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 http://www.amazon.com/New-Case-Gold-James-Rickards/dp/1101980761
*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: 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 http://thenewcaseforgold.com/ 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.
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