them a little more recently. I think the youngest one is in his 70s and a lot of the older ones are already deceased. In Saudi Arabia, the kingship is passed from brother to brother, not from father to son. We’re familiar with England where it will go from Queen Elizabeth to Prince Charles to Prince William as the third in line, but in Saudi Arabia, they go from brother to brother.

That’s been going on for a long time except now that these brothers are dying or getting old and senile, they’re starting to run out of suitable heirs. King Salman named his son Deputy Crown Prince next in line. After decades, he is finally setting it up to transfer to the next generation. This has caused a lot of resentment among some of these other brothers and half-brothers who are still around and their children who are all part of let’s call it the third generation who look like they’re being cut out of the line of succession completely. That’s caused a lot of internal intrigue.

On top of that, put in the rivalry with Iran, which is bitter and existential, and they have multiple layers of rivalry. There are two powerful countries on opposite sides of what I’ll call the Persian Gulf. I think that’s what geographers and cartographers agree on, although I’m always very careful when I’m in the Middle East addressing an audience in Kuwait or Dubai or somewhere like that. I always try to be as polite as I can and refer to it as the Gulf of Arabia not to insult my host. It really is the Persian Gulf, but if you say the Persian Gulf on the Arab side, you’ll get some dirty looks. They can’t even agree on the name of the water. One side calls it the Arabian Gulf; the other side calls it the Persian Gulf.

The Iranians are not Arabs. The Arabs are Arabs and the Iranians are Persians, so there are different ethnicities and two different religions. It’s all Islam but the Sunni Muslims are on the Arab side and the Shiite Muslims are on the Iranian side, although you’ve got a lot of Shiites in Saudi Arabia, particularly the Eastern Provinces, who are a little bit of a fifth column in the sense that some of them are under Iranian influence.

We see the normal geopolitical struggles, competition in oil output for a limited amount of dollars, religious divides, historical divides, and cultural divides. And now Iran is trying to create and is pretty far along in terms of a nuclear weapons program. This is the entire recipe for basically World War III.

In the past, the United States has tried to intermediate and exert its own presence and military to try to keep the lid on, but President Obama has decided to withdraw from the Middle East to reduce the US footprint and leave local hegemonic powers to deal with their neighborhoods as sort of a cop on the beat. The US is clearly tilted in favor of Iran, and this does not sit well with Saudi Arabia. They consider it a stab in the back.

We might look for Saudi Arabia to push back a little bit. If it’s looking for a new ally, it probably would look to China since China is the largest purchaser of Saudi oil. The US doesn’t buy much oil from Saudi Arabia. Most of that oil goes to China. China, of course, is doing what? Backing away from the dollar.

With Saudi Arabia backing away from the dollar, that’s another exchange rate reserve position worth watching. If China’s dumping treasuries in Saudi Arabia, Saudi Arabia’s reserves are draining out, because they’re running a fiscal deficit.

We’ve bounced around a little bit from Iran to Saudi Arabia and China back to the US, but if you want me to try to capture all of these global capital flows in one phrase or sentence, I would say that there’s a global dollar shortage – the greatest since the 1950s.

People say, “The Fed printed almost $4 trillion. How could there be a dollar shortage?” The answer is the Fed may have printed $4 trillion, but the world has created about $20 trillion of new dollar-denominated credit. Yes, the Fed printed money, but people were printing IOUs faster than the Fed was printing money, and all those IOUs have to be paid back. With growth slowing, trade contracting, the Fed raising rates, and money coming to the United States, there aren’t enough dollars to go around to pay off that debt. We’re looking at massive, massive defaults, outflows from China, Saudi Arabia, and from around the world. Debt defaults are looming.

This is a potential global catastrophe. No one roots for a catastrophe, but I would have to say as this plays out, you would certainly want to have some allocation to gold.

There are fundamental drivers of the price of gold starting with negative real rates and inflation, so those are obvious ones.

An inflationary world where inflation starts to outstrip the rate of interest is called financial repression. There’s no doubt that central bankers favor that, and it’s a very bullish fundamental case for gold, but that’s probably a 2017-2018 story.

In the shorter run, meaning 2016, we could see gold go up significantly on this fear trade, geopolitical risk, and basically global financial crisis. If not a complete meltdown, then certainly there will be a lot of distress having to do with what I’ve described as the dollar shortage.

Unfortunately, the dollar shortage is not going to get better, because the Fed is on this kamikaze mission to raise rates and make US monetary policy even tighter. As I said, they’ll wake up but will be the last to know.

I would look for more stress and more drains from reserve positions in some of our major trading partners and more geopolitical risk. All of this will give a lift or, at a minimum, put a floor under the price of gold.

Jon: Before we turn to Alex, I’d like to ask you a rather broad question I’ve wanted to ask in some form for most of last year. In the course of our interviews, I’ve often heard you comment as you just did on the dire state of the international monetary system. You’ll often say something to the effect of, “The trouble is they (meaning the world’s financial authorities) refuse to make the necessary structural changes.”

My question is what structural changes? To put it another way, if you had the levers of monetary power in your hands for a day or a year or however long it would take, what would you do differently?

Jim: The problem is that having my hands on the monetary levers is a monetary solution, not a structural solution. As a monetary solution, can you create easier monetary conditions or print money? Yes, you can, but that’s not going to solve the problem. Indeed, it has not solved the problem for the last eight years.

What do I mean by structural solutions? How do you implement those? What are they specifically? Those are all very good questions. The point I make is that weak growth, the looming recession, global slowdown, all the stresses we’re seeing around the world, and all the things we’ve talked about so far on this call are not amenable to monetary solutions. They require structural solutions.

We are in a structural growth depression with emphasis on the word “depression,” and printing money won’t fix it. What are structural solutions? These are things that are more specifically in the hands of the fiscal authority rather than the monetary authority. The fiscal authority is the Congress or the legislature. It could be the Congress in the US, it could be a parliament in the case of the UK or Canada or any other parliamentary democracy, or it could be a Council in the case of the Kingdom of Saudi Arabia. Whoever calls the shots, whoever makes the laws, they’re the ones who are in a position to deal with structural problems and create structural solutions.

Now what are those solutions? Let’s begin with taxes. Tax policy is number one. Cut tax rates. You don’t need a PhD to figure that one out. Taxes in the US are way too high and that impedes growth. At this point, upwards of $10 trillion in corporate cash is sitting offshore that won’t come back to the United States because our corporate taxes are too high. That’s just one of many examples.

Another is the regulatory structure. You can pick any regulation you want and get into a policy debate, but I don’t want to debate all these individual policies. The problem is that they just keep piling up regardless of the intrinsic merits. I don’t care whether it’s transportation regulation, climate regulation, environmental regulation, Fair Labor Standards Act, and on and on. We simply keep piling up regulations that make it harder and harder to do business, harder to start a business, harder to create jobs. It should come as no surprise that the economy is slowing down.

Better outcomes for women would be another very important point. The US is pretty good on that score although we could do more to improve, but there are countries like Japan and certainly the Middle East where outcomes for women are not good at all. If women were more empowered, obviously they can be very productive and creative contributors to economic growth in their own countries. That would be the first one on my list for Japan, but Japan’s got its own cultural impediments, and we know what’s going on in the Arab countries.

Immigration is another one. I don’t like clichés, but people keep using the expression that the US is the least dirty shirt in the laundry, meaning we’re not great, but we’re not as bad as everyone else. Why are we not as bad as everyone else? Growth is weak, it could be better, but why are we doing better than other people?

Part of the reason is immigration, and that’s part of the reason Germany let in as many refugees as they did. That’s turning out to have a lot of serious problems associated with it that Germany has to address, but they are smart enough to know that if people aren’t having babies and you want to grow your labor force, you’d better get some immigration. I’d be very bullish on the Japanese economy if they let in a million Filipino immigrants every year.

As I travel around the world and go to a Catholic church in the Middle East, it feels like you’re in an underground society. They’re usually behind high walls and barbed wires. Some of the countries are actually pretty tolerant such as Bahrain. I go to a Catholic church there, and it’s me and 5000 Filipinos, because they’re all there as guest workers and immigrants and people who are invited in to provide labor and services.

Japan could do something similar, but they won’t. Labor migration; why can’t we get excess labor from Greece and Spain into the Netherlands and Germany? Forget about refugees from Syria. How about just people from inside the European Union?

I could go on and on, but taxation, regulation, outcomes for women, immigration, labor laws, and labor mobility. This is what I mean by structural changes we have to do to get growth going. Printing money won’t do it.

Jon: I don’t think there’s going to be any big surprises in your answer to this question, but the question wants to be asked: When you look around the world, what are the chances of those changes being made? And if they aren’t made, how should wise investors protect themselves?

Jim: Unfortunately, the chances are very low. I just spent some time explaining the structural changes the world needs to make to encourage growth, and I could spend an hour explaining why none of these things are happening. Printing money won’t do it; structural changes will do it.

Too many vested interests, too much political posturing, too much partisanship, too many people looking out for themselves instead of for the country, and too much ideological opposition. The thing about ideology is it’s the opposite of reality. Reality means you take the facts as they are and try to make things better. Ideology is: “I’ve got an idea in my head and I’m going to try to implement my idea regardless of the cost.” That’s a good way to ruin an economy or ruin a country.

We know what the solutions are, and I wouldn’t rule them out – I certainly look for them – but ask me what I think the odds are of these things happening. What are the odds of Japan letting in a million Filipino immigrants? Zero. What are the odds of Arabia overnight improving outcomes for women? Close to zero. What are the odds of the US cutting corporate taxes? Close to zero, and so forth.

In other words, none of these things are happening, so my best case forecast would be more weak growth of the kind we’ve had. Worst case, maybe even likely at this point, would be a recession. What will come from that is the Fed will, at some point later this year, get off their kamikaze mission of tightening rates, maybe actually turn around, and provide some easing first in the form of forward guidance and possibly by December or early 2017 cut some rates. That could give markets a lift, but it hasn’t worked that well for the last seven years, so we don’t know why that by itself would solve the problem.

The thing that will turn things around is helicopter money. Helicopter money is basically running bigger deficits, borrowing the money to cover the difference, and then monetizing the debt. It’s a form of money printing but instead of just printing money, handing it to banks, and having the banks hand it back to the Fed – that’s QE – here they print the money and buy debt that was used to run bigger deficits because the government is spending more money.

That is something I think is coming perhaps closer to being a 2017 story, and that’s the one that will get gold skyrocketing again. People will look at that and say, “Aha! Nothing else worked, but you’re determined to get inflation. If you can’t do it with monetary policy, you’re going to do it with deficits, and so now it’s back to the ’70s.” I think that’s when gold will really get a huge lift.

It will get a good lift in the short run based on geopolitical vectors, but in the longer run, meaning 2017-2018, the big boost to gold is going to come from helicopter money.

Jon: Thanks, Jim. Now Alex Stanczyk is here with questions from our listeners. Before you go there, Alex, I have a question for you. It’s the start of the New Year, and with Jim’s book, The New Case for Gold, coming out in April. Would you tell us a little bit about how you and Physical Gold Fund got to know Jim in the first place? I think it’s a story our listeners would enjoy hearing.

Alex: Jim first came on my radar around middle to early 2012. One of my research team came to me and said, “Alex, you need to come see this. There’s this guy on Bloomberg who is talking about gold, and he actually makes sense.”

I watched the interview and thought to myself, “Okay, this guy gets it.” The thing that impressed me about Jim is he spoke the language of institutional investors. Typically, we get people talking about gold usually framed in more of the gold bug category or a market analyst specialist, like a bank analyst who specializes in the metals market, for example. But Jim was the first person I had ever seen who spoke this institutional language.

I read his first book, Currency Wars, towards the end of 2012 and decided it would be really great if we could have Jim advising our board, so we reached out to him. At first, he was pretty understandably standoffish. I can only imagine how many gold-related businesses talk to him or try to contact him about gold. But he agreed to meet with me, and so I and another one of our directors, Nestor Castillero, flew to New York, met with him, and I showed him what we were doing.

Jim is one of the smartest people I know. Once I had shown him how we had Physical Gold Fund structured, he immediately got it. He recognized right away that we weren’t the typical fund in this space because of the way we do our vaulting and handle clearing risk and we have an insistence on making sure everything is non-correlated to risk on a systemic level.

Because of these things, he agreed to come on board with us. He may talk more about that in his book, but that’s basically how we met and how we agreed to start working together.

Jon: Thanks, Alex. And now what questions do you have today from our listeners?

Alex: This question is coming in from what I think is an anonymous source because his name is “John Gold III.” Some of you may recognize that name. He says this: Jeff Gundlach announced recently that he’s buying bonds denominated in currencies other than dollars for the first time in five years, and that the dollar has topped. Has the dollar topped?

Jim: Not yet, but it’s getting close to a top. The dollar, although not quite at an all-time high, is at a ten-year-high. I don’t necessarily think it will get to an all-time high, but it does have a little more headroom. The reason why is that the Fed is going to continue to raise rates. If you go back to the December FOMC statement, a press conference and the famous dots in the forecast of the Fed FOMC members and so forth, it put the Fed on track for four interest rate hikes per year. Basically, one per quarter or every other meeting. They do eight meetings per year, so that would be 25 basis points every other meeting. It was not automatic; they put in all the usual qualifiers, but that was the track they were on.

The market doesn’t believe it. If you look at the Fed Fund Futures Markets and say, “What are actual people betting real money on in the markets? What are they discounting? What are they anticipating?” They think maybe two. There’s a couple of people think three, and the view that there’s going to be four is extremely low, but not zero.

In my view, the Fed is not looking at the market; they’re looking at other things such as their models, which are based on things like NAIRU and Phillips curve. I don’t need to digress into what those things are, but let’s just say they’re obsolete.

The Fed’s actually going to keep raising rates, and as long as they do, they’re going to rebut or refute these market expectations. So if the market’s pricing at a low probability of four and the Fed actually goes ahead with two, you have to price in some probability of number three and number four, and that’s going to make the dollar a little bit stronger.

At some point, this will reverse. I gave some interviews right around New Year’s Eve that I called “The Year of the Boomerang,” meaning Janet Yellen threw her rate hike boomerang out there. It’s going to go out for a while then turn around and come back and maybe hit her in the head. Hopefully, she’ll duck.

The Fed’s going to have to reverse course. They’re going to have to turn on a dime and start cutting rates, but for the reason I mentioned, I don’t think they’ll really see that until the summer. Then I think it will be impossible to cut because of politics. The earliest I see the Fed cutting is December, which is about a year too late. They should have eased some more in December, maybe with negative rates or something else.

Does it make sense? No. Is the Fed going down a blind alley on a kamikaze mission? Yes. Be that as it may, it’s going to tend to make the dollar stronger, particularly with China, Saudi Arabia, and other people trying to get their money out.

I don’t think it will be a lot stronger, because there is a limit here, but in the short run I would expect the dollar to get stronger. Now you’ve got to pick your cross-rate, because stronger against the euro or the yen or the yuan – or gold for that matter. I think of gold as a form of money. The problem with cross-rates is you have to say, “Compared to what?”

The euro might not go down. I don’t see the euro getting a lot lower, but certainly against the yuan and Asian currencies. There are some currencies spiraling out of control like the South African rand, Brazil, and the Canadian dollar.

So yes, I do think the dollar will get a little bit stronger at least for a while.

Alex: That’s something on the mind of quite a few investors who are watching global macro and how that’s going to impact everything from commodities to everything else they’re doing.

The next question is coming from “Joshua B.” This goes back to our earlier conversation on the Middle East, but it’s referencing your first book. His question is: Is the Gulf Cooperation Council still a feasible currency block with the price of oil as a currency peg as you mentioned in Death of Money?

Jim: It is feasible, and I think it’s a good idea for them. I have been in the Persian Gulf and recommended this to policymakers there. I don’t think it’s happening, at least not in the short run, so it’s one of these things that just because it makes sense doesn’t mean it’s going to happen.

We talked about divisions inside the Kingdom of Saudi Arabia. There are lots of rivalries and jealousies among these Arab kingdoms. The UAE, Bahrain, Kuwait, Qatar, and Saudi Arabia can’t even agree on where to put the central bank.

They had some conversations about where to put the central bank and what the central bank should look like, but they couldn’t even agree on that. Abu Dhabi wanted it in Abu Dhabi and Saudi Arabia was insisting it be in Riyadh. They didn’t really get off the dime.

Is it feasible, is it a good idea? Yes. Could it ultimately peg to the price of oil or commodity basket or some other index? By the way, the Chinese have just done that. The way the Chinese wiggled out from under their dollar peg is to say, “We’re still pegging, but we’re just pegging to something else.” It turns out that something else is a wholly invented trade-weighted basket of currencies based on their trading partners, so it’s got the Russian ruble, the Malaysian ringgit, and all these other sort of off-the-rung currencies in there.

Could Saudi Arabia and the GCC do something similar? Yes, but I don’t see that right away.

Alex: The next question comes from our research team. There’s a gentleman on our team I’ve known for almost a decade now who follows different ratios and different indices. One of the ratios he’s followed for a number of years very closely tracks the oil/gold ratio. Historically speaking, there’s an average, and it typically comes back to a mean every now and then. When it’s really out of whack like it is right now, it is often coinciding with some kind of major geopolitical event.

What are your thoughts on that? Do you think gold is too high or oil is too low? Do you think that it’s possibly signaling some kind of impending crisis?

Jim: First of all, I think it’s a very interesting question and setup. I look at the gold/oil ratio myself. Around 16 to 1 is normal. Right now it’s a little bit closer to approximately 24 to 1. I’m just doing this off the top of my head, but it is way out of whack. What it implies is that either gold has to come way down or oil has to go way up or they have to meet in the middle.

When we’re talking about barrels of oil and ounces of gold, we have to convert them both to dollars to just do the math, and so the thing that’s really out of whack is the dollar. The dollar is way too strong.

The ratio is based on inflation. Inflation, deflation, the economy slows down, we get more deflation, the price of oil goes down, demand for oil goes down, but deflationary means high real interest rates. It’s usually pretty bad for the price of gold, so the price of gold would go down.

Within a range, that ratio would be maintained. The opposite is true when you get inflation all of a sudden. The price of oil goes up and the price of gold goes up, and again, we’re talking about the dollar price, the ratio is maintained.

That’s why that ratio exists and why it’s constant, because they’re really just two alternatives, two stewards of wealth that are both alternative to the dollar. If they’re constant in real terms, which they are over a long period of time, then the ratio should exist.

What’s going on now is something else, which is gold is not trading just like a commodity. Gold is trading like money and perhaps a new form of money pegged to the Chinese currency or the Russian currency. In other words, the way to think of the question is to consider the alternatives. Why isn’t gold lower? Oil, iron ore, copper, bauxite; all of these commodities have come way down. Gold’s off the top, obviously, but relative to 2011, in percentage terms, it has not come down as much as all these other commodities.

Why is gold doing relatively well compared to everything else? The answer is that there’s a kind of floor under it. I don’t want to suggest it’s a hard floor, but the Chinese are in the process of reallocating their reserve position out of dollars into gold. I’m not saying they’re dumping all of their dollars although $1 trillion have practically walked out the door, but they are in a rebalancing.

This rebalancing won’t last forever but may last for two or three more years, and that is why the ratio is out of whack. Ultimately, that ratio will be restored probably in the form of much higher oil prices once inflation kicks in, but the inflation is not here.

The way I would expect it to be restored is that we’ll have one more lousy year, then we’ll get to helicopter money, then inflation will take off, then oil will start to go up and gold will start to go up. Oil will go up a little faster, and then the ratio will be restored.

There is a geopolitical shock behind it, but it’s a hidden shock. It’s not a war; it’s a behind-the-scenes effort by the Chinese to acquire massive amounts of gold through stealth and deception. That’s the shock, that’s what’s getting it out of line. It will be restored when two things happen: 1) The Chinese get a lot more gold so they feel they can match the US in terms of a gold-to-GDP ratio, and 2) When the helicopter money kicks in and both oil and gold go up, oil will go up a little faster and the ratio will be restored.

Alex: What I’m hearing you say is that in 2016 we’ll be looking at much of the same with some slight fluctuations, but in 2017 we’ll possibly be looking at inflation starting to kick in and then it’s off to the races from there.

Jim: The world has to get inflation. It’s not pleasant; it’s a form of theft. I’m not advocating for inflation, but as an analyst, it’s not my job to be an advocate; it’s my job to get the analysis right. The global monetary elites have to cause inflation, because there’s no other way to pay the debt. They failed to do so for the last seven years, but they’re going to keep trying.

Alex: Thank you very much, Jim. As always, this has been a very illuminating conversation. I also want to thank our listeners for the questions they’ve submitted. We have far too many questions than we have available time to ask, but I want to encourage you to continue to submit questions, because this dialogue we developed with you has really shaped the conversations we’ve had with Jim over the last couple of years. With that said, I’m going to turn it back over to Jon.

Jon: Thanks, Alex. You couldn’t have said it better, and let me add my thanks to you, Jim. What a fantastic start to the year’s programs. It’s always a pleasure and an education having you with us. Let me also add my thanks to our listeners for spending time with us today and encourage you to follow Jim on Twitter. His handle is @jamesgrickards.

Goodbye for now, and we look forward to joining you again soon.


Listen to the original audio of the podcast here

The Gold Chronicles: January, 11th 2016 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles December 18, 2015

Jim Rickards, The Gold Chronicles December 18 2015:

  • The Fed has raised the interest rate by .25%, and it may go down in history as one of the Fed’s greatest blunders
  • The Fed always follows the economy, it never leads it
  • Janet Yellen’s models include the Philips Curve which has been thoroughly discredited, does not work and has no empirical support
  • Labor force participation is at a 40 yr low
  • If you lose one $85,000 job in the oil patch in North Dakota and gain three $25,000 part time service jobs the overall effect is net new jobs but a decline in aggregate demand and GDP
  • Unemployment is a lagging indicator, it does not tell you where the economy is going it tells you where the economy has been
  • World and US trade are collapsing in the absolute sense – total import / export levels are dropping at the same time
  • Expecting .50% (50 basis points) increase in rates through summer of 2016
  • Fed models are obsolete
  • Negative interest rates would destroy the trillion dollar money market industry
  • China is back to Yuan devaluation
  • Historically when the US economy goes into a recession, it takes 3% cut in interest rates to get the economy out of the recession. The question is then how does the Fed do this when the
  • interest rate is zero or near zero
  • The Fed has never accurately forecasted a bubble, or a recession
  • This expansion has been going on since 2009, and has been the weakest expansion on record
  • The saying goes that expansions cannot die of old age, but they can be murdered by the Fed
  • One of the main reasons the Fed is hiking now is to try and preserve what little is left of its credibility
  • The other reason the Fed is hiking is to try and “let the air out” of asset bubbles, however these bubbles do not go away slowly but rather abruptly
  • The Fed is in a desperate race to get to 3% before the next recession so they can cut
  • 45% of growth in China’s GDP is from investment and half of that is pure waste and should be written off
  • Real growth in China is probably closer to 3%-4%
  • Real global growth after subtracting China is closer to sub 1%
  • By summer 2016 the markets are going to figure out we are in recession
  • If the Fed cuts rates 60 days before the Presidential Election there will be strong political resistance
  • We will likely get to Dec 2016 with a total mess and 2017 will have to go back to easing
  • Fed tightening monetary policy and increasing rates through June 2016 will create a stronger dollar and a decline in corporate earnings
  • Given what’s happened to every other commodity gold has held up surprisingly well
  • Gold has bounced off of the $1050 level 8 times in the last few years
  • USD Gold price is a comparison of two kinds of money
  • Gold and Dollars are both money, neither produce yield unless invested
  • At some point the market will realize that this strong dollar policy has been a mistake and demand the Fed weaken the dollar
  • Likely to have a stronger dollar for the next 6 months, and the earliest Fed cut would likely be a 2017 event barring some catastrophe
  • The coming non US dollar denominated debt collapse is up to $9 Trillion in range before factoring in derivatives


Listen to the original audio of the podcast here

The Gold Chronicles: December, 18th 2015 Interview with Jim Rickards


The Gold Chronicles: 12-18-2015:

Jon: I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in a series we’re calling The Gold Chronicles.

Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management. He’s a consultant to the U.S. Intelligence Community and the Department of Defense and is also an Advisory Board member of Physical Gold Fund.

Jim, welcome. We’re really glad to have you with us on a rather special day today.

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

Jon: We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Hello, Alex.

Alex: Hello and good morning. It’s good to be here.

Jon: Alex will be looking for questions that come from you, our listeners. Your questions for Jim Rickards today are more than welcome.

Well Jim, they did it. The Federal Reserve unanimously agreed to raise short-term interest rates by 0.25%, the first rate hike in nearly ten years. They tell us this is based on an improving outlook for the U.S. domestic economy.

Two questions: 1) Did the Fed make the right call here, and 2) Why is this tiny rate increase such a big deal?

Jim: They definitely did not make the right call. I think, in the fullness of time, we’ll look back on this as one of the great blunders in Fed history, and that’s a major statement because they’ve made so many blunders. It’s a long list, but this will be added to those — right up there with 1929, 2008, and a few other occasions.

Let me explain the reasoning behind my response, because I never like to put out views without getting into the analysis and the thinking behind it. The Fed should have raised interest rates in 2009. Joe Kernan asked me during a CNBC interview in August of 2009, “What should the Fed do now?” I said, “They should raise interest rates 25 basis points. Don’t do it again soon, signal that it’s going to be baby steps, and not every meeting.” That is exactly the policy they enunciated Wednesday, but I said they should do it back in August 2009. Some people say 2010 or 2011, but the year is less important than the fact that they should have raised rates years ago. If they had done that, they could have raised interest rates up to 1.5% or 1.75%, and then sat tight for a while if that was necessary. Then, today, they would be in a position to cut, which is what they should be doing.

The U.S. economy is uncomfortably close to a recession, possibly going into recession in 2016. You’re not supposed to tighten into a recession; you’re supposed to ease into a recession. We can talk about the easing toolkit, but if they raised rates when they should have, they’d be in a position to cut them today.

This is really Bernanke’s fault, not Yellen’s. Under Bernanke, the Fed missed a whole interest rate cycle. Here’s the way interest rates interact with the business and credit cycle traditionally over a long period of time: First the economy expands, gets a little stronger, unemployment goes down, labor market conditions go tight, inflation ticks up a little bit. The Fed’s are watching, watching, and then, finally, the economy gets a little too hot, they hike rates, but it’s not enough. The economy is still growing, inflation is still going up, labor markets are still tight, so the Fed hikes again, they hike again, and then finally, they cool off the economy. The economy peaks, it starts to go down, all while the Fed is watching again. They’re like, “Okay, now unemployment is going up, inflation is coming down, there’s more slack to the labor markets, so we’d better cut.” They cut rates and then, finally, the economy picks up again.

Think of that as just a classic sine wave. The economy grows, the economy shrinks, it grows, it shrinks. The Fed tightens and eases and tightens and eases to try to smooth out the amplitude of those sine waves.

The point is that the Fed always follows; the Fed never leads. The Fed doesn’t make the economy do anything; they just kind of tag along, or at least historically that’s the case. They’re always behind the curve, and that’s sort of the way they view their job. This is the first time maybe ever – there might be one or two examples, but they’re not too encouraging – when the Fed is trying to somehow lead the economy into feeling good.

All of the data now indicates a recession or heading towards recession or contraction or significant slowdown in growth both globally and in the U.S. The Fed is just whistling past the graveyard. They raise rates, put on a happy face, and talk about strengthening the U.S. economy, but it’s completely a case of putting the cart before the horse. The Fed is supposed to see strong data and then raise rates. Instead, they’ve raised rates because they expect to see strong data. That’s not how it works.

Where is this outlook coming from? The question we can ask rhetorically is what is the Fed thinking? I think it’s important to understand that Janet Yellen is only loosely connected to the real world. She is a big-brain, model-based quant who has never spent a day in her working life outside of one of four places: Yale, UC Berkeley, the White House, or the Federal Reserve. She’s never had a private sector job, never run a business, never met a payroll, never sat in a trading floor, never had to bet her capital or other people’s capital on an economic outlook. She’s never done any of those things. As I said, she’s a quantitatively-driven and fairly liberal Democratic labor economist.

Janet Yellen has a model that says that when you get to a certain balance of unemployment and job creation, inflation is right around the corner. That model is based on something called the Phillips Curve. I thought the Phillips Curve was completely discredited by the early 1980s and I would grow old and die never hearing the words “Phillips Curve” again, but it’s back like a zombie that’s come out of the grave.

Yellen is giving speeches of an academic scholastic bent about the Phillips Curve. It’s simply the tradeoff between unemployment and inflation, so when unemployment and job creation gets to where it is now, you should expect inflation. That’s what she’s looking at.

The Phillips Curve doesn’t work; it has no empirical support. Even Yellen herself said, “You can’t just take the 5% unemployment rate and job creation at face value,” because we all know labor force participation is at a 40-year low. Yes, we’ve created jobs, but if you lose one $85,000-a-year job in the oil patch in North Dakota, and you gain three $25,000-a-year jobs bartending, you may have created net two jobs, but aggregate demand has gone down, GDP has gone down.

I am not against bartenders, by the way, and I’m happy for any unemployed person who got a job bartending, but when I look at the mix of part-time and full-time jobs, at labor force participation, and at what’s going on in real wages, I don’t see any strength in the labor market. The unemployment rate is a lagging indicator. It doesn’t tell you where the economy is going; it tells you where the economy has been.

Monthly job creation looks like it peaked in November 2014. We’re still creating a couple hundred thousand jobs a month, and that’s a lot at an annual pace, I’ll grant that, but it looks like it peaked 14 months ago. As a lagging indicator, I don’t take any comfort from that.

When you look at everything else that’s going on, the bulls, they point to car sales. With an annual rate of 18 million cars a year, I would point out that a lot of those car sales are being financed with the new subprime, which is auto loans. They’ve completely relaxed the credit standards, so again, I’m happy for anybody who got a new car out of it, but a lot of that debt is not going to be repaid. That’s at the outer limits. Inventories are piling up. They just brought a lot of pent-up demand forward with cheap finance and easy money. It appears to be hitting the wall, and you see that in inventory accumulation.

Take those things away from the happy-talk crowd, and everything else looks pretty bad. The scariest statistic to me is that world trade and U.S. trade are collapsing, and in the absolute sense. Most analysts look at trade surpluses and trade deficits – does that contribute or detract from GDP? It’s an interesting question, but forget about the surplus or the deficit; look at the absolute level of imports and exports. It’s going down. That very rarely happens. Trade deficits and surpluses bounce around based on terms of trade and exchange rates, but you almost never see imports and exports going down at the same time.

We did see it in the Great Depression, and Charles Kindleberger did a lot of great scholarship on this. I was advising a group of clients from one of the world’s largest banks about a week ago, and their chief U.S. economist was in the room. We disagreed on a few things, but he’s a good guy. After I made the point that I just made on this call, he raised his hand and said, “That’s true around the world including China, but it’s not true in the U.S.” The next day, the U.S. trade figures were released, and it was true. Both imports and exports went down.

Look at container shipments, the Baltic Dry Index, transportation indices. There are many data points, all of which are very meaningful. I would summarize the difference between Janet Yellen and me like this: Janet Yellen lives in a model-based world, and I’m trying to live in the real world of people actually buying stuff, shipping stuff, and making stuff.

It looks like we’re heading into a recession. I would have said that even if they hadn’t raised rates, because the fundamental economy is not that responsive to a little rate hike here and there. I think the Fed blundered, but 25 basis points by itself is not the difference between a recession and an expansion or continued expansion, although it certainly doesn’t help.

Just to spend another moment on this path, the Fed gave us some pretty good guidance about what they think is going to happen. I’ll caveat that by saying what they think is going to happen is not what’s actually going to happen.

Let’s talk about what they think is going to happen. They said they’d like to raise interest rates 1 percentage point a year for the next three years in 25-basis-point increments. That’s four 25-basis-point hikes a year if you’re going to do 1% a year. They meet eight times a year, so implicitly it would be a hike every other meeting. They didn’t say that in so many words, and Yellen was careful to say that it’s not on a strict calendar. She said it’s “data dependent.”

Fair enough – they always say that – but in terms of expectations, you would say, “25 basis points every other meeting for the next three years.” If you do that, you’ll get to 3.25% by the end of 2018. Steady Eddie, easy breezy, that’s kind of how they see it.

In the short run, what that means and what I do expect based on what the Fed is saying is that they will not raise interest rates in January, and there is no meeting in February. The next meeting is March, so you would expect a 25-basis-point increase in March, then nothing in April, no meeting in May, and then raise 25 basis points in June. It’s kind of baked in the pie to look for a 25-basis-point hike in March and a 25-basis-point hike in June. We’ll get to the 4th of July, and the floor on Fed Funds Rate will be 75 basis points.

That’s when it gets interesting. If the economy is fundamentally weak, a lot weaker than the Fed thinks (because their models are obsolete, in my view) and some of these trends that I just described play out, then they are in a pretty rigorous tightening cycle right into a recession. You don’t raise rates in a recession; you’re supposed to cut rates in a recession or do some other easing by using one of the other easing tools.

For people who say, “Well, until Wednesday, they were at zero, how could they cut?” There are a lot of other things they could do. First of all, they can go to negative interest rates, which interestingly, Janet Yellen mentioned in her press conference. She didn’t say they were going to do it, and I think it’s a very high hurdle to do that. Negative interest rates would pretty much destroy the money market industry, which is a trillion-dollar industry, and they don’t want to do that. But the fact that she even mentioned it as something they’re researching and thinking about is pretty interesting.

The easing options are: Go to negative interest rates, do more QE — unlikely because, again, that’s been pretty discredited and the research is showing that QE doesn’t work, do currency wars, or try to cheapen the dollar, but that’s not on the table now. If you’re raising interest rates, which they are, you’re making the dollar stronger, which they are, so currency wars aren’t in prospect.

They could do forward guidance. If you think about what they’re actually saying, they’re kind of doing a version of that. They’re raising rates, which they did on Wednesday, but they’re telling you that it’s going to be a very slow tempo of further rate increases. It’s a form of forward guidance whenever you talk about what you’re going to do next as opposed to leaving the markets guessing.

They’re tightening and easing at the same time. They’re tightening by raising rates and they’re easing by giving you forward guidance about not raising rates too fast. If that sounds a little schizophrenic, it is.

China just went through something similar. Until August, China was easing by lowering reserve ratio requirements and interest rates, but they were tightening by trying to maintain a peg to the U.S. dollar. When the market wants your currency to go down, and you’re trying to put a floor under it and maintain a peg, the way you do it is by printing money and using your reserves to buy your own currency. The People’s Bank of China was using dollars to buy yuan to maintain the yuan/dollar exchange rate. Well, when you buy yuan, you’re shrinking the money supply. That’s a form of tightening.

China was easing with two policy tools, interest rates and reserve ratio requirements. At the same time, they were tightening with another policy tool, which was buying the yuan. This made no sense and was not sustainable.

If something is not sustainable, it won’t be sustained. We saw that in August with a shock devaluation. They had to do it, because they were losing their reserves. They’ve lost $600 billion of reserves so far this year. Assuming that continued not at a linear pace but at an accelerating pace, China would be broke by the end of 2017. Although $4 trillion sounds like a lot of money, when it starts to walk out the door at an accelerating tempo, it’s never enough.

By my estimate, they would have been at zero reserves by the end of 2017 if they hadn’t done something. Of course, that was not going to be allowed to happen, so they did do something. They cheapened the yuan, and the way they did it was to shock the world. It caused a U.S. stock market correction. We all remember August 29th to 31st when the U.S. stock market was just falling into an abyss. Then the Fed didn’t raise rates in September (that was the start of the happy talk and dovishness), and then markets stabilized, and suddenly it’s all good now that they did raise rates.

But guess what? China is back to devaluing the yuan. They just learned a lesson: Don’t do it all at once in one day when the market’s not looking; do it in baby steps. The yuan has gone down against the dollar 12 days in a row. Now look out for 13 days in a row starting Monday. Little tiny steps, and they’re continuing that.

Something that was not sustainable wasn’t sustained in China. They’re not going to close the capital account because they want in with the IMF, and they’re not going to give up independent monetary policy because they want the ability to cut rates when they feel like it, so they caved in on the pegged exchange rate. There are three corners of the so-called Impossible Trinity, which was theoretically developed by Mundell in the early 1960s: 1) An open capital account, 2) A fixed exchange rate, and 3) An independent monetary policy. As I said, you can’t have all three on a sustainable basis, so they threw in the towel on exchange rate.

The United States is a little less vulnerable to the Impossible Trinity, because we don’t really need reserves since we print dollars, but the Fed is now on a non-sustainable path.

The Fed says they want inflation. It’s no secret that they want 2% inflation. The Fed thinks they see inflation coming because of this flawed Phillips Curve analysis they’re using, even though a lot of data points in the opposite direction.

When you raise rates, you strengthen the dollar. A stronger dollar is deflationary. If the Fed wants inflation, why are they pursuing a policy that causes deflation? That makes no sense. They’re on the same non-sustainable path. The question is, when will they cut? When will they ease?

If you follow this path – hike in March, hike in June, get to 75 basis points by the 4th of July – where do we go from there? This is where it gets really sticky.

Larry Summers did a great analysis about a week ago in an article in The Financial Times. He did a bunch of regressions and said, “Historically, when the U.S. economy goes into a recession, it takes 300 basis points of cuts to get out of the recession.” That’s how much the Fed has to ease to get the U.S. economy out of recession. If you start the recession at 6%, you have to cut to 3%, or if you start the recession at 5%, you have to cut to 2%. Basically, you have to take 300 basis points or 3% out of Fed funds to give the economy enough of a lift to get out of a cyclical recession.

But how do you do that if you’re at zero? How do you do it if you’re at 25 basis points? You can understand the Fed is now in a desperate race, and this explains why they hiked. I just went through a whole analysis indicating that the U.S. economy is weak and probably heading into a recession, plus they missed an interest rate cycle and should have raised in 2010. What on earth are they thinking by raising now when they should be cutting?

What they’re thinking is, first of all, we’re not going to have a recession. I would point out that the Fed has never correctly forecast a recession. They don’t get that right. They’ve never seen a bubble and they’ve never seen a recession. Of course, bubbles happen and they pop; recessions happen like clockwork, but the Fed has never accurately forecast either one. The fact that the Fed doesn’t see a recession means nothing to me, but that’s how they’re looking at it.

Think about what they’re doing. They’re going to raise 1% a year for the next three years. That gets you to 3.25% by the end of 2018. Then if you had a recession in 2019, you could, following Larry Summers’ lead, cut 300 basis points all the way back down to 25 basis points from 325 and get the U.S. out of the recession. Does anybody think we’re going to get to 2019 without a recession? I don’t think we’re going to get to 2017 without a recession!

Now just to talk about that a little bit, this expansion has been the weakest expansion on record. It’s been going on almost six and a half years since 2009, but it’s been so weak that if you talk to everyday Americans, they don’t even think we’re in an expansion. They somehow think we’re still in a recession. For them personally, they may be right about that, but we’re actually in the 79th month of an expansion.

The average expansion since 1980 – which is a period of long expansions, right? – is 78 months. We had the Ronald Reagan/George Bush 41 expansion in the 1980s, and then we had the Bill Clinton expansion of the 1990s. This expansion we have now is 79 months old. That doesn’t mean it ends tomorrow. You know the expression “expansions don’t die of old age” is true, but as someone has pointed out, they can be murdered by the Fed.

No matter what you think, we are certainly in overtime in terms of this expansion even though it’s fairly weak. It’s hard to imagine how on earth we could get to 2019 without a recession. The Fed is in a desperate race to get to a place where they can reverse a recession. They’re hiking to cut. That’s the best way to understand this. They’re trying to get to 300 basis points, the Larry Summers bogey, so they can cut 300 basis points to deal with the next recession.

They’re not going to get there. We’re not going to make it to 2019, so the Fed is going to come up short. In fact, if you think of it as a recursive function, they’re hiking so they can cut, but the hiking itself makes the recession more likely, and they’re going to have to cut more. They’re just not going to get their goals, because they’re hiking into weakness. It’s not responsible for the weakness by itself, but it’s going to make it worse and is certainly going to be deflationary. The U.S. is a sponge for all the deflation in the world.

Let’s step out of the U.S. economy a little bit and look at the global situation. There’s an idea around that from 1989 to 2008, we were globalized on the way up, but we’re not going to be globalized on the way down. This is nonsense, because there’s no decoupling.

Brazil is in a very severe contraction that’s worse than a recession. Russia and Japan are in a recession, Canada is close to one, and the U.S. is probably close to one. China is not technically in a recession, but the official numbers of growth over the last six years has gone from 10% to 9% to 8% to 7% to 6.8%. Add on the fact that 45% of growth in China’s GDP is from investment at least half of which is pure waste. I’ve been on the ground in China at the ghost cities. If they’re applying anything remotely resembling generally accepted accounting principles, they’d write that off.

If you subject another two or three points from the reported figures because of wasted investment, you’re talking about a collapsing growth from 10% to probably 3.5% or 4% at best. I’d say 3.5% is a better estimate. That may not technically be a recession, but because they’re such a large part of the global GDP, the impact on global growth is greater than a recession anyplace else.

A 40% drop in something that’s almost 15% of global GDP is taking six points out of the global GDP over a period of years. Global GDP growth is only about 3.5% to begin with. Of course, that’s happened incrementally over six years, but even if the year-over-year impact is closer to 2%, you’re talking about taking global growth down to sub-1%.

This is the environment the U.S. is operating in, and I already talked about contracting world trade, contracting shipment, Baltic Dry Index, Regional Reserve Bank surveys, declining industrial production, buildup of inventories – a long list of things.

Now let’s take it forward to July/August 2016. My expectation is by then, this negative recessionary data will be so strong that even the Fed can’t ignore it. We can see it coming now, Wall Street will probably wake up to it by the summer, and the Fed will be sitting there in August/September saying, “Huh, it looks like a recession. It looks like we tightened at the wrong time.”

But then what do they do? They could start an easing cycle at 75 basis points, but it will be 60 days from the election. Bear in mind, Janet Yellen is a Democrat. If the Fed cuts rates 60 days before an election, Ted Cruz will burn down the Fed. You won’t have to rely on egg farmers or everyday Americans, because some of the Republican candidates will do it for you. What if they cut rates and the Republicans won? The first order of business in January 2017 would be to abolish the Fed, so they’re not going to do it.

They’ve tightened into weakness and they’ll tighten a couple of more times. The weakness will be evident by late summer. At that point, they’ll probably feel like they should cut, but they won’t be able to cut because of the election. We’re going to get all the way to December 2016 with an overly tight monetary policy in the teeth of a recessionary and deflationary global economy, and probably the U.S. economy as well with a super-strong dollar. It’s going to be a mess.

At that point, they’re going to have to go back to easing. Now we’re talking late 2016/early 2017, probably starting with forward guidance, and then back to zero by the middle of 2017. We’ve seen that in eight major economies in the last five years including Japan, Sweden, Norway, and others. The European Central Bank has raised rates only to cut them again. They thought they could raise on some kind of economic boost or expansion, and within months or a couple of years at the most, they cut them and are back to zero.

I saw a poll the other day indicating that a high percentage of U.S. economists think the Fed will raise and then get back to zero within five years. My reaction was, “Five years? Try five months.” Well, it won’t be five months; it’ll probably be 15 months or early 2017.

They’re going to get up to 75 basis points, two more hikes, hit stall speed, the economy is going to start to either go into recession or be very, very weak, and then they’ll be back to zero by early 2017.

That’s my big picture analysis of the Fed blunder and the data behind it. As to what the Fed was thinking, there were three reasons for hiking on Wednesday. Number one, which has nothing to do with economics, was merely Fed credibility. They said they were going to hike by the end of 2015, but they went seven meetings and didn’t do it. When they got to the eighth meeting 16 days before the end of the year, if they hadn’t hiked in December, what little was left of their credibility would have been in the shredder, so they felt they had to do it. Economics? Who cares? They just had to do it to maintain institutional credibility. That was one of the reasons, which is not a good reason, but they painted themselves into that corner by saying last year that they would raise this year. And why did they say that? Because they had the same flawed model as they’re using now, but that’s their problem.

The second reason for hiking is letting the air out of asset bubbles. They didn’t say a lot about this, but they had mentioned it from time to time with Jeremy Stein, a Fed Governor who resigned about a year and a half ago, as a leading voice. I think he resigned from the Fed because he didn’t want to be around when this happened.

They always use the metaphor of letting the air out of the balloon slowly, but that’s never what happens. It’s more like hitting an overinflated balloon with a sharp object. It pops, it explodes. Just as the Fed never sees a recession, they never see an asset bubble.

There is this notion that maybe stocks or the bond market are in a bubble, commodities certainly are not in a bubble, emerging markets stocks and high-yield … there are a lot of bubbles to go around, maybe even residential housing in the United States for the moment. They think they need to let the air out of the bubble. I think one more rate hike in March could be hitting it with a pin, so “Look out below” there.

The third reason is one we talked about, which is hiking rates to cut rates. Just saying it shows how nonsensical it is. If you’re hiking rates to cut rates, why don’t you just leave them alone? That’s not what they’re thinking, because they feel they’ve got time. They think they can get to Larry Summers’ 300-basis-point bogey before the next recession. I’m like, “Sorry, guys, that’s 2019. You’re not going to make it.”

The three rationales are hike to cut, maintain credibility, and let the air out of the bubbles. My response is that it’s too late. They should have hiked five or six years ago, bubbles don’t deflate, they pop, your credibility is pretty much in shreds anyway, and you’re going to lose more credibility when you have to go back to zero in 2017, but that’s a story for another day.

I’ll let it rest there, Jon. I think we’ve exhausted the Fed subject, but I’m happy to pick up on any other topics you want to look at.

Jon: I do want to pick up on something, actually. You briefly mentioned Wall Street. We all know that stock markets love easy money, and the Fed has just signaled that easy money is going out of style. Why do the markets still seem relatively bullish, and how long can that last?

Jim: It’s a good question. The reaction on Wednesday was the stock market going up a lot, and that was kind of a bullish signal. A number of analysts have pointed out, and I agree, that a first-day reaction never tells the tale. What happened Thursday was possibly a better reflection.

I have to admit that I don’t watch markets day to day. I watch trends and a lot of economic fundamentals. While on this podcast, I don’t have a ticker in front of me and I’m not sure where the stock market is this minute, but I actually don’t care that much because I’m not a day trader. I’m not sure the reaction is bullish, and indeed, the reaction may turn out to be negative and consistent with the recessionary scenario I laid out. Bear in mind that historically stock markets discount recessions about six months in advance.

The stock market has gone sideways for a year. I understand it hit some new highs back in May, had a technical correction in August, and bounced back up in October, but if you look at it year for year, it’s basically gone nowhere with a lot of volatility along the way.

If it starts to go down, that would be consistent with this recession forecast. I spoke to Ben Bernanke about this when I was with him in Korea a few months ago, and he said that the Fed actually doesn’t care. His exact words were, “The Fed doesn’t care if the stock market goes down 15%.” In other words, the Fed doesn’t think it’s their job to prop up the stock market, and if the reaction to Fed policy is a 15% decline, they don’t care.

That’s interesting. What about a 20% decline, Mr. Chairman? In other words, at what point does the Fed start to care? I’m not predicting that that’s in the cards, because I think it’s more likely we’ll see a slow grind down.

Again, let’s come back to the underlying dynamics and not just throw a forecast out there without drilling down as to what’s behind it. The Fed’s tightening cycling, which has now begun, will continue, in my view, through June and maybe longer, but at least through June. This creates a stronger dollar.

A stronger dollar is bad for corporate earnings. We’ve seen corporate earnings go down significantly in 2015, and they should go down again in 2016. That’s because a lot of our major corporations and large cap-weighted components of the major indices get anywhere from 30% to 80% of their revenues from oversees. A stronger dollar means those overseas revenues are worth less in dollars when you translate them back, and that means corporate earnings decline.

That is also something that lags. You can say, “The strong dollar story has been out there for a couple of years; hasn’t that worked its way through the pipeline?” The answer is no, because corporations don’t like to speculate in currencies. They hedge their overseas currency exposure, but the hedging market only lets you go about a year.

Going back to 2014 or even late 2013, the dollar started to strengthen significantly. Really, it was a 2014/2015 story. The impact on earnings did not show up right away because they were hedged, but the hedges have rolled off, and the dollar continues to get stronger, and even the new hedges are going to have their expiration dates.

This impact on corporate earnings is still coming through on a lag basis, so the combination of fundamental recessionary trends, deflationary trends, plus a corporate earnings decline coming from the strong dollar would lead us to expect stock markets to go down.

This is a reason to have gold in your portfolio, by the way. Again, I’m not predicting a market crash, but if you ask me if it could happen today or Monday, I would say absolutely, that’s just in the nature of how complex systems melt down. I saw it happen in October 1987 when the stock market went down 22% in one day. If you converted 22% to today’s Dow points, that would be 4000 Dow points.

If the Dow went down 400 points, that would be headline news all over the world, so imagine 4000 points. Imagine what that would do to your portfolio. That’s what happened in October 1987, and that’s the reason I recommend 10% of your investable assets in gold. Whether gold’s going up or down – it has been volatile – that’s your fire insurance in case the rest of the house starts to burn down.

Getting back to the stock markets, the history of stock markets and recessions is that stock markets lead the way down about six months in advance. With the Fed tightening at the wrong time – not standing pat, not easing, but tightening – that would just make that worse because of the impact of the strong dollar.

I’m not sure it is “happy days are here again” for the stock market, but we’ll see how it plays out.

Jon: Let’s briefly talk about gold a bit more before we hand this over to Alex with questions from our listeners, because it is an important topic to our audience here. The dollar price of gold has been slowly drifting down and is hovering around $1060 today.

Given all of the instabilities and risks you’ve talked about these last few months, is it cause for surprise that the price has hovered so relatively low? And looking forward, what would you expect of gold in the brave new world that began with Wednesday’s rate hike?

Jim: The surprising thing about gold at $1060 to me is that it’s not lower. I know it’s at a six-year low and I know it’s come down 50% since the all-time high of 2011. I can read a ticker and I understand all of that.

But given what’s happening to every other commodity including oil, copper, iron ore, and other currencies such as the Canadian dollar, the Australian dollar, the Chinese yuan, and given all the recessionary trends around the world that we just talked about, it’s a little surprising that gold’s not at $950 or $875.

Gold has bounced off this $1050/$1060 level eight times in the last several years. I’m not saying it’s a hard concrete floor and I’m not saying it can’t go lower – it could – but it has actually been fairly resilient at that level and has certainly gone down a lot less than other proxies or other commodities in comparison to the dollar.

I was very happy to hear you say “the dollar price of gold.” You didn’t say gold went down; what you said is the dollar price of gold went down, and that is exactly the right way to think about it, in my view.

Gold is a form of money. I understand it’s dug out of the ground, there’s a mining industry, and I know a little bit about mining and how you do it physically, and feasibility studies, and the chemistry of it, and the electronics of refining. There’s a lot to it, but at the end of the day, you’re doing all of that digging and mining and milling and refining to get money, so gold is a form of money.

When I think of gold versus the dollar or bitcoin or any other currency – take your pick – I’m just comparing two kinds of money. None of these have yield. Gold has no yield. It’s a well-known standard criticism of gold, but I don’t consider it criticism; I consider it a tautology.

A dollar has no yield, right? Take a dollar bill out of your wallet and look at it. What’s the yield? The yield is zero. You say, “Oh, I can put it in the bank and get a yield.” Yes, you can, but then it’s not money any more. The Fed calls it money, because they’re in the business of maintaining this mystical illusion about where money comes from and what money really is. But if you put your dollar in the bank, you don’t have money any more; you have an unsecured liability of what may be a technically insolvent financial institution.

If you assume that you can easily get your money out, most days you can, but talk to the people in Cyprus or Greece. Talk to the people in the United States in March 1933 when the President closed every bank in the country by executive order.

I went to an ATM yesterday in New York and tried to get $500 out, but it said, “No can do.” There was plenty of money in the account; that wasn’t the issue. It said, “I’ll give you $300.” I smiled because I’ve been saying for a long time that in the next panic, the ATMs in the United States will be reprogrammed so that they’ll only give you $300 a day for gas and groceries. The folks on this podcast have heard me say that before, because I’ve certainly said it a number of times.

I use it as an illustration of how Greece can come to America, and $300 was the number I picked as the needed gas-and-grocery money. The government will just say, “Why do you need more than that?” I thought it was funny that this machine in New York would only give me $300 yesterday, so maybe that was my punishment for giving the forecast.

The point is that a dollar in the bank is not money but an unsecured liability of a financial institution that can easily shut its door. You can get yield, you can buy stocks, you can buy bonds, you can buy real estate, you can buy all kinds of things, but real money, such as the dollar or bitcoin or gold, doesn’t have a yield, and it’s not supposed to.

The dollar price of gold, to me, is not really a gold story, it’s a dollar story, and it’s pretty simple. In a strong dollar environment, you would expect a low dollar price of gold. In a weak dollar environment, you would expect a high dollar price of gold. If you want to know what’s happening with gold, you have to ask yourself what’s happening with the dollar. We just spent some time talking about what’s happening with the dollar in terms of the Federal Reserve.

There are other forces at work. There’s this whole mismatch or out-trade or whatever you want to call it between the physical gold market and the paper gold market. I think folks on the call are pretty familiar with that. There is manipulation going on.

I’ve spoken to more than one PhD-level statistician who has done studies that say the manipulation of the gold futures market is blatant. It’s amazing no one’s been arrested, but if the people behind it are the Chinese, then don’t expect them to get arrested!

There’s another trend going on that I hear about from my friends at the Physical Gold Fund who are very plugged-in as well as other dealers and participants in the physical market. They say the demand for physical gold is voracious and people are lined up to get the metal.

When I look at strong dollar, weak commodity prices and then look over at gold, if that were the only thing going on, my question would be, “Why is gold not lower?” I think it’s had very good resilience at this $1050/$1060 level. If you ask me for an explanation, I would say that it’s probably this voracious demand for physical gold.

While all the talking heads on TV are saying, “Gold’s down, gold stinks, whatever,” smart people around the world are buying. This doesn’t include Americans, however. You see it in Australia, China, parts of Europe, with the Swiss, the Germans, in South America, and around the world, but I don’t see it so much in the United States. Americans have been hopelessly programmed to think of gold as having not much value, but around the world, people are backing up the truck. They’re like, “Hey, $1050, I’ll take it. Just get me some gold.”

In fact, we’re hearing about delays in supply. It’s a United States law that if you’re a physical gold dealer and a customer comes in and says, “I’d like to buy some gold,” and you don’t have any on hand, you’re response is, “Okay, I’ll take the order. Here’s the price, and I’ll get it to you in two weeks, or whatever.” It’s against the law if that waiting period is more than 28 days, because that’s the definition of a regulated futures contract. If you’re a dealer who sells gold more than 28 days forward, you have technically crossed the line into an illegal off-exchange futures contract subject to enforcement action by the SEC. In the extreme case, it could actually be a crime, so dealers have to deliver within 28 days.

I recently talked to a dealer who said that’s not happening. It’s routinely taking more than 28 days to source the physical gold, but everyone’s turning a blind eye and not reporting it. The customer doesn’t care because they want the gold. The dealer doesn’t care because they want the order. Everyone’s tiptoeing around the 28-day rule, but the point is that those kinds of delays are not unusual right now. There are a lot of other stories to that effect, but it gives you some sense of what’s going on in the physical space.

You have price suppression and manipulation by the futures market, voracious high-end demand from Russian and China that is not abating, and you have voracious retail demand from everyday people around the world buying up the gold, although not apparently the United States. There is a giant tug of war going on around gold where the deflationary recessionary forces want to take it down, the technicals and the demand for physical want to prop it up, and it’s in an unstable equilibrium around right around the $1050/$1060 mark.

Where is it going to go? In the short run, I would expect everything I just described to persist for a while. The deflationary interest rate hike and weak economy forces are still trying to move it down, but the physical demand and strategic buying by Russia and China are still going on, so those opposing forces are still in play.

At what point does the market look around and say, “You know what? This strong dollar is killing us. It’s killing the U.S. economy, it’s a political liability, the Fed has blundered and raised rates at the wrong time. We have to get some inflation going on, and that’s going to be good for the dollar price of gold.” When does that happen?

A very interesting thing happened on Wednesday that is no coincidence. On the same day that the Fed raised rates, the Congress blew a hole in the budget caps. This was led by Paul Ryan with cooperation from Nancy Pelosi, Senate leadership, and the White House. They are on a spending spree, and they blew through these caps they enacted a couple of years ago.

Remember all the talk about the fiscal cliff and shutting down the government and no more spending that we lived through in 2012, 2013, and 2014? It went away, because they enacted these hard caps that have guided the budget for the last couple of years. Guess what? The caps have been blown up.

This is like a crime spree, a smash-and-grab by Republicans and Democrats in it together. What did the Democrats get? They got social spending, big solar tax credits, climate change, and the sort of stuff they like. What did the Republicans get? They got pork and more defense spending. They were all in it together.

What’s the significance to that? Think of it as a relay race. It’s hard to picture Janet Yellen in a tracksuit, but picture her in one as part of a mile relay where each runner has to run a half mile before passing the baton. Janet Yellen just passed the baton to Paul Ryan.

On the same day that they raised rates, Yellen, in fact, was saying, “We’re done. Zero rates, six years. Enough’s enough. We’ve done all we can. Don’t ask us to do more. We’re not even sure it’s working. We have to get back to business here at the Fed. We’re raising rates. Over to you, Paul.” She hands the baton to Paul Ryan. He blows a hole through the budget ceiling and starts spending money. What is that? That’s helicopter money.

A lot of people don’t understand the difference between QE and helicopter money, but it’s very simple to explain. QE, or quantitative easing, is money printing. The Fed prints money, they give it to the banks, the banks give it back to the Fed in the form of excess reserves, and the money doesn’t go anywhere.

The banks don’t lend it, people don’t want to borrow it, and nobody spends it. It has no what’s technically called velocity. It’s a very sterile exercise that doesn’t do anything for the economy. It may have some marginal impact on long-term asset prices, but the money just goes in a circle.

Helicopter money is different. We’ve all heard the metaphor Ben Bernanke talked about in a very famous speech in 2004 referring to something Milton Friedman had said long before that. And that is the Fed can always cause inflation. All we have to do is print money, rent some helicopters, push it out of the helicopters, people run around, pick it up, and spend it. Boom, there’s your inflation.

That was the metaphor, but how do you actually execute helicopter money? Helicopter money requires cooperation between the fiscal authority and the monetary authority. The monetary authority is the Federal Reserve while the fiscal authority is the Congress and the White House. What they do is run bigger deficits or basically spend money they don’t have, run bigger deficits, the Treasury borrows the difference to cover the deficits, and the Fed buys the Treasury bonds.

It’s essentially debt monetization, pure and simple. We continue to run deficits, but in terms of combining Fed debt monetization with bigger deficits, we haven’t had that since 2009. Well, we’re getting it now, and I would look for more of that in the future.

We’ve gone from QE as a form of ease, which didn’t really work, to helicopter money as a form of ease, which, in theory, should work, and the baton has been passed from Yellen to Ryan. It will not have a big impact in 2016 since the amounts aren’t big enough, but this cat is out of the bag, and I would expect the deficits to get bigger as the economy gets worse.

When we actually go into a technical recession, which I do expect, and unemployment starts to go up a little bit because we’re in a recession – which will be a reversal, but as I said earlier, that’s a lagging indicator, so don’t look for that to happen in the next couple of months, but maybe 2016 – the political consensus for larger deficits is going to be pretty strong.

If you’re a politician, what’s not to like about spending money, right? The Fed is sitting there saying, “Bring it on. We’ll buy the bonds if need be, but we don’t want to buy them in a sterile QE exercise. We want to buy them in an honest-to-goodness debt monetization exercise with you guys (meaning the Congress) spending money like crazy.”

That, in theory, should actually work. Now you have to spend a lot. We’re talking about going back to trillion-dollar deficits. Is there political appetite for that? Not today in a presidential election. Trump, Cruz, or one of these guys would go burn down the Fed. But after the election, regardless of who wins, in a recession, political winds will shift very abruptly and there will be appetite for it.

I don’t know who’s going to win the election, but whoever does, and certainly if it’s a Republican, it’s going to be their chance to do what Obama did in 2009, which is just expand the deficit.

If that happens, and it is happening in small ways, I expect it to continue. Then that’s going to be the turning point when the market’s going to wake up and say, “You guys are serious. No more of this QE stuff; you are going to spend whatever it takes as long as it takes to get the inflation. If you’re doing that, I’m buying gold, because I don’t want to be the last guy on the bus.”

That’s how it’ll play out. Patience is a virtue. I think that gold, absent of geopolitical shock or a severe financial panic, which is always a possibility (I’m not predicting either one, but you can’t rule those out), I would expect gold to kind of chug along sideways and maybe up a little bit through this tightening period, mainly because it will be a victim of the strong dollar. Eventually, even the Fed will understand that they blundered and they’ll reverse course – the Congress is already ahead of them – and then we’ll finally get the inflation people have been talking about for seven years.

Jon: Thanks, Jim. I can’t remember when we’ve concentrated so much information in one webinar. I know we have to let you go at the top of the hour for an appointment, but Alex, we have time for one question from a listener for a brief response from Jim here.

Alex: We want to thank the audience for all of the questions they send in. We get them on the webinar, in e-mail, and also over Twitter. I want to thank Jim for addressing the last question regarding gold, because that’s the majority of the questions we’re getting right now.

There are a lot of questions regarding gold sentiment. Most of it is obviously about western sentiment – which doesn’t necessarily mean the East and the Arabs, etc. are having the same sentiment – but in USD terms, there’s a lot of concern about the gold price.

I want to acknowledge that we have a lot of international clients and people who are interested in what Jim has to say, so this particular question is going to be more of an international nature. How bad will the global dollar-denominated debt problems become if we have a stronger USD over the next 6 to 12 months? I want to add to that what do you think is going to happen? Do you think we’re going to have a stronger or weaker dollar towards the end of 2016?

Jim: We’re going to have a stronger dollar for at least the next six months, maybe a little bit longer. At that point, I don’t think it will go weaker. It would go weaker if the Fed cut, but I explained how the Fed will not be able to cut for political reasons having nothing to do with the economics, because it will be, at that point, two or three months before the election. The earliest Fed cut would be in December, maybe not even then, but that would be the earliest.

So a weaker dollar feels like a 2017 event. Just to answer the first part of the question, the non-U.S dollar-denominated debt collapse is going to make this high-yield collapse we’ve seen the last two weeks look like a picnic. We’re talking about $9 trillion of dollar-denominated debt borrowed by emerging markets. We’re not talking about sovereign debt or things the IMF can come in and fix. We’re talking about mostly corporations or provinces or regions, as the case may be.

With the global economy slowing down radically and the dollar getting stronger, they’re not going to be able to pay off that debt, and we’re going to see a wave of defaults. It’s already starting. Everyone’s just whistling past the graveyard on this, but we’re going to see multitrillion dollar defaults.

The question is to what extent do the central banks of the countries of these borrowers intervene? It’s not a mystery, because we know who they are. We’re talking Russia, Brazil, South Africa, Indonesia, Turkey, Malaysia. To what extent are their central banks willing to exhaust their reserves to prop up their local borrowers?

In theory, if a corporation that owed dollars was getting local currency revenue and couldn’t afford the dollars in real terms, they could go down to their local central bank and get some foreign exchange to roll over their debt. But how low will the central banks be willing to go in their reserves?

My view is not very far. Is Russia really going to exhaust their reserves to bail out some auto distributor in Moscow? I don’t think so. Those defaults are going to come in a big way. They haven’t hit yet, but we’ve seen the beginning, we see waves breaking on the beach. In the energy sector, certainly fracking, that’s already happening. Other forms of high-yield are showing problems – a lot of that high-yield story is energy – but that’s going to spread dramatically over the course of the next year, and we’re not going to get any relief from a weak dollar until 2017.

I think by then it’ll be too late. The combination of weak growth and strong dollar is going to sink a lot of these borrowers.

Alex: Very good. Thanks, Jim. We appreciate it.

Jim: Merry Christmas and Happy New Year, and we’ll see you next time.

Jon: Thank you, Jim. The same to you, from all of us.

Thank you to our listeners for spending time with us time today. Let me encourage you to follow Jim on Twitter. His handle is @JamesGRickards. Goodbye for now. I hope you’ve enjoyed this very rich and information-packed presentation as much as we have in participating in it here. We look forward to joining you again in 2016. Goodbye for now.


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The Gold Chronicles: December, 18th 2015 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles November 12th, 2015

Jim Rickards, The Gold Chronicles November 12 2015:

*This is the weakest US recovery on record
*Given length of current economic expansion, US may already be in a recession and data has not caught up yet
*The Fed cannot pull the trigger on a rate hike because the data does not support it
*Detailed discussion of feedbackloops affecting the Federal reserve and zero interest rate
*United States is now a magnet for global deflation
*Fed still unlikely to raise rates in December
*Detailed discussion of IMF Special Drawing Right (SDR) and China’s position
*Sooner or later oil will eventually be denominated / traded in SDR’s
*SDR is backed by nothing, instead value is derived from a peg to a basket of currencies
*Chinese Yuan addition to the SDR basket expected in Sept. 2016
*London is now positioning itself as China friendly
*Indian gold monetization scheme is not likely to succeed
*Indian gold monetization scheme will allow Indian government to lease gold into the market
*Emerging market Central Banks are adding gold to reserves led by China and Russia
*China has lost $500B in reserves in 6 months supporting the Yuan
*During the next financial crisis markets and market makers will be non-liquid and if you do not have alternate forms of liquidity your wealth is at risk
*Jim’s best definition of a financial panic is “everyone wants their money back”.
*Most likely Fed will ease in 2016, and use forward guidance and currency wars as tools


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The Gold Chronicles: November 12, 2015 Interview with Jim Rickards


The Gold Chronicles: 11-12-2015

Jon:     I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.

Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management. He’s a consultant to the U.S. Intelligence Community and the Department of Defense and is also an Advisory Board member of Physical Gold Fund.

Hello, Jim, and welcome.

Jim:      Hi, Jon. It’s great to be with you.

Jon:     We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Hello, Alex.

Alex:    Hi, Jon. Likewise, it’s great to be here.

Jon:    Alex will be looking out for questions from you, our listeners. Your questions for Jim Rickards today are more than welcome, and you may post them at any point during the interview. You’ll see a box on your screen for typing in your question. As time allows, we’ll do our best to respond to you.

Jim, Fed Funds Futures are used by investors and traders to effectively place bets on the Federal Reserve’s upcoming decisions. I see that current analysis of these Futures suggests a 68% likelihood of a rate rise in December. So now it’s not just the pundits calling for an interest rate rise; it’s the markets as well. Yet, in a recent article, you continued to insist that the Fed won’t raise rates, and you cite a mathematical phenomenon to support your view — recursive functions. For those of us who are a bit math-challenged, would you help us understand your thinking here?

Jim:      Sure, I’d be glad to, Jon. I try to steer away from opinions and predictions. The difference between an opinion and analysis is that if you’re doing analysis, you should have something behind it. If you ask me right now today, “Will the Fed raise interest rates on December 17th at the next FOMC meeting?” I would say no. You’ll find a lot of people who would say yes, and obviously, the markets expect that. But I don’t like to stop there. I like to give the analysis behind it that involves facts and data and what the Fed itself is saying.

One of my biggest sources for my views on the Fed is the Fed itself. In other words, they’ve been talking tough. This time last year, November 2014, I did a series of interviews where I said the Fed would not raise interest rates in all of 2015. At the time, Wall Street was saying March, then they said June, then they said September, and now they’re saying December. I said all along that they wouldn’t raise rates, but I didn’t have a crystal ball. I wasn’t wiretapping the boardroom at the Fed; I was actually listening to what the Fed was saying.

The Fed has laid out their criteria for raising rates, so it’s not a secret. They have a forecast that says 2.5% growth, 2% inflation, and 5% unemployment. Right now, they’re missing on two of those three. They’re nowhere near 2.5% growth or 2% inflation. In fact, both of those have been trending in the opposite direction. Yes, it’s true that unemployment has hit 5%, but that’s really a proxy for a lot of other things that are going on. We did have a blockbuster October employment report, there’s no disputing that the report was strong across the board. There’s good reason to believe they borrowed a lot of strength from November. We’ll see what happens on the November employment report that will be released in early December. That’s just one data point, and it’s an important one.

When you look at all the other data – world trade, export growth, import growth, real wages, manufacturing indices, and quite a few other things – they’re all pointing down, to recession. By the way, recession at this stage should come as no surprise, because this expansion is 78 months old, which is longer than the average expansion since 1980.

Bear in mind, the period since 1980 has been one of very strong growth all the way back to the end of World War II. The average expansion since the end of World War II is about 38 months. The average expansion since 1980 – a very favorable period – is 77 months. This expansion, the one we’re in right now, is 78 months old. It may not feel like an expansion because it’s actually the weakest recovery on record, but it’s a recovery nonetheless. We have been growing continuously since the middle of 2009, so we’re 78 months along.

Recessions don’t die like clockwork just because it’s longer than the average expansion by every metric. It doesn’t mean it’s over tomorrow, but it does mean that nobody should be surprised if it is, because it’s pretty long. So, given all the data, the length of this expansion, and the fact that we’re certainly closer to a recession than not, we actually may be in a recession right now. We never find out until a year or two years after the fact, depending on how long it takes the official National Bureau of Economic Research to declare it. Leaving that aside, we may be in a recession now and not even realizing it. That’s my view based on a lot of data, a lot of analysis, and on what the Fed says itself as to why they can’t raise rates.

You made reference to what we call the recursive function, which I’ve been using to analyze this. A recursive function is just a fancy mathematical name for feedback loop. Any feedback loop is one where the output of the equation equals the input of the next iteration of the equation. So, you have a simple equation, you get some data, you solve it, you take that answer and plug it back into the same equation, run it again, get another answer, take that answer, plug it back in, run it again, etc., over and over. With computers, you can do this a million or billion times and graph the output to get some very interesting results.

Basically, any feedback with a recursive function is an equation that feeds on itself. It can explode exponentially or it can go to zero and get stuck there. They can do funny things, but the graph of the output is very revealing.

Without getting into the equations, let me talk about two feedback loops that are in play right now. The first is the feedback loop between the Fed Funds rate and the FOMC action in terms of raising rates. Jon, you pointed out that the Fed Funds market is giving a 68% likelihood of a rate increase in December. Well, one of the things the Fed has worked very hard to do for over two years is to get the market ready for the rate increase.

We’ve been hearing about it explicitly for a year, and I would say implicitly for two and a half years going all the way back to May 2013 when Ben Bernanke first used the word ‘taper’ in the famous Taper Tantrum. I’m sure he used a technical term like “reduction of long-term asset purchases,” but it’s taper by another name.

Bernanke started talking about tapering in May 2013, and December 2013 was when they actually started tapering. They finished the taper in November 2014 but still had forward guidance, which was a way of telling the market they weren’t going to raise rates quickly. Then, they removed the forward guidance in March 2015. So, they’ve been tightening by talking for two-and-a half-years.

As of March 2015, all bets were off because they removed forward guidance. In 50 speeches since then, they’ve been talking about tightening, but they haven’t actually done it. Why are they talking about tightening in what is clearly a weakening environment? The answer is they want to get the market ready. They don’t want to shock the market, and they don’t want the market to believe that they won’t tighten and then actually tighten. In that scenario, the market is shocked resulting in some kind of meltdown.

The problem is they can’t actually pull the trigger, because the data won’t support it. Until recently, the markets have been expressing that by saying, “We hear what you’re saying, but we don’t care. We’re thinking the same thing. We’re looking at the data and don’t think there’s any chance you can raise rates.” Going into the September FOMC meeting, the Fed Fund Futures market was only giving it about a 35% probability, and now they’re up to over 70%.

Here’s the feedback loop: The Fed wants the market to get ready. The market’s listening to the Fed. The Fed is raising the odds and expectation of a rate hike by saying, “Hey, the Fed really means it this time. Janet Yellen, she’s not kidding around. She said December is on the table.” The Fed looks at the raised expectation and says, “Aha, perfect time to raise rates, because now we know we won’t be shocking the market for the first time in a long time. The market is actually expecting us to raise rates, so what better time to raise rates?” Then they talk tough again and say, “We’re really going to raise rates.” (They gave a bunch of speeches just today.) The market responds, “They really mean it, so we’re going to raise the expectations.”

We have this feedback loop between the Fed talking tough and the market raising expectations. Higher expectations increase the likelihood that the Fed will actually do it, because now they know they’re not shocking the market. It goes around and around with the Fed Funds giving it higher probabilities and the Fed saying, “Well, now that you’re on the same page as us, what better time to raise rates?”

The only problem is that the whole thing is absurd. This is a cat chasing its tail. The economy is weak and we’re bordering on a recession, so why on earth would they raise rates at the beginning of a recession? The time to raise rates was 2010-2011 when the dollar was weak and the economy was doing pretty well, a lot better than it is now. Bernanke blew it; he missed a whole cycle. They should have started raising rates in 2010 so they could have them up to 1.5% – 1.75% by 2012. Then, today, now that we’re getting close to recession, they could cut rates because there would actually be room to cut.

The Fed missed the raising cycle, and now they should be cutting, but they can’t cut because they’re at zero. Although they’re still talking about raising, two wrongs don’t make a right. Just because they blew it in 2011 by not raising rates doesn’t mean they should blow it again by actually raising rates when the economy is weak. That’s tightening into weakness. Having said that, we’re talking about the Fed here. Don’t underestimate their ability to screw this up twice. Given the fact that the Fed usually messes things up, you can’t rule that out.

I’m saying the data doesn’t support a rate hike as we’re probably in a recession or close to one. The Fed and the Fed Funds Futures market are like two cats chasing two tails leading themselves to believe they’re going to raise rates. This would be an incredible blunder causing an emerging markets meltdown and U.S. stocks to melt down. We’re already seeing some of that in the stock market action the last couple of days.

I said there were two feedback loops and just described one of them. The other one is between the FOMC itself and actual deflation. I’m not talking about what the market expects; I’m talking about what the economy is actually doing. This is in reality the more powerful feedback loop that’s been in place since May 2013.

It works like this: The Fed wants to raise rates because they kind of know they should have done it earlier. They say, “Normalize rates.” Whenever people throw that phrase at me and say that the Fed has to normalize rates,” my response is, “Tell me what’s normal about this economy. The Fed’s been manipulating markets for eight years. What do you mean by normalization?”

That’s an aside, so coming back to what the Fed wants to do, they say they want to raise rates, but they also say they want inflation. That’s not a secret; they’ve told us a zillion times they want 2% inflation. The problem is, when you raise rates, you make the dollar stronger. That is deflationary, because a strong dollar means we can buy more imports for fewer dollars. It lowers the dollar price of imports and feeds into U.S. supply chains.

It also hurts exports. If you’re starting with a foreign currency and have to convert to dollars to buy a Boeing aircraft or General Electric wind turbine or an Apple iPhone or whatever, you may need more dollars because your currency is cheaper. So, a stronger dollar hurts exports which hurts jobs. It cheapens the price of imports which imports deflation from abroad. The United States is now a giant magnet for all the deflation in the world.

The Fed says they want to raise rates and they want inflation, but raising rates is deflationary because of a strong dollar. How does that work? The answer is it doesn’t work.

The Fed has been acting hawkish for the last several years by saying, “We’re going to raise rates.” The dollar gets stronger, the economy slows down, the stock market goes down, and the Fed gets spooked. Then, they start talking dovish as they did at the September 17, 2015, meeting when the FOMC decided not to raise rates. At the time, a lot of people in the market thought they would, but they had a dovish press conference, a dovish statement, and a couple of weeks later when the minutes were released, the minutes were super dovish. At that point, two of the Fed governors, Lael Brainard and Dan Tarullo, came out with super-duper dovish speeches. Lael Brainard just got right in Janet Yellen’s face on the nonsense of NAIRU, the Phillips curve, and a lot of other technical things that economists love to debate among themselves.

The point is we went through this whole period from September 17th to October 8th when it was nothing but sweetness and light dovish comments from the Fed. What happened? The stock market went up, because all of a sudden they said, “Well, they’re not going to raise rates, after all. They’re talking like doves. They’re talking 2016 and maybe indefinitely, so more cheap money is on the way.” Stocks went up and markets settled down.

What happened next? The Fed looked around and said, “It looks like the crisis is over.” When I say the crisis, I’m going back to August when China devalued their currency, the yuan, against the dollar on August 10th. That set off a whole chain reaction. Of course, the Shanghai stock market had been melting down since earlier in the summer. That caused a draw down in U.S. stocks, a 15% decline in a matter of weeks that reached an almost borderline panic stage at the end of August.

One reason the Fed didn’t raise rates in September was because the markets were melting down at the end of August. That’s when they got dovish and the markets went up. When the markets went up, the Fed said, “Aha, all clear. Now we can be hawkish again.”

That’s the other feedback loop where the Fed talks dovish, markets rally, the Fed takes that as a positive sign, they talk hawkish, the markets tank again, and the Fed doesn’t raise. Every time it looks like the coast is clear for a rate increase, the markets and the dollar react to the rate increase in ways that prevent the increase from ever happening.

The very simple equation for this is S2 = S1 (1-S1)r. You can plug in a couple of variables for S1 and r and crank up the math to get a number, then put S2 in the place of S1 and solve for S3, and run it again. Do that enough times, and guess what? It goes to zero and stays there forever and ever. So, I think the Fed has got itself into a feedback loop – probably several feedback loops – all of which point to zero rate.

From where we stand right now, I don’t see them raising rates in December. I mean, they don’t listen to me. I’m glad our broadcast participants and some people do, but there’s no reason to think the Fed does. They might blunder since they’ve blundered all along and raised rates anyway. In which case, look for a very serious meltdown towards the end of the year.

There’s one more thing that hasn’t been written about very much, and it’s another reason for not raising rates in the middle of December. The market makers in U.S. Treasury Securities are the so-called primary dealers. In December, primary dealers have to do a lot of what is called window dressing, i.e., reducing their balance sheets and cleaning up the books for year end. That’s when they have to do their quarterly and annual reports and tell investors and the SEC what they’re doing, etc.

That window dressing means reducing leverage which reduces liquidity. This goes back to the famous Lehman 105 Repo that almost brought down the world in 2008. Liquidity and the government bond market is a lot worse than people think, so the dealers are privately telling the Fed, “Don’t do this at year end. If you want to raise rates, do it in January.” It might also be a stupid idea in January, but it’s a lot better to do it in January than December, because the risk of tipping over the markets and causing turmoil, independent of expectations and the recession, just because you’re going to mess up the dealers, is very high. December is the worst possible time to raise rates. You would never want to do it year end, because there’s so much else going on in the market.

Those are my reasons for thinking they won’t raise rates. If I’m wrong and they do it anyway, it wouldn’t be a shock, because they’ve messed up enough things. Then look for a market meltdown towards year end.

Jon:     Let’s return to another favorite topic of ours: the currency wars. We’ve just had an announcement by China of direct conversion between the yuan and the Swiss franc. To my mind, this could look like a hostile move against the dollar. But doesn’t China want to play nice right now, as they’re close to getting a seat at the IMF table by having the yuan incorporated in the SDR, the IMF’s own currency? What is China’s game here?

Jim:     There’s a short answer and a long answer. I’m always good for the long answer, but I’ll give you the short answer. Playing nice with the IMF is not the same as playing nice with the dollar.

Remember, the IMF doesn’t print dollars; they print SDRs. China’s game is about playing nice with the IMF and about getting included in the SDR, which is on track to happen. But that doesn’t mean it’s not bad news for the dollar. I keep talking about that when I talk about the death of money or the death of the dollar or collapse of confidence in the dollar. This is not something that happens overnight, but it could happen even more quickly than I expect.

It’s also something that could play out in small stages over years. In some ways, that’s even more dangerous for your portfolio because people don’t notice. Some people are prepared for the big catastrophe, but most people probably are not. When it starts to happen, at least the more nimble investors will get out of the way of a moving train and just jump off the tracks. With a slow motion decline or collapse, even savvy investors sometimes don’t notice until it’s too late. That’s kind of how I see the SDR thing playing out.

Let’s talk about China, the IMF, and the SDR for a minute, and then I’ll come back to how that impacts the dollar. SDR stands for Special Drawing Right. That’s a geeky opaque name for world money. The IMF prints this world money although they don’t call it world money because it would probably scare people. They call it Special Drawing Rights or SDR so people don’t really understand what it is. It’s just another kind of fiat money. The Fed prints dollars, the European Central Bank prints euros, and the IMF prints SDRs.

The only difference is that we don’t get SDRs in our pocket. SDRs are not what I call walking around money. It’s world money used by countries to settle up their debts with each other and settle up balance of payments. You can use it for other things, e.g., there’s no reason why the price of oil couldn’t be denominated in SDRs. In fact, I expect it will be sooner than later.

The value of an SDR is computed by reference to four hard currencies. This is confusing because a lot of people call it the basket of currencies. The four currencies in the so-called basket are U.S. dollars, euros, pound sterling, and Japanese yen.

Many people think the SDR is somehow backed by the basket, like there’s a big pile of hard currency sitting in a vault somewhere backing up the SDR. That’s not true. The SDR is not backed by anything, any more than the dollar is backed by anything. The dollar is just printed by the Federal Reserve and you take it on faith.

You have to decide what an SDR is worth. If you want to buy an SDR, how many dollars or euros do you have to pay? That’s where the formula or basket comes in. It’s a three-step formula that’s not too complicated. Take the four currencies and weight them. In round numbers, it’s about 41% for the dollar, 37% for the euro, and approximately 10% each for the yen and sterling. It has to add up to 100. That’s your initial weighting.

Convert it into a slice of each currency that would add up to one, based on current exchange rates. Then convert those to dollars, also based on current exchange rates, add them up, and that’s how many dollars an SDR is worth. An SDR is worth about $1.40 right now, but it fluctuates and was worth about $1.50 not long ago. The fact that the SDR is down in dollar terms is actually a symptom of a strong dollar. It’s the same reason gold, oil, the euro, Australian dollars, Canadian dollars, Chinese yuan, copper, and everything else you can think of is down – because the dollar is up. The dollar price of anything is simply the inverse of the strength of the dollar. The dollar price of the SDR goes up and down, but it’s still a fiat currency they print and hand out.

The big play now is that China wants to join that club. One way I describe it is as joining a very exclusive club. There are only four members of the club right now, so China is kind of knocking on the door trying to get into the club. They’re going to be allowed in as we will see played out over the next year. The executive committee of the IMF will announce this green light sometime in a matter of days. The official announcement of the executive committee is merely saying, “Yes, we’re okay with it, so go ahead and make it happen.” They’ll say that to the staff, then the actual official announcement will come around the end of March 2016 with the effective date of September 30, 2016.

This is really a slow rollout, partly to give large institutional investors time to adjust their portfolios. A lot of investors weight their portfolios using the same weights as the SDR. If you suddenly introduced the Chinese yuan in the basket and it always has to add up to 100%, that means you would have to reduce the other ones, so who would take the haircut? That remains to play out. It does mean the big institutions are going to sell assets in certain currencies and buy assets in yuan in order to rebalance their portfolios to match the SDR. That’s actually a trading opportunity if you want to figure that out and get ahead of it a little bit.

This is what we mean by China being on its best behavior. Best behavior as the IMF defines it means an open capital account and a “freely usable currency” able to be used in trade and selling balance of payments. Countries need to be able to get it to buy reserves or, if they have it because their country is running surplus with China, they want to be able to swap it into Swiss francs, or dollars, or anything else. This announcement— conversion of yuan to Swiss francs — is a big one and it’s important. They’ve been setting up bilateral currency swap arrangements with Brazil and a lot of other countries for a couple of years now, all with a view to opening their capital account.

Is this good news for the dollar? Absolutely not. The dollar is pushed aside as the leading reserve currency and the leading trade currency. I would make the point that there’s a distinction between a trade currency and a reserve currency. Trade currency is what you use to buy and sell stuff. It’s fairly obvious. A reserve currency is where you park your savings.

If you’re a country and you run a surplus or you earned currencies –a surplus from your trading activities – what do you invest in? What stocks and bonds do you buy and what currencies? Do you want to buy Greek sovereign debt? Maybe that’s not such a good idea. Do you want to buy U.S. treasuries? Yes, that’s the number one choice in the world. That’s the reserve currency status. They’re related, because the more liquid you are in trade, the more likely you’ll have a bond market that people can invest in. All that liquidity connects.

Right now, the usage of the yuan in trade is much greater than its usage as a reserve currency. They still have a ways to go because they don’t really have a big bond market, but they’re working on one in London. Xi Jinping, the president of China, was just in London and got a euphoric reception.

According to diplomatic chatter, he felt completely ignored and insulted in New York in mid-September. It was his first state dinner in Washington at the White House, and he felt that the Obama administration kind of dissed him. My advice to Xi Jinping is don’t come to New York the same week as the Pope! The Pope got a much bigger audience than the president of China. That was bad protocol by his guys. Be that as it may, Xi Jinping went to London and was treated like a rock star.

Now we’re seeing London move away from the U.S. a bit and say, “Look, London’s been the financial center of the world for 250 years.” They want to keep a good thing going, so if China’s the financial power and buying gold and going to have the new reserve currency, then why not cozy up to the Chinese?

Just to wrap up the segment, I would say that China is doing everything right and is being green-lighted by the IMF. It’s working not just with Switzerland but London and other financial centers around the world to increase the liquidity and credibility of the yuan. None of this is good for the dollar, because as the dollar is diminished, the margin is less and less confidence. This brings us closer to the day when people lose confidence in the dollar completely.

Jon:    Let’s shift now from China to India. The prime minister of India, Narendra Modi, has just announced a gold deposit plan designed to pull gold into the mainstream financial system by allowing banks to pay interest on deposits of physical gold. What’s your take on this, Jim? Is it a local curiosity, or could India’s initiative have an impact on the global market for gold?

Jim:     This is my favorite story of the week, month, and year. I love this story because it is such an outrageous, bodacious, transparent fraud for the prime minister and finance minister of a sovereign government to try to pull. Let me explain why.

I do have complete confidence in the Indian people that they’re not going to fall for it. I would say any citizenry, any people, who are smart enough to buy 20,000 tons of gold in the first place are not going to be dumb enough to hand it over to the government. I think this will fail, but I think it’s very revealing as to why they’re even trying it. Let’s take a step back and talk in a little more detail about this, then I’ll give my analysis.

This is proposed legislation. It’s important to understand that in a parliamentary system, if a prime minister with majority control wants something, they usually get it. It’s not like the United States where the president can go to Congress, Congress will say, “Shove off. We’re not voting for that,” or Congress can vote for something, and the president says, “The heck with you. I’m going to veto it.” The U.S. has a completely dysfunctional relationship between the legislature and the executive where they’re barely talking to each other. That’s not true in parliamentary systems, so if the prime minister and the finance minister are in favor of this – which they are and have said so publicly – I think there’s a good chance this will actually become law.

I’ve had this debate for years, because I tend to look at official gold. When I say official gold, I mean the amount held by a central bank, a sovereign wealth fund, a finance ministry or whatever is under government control. That’s a much smaller amount than all the gold in the world. These are estimates, of course, but it’s estimated that all of the above-ground gold in the world (not mining reserves or things like that, but actual gold that’s either in bullion or jewelry or some industrial application) is about 180,000 tons. That is not a lot. I think many listeners know it would fill up one Olympic-size swimming pool but not much more than that. That’s all the gold in the history of the world, so it’s actually extremely scarce. The official gold is approximately 35,000 tons, a small fraction of only about 20% or less of the total gold. That’s where things stand.

I say India has only about 500 tons of official gold, which is not very much for the size of their economy. The U.S. has a lot more relative to its GDP. The economic entity that has the largest amount of gold relative to the size of its economy is actually Europe where the member states have about 4% of GDP in gold. The number for the U.S. is about 2.7% and the same for Russia. China is less officially, but unofficially it’s closer to 2.7%. India is a lot smaller than that. Their number is probably pretty good, so let’s say it’s 20,000 tons.

The plan that the government is working through the banking system is going to create a new deposit instrument. If that happens, Ms. Indian Bride or Ms. Indian Widow will take their gold to the bank, hand it in, and in exchange receive a certificate that pays interest. This is always the wrap on gold: it doesn’t have any yield. Well, I would say gold is not supposed to have yield, because it’s money. Money doesn’t have yield. If you want yield, you have to take risk, including a bank deposit. Nevertheless, the myth prevails that not having yield is an issue. So, give us your gold and we’ll give you a certificate that pays interest, but if you ever want your gold back, come again and you can cash it in. We’ll give you the gold back.

Beyond that, the banks are allowed to lease the gold. Now, think about this for a second. This is 20,000 tons of gold – two-thirds of all the official gold in the world. As I said, I don’t think the Indian people are going to fall for it. That 20,000 tons includes all the gold in all the Hindu and Sikh temples. I was in Malaysia recently and visited a Hindu temple where they had a 40-foot-high statue covered in gold, so there’s a lot of gold in temples. I don’t think they’re going to be melting down the temple gold anytime soon, but just the gold that people might have in jewelry, coins, and bullion stashed away somewhere. Even if that’s half of the total, it’s still 10,000 tons which is almost a third of all the official gold in the world.

People are supposed to hand in their gold and get a certificate, but no worries; you can always get your gold back. Then, the banks can lease it out. Now we’re into what’s called fractional reserve banking. This works exactly like unallocated gold from the London Bullion Market Association.

By the way, it’s the opposite with our host here, Physical Gold Fund. If you invest with them, they buy the gold. It’s your gold, it has a serial number, you have a manifest. If you want the gold, they’ll send you that exact gold. There’s no monkeying around with how much gold relative to how much investment they have. It’s one for one.

That’s not the case with banks. They’ll go ahead and lease out your gold and even ten times as much. They’ll only hold a small reserve relative to the amount of gold entrusted to them. That’s what fractional reserve banking is and has been the way banks work since the 14th century. It’s one of the most successful frauds in history and still going strong.

What’s the point of leasing gold to Indian jewelers? The reason they say they’re doing this is because India has massive trade deficits due to the people continuing to buy gold. Now, the jewelers are in India and the consumers are in India, but India doesn’t have any gold in the ground. They have 20,000 tons of gold that they’re wearing around their necks, but there’s no gold in the ground, so they have to import it, because all the people who have it won’t sell it. If you’re a bride and have a bunch of gold for your dowry, you can have that gold until the day you die, then bequeath it to your daughter or some family member for their dowry and hopefully accumulate it over time. So every time a new bride wants some gold and wants to get a dowry, they have to import it. The imports drive India into a trade deficit, which is what the finance ministry says they’re concerned about.

Think about the idea. You go to the people of India and say, “Give us your gold, and we’ll give you a piece of paper.” Then the bank says, “I’ll lend the gold to the jeweler, and the jeweler will make a nice necklace the bride can buy for her wedding day. We don’t have to import the gold, so that will make our trade deficit go away.” That’s what they say is going on.

They’re taking a necklace from one bride, leasing it out to somebody else, and making a necklace for another bride. Both brides think they have the gold, but there’s only one piece of gold. One may think she can go down to the bank and get the gold whenever she wants, and the other thinks she’s got the gold because it’s around her neck. So, you’ve got two people who think they have an ounce of gold, but there’s only one ounce of gold. Welcome to fractional reserve banking and unallocated gold. Welcome to the gold fraud and gold manipulation. This is how they do it.

The hope is that all those people with certificates don’t run down on the same day and ask for their gold. That’s a run on the bank and has been the problem with banking all along. It’s not just gold, because it can be paper money, bank deposits or anything else. If everybody shows up at the same time, they can’t get their money … unless with paper money since the Fed can print some. But you can’t print gold.

We’re going to a fractional reserve system for gold intermediated by the banking system. It’s a kind of fraud, because you’re going to have multiple people who think they own the same ounce of gold, but there’s only one ounce to back it up. Some of it exists in paper form and some exists in physical form. There’s a lot of mystical intermediation going on in between that no one quite understands.

That’s one thing that gives me pause, but there’s something even bigger here that I think is important. I obviously talk and write and speak about gold quite a bit, and I forecast much higher prices for gold, which I stand by because it’s eighth grade math. Just look at the amount of paper money, how much gold is there, divide one by the other, and hypothesize the loss of confidence in paper when you need gold to restore the confidence. What is the implied non-deflationary price? It’s somewhere between $10 and $40,000 an ounce and going up all the time because they keep printing money all the time. That’s kind of easy to analyze.

But then people say, “When’s that going to happen? How come it hasn’t happened yet?” The answer is that there’s enough gold around to maintain the price suppression, which is done through leasing, through the futures market, through unallocated gold forwards, and through fractional reserve banking as I just described. There’s some evidence it is done through counterfeiting, frankly.

Meanwhile, in the real physical gold world away from the world of paper gold, we know what’s going on. China has been buying thousands of tons (probably three or four thousand tons or more) and Russia has bought over a thousand tons in the last six years. Smaller players from Vietnam, the Philippines, Mexico, Malaysia, Turkey, and Iran are all buying gold, so physical gold is disappearing. I’ve said all along that I thought it would break down but not because the COMEX traders stood for delivery. Why would they do that? They make money on the roll, so they’re going to keep rolling over the contracts. Why do they want to mess it up? The bullion banks aren’t going to mess it up, because they make a lot of money doing this. The players have no interest in shutting down the system, because they’re making money doing what they’re doing. And Americans don’t understand gold or have gold, and the government doesn’t talk about it. So you put all that together, and it’s hard to see what’s going to cause this inverted pyramid to tip over.

One thing I think could start the buying panic and super spike in the price is a failure to deliver. Some place, somewhere, sometime in the system, we could have something that looks a little bit like MF Global or Refco or one of these big brokers going out of business. They would owe a lot of people a lot of gold that has been demanded, and they won’t be able to deliver. Those people wouldn’t get their gold but might get a check or a bankruptcy claim and have to show up in court and produce their claim. The bottom line is they’re not going to get their physical gold. When that becomes widely publicized, everyone else in the world will say, “Wait a second, what happened to the gold?” as they all run down and demand it causing the whole system to implode. That’s kind of how I see that playing out.

That won’t happen as long as there’s enough gold to go around and keep the game going, but what if there isn’t? India is a major country with a billion people. It’s not an unsophisticated jurisdiction. The head of the Central Bank is an MIT PhD crony along with Yellen and the rest of them. He’s a very well-regarded PhD economist who’s in this club of global financial elites that know what they’re doing over there, so when I see them making a blatant grab for even 10,000 tons of gold, it tells me they’re getting desperate and that the physical gold is disappearing.

You asked in your question, Jon, if this is a big deal. I don’t see it being successful because I think the Indian people are too smart for that, but if I’m wrong and they get suckered into handing over their gold, it’s a very big deal. All of a sudden there will be another 10,000 tons that can be levered ten to one, which is 100,000 tons that can be leased out in paper transactions. So it could keep the game going.

I still like gold for a lot of reasons. I like it for insurance reasons and think it’s a good store of wealth. I can make that case at length, but if this actually works, is it good for the price of gold? The answer is No, because it’s going to give the power elites in central banks and the sovereigns more physical gold to play with to fend off the day when somebody drops the ball and you can’t find the physical gold.

Having said that, I smile a little bit, because I really do think the Indian people are too smart for this scam.

Jon:     Thanks, Jim. And now Alex Stanczyk is here with questions from our listeners.

Alex:   Thanks, Jon. Jim, about your comments regarding India, when this all began or when they started talking about it a couple of years ago, I was thinking the exact same thing. I realized that if they actually were able to monetize some of this Indian gold, it would give them a huge amount of leverage in order to deploy that into the market through leasing just as you mentioned.

It occurred to me at the time that if they were able to figure that out, it could be a huge problem. After thinking about that further, I realized that the Indians are buying gold for religious and traditional purposes, but one of the other reasons they buy and hold gold is to store value, because they don’t really trust the banks or the government. I don’t know if they’ve thought that all the way through, but it’s a really interesting story.

Jim:     Yes, I think you’re exactly right, Alex. I’m all for religion and tradition, but I think Indians buy gold because it’s a store of wealth that can’t be inflated, can’t be hacked, and can’t be made to go away other than through outright confiscation. This is confiscation with a smiley face.

Another point is, once the bank got the gold and you showed up in a panic with your little certificate in hand and said, “Give me my gold, please,” they’ll just shut the bank. They’ll say, “Oh sorry, we changed the rules. Force majeure … you can’t have your gold.” So these people will never see their gold again, but I do think they understand that.

Also, I mentioned if the central authorities and global financial leads had another 10,000 tons of gold to play with, could they keep the game going? Could they keep the manipulation going? Yes, it would give them some fresh ammunition to keep the manipulation going.

I want to make another point, which is that when confidence breaks, no amount of reserves are enough. Look at China’s reserves being drawn down. There’s a run on the bank going on in China. They had the famous $4 trillion equivalent in reserves and lost $500 billion in about six months. Those reserves are running out the door. China is desperate to prop up the yuan, because everybody wants to sell yuan and buy dollars or Canadian or Australian dollars, get a condo in Melbourne, Sydney, Vancouver, Samoa, Rome, London, New York, or San Francisco – you name it.

The rich and elite in China are getting their money out as fast as they can. Four trillion dollars sounds like a lot of money until everybody wants their money back, and then you find out it’s never enough. Even with more gold to play with, when the gold-buying panic hits and the super-spike come, it’ll fall apart quickly, and no amount of gold will be enough to save you.

Alex:    That’s very interesting, and I happen to agree. As a side note, the COMEX futures, etc. basically have exactly what you said already in their rules. When people come and ask for delivery, they can simply say, “So sorry, we’re not going to do that.”

Jim:     Everyone accuses them of changing the rules, but I remind people that I’m actually enough of a geek that I read all these rule books. They have a rule that says they can change the rules, so they could say, “We’re not really changing the rules, because we have this rule over here that says we can change the rules.” Don’t ever rely on the futures exchange promises.

Alex:   If it were Monopoly, who would even play, right? To go now to some of the questions, as usual, we have a ton of questions in the queue. We’re going to try to answer as many as possible, but we will not be able to answer all of them.

I’ll get started with the first one that I’m going to paraphrase. It’s coming from LS, and his question is: “If there is a global financial crisis, how will clearinghouses be affected? In addition to that, will we be able to get our funds back if these brokerage houses have problems or issues?”

Jim:     The answer is No. Consider the last two extreme financial crises – and I’m not talking about market drawdowns or various panics of the past that have happened throughout history. I’m speaking specifically about 1998 and 2008.

I had a front row seat in 1998 and negotiated that bailout for Long-Term Capital Management sponsored by the Federal Reserve. As for 2008, it’s painfully fresh in the recollections for most of our listeners. They know what happened there. In each case, markets were close to shutting down. In the case of 1998, they were hours away from shutting down completely all over the world. In 2008, they were probably a couple of days away. Nobody wanted to get that close, because there was even more at stake, but these panics and the liquidity crises were so severe that they used extraordinary efforts – bailout efforts. In ’98, Wall Street bailed out a hedge fund; in 2008, the central banks bailed out Wall Street.

Coming ahead to the next financial panic, say ten years or 2018 if not sooner, the problem keeps getting bigger. In other words, ’98 was severe enough to threaten a shutdown of every market in the world, and that’s not an exaggeration. Greenspan and Rubin testified to that and I saw it firsthand. 2008 was even bigger than 1998. Wall Street couldn’t do the bailout so the central banks had to bail out Wall Street. The next time, it’s going to be bigger than the central banks, because the central banks have bloated their balance sheets and used up all their dry power.

The $4 trillion that the Fed printed to bail out the system the last time is still on the balance sheet. They haven’t done anything to reduce the balance sheet or normalize anything. The same is true in even more extreme form for the People’s Bank of China, the ECB, the Bank of England, and the Bank of Japan.

They’ve all exploded their balance sheets exponentially, so they’ve got very limited capacity to do it again. Then who’s going to bail out the central banks? The answer is the IMF. One way to do it is with SDRs, but the other way to do it – and actually, I think both of these things will happen – is to just shut down the banks.

Here’s the best description of a financial panic I’ve ever heard: Everybody in the world wants their money back. When times are good and you have the appearance of liquidity, people think of everything as money. If they have money market funds, it’s, “Oh, I can call my broker today and the money will be in my account tomorrow.” Well, if they shut down the market tonight, you’re not going to have the money in your account tomorrow.

In other words, it’s only money if it’s physical gold, if you have cash, or if you have access to an ATM or something. I’m not saying you should have 100% of your wealth in physical gold; I recommend 10%. Just understand that anything that’s not gold or cash is not money. You have some kind of counterparty risk, i.e., some kind of potential to be told, “Sorry, I’m not going to give it to you right now.” And that’s what’s going to happen.

I would expect that banks and brokerage firms would be shut down, ATMs would be reprogramed to dispense $300 a day for gas and groceries, and the government would say, “Why do you need more than $300 a day? That’s enough to eat and put gas in your car and get to work. We’ll get back to you about the rest of your money, but you don’t need it right now and we’re not going to let you have it.”

That’s not a reason to sell everything, pull all your money out of the bank, and stick it under a mattress, but it is a reason to have some of your net worth in physical gold or silver or cash, although it’s really hard to get cash because of the war on cash. People ask me how the war on cash is going. I say it’s over. The government won. Be that as it may, you do want 10% in physical gold in readily accessible form outside of the banking system, because when the crisis comes, they’re going to shut down the banks.

Alex:    To take that thought a little bit further regarding liquidity, the IMF says that the gold bullion component of monetary gold is the only case of a financial asset with no counterparty liability. I take that to mean even they consider cash, or the money of sovereigns, to be not quite in the same category.

Jim:      That’s right. Pull a dollar bill or a ten dollar bill out of your wallet and read it. A piece of paper money and everything in the bank is just a digital representation of the piece of paper. Where I went to law school, they always said to read the contract. A dollar bill is a contract between you and the central bank, so read the contract. It says Federal Reserve. Again, where I went to law school, a note was a liability. If you look at the balance sheet of the Fed, that’s where you find it. The money is on the liability side of the balance sheet of the Federal Reserve.

I think of what most people call money – paper money, dollar bill, or even if it’s in the bank in digital form – as a perpetual non-interest bearing liability of an insolvent bank.

Alex:    We have time for one last question here. There have been a number of people asking about negative interest rate policy. I know you’ve commented on this, but as a tangent, this question is from Dean M. He’s saying that, Jim, you talk about possible QE4 in March of 2016, but you have also mentioned negative interest rates. I think he wants to know which is more likely, and why?

Jim:      What I’ve said is March 2016 is my estimate of when the Fed will have to ease. Of course, the whole world is expecting them to tighten in December, but my view is they’ve been tightening for two-and-a-half years, and now we’re getting close to recession, so they’re going to have to ease.

There are five ways for the Fed to ease. One of them is negative interest rates, which makes you want to take your money out of the bank and go spend it because if you leave it in the bank, they’re going to take some of it. The second way is a QE4. The third way is forward guidance. The fourth way is currency wars, which is when you cheapen the dollar. The fifth way to do it is helicopter money, which is a combination of physical and monetary policy, or “QE for the people” as Jeremey Corbin calls it in the UK. With negative interest rates, QE4, forward guidance, currency wars, and helicopter money, the Fed is not out of bullets. They have five ways to ease monetary policy even when interest rates are zero.

I expect forward guidance. The listener said I’d been predicting QE4, but I actually have been predicting ease. I think the way they’ll do it is by reinstating forward guidance, because forward guidance is the easiest one to do. That just means sticking a word in the statement like “patient” like they did the last time. Now they’ll come up with a synonym for patient. Look it up in the Thesaurus: forbearance, or super-patient, or something.

That’s a message to the markets saying, “Not only are we not raising rates at this meeting, we’re not going to raise rates for at least six months, maybe longer, so knock yourselves out.” Put on the carry trade, risk on, invest in emerging markets, buy stocks, get margin loans, or whatever. All this stuff people have been doing to prop up the markets for the last seven or eight years will be risk on again.

The risk of borrowing short and lending long is this: I borrow overnight, convert my dollars to some emerging market’s currency, buy some stock market that’s going up a lot, leverage the trade, make 50% returns on equity, and I tell everyone I’m a genius when in fact, all I’m doing is making an incredibly risky leverage bet in cross-currencies.

The risk of the trade is that short-term rates go up. My cost to carry goes up, and I’ve got to unwind the trade, sell it, and pay back the dollars, because I’m short dollars in that situation. If the Fed says, “We just took that risk off the table, we’ve got your back, go knock yourself out, because when we use forward guidance, we’re telling you we’re not going to raise rates, so you can do this trade safely, at least until we say otherwise,” then that’ll get the game going again. So that’s actually what I expect. It’s funny that you can tighten and ease just by sticking a word in a statement, but that’s how messed up things are.

I don’t expect QE4. The academic research is starting to come in on QE1, QE2, and QE3, and I actually agree. Most people think QE1 served a purpose that was a necessary response to a liquidity crisis in 2008, and that’s what central banks are supposed to do. But QE2 and QE3 was pure experimentation by a mad scientist named Ben Bernanke. Now that the academics are looking at it, they’re starting to conclude that it didn’t really do any good, except it blew up the Fed’s balance sheet, created asset bubbles that are going to burst, and cause the next financial panic. QE is kind of getting a bad rap, so I doubt they’ll go to QE4. I don’t think they’ll use negative interest rates although they could. They are using negative interest rates in Europe and Switzerland right now and I think soon in a few other places, but I don’t think you’ll see negative interest rates in the US. The reason is that the US has a huge, huge money market industry, which is not true of the rest of the world. Money markets are a uniquely US phenomenon, and money market funds can’t run on negative interest rates. They need some positive carries so they can charge fees.

Remember, they have to take a little spread just to keep the lights on, pay the administrator, pay the lawyers, pay salaries, and protect their phony baloney jobs. They need some positive carry. Going to negative rates will completely destroy a trillion dollar industry, so they probably don’t want to do that.

I think currency wars is on the table. Helicopter money is when you spend more money, increase the deficit, the treasury covers the deficits by borrowing, and then the Fed buys the bonds by printing money. It’s a different form of QE, because you’re printing money but doing it specifically to monetize deficits, and it is spending that’s designed to ease monetary conditions and give the economy a lift.

The problem with that is it requires cooperation of the White House and Congress to enact whatever fiscal policy they want to do. As I mentioned earlier, the White House and Congress are barely on speaking terms, so politically that’s a tough one, especially in an election year. Negative interest rates, QE4, and helicopter money are unlikely, although not impossible, but I think a cheaper dollar and forward guidance are the most likely, and I think we’ll see those probably by March or shortly thereafter.

Alex:    That wraps up our time, so Jim, I want to thank you. As usual, you’ve done a great job. We appreciate your time, and I will turn it back over to Jon.

Jon:     Thank you, Alex, and thank you, Jim Rickards. It’s always a pleasure and an education having you with us. Most of all, thank you to our listeners for spending time with us today. You can also follow Jim on Twitter at @jamesgrickards.

Good bye for now, and we look forward to joining you again soon.


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The Gold Chronicles: November 12, 2015 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles October 7th, 2015

October 7thth, 2015 Gold Chronicles topics:

*History of IMF, one of the big 3 Bretton Woods institutions
*The IMF has evolved into its most powerful role ever
*IMF is a functioning world Central Bank
*The Fed has in effect been operating in a 2 year tightening cycle
*China’s reserves are being consumed at a rate of $100B per month stabilizing the currency
*The Fed may easy by mid 2016. Available tools include: Forward guidance, Negative Interest Rates Policy (NIRP), Direct easing (Helicopter money), QE4
*Emerging markets debt crisis, $9.5 Trillion on emerging markets corporate debt denominated in USD
*IMF is warning about declining liquidity in the bond markets and is encouraging governments to take precautionary measures
*IMF: Bond market liquidity could dis-appear instantaneously
*Physical Gold in non-bank storage is one way to protect against what governments might do under conditions of seizing bond markets
*The IMF has a little less than 3000 tons of gold
*IMF gold assets are the third largest holding in the world according to the WGC
*19 Members of the Eurozone combined hold 19,000 tons
*IMF gold was contributed by members joining when it was originally formed
*IMF has not created SDR’s and purchased gold with it
*Gold price required to support world liquidity in this sense would have to be higher than $10,000 per troy oz
*What tools can investors use when it comes to gold in light of potential problems with liquidity

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The Gold Chronicles: October 7, 2015 Interview with Jim Rickards


The Gold Chronicles: 10-7-2015


Jon: I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.

Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management. He’s a consultant to the U.S. Intelligence Community and the Department of Defense and is also an Advisory Board member of Physical Gold Fund.

Hello, Jim, and welcome.

Jim: Hi, Jon. It’s great to be with you.

Jon: We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Hello, Alex.

Alex: Hi, Jon.

Jon: Jim, let’s start in Lima, Peru, where it is IMF Week. The IMF and the World Bank hold several days of meetings twice yearly. Would you begin by giving us a brief refresher on the IMF explaining what it is and why these meetings matter?

Jim: I’d love to. Just as an aside, I went down to Washington last Friday to work with some national security people and conduct financial war game scenarios. They’re not all quite as elaborate as the one I did in 2009, e.g., sometimes it’s just one day. Traveling to this one in Washington, Madame Lagarde, managing director and head of the IMF, happened to be on my flight. I was sitting right behind her on the plane but didn’t have the occasion to speak to her, because she had two bodyguards, a couple of assistants, and a small entourage. She’s as elegant in person as she is on TV or in pictures; quite tall and walks fast.

When we stood up in the plane, per normal airplane etiquette, we all got out in the aisle. Well, I got out between her and her bodyguard, and he was not pleased with me. He got into his protective mode and almost knocked me down, but I did at least have a fun encounter with the head of the IMF!

Now let’s do a little IMF history, and then we’ll bring it up to date in terms of what’s currently going on in Lima, Peru. Going back to the origins, the IMF is one of the big three Bretton Woods institutions. The Bretton Woods Conference was in July 1944 at the Mt. Washington Hotel in Bretton Woods, New Hampshire. I was up there a couple of years ago doing another financial war game with the Boeing Corporation, and they picked the Mt. Washington Hotel as their venue. It’s a beautiful spot that’s still a remote area today, as it certainly was in 1944.

The Bretton Woods conference was toward the end of World War II. At that point, the Allies could see victory although victory was not in hand. This was just literally weeks after D-Day when the Allies were pushing towards Paris. The war was not over, but they were looking through the end of the war, expecting victory at some point, and saying to themselves, “Victory on the battlefield is fine, but we’re going to have a world economy to run after that.” They could see that the inter-war problems between World War I and World War II – German reparations, the Great Depression, the original currency wars (as I call them), the beggar-thy-neighbor devaluations, and other financial developments – made Germany’s burden more difficult. It was never quite satisfactorily resolved and created resentment on the part of the Germans, and in different ways, led to World War II.

So they said, “Let’s not that repeat that mistake. Let’s have a better post-war system.” There were a lot of institutions (the United Nations was one of them), but on the financial side, Bretton Woods was the place that was really led by the United States. They created the architecture of the post-World War II world economy.

There were three big institutions that came out of the Bretton Woods Conference. One was the IMF (the International Monetary Fund), which is what we’re talking about today. Another was the World Bank. The third one was, at the time, the General Agreement on Tariffs and Trade, trying to tear down tariff walls and tariff barriers. That has now morphed into the World Trade Organization (WTO), but it’s still one of the three pillars of the post-war financial order.

Let’s talk specifically about the IMF. It was originally a swing lender, sort of a credit card for countries experiencing balance-of-payment difficulties. Remember, at the time, from 1944 to 1971, the world was on a gold standard. It had some problems, but it was a pretty solid gold standard. This meant that if you were running a trade deficit, your trading partners could take your money they had earned by trading with you and cash it in for gold.

Well, there wasn’t enough gold to go around, at least at $35 an ounce, and countries were running chronic deficits, which meant that they could ultimately lose their gold. As a swing lender, the IMF would then say, “We will lend you the money you need in U.S. dollars to satisfy your creditors for the time being,” because the dollar was as good as gold and was tied to gold, “But we expect you to make structural reforms. Do something to improve the situation. Lower your unit labor costs, improve productivity, impose taxes if you need to balance your budget. Do whatever you need to do.” So the IMF was there as a short-term lender in exchange for structural changes that would in theory solve the problem and get countries back to trade surplus.

The idea worked fairly well in the ‘50s and ‘60s, but then it all broke down in the late ‘60s mainly because the United States did not hold up its end of the deal. It’s one thing to help all these other countries that are trying to tie to the dollar, but the U.S. was not on a sound fiscal basis. We had twin deficits – a trade deficit, first of all, and Vietnam where we were running budget deficits to pay for the war.

I think most of our listeners know that the system broke down in 1971 when President Nixon ended the convertibility of dollars for gold. At the time, he said it was temporary. I’ve actually spoken to former chairman Paul Volcker about this, and he confirmed that. Volker said, “I’m not sure I would have gone along with it if I had known it was going to be permanent. We thought it was going to be a temporary suspension and that we could get back to a gold standard, maybe at a different dollar price.” I think that’s what they expected, but as it was, it turned out to be permanent.

That takes us up to 1971. From ’71 to ’80 it was a confused period where the world didn’t know if we’d be going back on a gold standard, off a gold standard, going to fixed exchange rates, floating exchange rates, and so on. It was a fairly tumultuous period of borderline hyperinflation.

The IMF at that point was a forum or place where major countries could get together to work out new rules of the game, and they eventually did. They said, “Now we’re going to have floating exchange rates. We’re going to go off the gold standard.” That’s when they officially demonetized gold. A lot of people say the gold standard ended in 1971 when President Nixon ended convertibility, but the gold standard didn’t officially end until 1975.

From 1980 to 2000 was a period when the IMF didn’t have a clear mission. The old mission of being a swing lender to deal with balance of payments was over, because you didn’t have to worry about balance of payments anymore in a world where there was no gold standard or fixed exchange rates. There wasn’t a lot for the IMF to do, but they did come up with a new role for themselves as a lender to emerging markets. This was the period of the Asian tigers and high growth in Taiwan, Singapore, Korea, and elsewhere. Those countries would occasionally get into difficulty, and the IMF would come along and help them out sort of like the fire department coming and putting out fires in emerging markets in the developing world.

That role blew up in 1997-1998 with the emerging markets crisis where I think most observers (most prominently Joe Stiglitz) said that the IMF role was badly flawed. They would come into a country that was running balance-of-payment stuff and budget deficits, lend money to deal with a deficit, but then they would say, “You need to raise taxes. You need to cut public payroll.” It was basically an austerity type of prescription, the same kind of thing that’s being complained about in Greece today.

A lot of people took the view that this made matters worse. At the time, the IMF was very opposed to exchange controls. They said, “No, you have to keep an open capital account, and you have to give money to the people who are owed money. But we’ll lend you the money to make these payments in exchange for all this austerity.”


The case could be made that austerity only made things worse and that maybe exchange controls were not a bad idea in certain cases. The prominent voice for that point of view was Prime Minister Mohamad Mahathir of Malaysia. He very famously got into a shouting match with the IMF and George Soros at the 1997 annual meeting in Hong Kong. We’re coming up to the Lima annual meeting right now, but they’ve done this every year for a long time. I was actually there in Hong Kong for that annual meeting in 1997 where this all came to a head.

That brings us up to 2000 at which time the original Bretton Woods mission of being a swing lender under the gold standard was gone, the fixed exchange rates were gone, the gold standard itself was gone, and the emerging markets fireman role, if you will, was discredited. So in the early 2000s, the IMF looked like an agency without a mission and with nothing to do. They did have experts who would write studies and do what they call Article IV Consultations. Article IV Consultations are when they come into your country, meet with your finance minister and various officials, and look at what you’re doing about your exchange rate. Then they would give you a report, but there really wasn’t a lot to do. It was a period of very solid growth in emerging markets. The developed economies weren’t growing quite as fast, but they were growing with no inflation to speak of. The world seemed like a pretty stable place financially. This was the period called the Great Moderation at the time, meaning moderation in deficits and moderation in inflation.

There was talk by 2005-2006 of possibly disbanding the IMF since it looked like they didn’t have anything to do. That all changed in 2007-2008 with the global financial crisis when the IMF took on a completely new role. You have to give the IMF credit for reinventing themselves. They’ve had at least four different personae, if you will, a few of which I’ve mentioned, but this new one was really to be a secretariat for the G20, a group of 20 nations.

Most important financial decisions in the international monetary system had been made prior to that by the G7. The G7 were the seven largest developed economies including the U.S., Canada, France, Germany, the U.K., Italy, and Japan. That had been the main forum, but by 2008 it was clear that because of globalization, the rise of China, and the BRICS, it could no longer be an exclusive rich countries’ club. They had to bring in developing economies including important ones obviously such as China. So that broader platform was the G20.

President Bush and President Sarkozy of France convened a G20 meeting in Washington in November, 2008. This was just weeks after Lehman, AIG, and the collapse of markets around the world. It was a pretty desperate time. The G20 started working on a plan which played out in subsequent meetings: London in April 2009 and Pittsburgh in September of 2009. There was a sequence of meetings where they worked out the currency wars – what became the weak dollar in 2011 and the strong dollar today.

The G20 was fine in terms of heads of state, but they had no permanent staff, no expertise, no research department, and no bureaucracy. It was just a bunch of leaders who got together, so they outsourced the hard work – monitoring and research – to the IMF. The IMF became, in effect, the bureaucracy bolted onto the G20. That’s a very powerful role, because the G20 were heads of state including President Bush, then President Obama, President Xi of China, and other heads of states. It was a very powerful organization and still is.

The IMF has evolved into probably its most powerful role ever considering that ten years ago people were seriously talking about disbanding it. Today it is the de facto central bank of the world. They have 3,000 tons of gold, they’re expanding their balance sheet by issuing liabilities and creating assets in the form of loans, and they have their own currency, the Special Drawing Rights (SDR). They can print as much SDR as they want and hand out, and I expect they will do so in the next crisis. So they are, for all intents and purposes, a functioning central bank of the world, and the bureaucracy, if you will, for the G20, which is the board of directors of the global economy. I don’t think any of that is an exaggeration. It’s really what they’ve become: a very powerful organization.

That brings us up to today with the IMF in Lima, Peru. They have two important meetings: an annual meeting in October and a spring meeting, usually in April. The spring meeting is always in Washington, and the annual meeting floats around. This year it happens to be in Lima, so a lot of your household names in addition to Madame Lagarde – finance ministers and some essential bankers – are all down there now with quite an ambitious agenda. We’ll be hearing a lot about it in the next two weeks.

Jon: Thanks for that recap. It’s really helpful not only to get the definition, but to get the historical context and bring it up to date. There’s been quite a lot of buzz about this year’s meeting, and the IMF has been pretty vocal. They’ve been putting out some strong alarm signals on several topics, and I’d like to take them one by one.

Let’s go first with the state of the world’s economy. Growth is below expectations, there’s particular anxiety about Chinese manufacturing, and U.S. job numbers, even with the rosiest spin, which we see plenty of, are disappointing. How seriously should we take this economic hand-wringing by the IMF?

Jim: We should take it very seriously because they have the expertise. They have a lot of smart people, PhDs, and quite a few graduates of my old school where I got my graduate training in international economics, The School of Advanced International Studies which is part of the Johns Hopkins University. The main campus of Johns Hopkins is in Baltimore, but what’s called SAIS (School of Advanced International Studies) is in Washington, D.C.


Think of it as an intellectual boot camp for the IMF where people from around the world, not just U.S. students, go. It’s a rather small group of about 300 students and tends to have some fairly elite experiences coming out of finance ministries and elsewhere around the world. They feed into the IMF.

I graduated from SAIS in 1974. A few years later, one of our prominent graduates named Tim Geithner came through. He went to work for the IMF and later became President of the Federal Reserve Bank of New York and Secretary of the Treasury. That’s an example of the kind of training you get there. So I do think what the IMF does is important and should be taken seriously. They have the expertise and the added role I described earlier. If anything, being at the beck and call of the G20 enhances their clout.

I’ve always said the IMF is what I call transparently non-transparent. Let me explain what I mean by that. When I say they act transparently, they put everything on their website. You can go to the IMF website and browse around a little bit to find the world economic outlook and global financial stability report. You’ll find a lot of these papers including the famous paper from 2011 that lays out a ten-year plan on how to evolve the Special Drawing Rights into a world currency.

There’s not much they do that you can’t find out about on the website, but good luck understanding it. It is written in very dense jargon, even more dense than the kind of jargon we’re used to seeing from the Fed. They use a lot of buzz words that, if you’re an expert in the international monetary system, will seem familiar to you, but if you’re just a smart, interested person who would like to learn more, it’s tough to get through. The stuff is there, so I give them credit for putting it out there, but as I said, good luck understanding it all.

That’s where the specialized training I and others have received is helpful. Sometimes I’m like a translator. I read these really technical reports and have some ability to put it into plain English for the audience, so I feel like a missionary going out, exploring the territory, and reporting back.

You mentioned some of the reports that came out this week. Let’s take them one at a time. The world economic outlook is the one that gets the most attention. It’s basically a forecast for the entire world. They go country by country, region and region, and for the whole world. In it they have been lowering their forecasts. Now I must add that the IMF has a pretty bad forecasting record. They have talented people, but they have the same problem as the Fed and others; they have consistently overestimated growth for the last seven years.

This is endemic. You see it everywhere from the Fed, from Wall Street, and from the IMF. They say 3%, but it turns out to be 2%. They lower their forecast to 2.5%, and it turns out to be 1.8%. There are reasons for this regular overestimate of growth. I don’t think it’s some deep, dark conspiracy where they’re trying to lie to people. I think they just have obsolete models. They’re using regressions that deal with over 30 business cycles and business expansions since the end of World War II. They take all that data, do the regressions and correlations, and say, “Based on where we are now, we ought to be growing at such-and-such a rate.” There are some other factors that go into the analysis, but the problem with that system of methodology is that it doesn’t apply because we are not in a cyclical recovery. We’re in a growth depression, really the first global depression since the 1930s. You can have a lot of data, but if you’re in a different world, a different situation, that data is not going to tell you very much. And that is the situation we’re in today. I use very different models such as complexity theory, inverse probability, some economic history and behavioral economics, and a lot of other things to get my forecast, but I can see where the IMF and the Fed go off-track.

On the one hand, their forecasting record is pretty poor and they’ve overestimated growth, so I see no reason why they’re not doing that again. On the other hand, they have lowered the growth estimates, almost as if they’re learning by doing. If you get hit in the head with a 2X4 enough times, you’ll learn to duck. I still think they’re overestimating global growth, but they did lower the global forecast to about 3.1% for 2016.

That’s not a lot when you consider economies in the emerging markets like Brazil, Russia, China, India, and other important economies not quite as large like Turkey and Malaysia. When you consider that their potential growth can be 5% to 7% and the world is only growing at 3.1%, that’s a pretty sad story.

The U.S. does not have potential for 7% growth. Maybe that’s possible in the very short run, but it’s unlikely. The central tendency for U.S. long-term growth is higher than we’ve been doing. I think it is 3.5%, but we’ve been doing around 2% since the end of 2008. For global growth to come in at 3.1% is pathetic given the high potential growth in a lot of the important economies around the world. That tells you how weak things are.

Based on what I just said about their forecasting methodology, it could be worse than that. Imagine global growth coming in around 2% or 2.5%. This means that the big emerging economies probably come down to 4%, and the developed economies are getting closer to 0%. That is what that implies, so I think this is a pretty sobering and dour forecast.

To give the IMF credit, they’re not sugarcoating it. They’re warning the world that the slowdown is taking place. This brings us around to the Fed, because when you ask, “Why is this slowdown taking place if there’s all this potential growth out there and you have a lot of under-utilized factors of production, whether it’s labor or capital investment, infrastructure improvement, or structural changes? If there are a lot of things you can do to get growth, why are we not getting it? What’s the problem?” I would trace a lot of the problem back to the Federal Reserve.

You do have a circular flow of cause and effect. On September 17th, when the Fed decided to not raise their target for Fed funds (not to raise interest rates, in other words), it surprised a lot of people. It didn’t surprise us or the listeners of this podcast because we had said all along that they would not raise rates, but it surprised a lot of people on Wall Street. Janet Yellen gave us a reason, and that was the slowdown of global growth, exactly the kind of thing IMF is talking about.

That has now in effect come back to the United States in the form of reduced exports, i.e., the strong dollar slowing U.S. exports and importing deflation from around the world in the form of lower import prices. When the Fed said they wanted inflation, they threatened to raise rates, which strengthened the dollar, which caused deflation. So the Fed’s own policy is pushing in the opposite direction of the Fed’s stated goal. We said months ago that this makes no sense and would have to be resolved, probably to the detriment of the Fed. It turned out that they were unable to raise interest rates.

Janet Yellen blamed it on global growth and mentioned China specifically. That’s fine, but one of the reasons China was slowing down was because they had pegged their currency to the U.S. dollar, and the Fed has been tightening for two-and-a-half years. When I say that, people look at me like I have two heads. “What do you mean the Fed has been tightening? The interest rate has been 0% since 2008. We’ve never seen so much money around. They printed four trillion dollars. How on earth could they be tightening?”

The answer is they have been tightening since May 2013 when Ben Bernanke started the taper talk. He didn’t actually taper in May of 2013 but said they were thinking about it. ‘Tapering’ means reducing money printing. Under QE3, the Fed had been buying about $85 billion a month of Treasury Securities, which meant they were printing $85 billion a month to buy the securities. He said, “We’re tapering that. Instead of $85 billion, we’ll lower it to 70, then 60, then 50,” and so forth until they got to 0. A lot of people say that’s not tightening because you’re still printing money. It’s true you’re printing money, but you’re printing less than you did the month before.

Things don’t happen in black and white in markets; everything happens at the margins. Small moves change expectations and affect various kinds of behaviors, so just talking about tapering caused the “taper tantrum,” or the emerging markets crisis. Capital started to flow out of emerging markets, emerging markets’ currencies collapsed, the stock market collapsed, and money started coming back into the U.S.

They actually started tapering in December 2013 after talking about it for seven months. Then in November 2014, they finished the tapers and weren’t printing any money, but they still had forward guidance in those statements saying, “We in fact promise not to raise rates.” In March 2015, Janet Yellen removed forward guidance by taking the famous word “patient” out of the statement. So the Fed was no longer promising not to raise rates but was in effect saying, “We’re getting ready to raise rates. Anyone in a carry trade, shorting dollars, or borrowing dollars to invest in emerging markets assets better watch out, because we’re going to raise rates and pull the rug out from under you on that trade.”

People heard her. They started covering their short dollar positions, the dollar got stronger, and there were huge capital outflows from emerging markets. Even without changing rates, they were talking and acting their way through a tightening cycle for two-and-a-half years.

Back to China, they pegged to the dollar and the Fed was tightening. To maintain the peg, they also had to tighten. To do this they had to buy their own currency. If the market wants to take the yuan down and lower the exchange value of the Chinese yuan, and they want to keep it up at a higher level, they have to go buy it to maintain the peg. What were they using to buy it? They were using dollars. They were selling Treasuries, taking the dollar, and buying their own currency from their exporters or anyone who had it. That was causing huge capital outflows from China which caused the dollar to get stronger and the yuan to be too strong.

The Chinese government was propping up the yuan. At the same time, they were trying to ease because their economy was slowing down, so they were lowering interest rates to ease. We had this crazy situation where they were easing and tightening at the same time using two different policy tools. They were using interest rates to ease and they were using exchange rates to tighten. What kind of policy eases and tightens at the same time? That makes no sense. China eventually threw in the towel on the peg and famously broke the peg in August this year, letting the yuan devalue. That started the U.S. stock market collapse.

My point is this is all connected. The Fed blundered by tightening, because the U.S. economy was not strong enough to bear a strong dollar caused by the tightening. The time to tighten was 2010, yet they missed the whole cycle. They should have tightened in 2010/2011 when we had the cheap dollar, which gave the economy a tail wind. They blew it, but two wrongs don’t make a right. Just because you should have tightened in 2010 and failed to doesn’t mean you should tighten today when the economy is getting weaker and the U.S. is probably heading into a recession.

The Fed was not tightening only for the U.S. They took the U.S. economy and the Chinese economy down causing the Chinese to break the peg. Now here we are. The Fed is stuck with a strong dollar and deflationary tendencies. They have no way out.


This whole thing is a mess, and it’s working through the interest rates and exchange rate mechanism. That’s what the IMF was warning about. About a week prior to the September 17th meeting in Turkey at the end of the G20 financial summit, Christine Lagarde issued a statement – a warning – that was as blunt as anything I’ve ever heard. There was no polite language around it. She just said to Janet Yellen, “Do not raise rates.” If you recall, the BIS, the G20, the World Bank, Larry Summers, and IMF – everybody was saying the same thing to Yellen: “Do not raise rates.”

She listened and to her credit, she didn’t, but that dialogue is going to keep happening. Now the IMF was out again this morning with a world economic outlook saying, in effect, “Don’t raise rates. The world is too precarious. Growth is too slow.” So that’s one of the big statements they’ve issued. We could talk about some other ones as well.

Jon: Let’s do that. You mentioned the emerging markets a couple times in your answer. In one of their anxiety bulletins, the IMF has also been talking about the threat of a potential debt crisis engulfing the emerging markets. As I read it, the concern seems to be primarily with corporate debt. How real is that threat in your view? And if defaults happen on a large scale, will the impact be limited to the emerging markets themselves?

Jim: Those are great questions, Jon. First of all, the threat is very real. Let’s put some numbers on it. The whole idea that the world was over-leveraged, there was too much debt in 2008, we had a financial crisis that destroyed tens of trillions of dollars of wealth, but we learned our lesson so we’re going to de-leverage – that is not true.

The world is more highly leveraged today than it was in 2008. There’s been over $60 trillion of new debt created since 2008, so the world is actually more leveraged and dangerous than it was then. That’s the starting place and is part of what the IMF is talking about. Specifically, there is $9 trillion of dollar-denominated emerging markets corporate debt.

Let me unpack it a little bit. That huge number of $9 trillion is slightly more than 10% of global GDP. This is emerging markets only, so we’re not talking about developed countries like Australia, Canada or Europe. These are just emerging markets, primarily the BRICS, with a lot of it in China. And it’s corporate debt, not sovereign debt. Sovereign debt can usually be finessed. If sovereigns get into trouble as we’ve seen in Greece, Ukraine, and a few other places, the IMF is equipped to bail them out. The IMF is not around to bail out corporations and cannot do so. What they could do is bail out countries, then the countries take the money and bail out their own corporations.

So we have $9 trillion of dollar-denominated corporate debt in emerging markets, and the dollar’s getting stronger. What does that mean? It means your debt burden is going up. If you’re a hotel operator or an airline or a manufacturer – any business in Brazil, India, Indonesia, Turkey or China, for that matter – why would you borrow dollars? You borrow dollars because the interest rate is cheap. You’re paying 1% – 3% in money and using it to expand local operations. If you make money by getting paid in yuan, Turkish lira, Indonesian rupiah, Brazilian reals or any of these foreign currencies, but you owe dollars to the bond market or J.P. Morgan or whoever and the dollar gets stronger, your debt burden just went up.

You’re caught between a rock and a hard place. You have a slowing economy, so your revenues in local currency are probably going down, but the value of your debt is going up because the dollar is getting stronger. That’s a recipe for default, and we’re beginning to see that.

Where do these emerging markets even get dollars to pay off the dollar debt? They have to go to their central banks. That means they have to cash in some of their reserves. We’re seeing huge reserve drawdowns in Russia, China, Malaysia, and all over the world. Not that long ago, China threw around the $4 trillion in reserves number. Guess what? That $4 trillion is now down to $3.5 trillion, and the money is coming out at a rate of over $100 billion a month. There are huge capital outflows coming out of China.

A lot of these reserves have been built up since 1998. The emerging markets were not hurt that badly in the global financial crisis in 2008. Yes, everyone suffered to some extent, but that was very much of a developed market crisis. It was a U.S./European crisis more so than the rest of the world. China got through it okay. Part of the reason was that a lot of these emerging markets had been the center of gravity in the 1998 crisis. They had learned their lesson, built up their reserves, were managing their economies better, etc., so they got through it in a lot better shape than the U.S. and some others.

Here we are almost ten years later, and they seem to have forgotten those lessons. Now their reserves are draining out very quickly, so there is a potential for crisis in emerging markets debt. It’s not just the IMF but also the BIS (Bank for International Settlements) in Basel, Switzerland, that have warned about it as well.

The second part of your question – if that crisis breaks out – I think is likely because growth is slowing down. We already talked about how growth is probably worse than the IMF forecasted. The Fed shows no signs of easing, at least so far. A lot of this could be alleviated if the Fed eases. I do think they will maybe at the end of the first quarter or beginning of the second quarter of next year.

People ask, “How can the Fed ease with interest rates at 0%?” They ease by words; by going back to forward guidance. They put some words in their statements telling the markets that they’re not going to raise rates anytime soon. Think of the phrases they’ve had: “extended period,” “a considerable time,” “patient.” These are all buzzwords the Fed has used to signal the markets that they’re not going to raise rates.

What’s the significance of these words? I talked to the person who writes these statements for the Fed. He said they just make it up, call Jon Hilsenrath at the Wall Street Journal and tell him what they think they mean, and then Hilsenrath reports it. He’s a good reporter, so I’m not criticizing him. He’s just doing his job, and it’s nice to have these kinds of sources. After he reports it, everybody says, “We get it.” So the process is sort of picking words out of a thesaurus, sticking them in a statement, calling the Wall Street Journal to tell everyone what it means, and everyone nodding and saying, “Okay, we get it.” That’s how we conduct monetary policy today.

Again, the Fed could go back to easing. That would make the dollar weaker, take some pressure off this emerging markets debt, and give the U.S. economy a break. But then, of course, you’re back to the currency wars just like in 2011 with the weaker dollar. All the countries that are complaining because the dollar is too strong and causing capital outflows will then start to complain that the dollar is too weak causing them to lose exports. You can’t have it both ways, but that is the problem with currency wars. It’s a zero-sum game. There are always losers. All you’re doing is picking different sets of losers at different times. You’re not really solving global problems.

This emerging markets debt crisis is serious. In the intermediate, I think by the middle of next year, you may see the U.S. try to weaken the dollar through some Fed easing policy, but right now today that’s not happening. The Fed continues to talk tough and the markets continue to expect a rate increase, maybe in October or December. I personally don’t have that in my forecast, but a lot of people do.

It’s a very messed up world. The bigger picture is that there’s too much debt and not enough growth. It’s that simple. There are only three ways out: 1) You have to have inflation to get rid of the debt; 2) You have to default to get rid of the debt; or 3) You have to have real growth. Real growth requires structural reforms that governments don’t seem to be willing to step up to. Central banks can’t get inflation because the deflationary forces are too challenging, and nobody wants to talk about the D-word, which is “default,” because that has consequences and spillover effects that could cause a global financial panic.

It’s not a great menu of policy choices, but there are no other ways out of this. Emerging markets will start to melt down unless the Fed eases. My guess at the end of the day is that the Fed will ease, but if they don’t and that meltdown starts, there is no way it will be contained to the emerging markets. It will come back to effect the U.S. through a contagion.

I’ll explain how that works. Hedge funds, banks, and other leverage traders who start to lose money in one market, and get margin calls because they are leveraged, will sell something else. They won’t sell the thing they want; they’ll sell the thing they can. Even if they like the U.S. stock market, if they have U.S. stocks that seem liquid, they’ll sell the U.S. stocks to get cash to meet the margin call on their emerging markets bonds that are going into default. They lever them up with a deal, and the dealer is calling them for margins. That’s how the contagion spreads, so there’s no way it’ll be confined to the emerging markets, which brings up the whole subject of liquidity in bond markets.

Jon: That is another one of those warning signs coming out of the IMF. They’re worried about declining liquidity in the bond markets. This is something you’ve addressed in these conversations before, but I’m wondering if you have any new thoughts to share with us on that.

Jim: I do. It’s one of these papers coming out of the IMF meeting regarding their global financial stability report. The paper is called “Chapter 2: Market Liquidity – Resilient or Fleeting?” It is 60 pages of pretty densely-argued stuff, so it’s not exactly light reading.

Here’s the bottom line. They say something that’s very odd. They say that liquidity is okay – not great, but okay. They don’t sound as dismal on it as some other analysts do, probably because they don’t want to panic people, but then they say it can disappear instantaneously. That’s a weird thing to say. Instead of saying, “Market liquidity is getting weaker and weaker and weaker,” they’re saying, “No, it’s okay, but it could go away in the blink of an eye.” That’s pretty scary.

By the way, we’ve seen examples of that. We’re near the first anniversary of the October 15, 2014, flash crash in the U.S. treasuries market. That was a funny kind of crash because prices went up but interest rates went down. That was not the smooth, continuous trading and price-level adjustment that the academics always assume. It was what’s called a gap move where prices in one instant are at one level and then they just drop four standard deviations in the blink of an eye. They reset at a different level, and that’s what happened. We’re going to see more of that when there will be a panic triggered by some catalytic event causing everyone to get on one side of the boat and it tips over. That’s what the IMF is warning about.

What they go on to say is the part I found intriguing. What was the point of giving a warning? The IMF can talk about it all day long, but they don’t run the bond market. They’re not the U.S. Treasury or Exchequer or French finance ministry, so they’re giving a warning but can’t really do anything about it.

What do they recommend governments do? They say governments ought to take preparatory moves or basically have preemptive strategies to deal with the fact that liquidity can disappear. What would that preparation be? If you think about what they’re really saying, it’s this: “You better get ready to lock down the system. If liquidity disappears, it will be like a run on the bank on steroids, and you can’t make it come back. You can’t print any more money, because you’re at the outer limit of confidence.”

What can governments do? They can close markets, freeze bank accounts, do what they did in Greece, and put on capital controls. These are things they could do, but they’re all really ugly if you’re an investor trying to get your money.

This is one of those times when I do think it helps to not even read between the lines. At least understand that the IMF uses words like “spillover” instead of “contagion” and “macroprudential” instead of “lock down the system.” When you hear the word “macroprudential” coming out of the mouths of an elite global financial regulator, you should think to yourself, “They’re saying I can’t get my money.”

I think it’s an ominous warning, but what’s even more ominous is what they’re recommending people do about it. They’re saying, “We don’t have a magic wand to restore liquidity, so we’re suggesting that if you’re not prepared to print the money or hand it out or guarantee deposits ad infinitum, you better be prepared to close your markets.”

That’s one of the reasons I like gold. One great thing about physical gold in non-bank storage is that it’s not in a bank, it’s not in a market, it’s not digital, and it can’t be locked down by executive order. I’ve never recommended that investors go all in on gold, but I’ve recommended 10% allocation. Some people think that it’s more ideal for clients to have 20% or even 50%. I think that’s a little high, but the truth is, the average institutional investor has less than 2%. A lot of people I talk to have 0%. They listen, they’re kind of interested, but at the end of the day, they don’t actually make the move.

The bottom line with all of that is they’re not prepared for what we’re talking about. This is not fantasy or scare-mongering. People accuse me of being a scare-monger to which I reply, “I’m not a scare-monger. I’m an analyst, and I’m not making things up. I’m telling you what the BIS, the IMF, the G20, and the World Bank are saying. They are saying that liquidity can disappear in the blink of an eye, and the solution is to basically lock down markets. If you don’t want to be frozen in that situation, then you should have some gold in non-bank storage so you can have access to it. That’s your liquidity.

Jon: Thanks, Jim. Now Alex Stanczyk is here with questions from our listeners.

Alex: Steve M.’s question is, “Is there a scenario where the Fed would be forced to raise rates regardless of the state of the economy?”

Jim: There is. I think it’s unlikely and it’s not in my forecast, but people talk about it and it could happen. Just because I have a forecast doesn’t guarantee that something’s going to play out.

I find the whole debate about raising rates just a little sterile, because the quality of the analysis is poor. A lot of people say, “It’s been a long time, so you ought to raise rates.” That’s not analysis; that’s a claim, that’s a declaration. What kind of analysis is that? It’s like saying, “I’m tired of playing Russian roulette, so I think I’ll blow my brains out and get it over with.” Just because it’s been a long time is not a reason to raise rates,.

As I said, they should have raised rates in 2010. In an interview I did on CNBC in August 2009, Joe Kernen turned to me and asked, “What should the Fed do now?” I said, “They should raise rates 25 basis points. There’s no global financial panic. There’s plenty of liquidity.” It’s true that unemployment was still 10% and the economy was still recovering, but so what? What does the Fed have to do with it? This idea that they can create jobs is nonsense. The Fed doesn’t create jobs.

But they didn’t raise rates – not that they were listening to me in particular. That was the time to raise rates, but they failed. However, just because they failed to do the right thing then doesn’t mean they should do the wrong thing today. Today they should be easing because the economy is slowing down. The IMF just told us that.

There’s plenty of evidence with the data that’s coming in. I’m used to seeing data that’s mixed, bad data and good, so I try to parse it and look for trends. On balance, I’ve probably been more than a little bit bearish on the economy, but now I don’t see any good data. I don’t see the other side of the argument. All the data – exports, deflation, labor force participation, wage growth, manufacturing surveys, service surveys – Everywhere you look, it’s all trending down.

I don’t see the case for raising rates, but if there is a case, it would be because they’re worried about bubbles. Their argument would be, “We need to let the air out of these bubbles. If we don’t, these bubbles are going to burst and it’s going to be a lot worse. Whatever damage we caused by raising rates at the worst possible time will not be as bad as letting the bubbles persist and having those things blow up.”

There’s one problem with that argument: I cannot think of a single case where the Fed actually correctly identified a bubble and tried to finesse the air out of the balloon. They didn’t do it in ’94 in Mexico, they did not do it in ‘97/’98 in the emerging markets crisis, they didn’t do it in 2000 with the tech bubble, and they did not do it in 2007 with the mortgage crisis. First of all, they have no history of correctly identifying bubbles, and secondly, they have no history of knowing how to let the air out before they explode.

It’s a pretty unappetizing scenario for the Fed if the economy’s getting weak but they are the one to raise rates and make it weaker. We’ll have people driving tractors up the steps of the Fed again like in 1980 when they had a tractor march because farmers were complaining about the back-to-back recession. If not trackers up the steps of the Fed, maybe torches and pitchforks on Constitution Avenue.

Could they raise rates? Yes. What would be the argument? “We know we’re doing damage, but it’ll be less damage than letting the bubbles come and trying to pop them.” I do find it extremely unlikely though, because there’s just no history or policy of it. Are they going to do that in an election year 2016? I don’t think so.

The other scenario where they could raise rates would be if the economy actually got better. I agree with that. If inflation gets up to 1.8%, growth gets up to 2.3%, unemployment comes down for the right reasons as opposed to the wrong reasons, and all those trends are moving Janet Yellen’s way, then they would raise rates. I would be the first one to say they’ll raise rates within 30 days.

But that is not what the data says. The data says we’re far from Yellen’s goals, and we’re moving in the wrong direction. If we get real growth and are moving towards her goals, she’ll raise rates. That will come as no surprise, but that is not how the data is coming out. The only reason to raise rates in a weak economy would be to pop bubbles, and there’s no history of that, so I don’t expect it.

Alex: That makes a great deal of sense. Moving on, I think some people know that the IMF does own gold as an asset. I was recently reading a report by the IMF that shows gold and gold bullion on a chart listed higher than SDRs and currencies of sovereigns. I don’t know if they actually emphasize it that way internally or if that in fact means anything, but according to the IMF it is important as a reserve asset.

The next question is coming from Jim H. who wants to know, “Does the IMF simply print SDRs and then buy their gold? If they’re just printing SDRs, isn’t that inflationary by definition?”

Jim: Great question. The answer is that the IMF has about 3,000 tons of gold. That’s a lot of gold, in fact that’s the third largest stash of gold of any individual country. The United States has a little over 8,000 tons, Germany has a little over 3,000 tons, and the IMF comes in third at 3,000 tons.

This is from the World Gold Council data, not how I analyze it. I take all the members of the Euro Zone – there are 19 countries behind the euro – and combine all their gold to determine the amount of gold available to back up the single currency. That number is over 10,000 tons, so the 19 members of the eurozone have 10,000 tons, which is why I count them as number one. I count the U.S. as number two with 8000 tons. China officially has just under 1,700 tons, but there’s very good evidence that they have 4,000 tons, perhaps more. Using that evidence, I would give the Chinese credit for 4,000 tons, so I’d make them number three, and then the IMF as number four.

Even at number four, it’s a lot more than the next closest. We have Switzerland and Russia with just over 1,000 tons, then we drop off to Japan with around 700 and the Netherlands with 600. It really goes down fast from there. Interestingly, Greece has 100 tons, although it’s in hoc to the European Central Bank.

The IMF has one of the largest gold hordes in the world. They got it from their members. When you join the IMF, it’s like joining a club. If you join a club, you have to pay dues. There’s usually a pretty high initiation fee and then monthly dues. Going back to the 1940s/1950s, when you joined the IMF, you had to buy in. Like in a poker game, you had to put up some chips. At the time, those chips were partly in gold. You could give them currencies as well, but mostly you gave them gold, so that’s where the IMF got their gold.

This goes all the way back 70 years to 1944, but it is not true today. If a new country joins the IMF, they don’t make them give gold. They can actually give their local currency which is pretty inferior.

The IMF used to have more gold but they sold 700 tons between 1975 and 1980 as part of a secret plan. When I say “secret,” these were classified documents at the time that have since been declassified, so scholars have access to them. President Ford, Henry Kissinger, and the IMF did a secret dumping plan between 1975 and 1980 and dumped 1,700 tons of gold on the world markets, 1,000 from the U.S. and 700 from the IMF. They used to have about 5,000 tons but they returned 700 to the members.

The IMF also sold 400 tons of gold in 2010 as part of a gold dumping exercise. Two hundred tons was sold to Mauritius, India, and Sri Lanka, but the buyer of the other 200 tons is a secret. I don’t know who it was, but I’m pretty sure it was China. I can’t prove that, so I’ll label that as speculation.

So even as recently as 2010, the IMF was dumping gold to suppress the gold price. The problem is that when you dump the gold, you eventually run out of it. In answer to your question, they got their gold the old-fashioned way – people paid in to get stock in the IMF.

As far as SDRs are concerned, they do print them and hand them out. There’s nothing more to it than that; it’s just printed money. They have not been using it to buy gold although it would be interesting if they did. That would be a gold-backed SDR in the making, which is one solution to the global liquidity problem. The only problem is, to make that work, you’d have to have the price of gold around $10,000 an ounce. I think we’ll get there as the situation deteriorates, but you can’t print money and buy gold or go back to a global gold standard unless you’re willing to raise the price of gold significantly in order to have enough liquidity for world finance. I’ve done that analysis, and the answer comes out to about $10,000 an ounce, possibly higher. You could get numbers, depending on assumptions you want to make, as high as $44,000 an ounce, but I’ll stick with $10,000 an ounce for now.

To recap, the IMF does have a lot of gold. They’ve stopped dumping it, and I think they’re going to sit tight with what they have. SDRs are printed and handed out, but they’re not using them to buy gold although they could. That would be a radical change in the so-called rules of the game.

Alex: Our next question is something I’ve thought about as well many times, and I think it’s important for people to consider. This question coming from Roberto C. is, “What’s the best product to buy gold and have access to your money if you want to sell when liquidity becomes an issue?”

Jim: There are a number of funds that tailor their product to exactly what Roberto is asking. I’m on the Board of Advisors of Physical Gold Fund, so of course that would be my first choice, but in fairness to the listeners, there are a couple other programs out there.

Here are the key things: Number one – You want physical bullion. You do not want ETFs or COMEX futures or unallocated gold forwards from London Bullion Market Association banks. And you certainly don’t want any cheesy dealer over-the-counter contracts, so you don’t want paper gold. You want physical gold.

Number two – You want it in non-bank storage. You don’t want to put any significant amount of gold in your home because of obvious security issues, so look for storage in vaults. You want vaults that are reputable, insured, bonded, and have been around for a while. Physical Gold Fund qualifies in all those respects. When I visited the Physical Gold Fund vaults as part of my due diligence and to get acquainted with Physical Gold Fund, we visited their vault in Switzerland. Sure enough, there was the gold. It wasn’t just Physical Gold Fund people, either. We went into the vault with auditors and guards and a lot of third parties. They brought it up in a forklift, opened the seals, and opened the lid. It was a bit like Raiders of the Lost Ark. There was the gold, and all the serial numbers checked out. It’s a very first-class operation.

Again, there are others out there, but with the Physical Gold Fund, if you buy one of the units, the money goes straight to the Physical Gold Fund. They’re not hedging with futures or anything like that. If you want gold, you can call them up and say, “I’d like to take delivery.” Shipping could take a day or two to show up on your doorstep, but it is delivered to your house. Considering that you could be living in a world where banks are closed, ATMs have been reprogrammed to dispense only $300 a day for gas and groceries, and the stock exchange and money market funds are closed, you can call Physical Gold Fund and they’ll ship the gold to your house. That is very commendable.

Alex: Jim, thank you very much, as always.

Jon: Thank you, Alex, and thank you Jim Rickards. It’s always a pleasure and an education having you with us.

Jim: Thanks.

Jon: Most of all, thank you to our listeners for spending time with us today. You can follow Jim on Twitter. His handle is @JamesGRickards.

Goodbye for now, and we look forward to joining you again soon.


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The Gold Chronicles: October 7, 2015 Interview with Jim Rickards


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Transcript of Jim Rickards – The Gold Chronicles September 15th, 2015

September 15th, 2015 Gold Chronicles topics:
*Jim is correct again on no Fed rate increase
*No rate increase through end of 2015
*What the Fed needs to do is ease
*Fed’s easing options moving forward: QE4, Forward Guidance, Helicopter QE, Negative interest rates, Next salvo in currency wars
*The time to raise rates in 2010 and have missed and entire rate cycle
*The Fed does not lead the economy, it follows it. Raising rates will not make the economy stronger
*Nominal interest rate versus real interest rate
*Real interest rates is what effects gold price
*The dollar price of gold is just the reciprocal of the dollar fluctuating in value
*China’s sale of US Treasuries is being absorbed by the market. Bernanke: The financial system is a closed circuit
*Financial warfare and risks in digital assets from cyber threats
*Conversations with the only man who has ever been the head of both the CIA and the NSA
*Cyber financial warfare attacks are the Precision Guided Munitions of future warfare
*Physical gold cannot be hacked
*World monetary system is described by financial elites as”incoherent”
*Voices joining in cautioning catastrophic collapse of intl. monetary system include BIS, IMF, G20
*If the Fed cheapens the dollar, it will likely raise the price of gold
*The challenge with issuing helicopter money is that you need the cooperation of treasury, Congress, and the executive office working together in order to do it

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The Gold Chronicles: September 15, 2015 Interview with Jim Rickards


The Gold Chronicles: 9-15-2015

Jon: I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.

Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management. He’s a consultant to the U.S. Intelligence Community and the Department of Defense and is also an Advisory Board member of Physical Gold Fund.

Hello, Jim. Welcome.

Jim: Hi, Jon. How are you?

Jon: Excellent, thanks. And yourself?

Jim: I’m doing fine, thank you. It’s a beautiful day here.

Jon: Very good, and down here in Arizona, too. Jim, as we are recording this interview, it’s just before the start of the September Federal Open Market Committee meeting. You’ve consistently predicted no rise in interest rates, though I see that you remarked a few days ago that it’s a closer call now than at any time this year. I’m concerned with that ‘close call’ remark. Is this because U.S. and global economic fundamentals have actually improved?

Jim: It’s interesting, Jon. I said that in late 2014 and have continued to say that there will be no rate hike in all of 2015. Some of the listeners may follow me on Twitter, and the great thing about doing television interviews and this podcast is that we have all the video and audio links, so I can show clips from late last year where I said that.

Just to be clear, this is not guesswork or just staking out a position for the sake of attracting a little attention or being controversial. It’s all based on fundamental economic analysis. I don’t even try to be that heterodox or orthogonal to what the Fed is saying. I actually listen to the Fed, I read the speeches, and I read the minutes. I don’t listen so much to television commentators, but I listen to the Fed itself and what the Governors and Reserve Bank Presidents are saying. I then take those indicators, combine them with actual data, and draw my conclusions. I have been saying it all along.

I think I did say this one maybe is a little closer than usual, although I’ve actually backed away from that at this point. It’s unfortunate that it changes day to day. Again, I’ve consistently said that there will be no rate hike. What’s interesting about this time is when I said last year that the Fed would not hike rates in all of 2015, I wasn’t talking about a particular meeting. I said I didn’t see how it could change over the course of the year.

We all remember Wall Street saying they were going to raise rates in March. Instead, the Fed just took away forward guidance, removed the word “patient.” Then everybody said June – we were all spun up about June because there was a press conference – and that didn’t happen. Now everyone is saying September, and I still don’t see it happening. I expect that Thursday will come and go with no rate hike, and then we’ll all be talking about December, although if there is a surprise on Thursday, the Fed might drop a hint about October.

Just to digress on that, there are eight FOMC meetings per year. They don’t meet every month; they meet eight times a year, but only four of them have press conferences. They don’t always have a press conference, so the working assumption is they would only raise rates when there’s a press conference, because they’ll need that opportunity to explain their thinking to reporters.

But actually, that’s not true. Last spring, the Fed rehearsed an impromptu teleconference. They gave everyone one of those dial-in numbers similar to what we’re doing right here where our listeners can log in. They said, “Don’t assume it has to be at a press conference meeting. We might do it at one of the other meetings, and if so, we will do one of these webinars or teleconferences to explain ourselves, so don’t rule that out.”

Be that as it may, I am so used to being out of consensus that now it looks like the majority of the economists and even a large majority of the major Wall Street economists — at least those associated with primary dealers — and the Fed Funds Futures Market, and all the indicators we can find are saying there’s no rate hike this Thursday.

It always makes me a little uncomfortable when I’m in the consensus, because it makes me wonder what I’m doing wrong! In any case, it looks like Wall Street, the markets, and others have caught up to the view that I’ve been presenting all along, which is that the economy is just too weak to bear a rate increase. As I’ve said before, the time to raise rates was actually 2010/2011 when the economy was growing on a sustained basis.

It wasn’t growing strongly, nowhere near potential, for example unemployment was still high, but it was at the early stages of a recovery. That was the time to raise rates, but the Fed didn’t do it. They missed a whole rate cycle, and now it’s too late.

Right now we’re probably getting close to a recession. Undoubtedly the world is slowing down. You look around and see China not technically in a recession but slowing down dramatically, Brazil, Japan, and others in technical recessions, Russia and other major economies in recessions, and the U.S. slowing perceptibly.

What I call the happy-talk crowd likes to look at 2015 second-quarter GDP at 3.7%. That was pretty strong although a lot of it was inventory accumulation. There is a tool put out by the Federal Reserve Bank of Atlanta that’s not perfect, but it’s the best information we have. It’s a real-time GDP tracker, and it’s showing third quarter GDP. Of course, we’re almost at the end of the third quarter coming on September 30, but we won’t have the official number for the third quarter until the end of October. Here we are almost five-sixths of the way through the third quarter, and that’s indicating 1.5%. Combine 0.6% in the first quarter with 3.7% in the second quarter and 1.5% estimated in the third quarter, and it looks like 1.9% growth from January to September, most of the year. In other words, it’s the same kind of crummy 2% or less growth we’ve had all along since 2009. This is certainly not a compelling case for raising rates.

There’s my expectation, but we’ll all find out on Thursday. One of the things I do in my analysis is when I have a view, I’m not necessarily shy about expressing it, but I do ask myself, “What if I’m wrong? What if they do raise rates?”— notwithstanding my expectation that they won’t. That could actually be catastrophic.

It’s a good reason for investors to think now (actually, you should have been thinking all along) about probably increasing your cash position, and if you don’t already have let’s say 10% gold, adding to your gold position. Get into some of those safe-harbor assets, because if the Fed raises rates — again, I don’t expect it, but if they do — this is going to exacerbate what’s already an emerging markets meltdown with massive capital outflows coming out of emerging markets, coming into the U.S., making the dollar stronger, and it could be very, very nasty sailing.

Even if they don’t raise rates, I do expect more of the same. When I say, “More of the same,” the Fed will continue to talk tough. In other words, they’ll talk about raising rates even though they don’t raise them. If they don’t raise rates but continue to talk tough and even hint at October, which again would not surprise me, that’s going to keep the dollar strong and keep the pressure on emerging markets.

We’ll have more of what we’ve been seeing since August, which is pressure on emerging markets’ currencies, capital outflows, volatility in U.S. markets, concern about a global slowdown, and possibly the beginning of a bear market in equity. I think all of these things will continue. If they do raise rates, I would expect all that on steroids. Basically, they would accelerate what could be a market panic comparable to 1997.

The thing I least expect is the Fed to do what they actually need to do which is ease a little bit, because, as I say, we are in danger of tipping into recession. People say, “How can the Fed ease rates? We’re at zero.” They actually do have five tools in their toolkit. I’ll leave aside for a separate discussion whether any of these things work, but at least in the Fed’s mind, they all work.

1) They could look at QE4. 2) They could look at negative interest rates. Although that would be a bit of a shock in the US, they could do that. 3) They could resume the currency wars and try to cheapen the U.S. dollar particularly against Europe and Japan. 4) They could go back to forward guidance — that’s just jawboning — re-introduce the word “patient” (“We’re going to be very patient at this time”), which they took away in March. 5) They could use what’s called ‘helicopter money.’ Helicopter money is when they work with Congress to run larger deficits, the Treasury papers over the deficits with borrowing by issuing bonds, and the Fed buys the bonds. It’s simply another form of money printing. The difference between QE and helicopter money is that when you do QE, you give the money to the banks; when you do helicopter money, you give the money directly to the people in the form of whatever programs Congress decides to support.

Again, I’m not here to debate whether those are good or bad ideas, but there are five ways for the Fed to ease or purport to ease. I don’t expect any of them, but if things get worse, which they may, we could see those things early in 2016.

For now I’ll stand by my forecast of no rate increase on Thursday, maybe a hint of an October surprise, and more volatility. To your point, Jon, whatever closeness in the call I might have seen a couple of weeks ago has disappeared, and the economic data since then has confirmed my long-held view that they will not raise rates.

Jon: Let me ask you one twist on this question, Jim. You’re right that many more commentators seem to be lining up with your long-held forecast that they won’t raise rates, but I’m hearing some voices say, “The fundamentals don’t justify them raising rates, but it’s very dangerous if they don’t, because then they’ll be leaving it too late, and when they do eventually raise rates, it’ll go too fast.” Is there any validity in that anxiety? What’s your view on that?

Jim: That doesn’t fit the facts or the data. Here’s what I mean by that. When commentators say, “If they don’t raise them now, they’ll leave it too late,” I would say it’s already too late. The time to raise them, as I said, was 2010.

We’ve had 38 business cycles since the end of World War II that all follow a classic pattern. The economy gets stronger and stronger, things get a little hot, labor markets get tight, capacity utilization gets tight, inflation picks up, the Fed says, “Okay, time to raise rates” and they do, but they’re usually behind the curve so they raise them again and again, and then finally the economy cools off, things slow down, unemployment goes up, inflation goes down, capacity utilization drops, then things look kind of bad, we’re in a recession, the Fed says, “Okay, time to cut rates,” they cut them, and you go up again. It’s like a sine wave up and down, up and down. That’s a normal business and credit cycle.

What’s different this time is that we’re not in a normal cyclical recovery; we’re in a growth depression. When you get 2% growth for seven years, that’s a growth depression. That’s not a normal recovery, but it’s still a recovery. It may be weak, it may be well below potential, it may be depressionary in that sense, but it’s still a recovery and you’re supposed to normalize rates in a recovery. As I say, the time to do that was 2010/2011.

The Fed could have raised rates in baby steps with big gaps in between. Over the course of two years and 16 FOMC meetings, they could have gotten them up to 1.5% – 1.75%, something like that. If they had done that — and they should have done that — they would be in a position to cut rates today just doing 25-basis-point cuts to keep the economy going. That’s a normal cyclical process.

The Fed missed an entire cycle. They just skipped it because of Bernanke’s experimentation. I spoke to Ben Bernanke in Korea recently and we talked about this. He used the word “experiment.” It wasn’t me; that was his word for what he was doing. This looks like a failed experiment.

Analysts have this exactly backwards. There’s a sense out there that I see everywhere and I’m incredulous. It says, “Oh, gee. If you raise rates, that means the economy is strong, and you better raise them fast before the economy gets too strong.” As if somehow raising rates made the economy strong. That’s the exact opposite. What’s supposed to happen and what normally happens is that the economy gets strong and then the Fed raises rates.

The Fed doesn’t lead the economy up and down; the Fed follows the economy up and down. As the economy actually gets stronger, then yes, at some point the Fed does have to raise rates. But there’s this idea out there of, “You’d better raise rates to make the economy strong.” It doesn’t make the economy strong; it actually slows the economy down. That’s the whole idea.

With this notion that “You’d better raise rates before it’s too late,” show me the evidence of inflation. Where is it? Show me the evidence that labor markets are tight. I understand the employment rate is 5.1%, but so what? Labor force participation is at an all-time low, job creation peaked last November and has been going down fairly precipitously ever since, labor force declined last month, and real wages are going nowhere.

When you look behind the headline happy-talk data, the labor market is showing no sign of tightness, no sign of real wage increases, and no signs of inflation. In fact, inflation numbers are coming down, economic growth is coming down — we already talked about that. In looking at every indicator, this is not an economy that’s getting stronger.

In fact, we are 77 months into this recovery. By the way, that’s a very selective period, because we’ve had two of the longest recoveries in history — in the 1980s during the Reagan years and the 1990s during the Clinton years. The average recovery since 1980 is 78 months. We are now at 77 months. In other words, we’re one month away from having an exceptionally long recovery. If you figure the average since World War II, it’s much shorter, down in the low 40s. So this is a very long recovery.

If you knew nothing else — if you didn’t have any data about employment, inflation, growth, past utilization, or anything — and you were just looking at the longevity of it (and I agree that that’s not dispositive), you would say, “We’re pretty close to a recession.”

This notion that somehow raising rates means you have a strong economy is nonsense and completely backwards. It puts the cart before the horse. When you have clear signs of a strong economy, which we don’t, that’s when you raise rates.

There was one honest analysis where an analyst was very candid and said, “I get the weak data part, but you want to raise rates anyway. It’ll take the stock market down 25% and cause a recession, but you ought to do it anyway, because the danger on the other side is you’re creating bubbles and it’s going to end badly.”

I agree with that completely. I think if they do raise rates, it will take the stock market down 25% in a hurry — that’s one reason to have some gold and cash — and it will cause a recession if we’re not in one already. This is an outside analyst saying this, and I think the analyst did a very good job of thinking about it that way. Instead of the happy talk saying raising rates makes the economy strong, it’s saying raising rates is going to put us in a recession, but we ought to do it anyway. It’s like, “Take your medicine, kid.”

Show me a Fed Chairman or Fed Board of Governors who has ever tried to pop a bubble, who has ever tried to get out in front of an economic cycle or even knew a bubble when they saw it. While I agree with that analysis, I don’t think that’s how Fed Governors and Fed Chairs think about the problem. They’re looking much more in real time and therefore don’t see bubbles. They didn’t see the bubble in 2007, they didn’t see the dotcom bubble, they didn’t see the emerging markets bubble in 1997, and they didn’t see the Mexican bubble in 1994. The Fed has demonstrated that they can’t see bubbles when a bubble is ready to come up and bite them in the ankle. Why would this time be any different?

The case for raising rates is either delusional in the sense that people think it’s magically going to make the economy stronger, which it won’t, or it’s candid, which is it would cause a recession. But that’s actually a reason not to raise rates.

Look, anything can happen and I understand that, but we do the best we can as analysts, and that’s how I see it.

Jon: Let’s step back for a moment from this immediately topical question of tomorrow’s FOMC meeting. I’d welcome a little refresher and guidance from you on the underlying structures we’re consistently talking about. What I’m thinking about is the relationship of interest rates to the strength of the dollar, and then the relationship of both of those to the inflation and deflation. Would you give us a little two-minute seminar on how these three forces — interest rates, the dollar, and inflation/deflation — impact each other?

Jim: Jon, as you and I have spoken before, you know that when anyone brings up the subject of interest rates and how they interact with prices, inflation, deflation, and policy, etc., I’m always very quick to make the distinction between nominal interest rates and real interest rates. That’s a very important distinction that I think is too often overlooked in the discussion.

As a quick primer, nominal interest rates are the rates you see. Whatever the coupon or yield to maturity on a bond is, whatever the bank is paying you on your deposit, whatever you’re actually getting whether it’s 0.25% or 2% on a 10-year note, that’s the nominal interest rate. To get to the real rate, take the nominal interest rate and subtract inflation. As a simple example, if the nominal interest rate is 3% and inflation is 1%, it’s 3 minus 1, so the real rate is 2% or positive 2. That’s how you think about real rates. Real rates have much more of an impact on the real economy and commodity prices, including gold, than nominal rates do.

Just to illustrate that, gold went from $35 an ounce in 1971 to $800 an ounce in 1980. That’s a 2000% increase in about nine years. What was happening to interest rates at the time? Interest rates we’re going to the moon. They went to 6%, 7%, 10%, 13%, 15%, and ultimately short-term rates got to 20% and 30-year bond rates got up to 15%. Interest rates were sky high and the price of gold was sky high, but what that leaves out is the fact that while the nominal interest rate was going up, the real interest was going down because inflation was going up even faster than the nominal interest rate.

For example, there was a time in 1980 when the nominal interest rate was 13% for 30-year-bonds but inflation was 15%. What’s 13 minus 15? At least where I went to school, that’s negative 2. In other words, the real rate isn’t even positive anymore; it’s negative.

It sounds crazy, but to me 13% interest rates were lower than 3% interest rates. “Wait a second, Jim. How can 13% interest rates be lower than 3% interest rates?” The answer is that nominally the 3% rate is lower, but when you do it in real space, 13 minus 15 is negative 2, and 3 minus 1 is positive 2. In the first case, real rates are minus 2, and in the second case, real rates are positive 2.

It’s the real rate that kills you. It makes gold go down and investment difficult. When real rates are low or even negative, that tends to be associated with high inflation. It’s bullish for gold, at least in nominal terms, and encourages spending and investment. You have to always make those distinctions.

People like to say interest rates are at an all-time low right now, but actually nominal rates are close to all-time lows and real rates are nowhere near all-time lows. A 10-year note, which I think is a good proxy, is about 2% right now and inflation is running around 1%, give or take, so the real rate is positive 1. That is a fairly high real rate and one of the reasons deflation has the upper hand and gold prices have kind of gone sideways. That’s an important way to think about interest rates when you’re trying to sort it all out.

Having said that, what’s the impact on the dollar? Again, high real rates make for a strong dollar. Look around and you’ll see that interest rates are being cut. Go around the world — Canada, Australia, New Zealand, China — they’re all cutting interest rates. The Bank of England is, Bank of Japan is at zero, and yet if you look at the US, I can go out and buy a 10-year note and get a positive return. Even though nominal rate is 2, with inflation at 1, I get a positive return of positive 1. For capital allocators looking around the world, all of a sudden the U.S. looks like a very attractive destination for capital because the real rates are high. That brings capital into the U.S., which means you have to buy dollars, which makes the dollar stronger.

In some ways, the dollar price of gold is just the reciprocal of the dollar. A strong dollar can mean a lower dollar price for gold, and a weaker dollar can mean a higher dollar price for gold. Of course, you know I like to say that gold doesn’t change – an ounce of gold is just an ounce of gold. That’s my constant. When someone says the dollar price of gold is going up or down, I just say, “Fine, that’s a dollar problem; it’s not a gold problem.” A lower dollar price of gold just means a strong dollar. That is what we’re seeing because of the real interest rates.

The point being, these things are all connected. The nominal rate is not dispositive. You have to look at the real rate, you have to think about things in real space, you have to adjust for inflation, and you have to think about the impact.

Jon: Let’s stay with the dollar part of this story for a moment and look at how China plays into this. I’ve read that China has been selling off a record volume of U.S. Treasuries recently. This plays into a rather popular narrative that China is almost waiting to pounce and at some moment offload huge volumes of its U.S. debt basically in a ploy to wreck the dollar and the U.S. economy. Give us your view of this theory.

Jim: Some of it is theory and some of it is fact, so let’s start with the facts. That’s always a good place to start! China is, in fact, selling Treasuries and reducing several holdings of Treasuries.

There’s been an enormous drain of reserves from China. They’ve lost over $400 billion of reserves in the past three months. Part of it was used to prop up their stock market, part of it was used to defend their currency at least until they broke the peg in early August, part of it is still being used to defend their currency now because they have a new peg at a lower level, and some of it is going because there’s capital flight coming out of China. Chinese oligarchs, Princelings, and the politically connected people are saying, “I want some dollars. I want to get out of here and buy a nice condo in Vancouver, Melbourne, Sydney, Istanbul, London or all these places around the world.”

What’s interesting is that when you have $4 trillion in reserves, which is where China started this process, it looks like an impregnable castle. It’s like, “Wow, $4 trillion, that’s a lot of money.” That’s fine if the dynamic is going your way, but when the dynamic reverses and you start to lose reserves and you begin to drain your reserves because you’re pursuing some policy, it’s amazing how quickly they can disappear. Of course, the emerging markets found this out the hard way in 1997, Mexico found it out in 1994, and places even today such as Malaysia are draining away their reserves.

It’s a scary thing to watch. Think of watching the gas in your gas tank go down. You may still have three-quarters of a tank, but if you keep going and can’t find a gas station, you’re going to hit empty.

China is quickly losing reserves and is selling Treasuries to basically pay for that outflow of dollars. So why aren’t U.S. interest rates skyrocketing? Why hasn’t the U.S. Treasury market collapsed? Why aren’t all these horrendous things happening that so many people predicted when China started selling Treasuries? The answer is that there are plenty of buyers. In other words, if somebody is selling, somebody is buying.

By the way, this is not some kind of coordinated assault on the U.S. dollar. It’s not some nefarious plot by the Chinese to dump Treasuries and sink our markets. Far from it. China is playing defense. They’re not on offense; they’re playing defense by trying to either manipulate their currency or deal with the demands for capital flight or prop up their stock market, as the case may be.

To me, the interesting question is not that China is selling, which they are, but who are the buyers? There are plenty of them. First of all, people are getting out of other markets. It’s almost like the Malaysian company forces the Malaysian Central Bank to sell Treasuries to give them dollars, and then that individual company takes the dollars and buys the Treasuries.

This is something that was explained to me 35 years ago. I was a young senior officer at Citibank, 27 or 28 years old, sitting at lunch across from our Chairman and CEO, Walter Wriston, one of the most famous bankers of the 20th century. I said, “I’ve just seen this movie Rollover,” an oldie but goodie movie from the 1980s with Jane Fonda and Kris Kristofferson. The plot of the movie was that the Arabs were secretly pulling all their money out of U.S. banks and buying gold, and that was going to lead to the collapse of the banking system and the dollar.

Then I said, “Mr. Chairman, what do you think about the possibility of the Arabs pulling all their money out and buying gold? Wouldn’t that be the end of our banking system?” He looked at me benignly and said, “What you have to understand is that the global financial system is a closed circuit. The Arabs certainly could pull their money out and buy gold, but the guy who sold them the gold is going to get the money, and that guy is going to put it back in the bank, and that bank is going to lend it to us.” In other words, as long as the interbank lending system functions, the money doesn’t go anywhere; it’s a closed circuit.

We’re seeing something similar in Treasuries. It is true that the Chinese are selling, but there are plenty of buyers, and some of the buyers may be wealthy Chinese who are getting their money out in the first place. They just take the dollars from the Central Bank, come to Vancouver, buy some Treasury bills, and you’re back where you started.

At the end of the day, there is one buyer of last resort, and that is the big U.S. banks. They will be forced to buy the Treasuries. This goes under the heading of financial repression. I think a lot of people have heard that term, but this is financial repression in real life. It’s an economic analysis that’s been articulated by Carmen Reinhart. Reinhart’s seminal paper credits Alberto Giovannini, a former partner of mine at Long-Term Capital and a very well-known Italian economist who wrote about this in the 1990s.

The idea is that, at the end of the day, governments can make banks do whatever they want. In 2008, all the banks got bailed out. In early 2009, these bankers took their head out of the foxhole. The shooting had stopped, there was smoke, damage, and carnage everywhere, and they’re like, “Hey, I survived. My bank is still here. I got bailed out by the government. I still have my phony-baloney job. I still have my $1 million plus bonuses. This is great. I can get back to business and pay myself lots of money.”

They missed one thing. They were bailed out, they did keep their jobs, they did keep their bonuses, but what they missed is that they’re now wards of the U.S. Government. They’re working for the U.S. Government, and if the Fed makes them buy bonds, they will buy bonds. In effect, the Fed can just say, “If you don’t, we’ll shut you down.”

I’m not too worried about Chinese selling, because there are plenty of buyers out there, and if all else fails, the banks will be forced into becoming buyers. This will equilibrate the market, so I don’t think it’s that cataclysmic.

Jon: Thank you. Now shifting the focus for a moment, you recently had an extensive conversation with a very interesting individual. I’m referring to General Michael Hayden. You dubbed him as America’s top spy, and with good reason. He is the only person to have headed up both the Central Intelligence Agency and the National Security Agency.

The focus of your conversation, as I understand it, was financial warfare, a recurring theme in our conversations. I’m curious to know what you gleaned from this exchange with the General.

Jim: It was a very interesting conversation. Mike Hayden is my favorite spy. He’s a really, really nice guy, brilliant, a four-star Air Force General. He has led multiple intelligence agencies including Air Force Intelligence before he became head of the NSA, the National Security Agency, and finally, Director of the CIA.

He’s kind of bald, wears glasses, and is a little shlumpy. He looks about as much like James Bond as Elmer Fudd, but that’s the real world. Not all spies are running around in tuxedos playing at Casino Royale. Some of the best spies are actually people you wouldn’t even notice in a crowd, and that can be very effective.

General Hayden told me stories about how, when he was in Bulgaria, he used to buy a ticket on a train to the end of the line. He’d ride the train all day, get to the end of the line, buy a ticket, and ride the train back. In places like Bulgaria where the road system is not that well developed, a lot of stuff moves by rail including tanks, military hardware, and troop trains, etc. Just by being a passenger on a train and going from one end of the country to the other in the course of the day, he picked up enormous intelligence that he could then debrief to his associates. That’s old-school spying and very effective.

We talked about was cyber financial threats to national security, i.e., cyber financial warfare. That’s a bit of a specialty of mine, and he was fully conversant with that. The NSA is actually in charge of what we call SIGINT. Any ‘INT’ is just short for ‘intelligence’. SIGINT is short for signals intelligence, which is basically intercepting radio transmissions, telephonic transmissions, Internet, and any kind of telecommunications. Then there’s HUMINT or human intelligence. That’s the old cloak-and-dagger type of spy stuff.

He was very conversant with this concept of cyber financial threats. Categorically, he called cyberwarfare or cyber financial attacks the PGMs of the 21st century. For those who don’t know, ‘PGM’ is ‘precision-guided munitions’ such as a cruise missile, Tomahawk cruise missile, or something from a Predator drone. He didn’t suggest that that would be the main battlespace today, but over the next ridgeline or maybe the one after that, it’s how wars would be fought. I disagreed a little bit and said, “General, I think it’s here now.” Of course, he would know as well as I, but it’s a pretty active field right now.

There is this recognition in the intelligence community and the national security community that cyber financial warfare is as much a threat as chemical, biological, and radiological weapons or certainly conventional kinetic weapons of a kind we’re all familiar with.

That has interesting implications for investors. We all know the traditional arguments in favor of gold, but there’s now a new 21st century argument in favor of gold, which is that it’s not digital. You can’t wipe it out, you can’t hack it. I’m talking about physical gold. If you have paper gold on COMEX or something, or ETFs, then that’s a digital asset that can be hacked or erased.

I know people who have a lot of their wealth in a brokerage account like Charles Schwab or Merrill Lynch or Goldman Sachs. They say, “I’m really wealthy, because I’ve got all these stocks and bonds.” I say, “Really, where are they?” They’ll show you an account statement. Maybe they get the account statement in the mail, but that’s probably online, too. I then say, “Well, that’s interesting. Look at all those nice assets here on the account statement. You realize it can all be wiped out and erased in a heartbeat. What do you really have?”

What they have is a bunch of digital representations of potential wealth in a rule-of-law society, but what if that’s erased? What if it’s hacked? What if the rule of law breaks down? What if governments freeze assets, etc.? Physical gold is the one thing that’s immune from all that. It’s not a reason to have 100% gold, but in my view it is a reason to have 10% gold, because it gives you some protection against that in addition to all the traditional reasons for gold.

It is interesting to meet with and talk to someone as experienced, plugged-in, and prominent as General Hayden who is in complete accord with me and others that financial warfare is the battlespace of the 21st century.

Jon: Before we turn to Alex here, there’s been a consistent vocal minority, of which you’re a part, predicting an imminent financial crisis. You’re not saying when it will happen, but you’ve said again and again that we’re in for a financial crisis even beyond the scale of 2008. I often hear people speaking rather dismissively of “the doomsday crowd.” You pointed out recently that some of the voices in this so-called doomsday crowd include the Bank for International Settlements, the IMF, and the G20. I wonder if you could elaborate on that a little bit?

Jim: Sure. You’re right, Jon. I do see a catastrophic collapse of the international monetary system. I don’t think it’s inevitable; I don’t think it has to happen. I just think it’s very likely that it will happen, because I don’t see any signs that the remedial or preventive steps are being taken.

I can give you four or five things that could be done tomorrow that would prevent it from happening including breaking up the banks, banning derivatives, or banning high-frequency trading. None of these things really serve any particular purpose other than to enrich the individuals who are behind them. They don’t do society any good, so getting rid of them would lead to a more stable system that would still serve everyday investors in terms of market liquidity and being able to trade stocks in secondary markets, etc., which was the original purpose of a stock market.

I think there are things that could be done to prevent it, but then as an analyst, you have to say, “Okay, is anyone doing those things? Is anyone taking those steps?” The answer is no. Therefore, I’m back to the other branch of the tree, and that is if we don’t have systemic reform, we will have systemic collapse. That’s very easy to see. When I say easy, I mean there are recursive functions, analysis, science, and other equations behind it, but it’s a pretty straightforward analysis.

As far as timing, you cannot call it to the day, the month, or the year. I think over a five-year horizon, it’s more likely than not; over a three-year horizon, still more likely than not. But it’s not the same as saying it would be next month or next week, although it could be. That’s the interesting thing about it. When I say it’s more likely than not in three years, I don’t rule out the fact that it could happen tomorrow. I’m not predicting tomorrow; I’m just saying that that’s part of the analysis.

Having said that, I do not consider myself a doom-and-gloomer; I do not consider myself part of the doomsday crowd. When this catastrophic collapse that I’m describing happens, it will not be the end of the world. We will not all be living in caves eating canned goods with our trigger fingers on machine guns. I don’t think that’s true at all. I think we’ll still be in our houses, we’ll still wake up, and life will go on, but it will be a different world financially.

We’ll see extreme responses. We’ll see an emergency summit conference of leaders not unlike the November 2008 G20 conference in Washington that George Bush and Nicolas Sarkozy put together on fairly short notice. We’ll see a reformation of the international monetary system, maybe in a venue something like Bretton Woods. I would like to see that happen today in a rational forward-leaning way before the collapse happens.

As mentioned earlier, I recently spoke to Ben Bernanke, former Chairman of the Federal Reserve. I also had a conversation with John Lipsky. John is a very fascinating individual and a great guy. He is the only American ever to head the IMF.

People who are familiar with the IMF say, “Wait a second, the IMF job is reserved for non-Americans by tradition.” It’s not a law as such, but when Bretton Woods was set up, there was a sort of handshake deal that the head of the World Bank would always be an American and the head of the IMF would always be non-American. That’s been true for all these years, and yet John Lipsky, an American, was briefly head of the IMF for only a few months.

It was after Dominique Strauss-Kahn was arrested on an airplane in JFK and faced some fairly scandalous charges. Normally, the IMF succession is very orderly, but that was a little disorderly. Dominique had to resign. John was the number two guy, Deputy Managing Director, so he became Acting Head for a short period of time until they could decide on Christine Lagard, who came in a few months later.

Having spoken to the former Chairman of the Fed and the former head of the IMF just a few weeks apart – one conversation in Korea, one in Washington – they both used the same word to describe the international monetary system. That word was “incoherent.” I don’t think they rehearsed that for my benefit; I think it’s just the word that comes to mind among the power elite as to what’s going on.

This is indicative of the state of affairs and points to what you were saying, Jon. If you were to ask me who really runs the world of finance or what are the most powerful establishment institutions in the world, you could have the Fed on that list in terms of the elites and look at the Bilderberg Conference (I’ve spoken to Bilderbergers about this), but the three most powerful multilateral institutions would be the Bank for International Settlements (BIS) in Basel, Switzerland, the International Monetary Fund (IMF) based in Washington, and the Group of 20 (G20), which is a floating crap game of developed economies and BRICs and some emerging markets that meet all over the world on a rotating basis.

All three of them have issued very dire warnings. It’s not just, “Oh, gee. We better slow down. We better do this or that.” It’s “No, we are looking at a highly unstable financial situation.” They practically threatened Janet Yellen. Christine Lagard gave her multiple warnings. The G20 finance ministers just met in Turkey and issued a warning. These are very blunt warnings.

When I see the power elite warning about global financial instability and the potential for collapse, not only does it confirm my own analysis, but it says to me that they’re trying to wash their hands of this. They’re saying, “We told you.” When it happens, they’ll be able to say, “Hey, don’t blame us. We told you this was coming.”

I hate to blame the victim, and I do sympathize with people who lose a large percentage of their net worth because they were all in the stock market and didn’t have some gold. However, when it happens, as much as one might sympathize with any investor who’s not prepared, there’s really no one to blame, because you have been warned.

Jon: Thanks, Jim. Here’s Alex Stanczyk with questions from our listeners.

Alex: Thanks, Jon. We have about five minutes left of our traditional time slot, but Jim has graciously agreed to give us a little bit longer. I want to thank all of our listeners and the people who sent in questions.

When we schedule these webinars, we receive questions over Twitter, some by e-mail, and we also get some coming in live while we’re doing the webinar. Let me give some quick guidance about submitting questions. Please refrain from asking questions having to do with legal advice, tax advice, and possibly some trading advice. Also, we’ve already answered a lot of questions that tend to come up over and over again. After doing this with Jim for almost two years now, we have a large archive of webinars available, so may I direct you to the Physical Gold Fund website where you can access a huge archive of various different webinars that answer a lot of the most frequently asked questions.

That said, we’re going to move on and go to the first question. This is a Twitter-based question coming from @awyee707 who asks, “How can the Fed cheapen the dollar without raising the price of gold?”

Jim: They probably can’t. I think if they cheapen the dollar, it will raise the price of gold. As I mentioned earlier, the dollar price of gold is just the reciprocal of the dollar. Strong dollar is lower price of gold; cheap dollar is higher price of gold. Now it’s not as simple as that or a perfect correlation, but it’s a strong correlation. The other driver, which we also talked about earlier, is real interest rates.

If you somehow had a cheap dollar in a world of high real interest rates, that’s a mixed bag. You’d have one force pulling gold down, which would be high real interest rates, and another force pushing gold up, which would be a cheaper dollar. That’s just back to this inflation/deflation tug of war I started talking about in 2011 in my first book, Currency Wars, and hasn’t gone away. That dynamic is still in place.

The bottom line is, “How do you get to a cheap dollar?” You can’t just wave a wand and say ‘cheap dollar.’ You actually have to do something. That would probably mean a stronger euro, a stronger yen, a cheaper dollar. We’d start to import inflation into the United States in the form of higher import prices. That, in theory, would feed through the supply chain and get a little bit of inflation going. Remember the equation of nominal rates minus inflation equal real rates. With higher inflation, real rates are going to come down, and that’s good for gold. If the Fed does try to engineer that, that’s very bullish for gold.

Alex: The next question is coming from [@juhaem]: “Is there some kind of big problem with helicopter money? Why haven’t the Central Banks used it if they really want inflation?” I think what our questioner is referring to is money that’s given directly to people.

Jim: They haven’t, but they may yet. A couple of days ago, the President of the Federal Reserve Bank of Minneapolis, Narayana Kocherlakota, gave an interesting speech where he talked about this. But here’s the problem. To do helicopter money, you need cooperation between the Congress, the White House, the Treasury, and the Federal Reserve. They all have to be involved.

The notion is you print up a bunch of dollar bills, rent some helicopters, fly around, push the bills out of the helicopters, and everyone scoops them up. It’s an interesting metaphor, but that’s not actually how it works. The way it’s done is by Congress voting larger deficits to spend money. Where would that money come from? The Treasury would borrow it. How would the Treasury finance the borrowing? The Fed would print money and buy the bonds.

The handoff goes from the Congress in terms of voting on spending, then the President has to sign the bill, then the Treasury has to finance the deficit, and then the Fed has to print the money and buy the bonds. They all have to work together.

At the end of the day, the Fed is still printing money. When they print money in QE, they buy existing secondary market bonds from the banks and credit the banks’ accounts with dollars that come out of thin air. But where does the money go? It goes to the banks.

The problem is it’s just been sitting there. Banks take the money and redeposit it with the Fed in the form of excess reserves, and then the money just sits there. Banks don’t lend it, people don’t want to borrow it, nobody is spending it, velocity is down. You can print all the money you want, but if it’s not getting lent and spent and there’s no velocity, that doesn’t do anything for inflation or nominal GDP.

The difference with helicopter money is you bypass the banks, disintermediate the banking system, and give the money directly to people. When I say people, if the Congress votes an infrastructure project, that money is going to go to construction workers and owners of construction companies. If the Congress votes some new benefit, that money is going to go right to the people who participate in that particular welfare or benefit program. Those are the people who get the money. The point is, you’re not relying on the banking system.

It’s theoretically possible, and if they get desperate enough, they’ll try to make it happen. You might not see that until 2017 because you’re probably going to have to have the same party – Democrat or Republican – running the White House and the Congress to make it happen. Republicans and Democrats are barely talking to each other, so it’s hard to see how they could actually pull this off, but 2016 is an election year. There’s nothing Congress doesn’t like about more spending in an election year, so maybe it will happen after all. That’s how it works and that’s what you have to watch for.

Alex: This topic comes back around to the whole idea of the Fed being able to push the economy in the first place. As you said a little while ago, the Fed follows the economy; it doesn’t lead the economy. Looking at what the Fed’s tried to do ever since 2008 and even before, it doesn’t seem like anything they’ve done really has any kind of effect.

What we’re probably looking at here, if I remember correctly from things you’ve said before, is that in order to get real inflation, we’re going to have to have some kind of sentiment or shift in the psychology before something like that happens.

Jim: That’s right, and it’s not easy to do. It took the worst recession and the worst financial panic since the Great Depression to shift people from spending to not spending. What’s it going to take to get them to shift back again into spending? I don’t see that happening anytime soon.

Alex: We have time for one other question coming from Steve M. who asks, “With Europe continuing to slow, do you see Draghi increasing euro QE into the end of the year?

Jim: Draghi is my favorite Central Banker, because he’s the only one who really understands central banking as far as I can tell. He understands that Central Bankers actually have very little power, so you have to talk a good game. If you talk a good game and put on a brave face, people actually believe you.

Go back to June of 2012 during one of the periodic sovereign debt crises. Greece has been in continual crisis from 2010 into 2015, but some periods are worse than others. The summer of 2012 was one of those acute periods, and Draghi said, “I will do whatever it takes to defend the euro, and believe me, it will be enough.” That phrase, “Whatever it takes,” I thought was a little bit of bravado, but he meant it. I think Draghi will do whatever it takes.

The euro seems to have stabilized. As I’ve said, I don’t see any real chance that the euro is going to fall apart. I have been pretty much laughed at for years about that, but it’s working out that way. If you go to Athens tomorrow, you’re going to spend euros. They’re not out of the euro, nor will they be.

Europe is doing okay for the time being, but remember the reason they’re doing okay is because of the currency wars. The euro got cheap. It went from $1.60 to $1.40 to $1.20, and in February of 2015, it was $1.05. At that time, everyone said it’s going to par but I said, “No, this is the bottom.” It’s come back up a little bit. I see it getting stronger next year, but the euro has held together, and that’s what has given Europe a lift.

The Irish economy is doing very well, and the Spanish economy is doing very well. Sure, there are pockets like Greece and Eastern Europe – and even France, for that matter – that are not doing that well. Germany is probably going to decelerate a little bit because of the slowdown in China and the fact that they have such a large trading relationship with China. It’s a mixed bag, but on the whole, Europe is a little bit of a bright spot because the euro got cheap.

The interesting part is that the U.S. engineered a weaker euro and stronger dollar to help Europe in the belief that the U.S. economy was strong enough to bear a strong currency. That was a blunder. It turns out that the U.S. economy was not strong enough to bear a strong currency. We got the strong currency but we’re flirting with a recession.

At what point does the U.S. wake up and say, “You know what, the strong dollar thing is not working for us. We need a weaker dollar like we had in 2011 to keep the game going. Hey Europe, you know what that means: we get a weaker dollar, you get a stronger euro.” If that happens, Draghi may actually do more QE or maybe even deeper negative interest rates just to give Europe a little bit of a lifeline.

The problem with currency wars is not only are they not a positive sum game, they’re not even a zero sum game. Cross rates are a zero sum game, but currency wars are probably a negative sum game because of the uncertainty that gets introduced into the global capital flows and the global trading system.

Again, I think Europe is a bright spot for now. I doubt that’s going to change in the near term. I suspect the Fed will continue to blunder in their forecasting ability by thinking that the U.S. economy is stronger than it actually is, by continuing to talk tough, by talking about the October surprise to keep a strong dollar, and believe somehow that’s all going to work.

By late this year or early next year, I believe even the Fed will see reality. At that point, you may see the beginning of a weak dollar policy and a stronger euro. Draghi is just going to have to go along with that. At the end of the day, the Fed has Europe under its sway because of the importance of the dollar/euro swap alliance between the central banks to prop up the European banking system. It’s all connected in interesting ways that will play out.

Alex: That sounds like possibly the beginning of the next round of salvo in the currency wars, which may continue until we see that psychology shift. Thanks, Jim.

Jim: Thank you, Alex.

Alex: With that, we’re going to hand it back to Jon.

Jon: Thank you, Alex. Let me just briefly remind our listeners that you can follow Alex Stanczyk on Twitter. Go to Twitter and type in @alexstanczyk for great insights and very valuable links to follow there.

Thank you, Jim Rickards. It’s always a pleasure and an education having you with us.

Jim: Thanks Jon.

Jon: Most of all, thank you to our listeners for spending time with us today. You may also follow Jim on Twitter. His handle is @JamesGRickards.

Goodbye for now, and we look forward to joining you again soon.


Listen to the original audio of the podcast here

The Gold Chronicles: September 15, 2015 Interview with Jim Rickards


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Transcript of Physical Gold Fund interview with Director of one of the largest Swiss Refineries

Dear friend of Physical Gold Fund, we are pleased to bring to you what in our view is perhaps one of the most important interviews in the gold market in 2015. The gentleman we are interviewing  is part of senior management of one of the largest Swiss refineries.  His refinery is one of only 5 global LBMA referees, which takes samples from other refineries around the world and certifies them to produce gold meeting the purity and form factor of the LBMA good delivery standard, which makes it part of the very core of the industry globally. He has over 30 years experience in the gold markets and has in our view one of the most authoritative perspectives into global physical gold flows in the world. His unique outlook, formed from internal data on gold flows through the refinery, combined with colleagues throughout the industry including the largest bullion banks (versus news outlets)  is an invaluable source of information and paints an important picture for the gold markets moving forward.

Please enjoy this exclusive interview with our compliments.

Alex Stanczyk
Managing Director
Physical Gold Fund SP

Topics include:
*Why trying to correlate physical flows with the price can be misleading
*On-going tightness in the physical gold markets
*There is less liquidity in the physical market
*The physical tightness of flow is reflected in the price “not at all”
*As long as the spot market is settled with cash settlement, the physical flows are not determining price
*If investors dealing in cash markets begin to take delivery, the physical is just not around
*The current pricing mechanism can continue indefinitely unless investor behavior changes to taking delivery versus cash settlement
*The gold price has “no correlation to the physical market”
*If this behavior changes (to taking physical delivery) it could become dramatically dangerous
*Gold is moving in one direction from west to east with small exceptions over the last year
*90% of the refinery’s business is currently supplying demand from the east (India, China) and 10% to western markets
*China has imposed a new standard on the LBMA good delivery system of 1 kilo, 999.9 fineness
*400oz bars being melted and refined to 1 kilo 999.9 fine bars and shipped into China are coming out of London and particularly the ETF’s such as GLD
*In the next gold upleg, scrap may not be readily available – overall scrap has decreased remarkably
*Declining investment in the mining sector and geo-political issues affecting mining viability will unavoidably reduce gold supply moving forward
*The danger of less supply moving forward is more likely than the comfort of more supply

Listen to the original audio of the podcast here

Physical Gold Fund interviews Director of one of the largest Swiss Refineries



Jon: Hello. This is Jon Ward with Physical Gold Fund. Recently I was privileged to hold a candid conversation with one of the most connected and influential people in the physical gold market. The gentleman you’re about to hear from holds a senior position in one of the five largest precious metals refineries on the planet. Because of his current position and his decades of prior experience, he has a deep inside knowledge of today’s physical gold markets. His insights and unique perspective on these markets goes way beyond what you will ever find in the mainstream press. Due to the sensitivity of the information he reveals in this interview, his identity and that of the refinery he works for have been withheld. Here is the conversation we recorded.

Head of Refinery: Hello, Jon.

Jon: It’s great to have you with us.

Your refinery is one of the largest refiners of precious metals in the world. The company is notable for being one of only five global referees for the London Bullion Market Association. This means that your company certifies all refineries worldwide for their ability to produce gold that meets the LBMA Good Delivery standard.

To begin, please tell us a little bit about your background in the precious metals industry and the position you hold today.

Head of Refinery: With pleasure, Jon. Thank you very much for giving me the opportunity to talk to our customers directly. I started in 1978 as a telex boy in the precious metals department of Credit Suisse. That’s how I earned my living during university. In 1985, I changed to another large Swiss bank, UBS. I stayed in the banking business until 2001 when I had the feeling and impression that physical business in precious metals was becoming more and important.

I found this importance to be neglected by the banks to some extent. That’s why I then moved into precious metals refining. My refinery, as you said, is one of the largest in the world, and I have built up the precious metals trading, funding, and hedging business for this refinery.

Jon: In your day-to-day work in this industry, what are your primary sources of information about the precious metals market?

Head of Refinery: We have, by nature, a lot of direct information. If you look at the trucks driving in and out, look at the bar lists, and look at the capacity utilization, that gives you some information already. It could be misleading, however, if you try to correlate the physical business with the prices. You have to be very careful there.

Information is also dependant on the network you have. At my age, there are a lot of downsides, especially if you get up in the morning and you feel your bones! But age also has advantages in the network we have here. It is huge. We have been an internationally oriented company since the beginning, so our contacts really are all over the world. We are proud of this network, and therefore, I would say our information is coming less from the newspapers and more from the market.

Jon: Yes, it’s from the people you talk to personally day-by-day across the world. In 2013, I recall you commented on the tightening of physical supply in the gold market and even the difficulties you were having in sourcing material. In fact, as I remember, you remarked that in 30 years, you’d never seen anything like it. Is that situation still true in 2015? How difficult is it to source the metal you need today?

Head of Refinery: The situation has not changed. It is truly difficult. This is also reflected by the price. It is getting more and more expensive to get material out of the market, and also there is less liquidity in the physical precious metals market than there used to be in the past.

Jon: Wouldn’t you say there’s a paradox here because the price of gold on the spot market is seen as low? What’s your understanding of the current price of gold? How well does the price today reflect the realities of physical supply and demand you just described?

Head of Refinery: The price does not reflect the realities at all. Don’t forget, we have a huge amount of artificial gold or paper gold floating around the market. If you look at the numbers of futures exchanges, there is a lot of metal you can’t even detect because it is within some derivative product, which in the end, you have no clue how much it is and on which side it is.

The other point is that nobody is interested in any physical delivery at the end. These products are all cash settled. People are happy just to use the spot market as a benchmark, and the product itself never ends up in the physical market. This looks dangerous to me. If we were to have a situation where everybody said, “Okay, now I have a long position that expires, so I want the physical,” for sure, the physical would not be around.

Jon: That’s a big ‘if,’ of course. Is it your belief that this paper market can be sustained indefinitely with a huge mismatch between the price in the market and the supply and demand in the physical? Can this go on forever, or do you think will it break at some point?

Head of Refinery: It depends very much on the behavior of market participants. Generally, if you look at the situation we have now, nobody understands the price of gold. We have serious geopolitical, not only risks, but already issues. We have a financial world with debt crises we have not seen for decades. We have a relatively low gold price that is in no correlation with the physical market. So there is question mark after question mark.

Will this continue? I think it depends very much on the behavior of the people. As long as market participants are happy for cash settlements, this can go on forever. The spot market price of gold is nothing more than a number, a benchmark. People are happy with cash settlements or they take the currency. If this behavior should change, then it could become dramatically dangerous.

Jon: Going back to the physical market, you’re in an unusual position to observe the flow of precious metals across the world. I’m curious to know what you’re seeing. Where is the gold coming from? Where is it going? Who are the main sellers? Who are the main buyers? Would you summarize the picture for us as it is today?

Head of Refinery: This is very easy, actually. There is nearly just one direction, from West to East. We have seen a small exception within the last year or so with increased demand in the Western world in Germany, but this bears no relation to what we see in general. The flows of metal end up in Asia. It is mainly China, also India, and to some extent the Middle East.

Jon: If you were to roughly estimate the percentage of buyers of precious metals in the East and the percentage of buyers in the West, how would you map it out?

Head of Refinery: For the whole market, figures are published by GFMS or other researchers. They give a more accurate overall picture. In our case, however, it is 90% going to the East and 10% to the Western market.

Jon: That is a pretty dramatic distinction. Obviously, it begs the question. Why is there so much less demand for gold in the West than there is in the East? Physical gold, that is.

Head of Refinery: I think Western financial markets simply offer more possibilities than you have in Eastern markets. People are happy to move out of their gold positions, to sell their gold from an ETF, and jump into some shares or whatever products are available.

The flows are also more driven by demand, but of course, where there is a buyer, there must be a seller. At the moment, it looks very much like people are very confident in general financial markets, and that’s why we have gold prices at these levels.

Jon: Let’s look a little more closely at the East, particularly China, where demand for gold has been high for several years. It seems rather opaque. It’s not very easy to know how much gold China is accumulating, because there are doubts about the official reports. What’s your picture of that? How much variance do you see between the official reported accumulation of gold in China compared to the reality?

Head of Refinery: I absolutely agree with you when you say it’s opaque. I have the same feeling. I don’t know myself how accurate these figures are, but I have my doubts. Not only is China the largest or second largest importer of gold; they’re also the world’s largest producer. Where this gold all ends up, we don’t know.

I must say that I’m always surprised about the retail demand in China. It is really unbelievable how much gold ends up in decorative items, in jewelry, and also in bar vaulting. But the big question mark we have to put there is what are the figures from the People’s Bank of China? We can estimate or possibly believe their figures, but my personal assumption is that the holding is much larger than what’s published.

Jon: Staying with China for a moment, we see that they tend to prefer 1-kilo bars at 999.9 purity over the traditional LBMA Good Delivery Bars, which are 400 ounces at 999.5 purity. Would you say China has effectively imposed a new international standard on the physical market?

Head of Refinery: It has definitely imposed a new standard. It is also interesting to see that 999.5 gold bars were the bars typically for central bank holdings. Then when demand was on the consumer side, these bars were converted to various weights – from 1-gram wafers up to 1-kilo bars. That was always the case. Now, however, given the scale of demand from China, yes, they have established a new standard.

Jon: Over the last couple of years, has this meant that you actually had to melt down and re-refine a whole lot of 400-ounce bars for China? If you have, I’d like to know where the bars come from.

Head of Refinery: The bars are coming from what you could call “the market.” Looking back, there were all these ETF liquidations, and the ETFs were holding bars in the form of 400-ounce bars. At that time a lot of the physical liquidity maintained in the London gold market was actually in 400-ounce large bars. The final customers were not interested in 400-ounce bars, so it was one of our jobs to take these bars, melt them down, refine them up to the 999.9 standard, and cast them into kilo bars.

Jon: Were a whole lot of these bars coming from London?

Head of Refinery: Regarding the ETF liquidations, this gold had to go somewhere, and that was all converted. This is a thing you see every year. You also see some liquidations of physical gold held with COMEX and NYMEX. More or less, these are the sources of gold other than newly mined.

Jon: What about scrap? That traditionally has been at least one source of gold. What’s the status of the scrap market today?

Head of Refinery: We saw a dramatic decrease when the price came down. To put it another way, when we had $1900 an ounce, there was definitely an incentive to look at melting down some of your old jewelry and whatever was around. We now have price levels around $1150, so this incentive is gone. A lot of scrap coming from old jewelry is just not in the market anymore.

We have seen, however, a certain small increase in the scrap business from the jewelry industry’s processing and production. There is always some waste coming back. Then there is price-sensitive scrap – very opportunistic – coming every now and then out of Asian countries; not China or India, but other countries in the area. This may have something to do with the currency, exchange rates, and sometimes with certain tax issues, but this is not a steady flow.

Overall, I can say scrap has decreased remarkably.

Jon: I’m getting the impression scrap is not a very significant source of gold for your business. Is that correct?

Head of Refinery: No, not for the time being.

Jon: Let’s look at the mining sector then. Infrastructure investment in mining has been dramatically reduced since 2011. How do you see that impacting the future supply of gold?

Head of Refinery: I think it is a very important question. Mining companies are not doing well at the moment. Just have a look at their share prices. If one of the results is that they are not exploring anymore but saving costs, that’s a big issue for them. I think it is unavoidable that within a few years, we will see that there was less exploration done in the past, and that means there will be less gold in the market.

Although I must say, if you look back, the mining companies were still able to increase general production at a pace of 1.5% to 2.5% a year. However, with the present cost situation and drop in exploration, I think the only reasonable conclusion is that in a few years’ time, we will have less newly-mined gold.

Jon: Let’s say the price of gold rises at that time. If I understand this right, it takes the mining industry quite some time to catch up and start increasing production again.

Head of Refinery: Yes, absolutely. Setting up a mine is a big investment. Even for a small venture, it could easily cost about a few dozen million US dollars. That said, even if you explore and know how much is in the ground, you still don’t have a mine that is producing. For several million dollars, the investors must feel comfortable with the price of gold and, also, in general, the political environment. Financial stability must be there. You must believe in the safety of your investment.

We see both of these points now, and I would not say they are very positive. On one side, the gold price is under pressure, and on the other side, there is the geopolitical situation in those places where you still have potential for production. These places are not the most attractive places to invest in. I see a double threat there that will have an impact on future production.

Jon: Are we looking at a future where there could be a rise in the price of gold and greater demand for physical gold in the market, but a squeeze on supply to meet that demand?

Head of Refinery: This is certainly possible. Also, since the last move up, a lot of scrap has already come to the market, so if the price moves up again, I don’t know how much scrap will be around in order to compensate for the lower volumes coming from the mining industry.

For physical gold, I’m very much on the bullish side. Let’s put it this way. The danger of less supply is bigger than the comfort of more supply. That should have an impact on the price, yes – and then do it in physical form.

Jon: Maybe that should also be an alert to those interested in purchasing gold to buy while the gold is available, and as you say, do it in physical form. Thanks for that emphasis.

As an introduction to some of our listeners who are not familiar with your company, what can you tell us about your company today?

Head of Refinery: One point for sure is that we are a precious metals refiner. We do only precious metals, and we don’t diversify into any other metal or material – ceramics, or whatever. We are precious metals, and we will always be precious metals.

What is also special about our refinery is that we are a fully-integrated service provider. That means we refine the metal, we provide hedging facilities, and we give our customers the possibility of maintaining a metals account. With this kind of combination, you could say we provide banking services and refining services. However, what we have on the financial service side always must be related to physical metal.

A further point is that we are a Swiss refinery. In Switzerland, we have the only country in the world that has legislation for trading and processing precious metals. Security and safety for our customers is guaranteed in the end by the Swiss government. Then the other issue about Switzerland is that we are a safe place. We have a stable currency, or maybe even a too-stable currency. We have open financial markets. In a nutshell, that is what is different about my company compared to other refineries.

Jon: I believe you’ve been expanding capacity recently. Tell us about any new initiatives at the company that might be of interest to our listeners.

Head of Refinery: There are a few investments. We are investing and very much want to grow in the high-end jewelry and watch industry in Europe. We are expanding there with innovative product designs and alloys, always in very close cooperation with our customers.

Then looking at mining partnerships, we are expanding in Latin America. We have just opened in Santiago, Chile, and are trying to provide even more competitive services for the Latin American mining industry.

We also have several ventures together with the United Nations and some government institutions. We are looking at the artisanal mining industry both in Africa and also Latin America. Although only about 10% of the gold produced is coming from artisanal miners, they account for 90% of the workforce in gold mining. They are often working with very outdated technology, maybe sometimes even dangerous technology — I just want to mention mercury and environmental issues. We have been approached, and also looked ourselves, for contacts at the UN and in certain governments. The response is always extremely positive; therefore, we have considered this one of the areas where we will invest more time and money, and grow.

Jon: That’s most interesting. Do you have any final thoughts to share with us about the current state of the physical gold market?

Head of Refinery: If I am honest, the only thing I could share now with you would be that I’m perplexed about the discrepancy between the prices and the situation of the physical market. This is something I still do not understand and is a riddle for me every day. For all people who are interested in precious metals, the physical side of this business should be given more emphasis.

I believe that in this situation with all the clever plans, the structured products, and whatever is offered, the market should be checked very, very carefully. If you see in one of these products a paragraph that references the possibility of cash settlement, keep your hands off. I may sound old-fashioned, but if you are interested in precious metals, go the old-fashioned way – do it physically. I think the market is going to be quite interesting in the near future.

Jon: Thank you for sharing your unique experience and insights with us today. It’s been a pleasure talking to you.

Head of Refinery: My pleasure, too, Jon, and thank you for giving me the opportunity.

Jon: On behalf of all of us at Physical Gold Fund, thank you to our listeners. We look forward to joining you again soon.


Listen to the original audio of the podcast here

Physical Gold Fund interviews Director of one of the largest Swiss Refineries


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Transcript of Jim Rickards – The Gold Chronicles July 16th, 2015

July 16th, 2015 Gold Chronicles topics:

*Comments on co-Keynote with Former Fed Chairman Ben Bernanke
*Comments on recent experience and invitation to Pentagon hosted financial wargames
*As predicted, there has been no Grexit
*Bank holidays is a standard way of dealing with financial crisis, people should consider preparing ahead of time
*Greece and Cyprus have been dry runs for how to deal with crisis on a much larger scale
*The China market crash is on-going, this has just begun and will continue for a time
*The extraordinary effort put forth by the Chinese government to halt the crash will not work over the long term
*The greater issue here is whether this turns into a social problem within China
*The most recent Pentagon wargame was specifically focused on China
*Other countries are now building their own systems which circumvent things like SWIFT so that they are able to function without it
*This wargame was more focused than the last, and the Pentagon is taking financial warfare very seriously
*Why a gold market corner is unlikely
*What large futures positions in gold by major institutions probably means
*Movement of unallocated gold in banks to allocated gold in private storage
*People are taking gold out of banks because they are losing confidence in the banking system and putting it into private storage
*Fourth quarter is traditionally a seasonally good time for gold
*The only reason the Fed will raise rates is if inflation remains weak, period, full stop
*The dollar price of gold continues to go down, this is probably a good entry point
*The Fed always follows the market, it doesn’t lead the market. If Yellen raises rates in a weak economy it would be a disaster
*Fed rate increases are always conditional on data, and we are not getting to any of the levels Yellen has specified in the past
*Bernanke describes the international monetary system as “incoherent”, and he is involved with the IMF and Sec. Treasury on China voting rights with the IMF
*Expectation is that China will be included in the SDR in the fall of 2015
*Bernanke says that everything the Fed had done since 2008 during his tenure had been an experiment

Listen to the original audio of the podcast here

The Gold Chronicles: July 16 , 2015 Interview with Jim Rickards


The Gold Chronicles: 7-16-2015

Jon Ward: Hello, I’m Jon Ward on behalf of Physical Gold Fund. We’re delighted to welcome you to our latest webinar with Jim Rickards in the series we’re calling The Gold Chronicles.

Jim Rickards is a New York Times bestselling author and the Chief Global Strategist for West Shore Funds. He’s the former General Counsel of Long-Term Capital Management. He is a Consultant to the US Intelligence community and the Department of Defense and is also an Advisory Board Member of Physical Gold Fund.

Hello Jim and welcome.

Jim Rickards: Hi Jon. It’s great to be with you.

JW: Today we have an unusually full agenda. First, my apologies to our listeners as we will not be taking questions. We’ll be sure to make additional time for your questions in upcoming webinars, so please keep sharing your thoughts with us.

Greece has been the hot topic until just a few days ago, but as you predicted, there has been no Grexit. In fact, it transpires that the Greek government, for all its bluster, really had no serious contingency plans for leaving the euro. I’m left wondering, how close did we come to an actual meltdown here?

JR: It’s a great question, Jon, an important one, and you’re right. Remember that this whole Greek sovereign debt crisis started in 2010. There’s nothing new about it. It’s been going through stages of quiet periods and intense periods for the past five years.

Beginning in 2010 and continuing through this past weekend, I was one of the voices saying that Greece would not leave the euro. I think most voices were on the other side. They didn’t see how they could stay in. Even today, I saw that Austan Goolsbee, who was one of the members of the Council of Economic Advisers to President Obama, published a piece saying they’re in for now, but in the long run, they can’t possibly remain in. He listed a bunch of reasons although I thought he left out a couple.

The point is, no matter how many challenges you overcome, people just can’t get their minds around the fact that this is Hotel California. You get in; you can’t get out. There’s no treaty provision, no legal provision, for exiting. Now, that wouldn’t stop a sovereign power from simply unilaterally declaring they were breaching the treaty. That is possible, even though it would be messy. I’ve always understood this not as an economic project but as a political project. Once you see it as a political project with other goals in mind, then you can understand that the political will is there to keep it together, and indeed it has stayed together.

That’s fine as far as it goes, and I will say it’s nice to get these things right. Some people have complimented me on that. The temptation is always to take a victory lap, but the fact is, this was a lot more dangerous and came a lot closer to a Grexit than I would have thought. In other words, I got the result right, but the process was a lot more challenging.

I was up late Sunday night New York time which was early Monday morning in Brussels. The summit conference actually set a record for the longest euro summit conference with almost 24 hours of continuous meetings. There was some pretty good reporting. You could pick things up on Twitter from reporters who were outside the room, so you were getting as close to real-time information as you possible.

I always felt that Germany and Greece would both blink, that they both considered a Grexit – Greece leaving the euro – would cause more harm than whatever it was they had to do to keep Greece in. But in the end, Germany didn’t blink, at least not very much. It was Greece that had to do all the concessions, and it became apparent that Germany was prepared to see Greece leave.

I’ve been in a lot of tough negotiations, and the only way you get a good result in any negotiation is if you’re prepared to walk away. If you make it clear at the table that you’ll pay any price or do anything, whatever it takes, to get a deal done, then the other side will take advantage of you one way or another. To get a good deal, you have to be prepared to let the deal go down.

That was always dangerous as far as the euro was concerned. I took the strong view that there would be no Grexit, but I also said that if I was wrong and there was a Grexit, it wasn’t going to be contained. It wasn’t going to be the non-event a lot of people were expecting, and that it would be catastrophic in its consequences.

That became very apparent Sunday morning when markets seemed to be a little bit complacent. When it became obvious that Germany was prepared to see Greece go, then you start to think through what that meant. The only way I could understand it was that Germany understood the consequences but felt it would be really bad for the rest of the world. In other words, it might be the United States and certainly the Greeks themselves who would have to bear the brunt of it, rather than Germany.

There might be some truth to that, but the good news is that Greece did not leave. There was no Grexit, and the eurozone has held together. I expect that will continue to be the case and that they will add new members.

I went through this in some detail in Chapter 5 of my book The Death of Money. Anyone who read the book last year would have seen this result coming because I outlined it in detail. I expect that will continue to be the case, but it was a far more dangerous situation.

I will say that late Sunday night New York time was the most critical, most dangerous moment in global capital markets since the Lehman Brothers weekend in mid-September 2008. It didn’t result in a collapse; the world didn’t actually fall apart, but it came dangerously close. I guess I would say that I’m glad we got the call right, but it did look a lot more dangerous than I thought, and that’s something that should bear watching in the future because the danger has not really gone away.

JW: There’s one footnote to the Greek story that you picked up in your newsletter, Strategic Intelligence. You report that in response to the crisis, Greece banned the sale of gold to its citizens. This may be a point of interest to our listeners here. Do you have any comment on that?

JR: I did notice that, and it’s very typical of what governments do in a crisis situation. We all know that the banks were closed and the ATMs were reprogrammed to allow 60 euros a day. We all saw the queues of Greek citizens lined up to get 60 euros – roughly $100 or so – out of the banks.

When I saw those pictures a week ago Sunday, I certainly felt a lot of sympathy towards the people in that situation, but I thought to myself, “Gee, what were you waiting for? You could see this coming a mile away. Why weren’t you at the ATM a month ago, two months ago, six months ago or a year ago getting some cash and putting it in a safe place of contingency for exactly this kind of thing?” This has happened in Cyprus, it’s happened in Greece, and it will happen again. I can see this happening even in the United States in the next financial crisis, one that I expect will be worse than 2008.

That brings us to gold. You get your money if you can – that’s easier said than done – but what do you do with it? Authorities did not want people buying gold. You could say, “I’m going to get my euros out of the bank. I’m a Greek citizen; I don’t trust the Greek banks, so I’m going to get my euros out of the bank.” But what would happen if Greece was kicked out of the euro and the euro itself collapsed? Now you’d have two layers of risk: one, your own banking system, and two, maybe your euros aren’t going to do any good because those two things are correlated.

It’s a lot like when you work at a company and they offer you a generous stock purchase plan. You buy the stock thinking that’s a good investment much like the employees at Enron. Then you wake up one day and find that the company has failed. Well, you get a double-wipe out — you lose your job and your net worth at the same time. By buying your own company’s stock, you’ve doubled down on the company, and if it fails, you lose both your job and your investments. There’s a conditional or hidden correlation there.

The same thing could have been true for Greek citizens. They were lucky to get euros out of the bank – the ones who could – but just because they had their euros doesn’t mean they were home free, because if Greece quit, then the euro itself could have failed. They were doubling down in a way.

What’s the way out of that? One way out is in buying gold, to be protected against both – the Greek banking system and the euro failing – because gold is not correlated to either one of those things. In fact, I think gold could be expected to go up in that kind of catastrophic outcome.

The authorities don’t like that. They probably weren’t happy with the 60 euros a day or anyone who was hoarding cash, but they at least felt, “If we stabilize the system and do the deal with Germany, then those people will show up and put the money back in the bank.”

By the way, that’s exactly what happened in the United States in 1933. As this Greek bank holiday was going on – it was day 5, day 6, day 7 – I was reminding people that, so far at least, the Greek bank holiday had not lasted longer than the U.S. bank holiday. In March 1933, the U.S. closed all banks. Of course, there were no ATMs then, so you couldn’t even go the ATM and get $100. President Roosevelt just closed every bank in the United States by executive order. When they closed, they did not say when they would reopen. It so happened that they reopened about nine days later, but they didn’t say that at the time. They just said the banks were closed until further notice and would let people know when they would reopen.

The reason they closed them was because there was a run on the banks. People had completely lost confidence in the banking system and were running down to get all their money out of the banks. They were putting it in coffee cans and shoeboxes, burying it in the back yard, hiding it under their beds and mattresses or whatever.

As they were taking money out of the banks, a funny thing happened. There were “bank holidays,” so you couldn’t get your money out any longer. During the next nine days, the government went through the exercise or the appearance of examining all the banks. I don’t think they examined very many, but they were at least able to go through the motions – à la Tim Geithner’s stress test – and then announced that the banks that were opening at least were sound. At that point people lined up to put their money back. The banks were closed because of a run on the bank and everybody taking their money out, but then, after they reopened because confidence had been restored, people put their money back.

I’m sure the Greek authorities were hoping for the same thing, meaning people would take the money out, but once things stabilized, they’d come back down to the bank and put money back in. But there’s a problem. If you buy gold, that’s it. If you own gold, you’re not going to walk up to the teller and hand them your gold, so the authorities wanted to ban the sale of gold. Gold is a one-way street. You can always sell it, but you’re much more likely to hang onto it as a form of insurance, which in fact is a good reason to own it.

Authorities – central bankers, bank regulators, and mainstream economists – hate gold, because once people buy gold, they tend not to sell it. They tend to hold onto it to keep as protection against various catastrophic outcomes. I believe we’ll see that again.

I look at Greece and Cyprus as dry runs for the same thing on a much larger scale. Whether it’s in the U.K. or United States or Canada – it could be a lot of countries around the world – these things are being tried out on a small scale. Bail-ins, reprogramming of ATMs, and the ban on gold sales will be used on a much larger scale in the next financial panic.

Going back to the people lined up at ATMs, I say, “What were you waiting for? You should get your cash now if you want cash. Get your gold now if you want gold. Don’t wait for the lockdown.”

JW: Let’s turn from Greece to China, where there’s been some measure of recovery from the stock market collapse. We were all following it with great interest, but how serious was this collapse? It looked huge on the charts, but after all, the fall in values was only to levels seen as recently as March of this year. Is the bigger story perhaps the zealous interventions of the Chinese authorities?

JR: I think both stories are big. Let’s take them separately. First of all, I would not refer to this crash in the past tense. It’s actually just starting. I was on television last fall looking at the Shanghai Composite Stock Index and said, “This is a bubble that’s going to crash.” To me, it was very apparent. Bubbles are not that difficult to spot.

When it did crash, I called attention to that and said, “Hey, I was out there a while ago saying this was a bubble that was going to crash.” Somebody immediately came back and pointed out that the level at which I made that forecast was actually below where it was after the so-called crash. In other words, if you had ignored me and bought stocks, you would still have made money.

I’m not in the business of picking tops and bottoms or picking exact turning points. I am in the business of analyzing system dynamics and trying to understand where those dynamics are going so that we can stay ahead of the curve and not be surprised by these things, whether it’s Greece or the Chinese stock market and so forth.

Yes, it is correct that it was off the top and crashed pretty hard – about 30% – but even at the 30% level, it ran up so much that even after going down 30%, it was still above the level where it was at the beginning of the year. But it’s not over. When bubbles break, they don’t go straight down to the bottom. They go down, bounce up, down again, and then they bounce up a little bit. We hear people saying, “Buy the dips.” They buy the dips, it goes up, it goes down again, and some people say, “There’s another dip. Buy the dip,” etc. It’s a process of denial, a process of stages, an irregular process. It doesn’t go straight down.

I suggest that analysts or investors take two stock charts that actually look very alike, the Dow Jones Industrial Index from 1927 to 1933 or the NASDAQ stock market from 1996 to 2001. Either one of them will do fine. Then just normalize it and overlay it on top of the Shanghai Composite. What you’ll see is that the run up looks quite similar. It gets strong, it gets momentum, and then it goes hyperbolic. Then it goes straight up, it gaps up, and then it breaks. You’ll see is that Shanghai is nowhere near a bottom.

Everybody remembers October 21, 1929, when the U.S. stock market went down almost 25% over a two-day period. That was just the beginning. The market didn’t hit bottom until 1933. It took four years to grind its way down and was down 90% by the time it was done, not 20% or 30%.

It was the same thing with NASDAQ when it broke in January 2000. It found its way back not to the old high, but it went up a little bit and ground down a little bit. Then it broke sharply and ended up down 80%. So if you look at those stock charts and look at what’s going on in Shanghai, I would say that this crash has just begun.

Coming to your second point, the Chinese government has used extraordinary measures that are fairly well-known. They did a whole host of things to basically stop the fall. They banned short selling which seems to be the first thing everybody does. Then they told institutions they were not allowed to sell at all. Then they limited margin accounts. They also came up with a $19 billion investment fund. So they got all the brokers to buy stocks, they told the institutions they were not allowed to sell stocks, they eliminated short selling, and they did a number of other things. Who knows what they did that we don’t know about?

It was an extraordinary effort, but it hasn’t really worked. It stopped that crash dynamic and put a floor under it, but it hasn’t caused it to rally very much. I wouldn’t expect it to. This process is just beginning, so yes, it is very serious.

By the way, this doesn’t mean that the Chinese economy is falling apart. Growth has slowed down a lot, and that’s a big deal for the world because they are about 10% of global GDP, but the economy hasn’t ground to a halt. This is a stock market crash and a capital markets problem. A lot of individual investors are getting wiped out, and it could be a social problem for the Communist Party and the authority of the Communist Party.

I expect it to go down a lot more, but I would watch very closely. It’s far from over. It has that dynamic to it where it could to go down another 50% from here, go up and down a little bit, and fluctuate. This is really just beginning, and it’s a serious problem for people who threw money into it.

Meanwhile, the elites – the princelings, senior Communist party members, CEOs, owners of state-owned enterprises, and other mega-wealthy in China – are getting their money out as fast as they can. They have been for years as I covered in Chapter 4 of The Death of Money.

I travel around the world quite a bit. Go to Vancouver, British Columbia or Melbourne, Australia or Istanbul, Turkey or London or Paris – I was just in London and Paris last week – and you hear the exact same story. High-end condos are going through the roof. They’re being bought up by mostly Chinese money among others – maybe some Russian oligarchs and South American drug lords as well.

You have to be connected to get your money out of China. You may be upper middle class – perhaps you own five McDonald’s restaurants in Wuhan or a chain of 7-Elevens in Chongqing or a car dealership in Shanghai — you’re not poor but you’re not mega-wealthy. You may have a few million dollars saved up, but you still cannot get your money out of China very easily. If you are mega-wealthy worth $100 million or $500 million or $1 billion as many of these Chinese princelings are, there are a lot of ways to get money out of the country either through corruption, the ability to have offshore companies, transfer pricing, rigging fake losses in a casino, etc.

What does it tell you if the smartest, richest, most connected people in China are getting their money out? How much confidence do they have in their own economy? The stock market is a problem, but it’s not the only problem. There is a lot of rot in that society. You could be looking at social unrest down the road.

As I said, I think their stock market has a long way go down, so I wouldn’t invest a nickel in China. There are other reasons for that. For example, if you’re a large business, they steal your intellectual property. China is a fascinating story. It’s an old culture, a strong economy, and an important player in the international monetary system. I watch it from the global macro international monetary perspective, but it has so many problems and so much opaqueness that I wouldn’t recommend anyone investing in it.

JW: Is the implication then that this collapse is a very special case? Or is there anything to draw from it in a larger sense about stock market investment and what can happen from an investor’s point of view?

JR: It’s a special case in the sense that China’s stock market is collapsing. This is not happening elsewhere in the world. The European stock industries are doing okay, and Europe’s growth seems to be a little bit better.

The U.S. looks like it peaked last November – not literally peaked, but it’s reached a few new highs since then although not very much higher than it was last fall. The U.S. stock market is going sideways in what I call ‘non-directional volatility.’ There are days when it’s up 200 points, down 150 points, up 90, and down 80. Looking at a chart of the S&P and the Dow Jones, they’re wiggling sideways with a lot of volatility. Job creation seems to have slowed down as have a lot of things, so it looks like the U.S. is not quite in a recession, but we’re close to one. Growth really hit a wall as to the stock market late last year.

I don’t see the bubble crash dynamic in other major stock markets that I do in China. China seems to be unique in that case. I look at the interconnectedness, what I call density function or the potential for either what’s called contagion or what the IMF calls spillover effects. What are the odds that a crisis in one country spills over and causes a crisis in another country? That’s always a potential problem and something I look at very closely.

The Greece thing seems to have been contained to Europe so far and not too much damage was done to capital markets. Obviously, this is extremely painful for the people of Greece as they have to sacrifice: their pensions are being cut, their unit labor costs are going down, wages are going down, and unemployment is going up. There are a lot of problems inside Greece, although that could bottom and turn around pretty quickly once banks reopen, they get access to capital, and maybe some Chinese capital comes in. You might look for a turnaround in Greece, but there was no real contagion, although I think there would have been if Greece had left the euro.

The China thing does seem to be unique to China. Looking back a week ago Wednesday when we had that awful sequence of events, it looked like Greece was collapsing, China was collapsing, and the New York Stock Exchange was closed for some software problems all at the same time. Two of those things are behind us – the Greece thing and New York Stock Exchange closing – and regarding China, I think markets have absorbed that.

These don’t look like the kinds of things that will set the world on fire, if you will, or start global contagion, but they are warnings of how unstable a lot of things are. I always say that the thing that will cause a global panic is the thing we don’t expect. We could see the Chinese event coming. I talked about it on television last year in 2014. I may have been early – that’s fine – but we could see it coming a mile away. And we’ve been talking about Greece for five years, so as dangerous as those things were, neither one of them were unexpected.

One reason to own gold, one reason to be prepared and not wait for a crisis, is that when the crisis comes, it will be something we don’t expect and there won’t be time to get ready. The time to get ready is now.

JW: That’s the black swan concept! Let’s stay with China for a minute. In your first book, Currency Wars, we read about your participation in a financial war game hosted by the Pentagon. I understand you’ve just taken part in a second such war game along with a handful of elite participants from the military, the CIA, the Federal Reserve, and so forth.

I’d like to ask you about it, but I’m struck by one implication. Clearly there are people at the highest reaches of government in the United States who are taking what you have to say very seriously. Is that your impression, too?

JR: This is being taken very seriously, but I wish it were taken a little more seriously at the Fed and Treasury. Senior officials of those agencies are invited to these war games, but sponsorship and hosting comes from the Department of Defense. Actually, I would give the Defense Department, the intelligence community, and the national security community generally slightly higher marks than the Fed and Treasury for thinking about these things as threats to national security.

The Fed thinks about bank risk and financial contagion, and the Treasury thinks about counter-terrorist finance, Iranian sanctions, and all that. Those things are a little more oriented to the banking system, so they are working on that rather than capital markets, which is different than following the money around the banking system.

The Treasury tends to chase money, freeze accounts, and interdict funds of bad guys whether it’s drug dealers or terrorists or whatever. The Fed worries about systemic risk in banks. Neither one of them is thinking as much about financial warfare. Financial wars are different than currency wars. Currency wars are an economic phenomenon where countries try to steal growth from each other by cheapening their currencies, try to import inflation, and try to export deflation to the other guy. There may be some rough elbows in the arena, but it is a kind of economic competition.

Financial warfare is different in that you’re actually using financial weapons to damage your enemy. I would point to U.S. sanctions on Russia in Ukraine, and Russia fighting back by joining hands with China through the BRICS Summit, the Shanghai Cooperation Organization, the Asian Infrastructure Investment Bank, and other institutions that they’re standing up to. They’re basically replicating the Western financial system on their own so they don’t have to depend on it and can’t be victimized by sanctions. That’s more in the nature of financial warfare.

We’ve done a number of war games. The first one ever was done in 2009, and I wrote about that in Chapters 1 and 2 of Currency Wars. Interestingly, that war game was sponsored by the Pentagon, specifically the Pacific Command, and it was conducted by something called the Office of Net Assessment and the Office of the Secretary of Defense.

We conducted it at the John Hopkins Applied Physics Laboratory because they have a war room there. It’s the same place they’ve been doing the Pluto planetary exploration with this New Horizons spacecraft. All the pictures you’ve seen in the last few days of the high fives and cheering from the ground control team for the New Horizons spacecraft that went past Pluto were all from the same place in which we did the war game in 2009, in a different building. They do a lot of weapons, space exploration, and war gaming for the Pentagon.

The most recent war game I did was on May 8th and was also sponsored by the Office of Net Assessment and the Secretary of Defense. We actually performed this at the Pentagon, and it was fun going there. It was an interesting day because May 8th was VE Day (Victory in Europe Day), the 70th anniversary of victory in Europe when the Nazis surrendered. The military arranged to commemorate it, and we were able to watch them fly over vintage aircraft. They had all these B-17s and B-29s, Stratofortresses and Flying Boxcars, Flying Tigers and other World War II vintage aircraft. It was striking and touching all at the same time to see the flyover.

This particular war game was different than the one we did in ’09 which was global, included teams from all over the world, and lasted two days. This was one day and was very specifically focused on China with a very interesting twist. When the U.S. was conducting financial warfare on Iran in 2012 and 2013 – before the President announced his detente with Iran, which has now led to this nuclear agreement, we were in a financial war with Iran and we kicked them out of SWIFT.

SWIFT is the agency in Belgium that handles the message traffic for all bank wire transfers in the world. Of course, it’s all digital and runs through a lot of fiber optic cable these days, but whenever any bank moves money anywhere around the world internationally, it runs through this system.

We kicked Iran out of that system, which meant they couldn’t get paid. They could ship oil in violation of the sanctions, but there was no way to pay them. You literally couldn’t move euros, Swiss francs, Japanese yen, dollars or any currency through the payment channels because the message traffic was interdicted at SWIFT. Leave it to Washington bureaucrats to come up with a good piece of jargon for that. We call that “de-SWIFTing”, so the United States de-SWIFTed Iran.

This recent war game involved China in the South China Sea and the confrontation between the Philippines and China. The U.S. is a treaty ally of the Philippines. If the Philippines gets in a fight, it’s not just an option on the part of the United States to come to their aid, we have a treaty with them that says we will come to their aid. If China tries to de-SWIFT the Philippines, turnabout is fair play, so the message and lesson for the United States is, “Be careful what you wish for.”

The U.S. developed and perfected these financial weapons, but what we are finding is that people don’t just sit still and get pushed around by the United States. They are building their own systems, so I think there will come a time when we want to put some financial sanctions on Russia, China, Iran, Turkey or some other country, and it won’t mean anything because they will have built completely alternate non-dollar systems where they’re quite happy trading with each other, paying each other, moving money, and not relying on the United States. That’s one possibility.

The other possibility is that China will take the same tactics we’ve been using and apply them to our friends. Again, we would have this scenario where China goes to the SWIFT Board in Brussels and tries to de-SWIFT the Philippines on the grounds that the Philippines is an aggressor in some confrontation in the South China Sea. Interesting stuff. I commend the Pentagon for being forward-leaning and thinking about this.

To go back to your original question, they were very serious. I was one of the financial experts invited along with people from the CIA, other branches of the intelligence community, the think tanks, the Council on Foreign Relations, and people you might expect to be there from the Fed and Treasury. Those from the Pentagon who were hosting this were very attentive. They record everything and do a debriefing book and all that. I would say that even compared to 2009, this one had a lot more focus, and it does seem to be more on the radar screen.

I think we can say that the future of warfare is financial warfare. As if investors didn’t have enough to worry about with bank closures, inflation, deflation, contagion, and all the rest, they could be collateral damage in a financial war, which will be fought in cyberspace digitally. This is another reason to have gold. It’s a non-digital, physical asset that cannot be hacked or erased.

JW: Let’s pick up on that and talk about gold for a moment. There’s been quite a buzz in the gold blogosphere about a possible market corner of gold led by Citi and JP Morgan, with those banks taking excessive long positions in the COMEX futures market. Would you give us your view on this?

JR: I did see those articles giving information that JP Morgan and Citibank had massively large, long futures positions in gold on COMEX. Somebody looks at that and says, “A-ha! They’re trying to corner the market.” Then someone will write a blog about it, they’ll throw it out on Zero Hedge, and everyone gets spun up: “Here’s the smoking gun. Here’s the proof that Citibank and JP Morgan are out to corner the market. Look at these massive futures positions.”

I roll my eyes and say, “Have any of you people actually worked in a bank?” I worked at Citibank for ten years as one of their international tax lawyers. I worked on every kind of transaction in addition to working at other banks, investment banks, and hedge funds, etc., along the way.

If you want to corner a market, first of all, you don’t just do it with futures. It’s a three-step process. First you have to buy up as much physical as you can so it’s quite scarce. Then go buy the futures. Yes, a large, long futures position would be an indicator of a market corner. Then step 3, stand for delivery; give the exchange notice that you intend to take delivery. Now the shorts, all the people who sold you the futures, have to go out and get the physical to deliver. Lo and behold, there is no physical because you have that, too. That’s how you corner a market.

Something like this did happen in 2005 in the ten-year notes. There was a big bond investor that got massively long on ten-year notes and massively long on futures. They dominated the open interest in the ten-year note future on the Chicago Board of Trade, and then stood for delivery, and then caused a massive short squeeze. It’s really a three-step process: you have to be physical, futures, and stand for delivery.

Here, we only have one of the three. Yes, they have a large futures position, but no indication that they’re going to stand for delivery. In fact, I would be shocked if they did, and if they did, they would be told by the exchange that they can’t do that. That’s number one.

Number two, I don’t know how you could corner the physical gold market. You could buy a lot of gold, but there’s no evidence that that’s going on. Three, and the thing that I think is most incredible, is I wonder if people read the headlines. These are the same banks that have paid over $30 billion in fines, penalties, restitution, compliance costs, etc., for rigging foreign exchange, rigging energy markets, rigging LIBOR. It’s actually hard to think of something they haven’t rigged.

These guys have had enough fun with the regulators. The idea that they’re now going to launch in to a corner of the gold market when they’re under this much scrutiny and transparency, and they paid, as I said, tens of billions of dollars in fines is absolutely absurd. I think we can confidently dismiss the notion that they’re trying to corner the market, both because a lot of the ingredients are missing and also because they’d get caught in a minute, and probably somebody would go to jail.

They do have the long futures position, so my analytical frame is to say, “Okay, what’s up with that? You’re not cornering the market, but something’s going on.” If you know anything about how banks actually operate, they don’t like large, long speculative positions. Banks like to do arbitrage, spread trades or match long and shorts at two different price levels or two different markets. They want to have some difference so that they can squeeze out some spread, leverage it, and get decent returns on equity. That’s how banks actually operate.

When I see a massively long futures position, it tells me that they must be short somewhere else and are probably trying to hedge the short position by buying futures. If you suddenly find yourself short of gold, one of the things you would do is go out and buy futures. Now you have a hedge position long and short. It might take you a while to fix your short, but you have insurance against price movements. Once you’re long and short, it doesn’t matter if the price goes up or down. You’re locked in the spread and insulated. The classic purpose of futures markets is to hedge prices and other markets.

If that’s true – and that’s far more likely in my view than a corner – then where’s the short coming from? Just to be clear, this is a speculation on my part; I don’t have hard evidence of this, although I do think it’s a likely scenario. The likely suspect for the way the banks could be short would be the fact that they’ve been short all along in the London Bullion Market Association (LBMA) unallocated gold forwards market.

When people call these LBMA banks and buy gold, I’m not talking about a few coins from the mint or the local dealer. I mean a lot of gold such as a ton or $10 million worth — very, very large purchases of gold. There are the usual suspects like Citi, JP Morgan, Goldman Sachs, HSBC, and a few others. When they call the LMBA banks and buy gold from the bank, the bank gives them a standard LBMA contract which I’ve actually read. Generally what you get is called unallocated gold. Unallocated gold means that they say you own the gold, you do have a price exposure, and there’s some gold somewhere, but there’s no gold with your name on it. In other words, there’s no specific segregated bar with a serial number.

When I was in Switzerland for Physical Gold Fund, we actually saw the gold that belongs to the investors in Physical Gold Fund. We had auditors, they had bar numbers and manifests, and we went item by item. Those bars actually belonged to the fund.

That’s not true with these LBMA agreements. You don’t have any allocated gold. That means a bank can have, say, one ton of gold and they can sell 20 tons of gold. They use the one ton to back all 20 of those contracts. In effect, they’re short 19 tons. They own one ton physical and sell 20 tons to a bunch of institutional investors or high-net-worth individuals who want to own gold, so they’re short.

They depend on their customers not asking for the gold. As long as this is all on paper, it works fine. Where it breaks down is if the customer comes in and says, “You know that unallocated gold? I would like to make it allocated and actually have the physical gold. In fact, not only do I want it allocated, but I would like you deliver it from your vault to a private vault run by Brinks or Loomis or one of the big secure logistics providers.”

That is what’s going on. People are taking their gold out of banks and putting it into new vaults because they’re losing confidence in the banking system. These new vaults are private storage vaults owned by private companies, not by banks.

Going back to my original scenario, the bank has one ton of gold and they sell 20. If even five customers show up and say, “I’d like my gold,” one ton each, you’re now short four tons. You have one ton of physical, but you have five tons of requests from five different customers. You’re short four tons, so you have to go out into the market and buy four tons of market. Guess what? That’s a big order. Good luck finding it. You can find it eventually, but you might not be able to find it quickly. So you have price exposure. You’re suddenly short the gold because your customers are demanding it.

What would you do? You’d go out and buy the futures. Now you’re hedged. You’re short to the customer who sent you the notice, you’re long on the futures, but you’re price exposure is hedged. Now you can take 30 or 60 days or however long it takes to source the physical and make delivery to the customer. The customer may think the gold is sitting in the vault and can be delivered tomorrow, but trust me, they can’t. They’ll be lucky to get it in 30 days and could even take a few months.

When I see a massively long futures position, it suggests to me – again, to be clear, I cannot prove this – that banks are turning up short in some other part of the operation, probably on these unallocated gold forwards. Customers are taking their gold out of the bank, the bank has to deliver to those customers, they’re short, they’re getting long futures to hedge, and they’re going to spend the next couple months going out and buying gold.

That’s actually bullish for the price of gold. The banks are smart. They’re not going to go out and buy it all at once. They’re going to work the order in small increments over a couple of months. If they’re in the process of doing that now, which I suspect they may be, they’re also running right into the fourth quarter. We’re not there yet, but the fourth quarter is traditionally a seasonally good time for gold.

We also have our friends, the Fed, and a lot expectation that they’re going to raise interest rates. I don’t think they will; in fact, I’m pretty sure they won’t and I’ve said they won’t. If they do, it will only be because inflation took off. The Fed is not going to raise rates if inflation remains weak. Period. Full stop. Janet Yellen said that. She expects and has forecast that inflation will pick up, but she has the worst forecasting record of anyone I can think of, so I actually don’t expect that, and I don’t expect them to raise rates.

If they do so because inflation took off, that is good for gold. When the market expects them to raise rates but they don’t, that is equivalent of easing, which is also good for gold. The Fed has painted itself into a corner. Either way, raising rates on higher inflation expectations or not raising rates when the world thinks you’re going to are both good for gold. So it’s a combination of seasonal factors: the Fed’s conundrum, the fact that banks are probably out shopping, and the dollar price of gold going down. This looks to me like a very good entry point.

JW: Speaking of the Fed, you were recently invited to a financial conference in Seoul as one of two keynote speakers. The other keynote speaker with you was former Federal Reserve Chairman Ben Bernanke. That’s quite some invitation. I understand you had the opportunity to engage Mr. Bernanke in an extended private conversation. Tell us about that encounter and what you gleaned from it.

JR: We were in Seoul, South Korea. It was a large conference, but we were the only two keynote speakers along with a couple of other panelists. They had a VIP reception for about ten of us including me, the former Chairman, and the VIPs of the Korean banking establishment. There was the head of the Korean Stock Exchange, one officer from the Korean Central Bank, and the head Korean securities regulator. Chairman Bernanke and I were the only Americans.

We had a nice chat and actually had a few laughs. I was one of a group of people who had helped to organize and set up the Center for Financial Economics at Johns Hopkins University. We worked hard to get an absolutely first-rate director, which we did, and no sooner did we get our director than Bernanke called him up and hired him away to come work at the Fed to be head of communications for a couple of years. I tease my friend and call him the Minister of Propaganda, because he’s the guy who was writing all these forward guidance statements that people were pulling their hair out over. I accused the Chairman of picking off our guy. He said, “Well, we didn’t pick him off. We just borrowed him. We gave him back,” which is true because our Director is back at the center, I’m glad to say.

Mr. Bernanke was very kind. I had a copy of his book with me and asked him to inscribe it, which he did very nicely. As an author myself, I know that whenever anyone asks you to sign a book, you always do it in a heartbeat. You never turn it down. He was very kind to sign the book.

He said a number of interesting things one of which was very striking to me. When talking about a rate increase, because that’s all anybody wants to talk about, he used the phrase, “The rate increase, when it comes, will be good news for the U.S. economy because it means growth is getting stronger.”

That’s a perfectly sensible thing to say. This idea that you raise rates and that makes the economy stronger is exactly backwards. The way it works is the economy gets stronger and then you raise rates. In other words, the Fed always follows the market, it doesn’t lead the market. There’s almost this magical or mystical belief that if Janet Yellen raises interest rates, it must mean everything’s all good. It doesn’t mean that all. In fact, if she raises rates in a weak economy, it would be a disaster. We’d have a meltdown.

What Bernanke said did make sense. He said, “The rate increase, when it comes, will be good news because it means the economy in getting stronger.” But then you have to look at the data, which is really weak. By saying “when it comes,” it told me that he wasn’t expecting it anytime soon. In other words, he was conditioning it on economic growth but didn’t suggest at all September, December, this year or any particular time, and he clearly conditioned it on stronger growth, which there is no sign of.

I thought he pulled the rug out from under Janet Yellen. Janet Yellen is trying to have it both ways. She’s trying to get out there, put on a brave face, and talk every day about raising rates later this year. All the headline writers and reporters run right out and write a headline: “Janet Yellen Says We’re Going to Raise Rates This Year.” Forget the headlines. If you actually read the speeches or listen to the testament and look at what she says, it’s always conditioned on stronger growth and economic conditions meeting her forecast. The forecast is three parts: lower unemployment, higher inflation, and stronger growth.

We’re not getting to any three of the levels that she specified in her May 22nd Providence speech. I read an interesting speech she did last Friday in Cleveland, and I found the May 22nd Providence speech to be a lot more specific about the numeric goals she’s looking at. I think she really told us what her playbook is. Based on that, we’re not getting close to any of them, so I don’t see a rate increase. That was consistent with what Bernanke said, and I agree with the former Chairman. People who are expecting Janet Yellen to raise rates are not listening carefully enough to what she’s truly saying.

Another interesting thing he expressed was when he talked about the international monetary system. Now we’re talking about IMF, currency wars, Special Drawing Rights (SDR), and all the things I spend a lot of time researching and writing and talking about. It’s a little unusual for the Fed Chairman to be immersed in that because that’s really the job of the Treasury.

The Treasury Secretary is supposed to be worried about the international standing of the U.S. dollar, and the Fed is supposed to worry about domestic monetary policy. The Fed’s not supposed to have a big footprint in the international monetary system, yet he told me that he was involved working with the IMF to restructure Chinese participation in the voting rights of the IMF.

I was a little surprised at that. He’s clearly competent to do that, but to see the Chairman of the Fed working hand-in-glove with the IMF and the Secretary of the Treasury on Chinese voting rights in the IMF was a little bit unusual. I thought, “Gee, you’re really out of the Fed’s comfort zone.” Then he went on to say that the international monetary system is incoherent. That was his exact word – “incoherent” – which I agree with. It is incoherent. It’s a mess. About ten days later I was in the United States down in Washington and had a conversation with John Lipsky. John is the former Director of the IMF. In a separate conversation, he used the exact same word. He said. “The international monetary system is incoherent.”

I don’t think Bernanke and Lipsky were coordinating their remarks, certainly not to me, but I did find it striking that the former Chairman of the Fed and the former head of the IMF both used the exact same word to describe what’s going on, specifically “incoherent,” which tells me that’s it’s in the air. The elites – the people who really run the global monetary system – are on the same page. We’re going to need new rules to the game, new rules to the playbook for the international monetary system, starting in the fall with the inclusion of the Chinese yuan in the SDR. I think we can all see that coming. They may go beyond not only changing Chinese voting rights, but also maybe issuing some SDRs. We have to watch that.

We’re halfway back to Bretton Woods. We have an informal peg right now going on between the Chinese yuan and the U.S. dollar, around 6.2 to 1. That’s been very stable. The Chinese are not playing the currency war card as they did from 2006 to 2014. They’re on their best behavior hoping to join this exclusive SDR club. I’ll certainly watch that very closely.

It was an interesting conversation, and I’ll briefly mention a third thing Bernanke was very candid about. He used the word “experiment” repeatedly. In other words, he said that what they and the Fed did with monetary policy from 2007 to early 2014 when he left was an experiment, which means they didn’t really know what they were doing. They were just trying stuff. He talked about FDR, Franklin Delano Roosevelt, and what was a very popular term in the ‘30s during the Great Depression. The New Deal was a government-instituted series of experimental projects and programs. “We were just going to experiment to see what worked.”

The thought crossed my mind that most experiments actually fail, and I was hoping that he hadn’t blown up the laboratory in the process. The jury is still out on the success of his time at the head of the Fed, but he was candid about the fact that they don’t really know what they’re doing.

JW: When I look back over the last 50 minutes, we’ve covered an extraordinary amount of ground. It’s always a pleasure and education having you with us. Thank you, Jim

JR: Thanks, Jon.

JW: Thank you to our listeners most of all for spending time with us today. You can also follow Jim on Twitter. His handle is @JamesGRickards.

Goodbye for now, and we look forward to joining you again soon.


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The Gold Chronicles: July 16 , 2015 Interview with Jim Rickards


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