EP. 90 The Gold Chronicles: December 2018 podcast with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles December 2018

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Topics Include:

*History of gold – Nixon tariffs, and closing the gold window
*Investment case for gold
*Why US debt to GDP ratio and increasing debt load creates a systemic problem with specific outcomes, all of which indicate an allocation to gold may be prudent
*How low gold sentiment in western markets may indicate a key buying opportunity
*Physics properties of gold, and why gold is a truly non-correlated means of storing wealth that is indestructible
*Why Physical Gold Fund uses Switzerland as a core component of the logistics and safety chain for the fund’s gold
*Physical Gold Fund vaulting protocols and governance
*Refinery Operations
*Gold market historical performance, current technical indicators and outlook

 

You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

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https://itunes.apple.com/us/podcast/the-gold-chronicles/id980027782?mt=2

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https://itunes.apple.com/ca/podcast/physical-gold-fund-podcasts/id1056831476?mt=2

You can access transcripts of our interviews at:
http://www.physicalgoldfund.com/category/transcripts/

You can subscribe to our Youtube channel to access these interviews and more at:
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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 Jim Rickards and Alex Stanczyk – The Gold Chronicles November 2018

Jim Rickards and Alex Stanczyk, The Gold Chronicles November 2018

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Topics Include:

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

 

Listen to the original audio of the podcast here

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

 

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jim:  Thank you very much, Alex.

 

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

 

You can follow Alex Stanczyk on Twitter @alexstanczyk

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

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

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

EP. 89 The Gold Chronicles: November 2018 podcast with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles November 2018

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Topics Include:

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

 

You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

You can listen to the Gold Chronicles on iTunes at:
https://itunes.apple.com/us/podcast/the-gold-chronicles/id980027782?mt=2

You can Listen to the Global Perspectives on iTunes at:
https://itunes.apple.com/ca/podcast/physical-gold-fund-podcasts/id1056831476?mt=2

You can access transcripts of our interviews at:
http://www.physicalgoldfund.com/category/transcripts/

You can subscribe to our Youtube channel to access these interviews and more at:
https://www.youtube.com/channel/UCXRWzw0vaNgCwo7nTMEAwkA

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

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

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

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles October 2018

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Topics Include:

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

 

Listen to the original audio of the podcast here

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

 

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here is what the IMF is warning about:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

My advice to the Treasury would be:

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

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

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

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

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

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

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

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

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

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

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

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

Jim: Thank you, Alex. See you soon.

 

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

 

You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

You can listen to the Gold Chronicles on iTunes at:
https://itunes.apple.com/us/podcast/the-gold-chronicles/id980027782?mt=2

You can Listen to the Global Perspectives on iTunes at:
https://itunes.apple.com/ca/podcast/physical-gold-fund-podcasts/id1056831476?mt=2

You can access transcripts of our interviews at:
http://physicalgoldfund.com/category/transcripts/

You can subscribe to our Youtube channel to access these interviews and more at:
https://www.youtube.com/channel/UCXRWzw0vaNgCwo7nTMEAwkA

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

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

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

EP. 88 The Gold Chronicles: October 2018 podcast with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles October 2018

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Topics Include:

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

 

You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

You can listen to the Gold Chronicles on iTunes at:
https://itunes.apple.com/us/podcast/the-gold-chronicles/id980027782?mt=2

You can Listen to the Global Perspectives on iTunes at:
https://itunes.apple.com/ca/podcast/physical-gold-fund-podcasts/id1056831476?mt=2

You can access transcripts of our interviews at:
http://www.physicalgoldfund.com/category/transcripts/

You can subscribe to our Youtube channel to access these interviews and more at:
https://www.youtube.com/channel/UCXRWzw0vaNgCwo7nTMEAwkA

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

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

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

EP. 87 The Gold Chronicles: September 2018 podcast with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles September 2018

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Topics Include:

*US Dollar Hegemony
*Why the US Dollar is considered the world reserve currency
*US Dollar as global trade settlement currency
*Tools of financial warfare – how the United States controls the majority of currency flows around the world
*How the US Dollar Payment system works
*How SWIFT works
*Secondary market sanctions at a business level
*Sovereign reactions to US Financial Warfare
*Future alternative payment systems

 

 

You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

You can listen to the Gold Chronicles on iTunes at:
https://itunes.apple.com/us/podcast/the-gold-chronicles/id980027782?mt=2

You can Listen to the Global Perspectives on iTunes at:
https://itunes.apple.com/ca/podcast/physical-gold-fund-podcasts/id1056831476?mt=2

You can access transcripts of our interviews at:
http://www.physicalgoldfund.com/category/transcripts/

You can subscribe to our Youtube channel to access these interviews and more at:
https://www.youtube.com/channel/UCXRWzw0vaNgCwo7nTMEAwkA

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

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

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

Physical Gold Fund Partners With Allfunds Bank

GRAND CAYMAN, Cayman Islands, Aug. 28, 2018 (GLOBE NEWSWIRE) — Physical Gold Fund (www.physicalgoldfund.com), a world leader in physical allocated gold, today announced the signing of a service agreement with Allfunds Bank, a leading global financial technology business.

Physical Gold Fund is the only allocated physical gold product available on the Allfunds platform with a Shariah compliant certification. With an extensive industry background, Physical Gold Fund’s Board Advisor, Gerhard Schubert, states, “The listing of Physical Gold Fund on the Allfunds platform marks a significant development for the wider Investment Community. Nothing similar exists within the previous offering on the platform and the fully Shariah-compliant capabilities of the Physical Gold Fund makes THIS Fund a great opportunity for investment diversification in the whole Islamic Investment Community.”

Physical Gold Fund offers a simple and elegant solution to investors that streamlines a portfolio allocation into physical gold. Decades of experience in physically allocated gold provide the foundation for PGF’s world-leading operational practices in the physical gold investment space. Physical Gold Fund provides an integrated solution for acquisition, security, governance, custody, insurance, and liquidation of physical gold in an approved regulated structure utilizing industry-leading best practices.

Allfunds Bank is the leading global B2B distribution platform of third-party funds, offering a one-stop solution for funds dealing, information management and research services supporting the mutual fund distribution activities of over 595 institutional clients, including commercial banks, private banks and insurance companies from 38 different countries. Further, Allfunds has a global network of offices across Europe, Asia and Latin America and over €300bn assets under administration globally covering 64,400 funds from over 1200 fund managers.

“We are delighted to finalize PGF’s inclusion on the Allfunds platform as we see it as important to our growth in both Europe, Latin America, and the MENA region,” said Philip Judge, Chief Executive Officer of Physical Gold Fund. “Allfunds has a reputation as one of the world’s most prominent platforms, and we believe we can offer Allfunds’ clients a unique physical gold investment product and an opportunity to improve the way they currently invest in gold.”

ABOUT PHYSICAL GOLD FUND SP

Physical Gold Fund SP is a global leader in physical allocated gold. It is a Segregated Portfolio Fund of the Physical Hard Assets Fund SPC. The Fund is regulated by CIMA, is registered with the FCA and is Shariah compliant certified by Amanie Advisors LLC. PGF is a transparent, open-ended, segregated portfolio fund that invests in unencumbered, fully-allocated physical gold in the form of “Good Delivery” gold bars meeting accepted global standards. Liquidity protocols unique to the industry have been put in place providing greater liquidity options compared to other funds in the market. Shares of the Fund are redeemable for gold and all physical gold is insured to its full market value.

This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state or jurisdiction. Nothing in this communication should be construed as investment advice or an investment recommendation. This communication has not been approved by any authority for any purpose.

Gerhard Schubert Joins Physical Gold Fund

GRAND CAYMAN, Cayman Islands, Aug. 07, 2018 (GLOBE NEWSWIRE) — Physical Gold Fund (PGF), a world leader in physical allocated gold is pleased to announce the appointment of Mr. Gerhard Schubert to its Advisory Board.

Mr. Gerhard Schubert’s career in the precious metals market spans forty years and includes worldwide industry experience. He served as a member of the Management Committee of the London Bullion Market Association and the London Platinum and Palladium Market. Mr. Schubert is a regular speaker on precious metals at industry conferences in the UAE, India and on Bloomberg Television. He has served on various committees of the DMCC (Dubai Multi Commodities Centre) in the DGAG (Dubai Gold Advisory Group) as well as in the Independent Governance Committee of the DMCC.

Mr. Schubert has worked in precious metals with Bremer Landesbank, DG-Bank, Shearson Lehman Brothers, DFS-Bullion, Bayerische Vereinsbank and Credit Lyonnais Rouse. He served as Head of Precious Metals London & New York for INTL Commodities and as Deputy Head of Base and Precious Metals with Fortis Bank Belgium. Mr. Schubert was the head of Gold and Commodities at Arab Banking Corporation (ABC Bank) in Bahrain where he led the bank’s global mandate for Emirates NBD in Dubai and served as Global Head of Precious Metals for Fortis Nederland, now ABN AMRO Nederland.

“Physical Gold Fund ticks all the right boxes for a hassle-free, Shariah compliant and competitive investment opportunity into gold as an asset class. Gold should be a part of any portfolio as it is negative correlated to nearly all other asset classes. This makes it a perfect diversification tool for any portfolio,” said Gerhard Schubert. “I am delighted to work with PGF as the structure of the Fund and the specific investment details are speaking for themselves.”

Philip Judge, Chief Executive Officer of Physical Gold Fund stated, “Physical Gold Fund offers an exceptional solution to investors seeking a regulated product that employs the best practices of private allocated custody in gold ownership developed over decades of operational experience. PGF makes investing in physical allocated gold simple by providing a one-stop solution for acquisition, governance, custody, security, insurance, and liquidation of physical gold in an approved regulated structure.” He adds, “We are thrilled to have Gerry join our Advisory Board because he brings to the team decades of gold industry and bullion banking experience along with a vast network of strategic relationships and contacts, particularly from Europe and the Middle East.”

ABOUT PHYSICAL GOLD FUND SP

Physical Gold Fund SP is a global leader in physical allocated gold. It is a Segregated Portfolio Fund of the Physical Hard Assets Fund SPC. The Fund is regulated by CIMA, is registered with the FCA and is Shariah compliant certified by Amanie Advisors LLC. PGF is a transparent, open-ended, segregated portfolio fund that invests in unencumbered, fully-allocated physical gold in the form of “Good Delivery” gold bars meeting accepted global standards. Liquidity protocols unique to the industry have been put in place providing greater liquidity options compared to other funds in the market. Shares of the Fund are redeemable for gold and all physical gold is insured to its full market value.

For additional information:  http://physicalgoldfund.com

This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state or jurisdiction. Nothing in this communication should be construed as investment advice or an investment recommendation. This communication has not been approved by any authority for any purpose.

Physical Gold Fund SP Announces Shariah Standard on Gold Compliance

DUBAI, United Arab Emirates, July 31, 2018 (GLOBE NEWSWIRE) — Physical Gold Fund SP (PGF), a world leader in physical allocated gold, is pleased to announce that Physical Gold Fund SP has been endorsed as Shariah-compliant by Amanie Advisors. Amanie Advisors issued the fatwa in accordance with the Shariah Standard on Gold set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and developed in cooperation with the World Gold Council.

Physical Gold Fund SP offers an exceptional solution to investors seeking a regulated product that employs the best practices of private allocated custody in gold ownership developed over decades of operational experience. PGF takes the hassle out of physical gold allocation by providing a one-stop solution for acquisition, governance, custody, security, insurance, and liquidation of physical gold in an approved regulated structure.

“We are pleased to work with Physical Gold Fund and provide our qualified assurance that it meets the highest level of Shariah requirements in line with AAOIFI Standards,” said Maya Marissa Malek, Managing Director of Amanie Advisors LLC, Dubai. “Physical gold is still a new asset class for Islamic finance and we hope this offering will help to grow and diversify the industry. Gold is certainly a unique asset class with distinct hedging features not found in traditional asset classes such as Sukuk.”

“Meeting compliance with the Shariah Standard on Gold is something we are very proud of,” said Alex Stanczyk, Managing Director of Physical Gold Fund SP. “This fund is unique, and there is nothing like it in the MENA region right now. Physical allocated gold is a perfect fit for the values expected here. We are excited to make this available to Islamic investors.”

About Physical Hard Assets Fund SPC

Physical Hard Assets Fund SPC is a Segregated Portfolio Company domiciled in Cayman Islands and regulated by the Cayman Islands Monetary Authority (CIMA).

About Physical Gold Fund SP

Physical Gold Fund SP is a global leader in physical allocated gold. It is a Segregated Portfolio Fund of the Physical Hard Assets Fund SPC. The fund is regulated by CIMA, is registered with the FCA, and is Shariah-compliant certified by Amanie. PGF is a transparent, open‐ended segregated portfolio fund that invests in unencumbered, fully-allocated physical gold in the form of “Good Delivery” gold bars meeting accepted global standards. Industry unique liquidity protocols have been put in place providing greater liquidity options compared to other funds in the market. Shares of the Fund are redeemable for gold, and all physical gold is insured to its full market value.

About Amanie Advisors

Amanie Advisors is a leading Shariah advisory firm specializing in Islamic finance solutions covering a wide range of services including Shariah advisory and consultancy, training, and research and development for institutional and corporate clientele focusing on Islamic financial services.

For additional information:  http://physicalgoldfund.com

This communication shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such state or jurisdiction. Nothing in this communication should be construed as investment advice or an investment recommendation. This communication has not been approved by any authority for any purpose.

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles July 2018

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Topics Include:

*USD/Gold and SDR/Gold were highly correlated up until Oct 1st 2016

*Oct 1st 2016 Chinese Yuan added to the SDR basket

*Since Oct 1st 2016 SDR/Gold trading tightly in a range of 875 to 925

*Why market operations by a central bank would explain SDR/Gold staying in such a tight band

*Possible actors conducting open market operations to maintain SDR/Gold

*Reasons actors may be interested in maintaining SDR/Gold

*Expansion required in SDR may be aided by a sovereign or supra-sovereign controlled distributed ledger / blockchain

*Timetables and implications for gold investors

 

Listen to the original audio of the podcast here

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

 

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

 

Alex: Hello. This is Alex Stanczyk, and welcome to another edition of The Gold Chronicles.
Today is July 26, 2018. I have with me again my friend and colleague, Mr. Jim Rickards.
Welcome, Jim.

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

Alex: We have a very thought-provoking topic for our listeners today, but before we begin, I’d
like to do a quick recap of our last podcast. We talked about things ranging from the new axis of
gold, why Russia has been accumulating gold for 38 consecutive months, financial warfare, and
we also covered a really interesting game theory scenario in which Russia and China collaborate
on a permissioned, distributed ledger that would be used to settle payments between
sovereigns. That generated quite a bit of discussion on our channel.

If you want to access any of our past podcasts, you can do so at
PhysicalGoldFund.com/Podcasts. We also have a YouTube channel. If you’re watching this on
YouTube and like this content or material, please take a moment to Subscribe and Like as well
as feel welcome to comment in the area below.

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

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

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

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

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

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

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

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

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

We have those allocations, and we know what they are by country. We can look at the actual
SDRs that you have and see situations where you might have a lot fewer SDRs than you were
allocated. That makes sense, because if you got a bailout or a loan from the IMF, they gave it to
you in SDRs. Now you can take those SDRs, call the IMF, and say, “Thank you, but I need
dollars.” They’re like, “Okay. Hold the phone while we call around and see who wants to swap
dollars for SDRs. We’ll do that, you’ll get the dollars, they’ll get the SDRs, and everyone will be
happy.” That’s what goes on.

Most interestingly to me is seeing countries that have more SDRs than they were allocated by
the IMF. That means they bought them in a secondary market either directly from the IMF or
one way or another. They’re moving around and getting reallocated.

There are secondary market transactions, but it’s just not a robust or typical or transparent
market. It’s a little bit more like the gold market at the BIS (Bank for International Settlements)
in Basel, Switzerland, that acts as an intermediary by trading gold on behalf of its central bank
members. We don’t know when or how; we just know the gold shows up someplace else. So,
that’s going on, and I look at the dollar value of the SDR as a frame of reference.

There’s a third number that comes out of that, which I hadn’t looked at because there’s not
much of a market, and that is the SDR price of gold. What is it? Where is it going? How does it
trend, etc.? Because the dollar is almost 60% of the SDR – makes sense – 60% of global reserves
are in SDRs, it follows that if the dollar price of gold is moving around, the SDR price of gold
should move around, which it does.

Unexpectedly, a researcher in Switzerland – the name is D.H. Bauer, Zurich, Switzerland, but I
don’t know much about this person – sent me an unsolicited manuscript via a third party. It kind
of arrived through the back door, but there it was. I looked at it, and it was so striking that at
first I actually didn’t believe it.

I said, “This is interesting if it’s true, but somehow I doubt it’s true.” Then I duplicated the
research and found out that it was true. It shows the correlation between the dollar/gold
exchange rate and the SDR/gold exchange rate – the SDR price of gold.

As I expected, the dollar/gold exchange rate and the SDR/gold exchange rate were, in fact,
highly correlated up until October 1, 2016. Then there was a big change; the dollar price of gold
continued to go higher. (Recently it has leveled off and gone down, but overall, it’s up. It’s kind
of jumpy and volatile and all the things we experienced first-hand.) But the SDR-gold exchange
rate flattened out right around 900.

The range above and below is quite small, smaller than the dollar/gold exchange rate. The
trend is not higher; it’s flat. If you run a straight line through the trend, the trendline is flat.
This obviously happened on October 1, 2016. What happened on that date? That’s the day the
Chinese yuan became a member of the SDR.

I’m dealing in facts. We’ll talk a little bit more about speculation, but the facts are that starting
the same day the yuan became part of the SDR, the SDR suddenly pegged to the dollar. It was
pegged at 900 SDRs exactly. A little bit higher, a little bit lower, but that range gets narrower. It
starts out 850 to 950 but stays in the range unlike the dollar price of gold, which continues to
go higher. That’s just a result of the dollar weakening against the SDR, so you need more dollars
but fewer SDRs to buy the same quantity of gold.

Then that range gets narrower. Today, I’d put it at 875 to 925. That’s an even narrower range,
as I mentioned, but it’s pretty tight, about 2.5% above or below. Not higher than that, and it
stays very tightly within that range. It went out recently just a tiny bit. If you say 875 is the low,
it hit 873, but it moved back up towards the 875 level and is getting back inside the range.

The first thing you notice is that it’s in a range. Why is it in a range? It looks like an auto-
regression. In other words, you say, “It goes up, it goes back down, it goes down and up, but it
stays in the range.” It doesn’t drift higher or lower like the dollar/gold exchange rate has.
What’s up with that? There’s no explanation.

There could be an explanation of manipulation by a major central bank, but there’s no
explanation other than manipulation. In other words, there’s no functionality, no causal factor,
there’s nothing in that relationship. The dollar/gold price trades freely, and the dollar/SDR price

at least appears to trade freely although maybe it doesn’t when you look at foreign exchange
rates. It doesn’t look like there’s any reason why the SDR price should be pegged to gold at 900,
but it is.

Who’s behind that? Through a process of elimination, you start with four potential powers. We
know who they are. The United States Treasury certainly has the wherewithal to do that.
There’s something called State Administration of Foreign Exchange (SAFE), which is a Chinese-
controlled foreign corporation or sovereign wealth fund. There’s the IMF itself with the ability
to print SDRs. And then there’s the European Central Bank (ECB) acting on behalf of its
members.

The thing about ECB gold is that they have the most gold under one roof, but it’s spread around
a little bit among the members. A total of 10,000 tons, which is more than the U.S., but it’s here
and there. There are 3000 tons in Germany, 2000 tons in Italy, 2000 tons in France, Netherlands
has maybe 600 tons, and a few others, but that’s that.

There really aren’t any other players who have enough clout. You need a lot of things. You need
some SDRs, gold, cash, dollars, foreign exchange, euros. China has a lot of yen, but you don’t
necessarily need a lot of yen since it’s actually a very small part of the SDR.

To mess around with the SDR, I would do it through the euro/dollar exchange rate. The dollar is
about 58%, and the euro is over 38%. One way would be to sell dollars and buy euros. It’s
doable, but you need a lot of foreign exchange, cash, gold, SDRs, and you need some reason to
do it. China sort of fits in all those categories as do the others if they felt like it, but they don’t.
The U.S. and the ECB are pretty transparent about gold holdings. I’m not saying they couldn’t
trade gold without some ability to keep it quiet, but it would show up. You’d see it in gold of
the U.S. or ECB going up or down. You don’t see those movements – at least not today – so take
those two off the table.

The IMF have their secrets, but they’re pretty transparent about gold. They report, publish, and
make known their position on gold. We haven’t seen any changes in their gold position since
2010. There were changes in 2010 worth noting, but nothing more recently, so let’s take them
off the table.

That leaves SAFE. SAFE is completely non-transparent, unlike the People’s Bank of China. I
would say the People’s Bank of China is transparent, but they’re a little bit of a front, meaning
they report what they want to report and don’t report what they don’t want to report. If they
don’t want to report it, they keep it in SAFE, which does not report publicly. SAFE is run by a
very sophisticated former PIMCO guy.

Through that process of elimination, I would put SAFE at the top of the list. I can’t prove that
SAFE is doing this, but I can say based on all the facts that they are the most likely candidate.
Their reason is a desire to get out from under the dollar hegemony, and they share that desire
with Russia, Turkey, Iran, and others that form what I call the new axis of gold.

We’ve spoken about the new axis of gold before. Now, what we’re doing is expanding it and
saying, “It’s not just the new axis of gold; they’re starting to act on that and produce results.”
Everything I just gave you is a fact. How likely is it that SAFE is the transacting party? I can’t
prove it, but it seems highly likely. They have the wherewithal, the reserves, a reason for doing
so, reasons for non-transparency, and they’re not advertising it. In all those respects, they look
like a very likely candidate even though we can’t quite prove it.

Now we’re into speculation, but I think it’s reasonable speculation, so let’s just say they are the
transacting party. If SAFE is doing this, you might say, “Interesting. Why 900 SDR?” It’s the
target, the ideal price, because 900 is the middle of the peg. “Where did that number come
from?” If you look at the total SDRs issued by the IMF, it’s just over 204 billion SDRs – not U.S.
dollars. The SDR today is about $1.40, so that would come to $285 billion, but let’s stick to
SDRs, so 204 billion SDRs.

I don’t think the IMF is behind this, but if they were, how much gold does the IMF have? There’s
no evidence that they’re doing it, but they have 2814 metric tons. If you multiply that by 2200
troy ounces per metric ton, that comes to about 90,472,000 ounces.

Let’s do a little bit of math. Take those troy ounces and turn them into regular ounces that you
and I know. It comes to about 6,190,000 pounds. At 16 ounces per pound, divide by 90 million
troy ounces times 0.911458. That’s just the conversion factor to get from troy ounces to regular
ounces, so we make the troy ounces go away. That comes to about 1200 SDRs.

We could say, “That would give 100% cover, but we don’t need that. Let’s assume 40% cover.”
That’s how much the United States had, by the way, from 1913 when the Fed was started to
1945. With 40% cover, you come to 480 SDRs per ounce.

Let’s take the 40% cover, which is the extreme amount of gold, and the 100% cover, which no
one really thinks you need, and just take the midpoint. The midpoint is 840.6 SDRs per ounce.
Pretty close to 900.

Using 40% cover, that was the U.S. official gold standard from 1913 to 1945. After 1945, we
lowered it. After 1968 – give or take a year – we lowered it again to zero. In 1971, we stopped
redeeming, and ever since then, it’s been no gold standard; floating exchange rates.

The gold standard has gone away in stages beginning in 1933, but from at least 1913 to 1945,
the law was you needed 40% gold to back up your currency. Most people thought that was
more than sufficient. So, using that as one extreme and 100% as the other extreme, the
midpoint is 840.6. Interesting that it’s not too far from 900.

Although the math is right – I’ll vouch for the math – it proves nothing. I can’t vouch for more
than that, but it’s interesting that we seem to have a likely candidate in the form of the Chinese
State Administration of Foreign Exchange, a secret sovereign wealth fund with the capacity and
a motive to get out from under the U.S. dollar hegemony.

SAFE has the reserves, the gold, the SDRs, the cash, the dollars, the euros, really everything
they need, so they’re the most likely transactor, but I can’t prove it. Based on the facts we do
know, however, I’ll put them at the top of my list as the number one most likely transactor.
We can see it’s going on, because it can’t happen without manipulation. We have a very likely
candidate, which is the Chinese State Administration of Foreign Exchange. We have a motive,
which I’ve already described, and as I say, a lot of reason to believe that that’s exactly what’s
going on. So, that’s where we are.

What does that mean in terms of, first of all, the predictability, and secondly, where we think
gold is going to go?

The axis of gold is a little different than the transactions pegging the SDR to gold. The SDR to
gold looks like China, but it could involve Russia in secret ways we don’t understand. Just take
open market data, assuming it’s correct. I think it’s correct for Russia and Turkey, but China is
not so clear. If they own more gold, then they own more gold. Russia’s gold reserves are
approaching 20% of their total reserves, and that’s a pretty high percentage.

Interestingly, the United States is 70%. When you say that the United States foreign exchange
reserves are 70% gold, that comes as a shock to a lot of people, but it’s true. We don’t need a
lot of euros and yuan and Canadian dollars. We can go buy them if we need them, but what we
need is gold, and we have it.

Russia is approaching 20%, Turkey is over 10%, and China is kind of struggling to get to 5%. Bear
in mind that China has $3 trillion of reserves, so they started with a pretty big reserve position
before they woke up one day and said, “Maybe we need to get out of dollars,” which they’re
now doing in their own slow way.

We don’t have all the information, but China is going up, Turkey is going up very steeply, and
Russia is steady-eddy and just keeps going up like that. They’ve been a little more transparent
about their reporting. We have that information.

There’s a definite turning point. Official gold holdings hit an inflection point in 2008, an
interesting time. We were at the bottom of a pretty bad recession at the end of 2008, early
2009, and yet that was the bottom year for gold as a percentage of total reserves. Gold fell to
about 30,000 tons officially, but today it’s back up to 33,000 tons where it was in 2000. So, we
started in 2000, went down, went up, and we’re back where we were 18 years ago.

That’s a noteworthy turnaround and an important one, except that the developed markets are
up a little bit – can’t say zero, but not a lot – but the emerging markets have made up the
difference. They’ve engineered this turnaround. Emerging markets include Russia, China,
Turkey, Iran, and some of the countries I mentioned. What’s going on there is interesting.

Beyond that, there’s still no question that the dollar superficially is the king reserve currency.
Using round numbers, it’s 60% of global reserves, 80% of global payments, and almost 100% of
oil pricing. Those are big numbers; that’s a big deal. The dollar is still king of the road, but the
fact remains that all those are lower than they were. Oil looks like the next one to start heading
south as we begin to see more oil priced in yuan and other leading currencies. Maybe Brazil will
charge its local currency for oil; it remains to be seen.

The dollar is going down. In the last four years, it has dropped from 66% to just over 62% as
global reserves. Now, 4% of global reserves is a big number. Likewise, it’s declining as a
percentage of total payments and even slightly now as the price of oil.

Meanwhile, gold is going up for reasons I just mentioned, so we do see a gradual substitution of
gold for dollars, gold pricing, yuan pricing, etc. of oil instead of dollars, and a reduction of dollar
reserves. It’s not extreme, not a collapse, but little by little, things are moving in that direction,
and I think it’s smart to take account of them. I wouldn’t say this is completely established and
operating, but at the same time we see the beginning formation of a cryptocurrency exchange
that is really distributed ledger technology. It’s nominated in SDRs and free of U.S. interference
and sanctions.

That would involve at least two currencies. Let’s call it the PutinCoin and the XICoin. You can
call it anything you like such as the SameCoin, the AsiaCoin or a lot of things. Suddenly, North
Korea will sell Iran weapons, Iran will sell oil to China, China will make fixed investment in
Russia, Russian tourists will go to Turkey, and the Turks will buy pistachios from Iran.

There will be more going on, but I just point that out as an example of trade among those
countries that will not involve dollars. Let’s call it an AsiaCoin that will settle and clear through
its own network. It’ll be encrypted and very difficult for the U.S. to hack.

Periodically – whether that’s monthly, quarterly or annually remains to be seen based on
balances – the net payments could be settled in gold. Of course, net payments are always

smaller than gross payments, but when you net things out, plus and minus, they could put the
gold on a pallet, put it on a plane, fly it from Tehran to Moscow or Moscow to Beijing or Beijing
to Ankara. We’re starting to see that.

There is this odd conglomeration of things where Russia and China want to get out from under
the dollar. There are actually other ways of doing it by building up SDRs but then pegging SDR
to gold. In that sense, the gold is hedged, and likewise, the hedge is constant, so you know what
you’re dealing with. That ties into the amount of gold the IMF has, which I explained earlier.

It’s all happening, but is it under one big giant conspiracy? Likely not, but it’s probably being
directed by the Chinese to a great extent. It’s probably being led by them even if they’re not in
charge of every step.

As I said, Russia has gone some of the way in gold, but China is all for it. China is doing their own
thing in gold in their own way, Turkey is breaking out in gold, and Iran is breaking out in gold
even though they’re not transparent.

These things are happening, but are they earth-shattering? In the short run, probably not,
although they’re really interesting once you pay attention to them. But in the longer run, they
could be a very big deal, because you could end up saying, “The dollar price of gold is going
here to there, but who cares? We have an SDR price of gold. It looks like this. We’re
accumulating SDRs. SDR is now a new gold standard. It’s a safe asset for people to get because
it’s hedged by gold, so we would urge you into the SDR and out of the dollar.”

It’s hard to see the IMF objecting to that – they probably wouldn’t – but it leaves the U.S. high
and dry. It’s like, “Hey, we’re 60% of reserves, 80% of payments, 100% of oil.” Then all of a
sudden, “We’re 45% of reserves, 50% of payments, and 70% of oil, and all those things are
heading south. They don’t look good.” Then you get into a stampede type of situation at which
point the dollar price of gold might not mean all that much.

I’m not saying this happens overnight. It probably doesn’t happen for a few years, but the initial
steps have been taken, and they’re clear. We probably can lay them at the feet of the Chinese
even though we can’t quite prove that.

It’s definitely worth watching. If I were a gold investor, I would care. I would say, “The dollar
price of gold is going to continue to fluctuate, but maybe I don’t care as much. Maybe I care
more about the SDR, and I have to keep an eye on that.”

So, it’s a big deal. It’s happening slowly – so slowly that most people haven’t noticed – but the
data is what it is. I have a presentation on this that I meant to give in Vancouver last week.

Unfortunately, I encountered a little illness and was unable to do that, but I will be making it
available, certainly to readers at that conference, and we’ll take it from there.
That’s an overview with a lot of detail and facts. It doesn’t have 100% facts, because we have to
make an inference or a leap when it comes to China’s involvement, but I think it’s a reasonable
leap and definitely bears watching.

Alex: I had a number of questions that came up while you were explaining this, and one by
one, you ended up answering them all.

The first was: How would this happen? How could it be conducted to where there’s something
resembling some kind of a peg? The answer is open market operations. Maybe not open
market, but if there’s a central bank, they can buy and sell various different assets to try to
maintain that peg.

Why does it exist? You explained that as well.
What would be the motive for maintaining it? That would be to get out from under U.S. dollar
dominance in terms of world reserves and payments.

I wondered if this is going to require some kind of massive shift away from U.S. dollars in terms
of reserves and payments. You also addressed that question in that it is happening and has
been happening. I actually knew that, but it took you saying it to remind me of it.

One of my colleagues says all the time, “What’s happening with the change of the world’s
reserve currency is like the slowest train wreck in history.” If people recall, the British pound
used to be the world’s reserve currency, and it took about 50 years for that to change. I don’t
know where you start measuring it from, but yes, I can see how that would be a process, and it
makes a great deal of sense.

Jim: Yes, right.

Alex: Well, this wraps up our time. That was a great explanation of your view, Jim. Hopefully,
we can dig deeper into it as more information comes to light in the future.
I just want to thank you, Jim, for being with us. I appreciate the discussion as always, and I look
forward to doing it again next time.

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

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

 

You can follow Alex Stanczyk on Twitter @alexstanczyk

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