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

Jim Rickards and Alex Stanczyk, The Gold Chronicles March 2018

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Topics Include:

*Update on 3rd Great Gold Bull Market
*Proper portfolio allocation when it comes to gold
*The difference in mindset between investors that are trying to accumulate wealth, versus investors who have wealth and are trying to protect it
*Gold as insurance versus investment
*Currency Wars
*Trade Wars
*Moving jobs from outside the US, into the US
*North Korea Update

 

 

Learn more about Jim Rickards new book, The New Case for Gold at http://thenewcaseforgold.com/

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.

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles February 2018

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Topics Include:

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

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

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

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

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

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

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

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

 

 

Learn more about Jim Rickards new book, The New Case for Gold at http://thenewcaseforgold.com/

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.

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles January 2018

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Topics Include:

*Central Banks have bought more gold than UST’s since 2013

*Why we are potentially on the cusp of a new set of rules for the international monetary system

*Financial elites with the IMF and the Fed have said that the international monetary system is incoherent…there is no anchor

*What Central Banks shifting from net sellers of gold, to net buyers of gold is signalling

*Why the United States has not sold any significant amount of gold since 1980

*History of the US influencing other sovereigns to sell their gold reserves

*Significance of Central Banks now buying gold as preparation for a new set of rules for the international monetary system

*Why gold may be in the first stages of a new multi-year secular bull market

 

 

Learn more about Jim Rickards new book, The New Case for Gold at http://thenewcaseforgold.com/

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.

 

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles December 2017

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Topics Include:

*Year in Review 2017

*Wealth Gap – Top 1/10th of 1 pct control more wealth than the bottom 90 pct

*Average incomes declining over close to 40 years

*Transcending partisan politics to understand how the system is inherently advantaged or disadvantaged for some and how it affects societal stability

*How societies deal with these kind of structural imbalances

*Financial system stability as a function of scale

*What institutional investors focusing on liquidity as a due diligence priority may be implying about the views forming on systemic stability

*Why the system still has not de-levered since the the 2008 GFC, and how risk it is even more concentrated today

*Fed policy update and implications for 2018

*Why avoiding a disorderly stock market decline is now being considered in Fed policy

*North Korea Update

*Secret US Weapons Programs: Waverider, Nap of the earth microwave systems

*Update on financial system lockdown, Ice-9, war on cash / war on gold

 

 

Learn more about Jim Rickards new book, The New Case for Gold at http://thenewcaseforgold.com/

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.

 

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles November 2017

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Topics Include:

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

 

Listen to the original audio of the podcast here

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

 

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

 

Alex:  Hello. This is Alex Stanczyk, and I have with me today the brilliant Mr. Jim Rickards. Welcome, Jim.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alex:  Yes, very much so.

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

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

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

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

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

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

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

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

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

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

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

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

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

Alex:  Very good.

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

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

Alex:  I remember that.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jim:  Thank you, Alex.

 

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.

Listen to the original audio of the podcast here

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

 

Learn more about Jim Rickards new book, The New Case for Gold at http://thenewcaseforgold.com/

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.

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles November 2017

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Topics Include:

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

 

 

Learn more about Jim Rickards new book, The New Case for Gold at http://thenewcaseforgold.com/

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.

 

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles October 2017

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Topics Include:

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

Listen to the original audio of the podcast here

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

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

 

Alex:  This is Alex Stanczyk, and I have with me today the brilliant Mr. Jim Rickards. Jim, welcome.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Another exact quote from Pompeo was:

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

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

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

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

“We’re running out of time.”

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

“Accept and deter is unacceptable.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Alex: Wow.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Jim:  Me too, Alex. Thank you.

 

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

 

Listen to the original audio of the podcast here

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

 

Learn more about Jim Rickards new book, The New Case for Gold at http://thenewcaseforgold.com/

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.

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles October 2017

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Topics Include:

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

 

 

Learn more about Jim Rickards new book, The New Case for Gold at http://thenewcaseforgold.com/

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.

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles September 2017

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Topics Include:

*Counter Party Risk Evaluation
*Training with Navy SEAL’s
*Comparing mountain climbing to a counter-party risk
chain
*How gold helps mitigate counter party risk
*Scenarios under which paper gold may not perform as
intended
*North Korea Update
*Analyzing likelihood of war using Bayes Theorem
*Why Kim Jong-Un is pursuing North Korea’s nuclear
weapons program in breakout mode
*Why UN sanctions vs North Korea will be ineffective
*Regulatory crackdown on cryptocurrency
*Chinese government shuts down all cryptocurrency
exchanges
*Conflicts of interest inherent in the Bitcoin mining
structure
*Blockchain and Distributed Ledger technology is not the
same as cryptocurrency
*Central Bank Issued Blockchain’s

 

 

Learn more about Jim Rickards new book, The New Case for Gold at http://thenewcaseforgold.com/

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.

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles August 2017

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Topics Include:

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

 

Listen to the original audio of the podcast here

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

 

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

 

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

Jim: Thank you for that introduction, Alex.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Let’s sort it out for the listeners. There are two big but separate deadlines converging on September 29th. The way the media reports it is by throwing words around that tend to get mashed together in a lot of readers’ or listeners’ minds; however, they’re separate and they’re converging like two meteors hitting earth at once.

One is something you mentioned, which is the debt ceiling. This has to do with the borrowing authority of the U.S. Treasury. Is the U.S. Treasury authorized to borrow money to pay the bills of the United States covering everything from Social Security, Medicare, Medicaid, operations of government, military, you name it. The whole budget is around $500 billion a year. That’s the deficit.

The budget is well over several trillion, but that must be authorized by Congress. Until it’s authorized, the Treasury is running on fumes. It sounds strange, but the Treasury has a bank account at the Fed and other banks that is no different from your bank account or mine.

If we have money in the bank and spend it with no income, that account goes to zero. Your checks then bounce and you can’t spend any more money. Believe it or not, that’s the situation the U.S. Treasury is facing. It is running out of cash. They have new cash coming in all the time from tax collections, but it’s going out in terms of payments. They can run negative cash flow and draw it down.

That’s the situation the Treasury is facing. They need Congress to authorize an increase in the debt ceiling so they can borrow more money so they can pay the bills. It’s that simple. The problem is that Congress is not really functional right now and is not inclined to do so. This is because the Republicans have a majority of the House and Senate but can’t agree among themselves.

By the way, this is a replay of Obamacare. I don’t want to get into the weeds in terms of the healthcare debate, but I think a lot of listeners know that the Republicans came into Washington with control of both houses of Congress and the White House and said they were going to repeal Obamacare. They didn’t do it and they’re not going to do it, because they couldn’t agree among themselves. They didn’t need Democratic votes, but they did need to agree, and they couldn’t do that.

The same thing is playing out with the debt ceiling. There are members of what’s called the House Freedom Caucus that say, “We’re not voting for the debt ceiling increase unless we get some conditions.” They want to defund Planned Parenthood, there’s an issue around sanctuary cities, and around money for the wall. The White House wants money for the wall, and there’s an Obamacare fix. It’s not the repeal of Obamacare, but Obamacare was running out of money, and that is a separate appropriation that has to get through.

So, there’s a bunch of stuff standing in the way of this vote. Now, you could say, “Okay, to heck with Republicans. Let’s just get moderate Republican votes and some Democrats.” Well, the Democrats are sitting there, notably Nancy Pelosi, who said, “Why should we help you guys? You’ve run us out of town, you’ve ridiculed us, you’ve called us every name in the book, you don’t want to work with us on anything else, you don’t like our agenda. Why should we give you any votes?”

Even though the Democrats in general favor raising the debt ceiling because they like all these programs and spending money, they’re not inclined to vote for two reasons: 1) Why should they help Republicans? 2) They don’t want all these riders attached that I mentioned. If you put defunding of Planned Parenthood in a debt ceiling vote, you will not get one Democratic vote, so, it’s not clear where the votes are coming from.

Let me shift gears for a second and talk about another event, which is the budget. The budget is different than the debt ceiling. The debt ceiling is borrowing to pay your bills, whereas the budget authorizes all government spending that gives rise to having to pay your bills in the first place.

The U.S. is on a fiscal year running from October 1st to midnight on September 30th. While most of us are December 31st, New Year’s Eve, the U.S. government celebrates New Year’s Eve on September 30th.

This year, September 30th happens to be a Saturday when banks are closed and the government is not working, so it’s really September 29th which is a Friday. September 29th is D-Day in terms of keeping the government open, and there are two ways to do it:

  • You could pass a real budget which is kind of what you were saying, Alex. Are we mature enough to actually do that? The answer is no.
  • The other thing you can do is called a CR or continuing resolution. It’s basically a vote by Congress that says, “We agree that all the agencies can keep spending whatever they were spending before. We’ll get back to you later about new spending, new programs, terminations, and all those things, but for now, keep spending.” That’s what a continuing resolution is.

Here’s the thing. That’s a hard stop on September 29th for the reason I mentioned. The debt ceiling doesn’t have to happen at the end of September; it can happen at any time. In years past, I’ve seen this happen in March or other times of year. It just so happens by coincidence that it looks like the Treasury is going to run out of cash on September 29th this time.

As I said, you’ve got yourself two asteroids striking the earth. One is the budget authorization in the form of a continuing resolution, and the other one is the debt ceiling increase in the form of authorizing the Treasury to borrow money. They don’t have to happen at the same time, but they are happening at the same time and are subject to the same dysfunctions. In other words, the issues I mentioned, e.g., the wall, Planned Parenthood, Obamacare fix, and sanctuary cities, pop up in the debt ceiling debate and also the continuing resolution budget debate. There is no consensus on any of them. Again, it’s not clear where the votes are coming from.

Just to add another layer of intrigue here (or dysfunction is probably a better word), it’s not clear if the White House is so afraid of a government shutdown. In a government shutdown, nonessential workers stay home, the military is still on duty, the TSA still works at airports, the Post Office is still open, but there are a lot of government functions that do shut down including popular ones like national parks and monuments. They’re the ones that are going to be most visible.

The White House might like that. Remember, the White House is not exactly Republican. They kind of are and they aren’t. Jared Kushner, Ivanka, and some others seem more like Democrats, but Trump is very hard to categorize. I wouldn’t call him a conservative Republican at all. He’s a nationalist, a Trumpist, a capitalist. He’s a lot of things, but I wouldn’t call him a conservative Republican.

Trump is just as eager to fight with the House Freedom Caucus and Mitch McConnell as he is with Nancy Pelosi and Chuck Schumer. He might say, “What we need is a good government shutdown. Let’s show the American people just how dysfunctional we are, just how immature we are,” etc. Again, I don’t want to take sides in that debate. My role is simply to warn listeners that these two things are coming together. I don’t see how they’ll get resolved.

On top of everything we just mentioned, it takes time to do these things. There’s something called the legislative calendar. Don’t think for a minute that Congress works seven days a week or even five days a week. They tend to show up Monday night and leave Thursday afternoon to go back to their districts on the weekends, so they probably work about three days a week, not to mention holidays. Their idea of the Labor Day weekend is a ten-day recess. Most of us are happy to get an extra day off, but they’ll take ten days for Labor Day.

The point is, the legislative calendar only shows 11 working days between now and what we’re talking about, the September 29th train wreck. It takes members of Congress 11 days to find their way to the bathroom.

They have a lot of other stuff on their plate. They have judicial appointments, they need to reconfirm the new FBI Director, there is some cat and dog legislation on Obamacare, and we have a national security crisis with Korea not to mention all the sound and fury about racism in Charlottesville. Again, I don’t want to get into the weeds here, but that’s obviously adding to the dysfunction.

Put this all together with the possibility that the White House might not mind a train wreck. The fact that there is probably a train wreck coming anyway due to the shortness of time, degree of difficulty, and the lack of consensus, we could have a government shutdown. I think we will have a government shutdown on October 1st effective midnight September 29th, and I think this debt ceiling crisis is going to go right up to the deadline.

That doesn’t have a date certain; September 29th is an estimate for that. Imagine you’re running a bond portfolio – a big one, like a pension fund or something – and you’re saying, “Is the United States going to pay me the interest due?”

By the way, there is a big outflow on October 1st because it’s the first day of the month. With Social Security, welfare programs, and benefit programs, that’s one of those days when the outflows are greatly and excessively inflows. People tend to pay their taxes in April, and by October, you’re running on empty.

This is a mess on top of all the other serious national security, terrorism, and other problems we described. It’s one more reason, in my view, why investors should be over-allocated to gold right now and also have some cash.

Alex:  When you’re discussing the schedule of how these politicians work, I’m over here shaking my head thinking, “Ah, the good life.” Hopefully, someday we’ll be able to rein that situation in.

Moving on to our next topic, as you and I have talked about many times, the world economy is heavily interlinked, and many of our listeners are professional money managers, so oftentimes, we will discuss what is going on in other jurisdictions.

Today, I’d like to talk a little bit about China. There is this disturbing trend going on over there where the banks are slowly becoming the majority, or I should say, the larger share of the investor base plus these things called wealth management products or WMPs.

From our discussions and what I’ve looked at in the past, the entire scheme of the WMP structure seems questionable to me. What are the risks and the potential spillover effects for the global markets?

Jim:  The risks and the spillover effects are huge. We’ve had a taste of this a couple times recently. Just about two years ago on August 10, 2015, China did a shocked evaluation of their currency, the Chinese Yuan. The markets didn’t see it coming, and even the elites, the IMF, the U.S. Treasury, and others did not see it coming. China had their own reasons for doing it.

That caused a shock in U.S. stock markets. Go back and look at a chart from August 10th to September 1st when U.S. stocks fell about 11%, and it was worse than that. It wasn’t just that they went down 11%, but it looked like there was no end in sight. It happened to be from peak to trough an 11% drawdown, but when it was down 10%, we didn’t know that it was going to turn around at 11%. It could have gone down 20%. Think about where you were on August 31, 2015, maybe taking the kids back to school, on vacation or getting ready for Labor Day weekend. Investors had a sick feeling in the pit of their stomach. It felt like there was no bottom.

Then the Fed rode to the rescue, and that was when we were going to have the liftoff in interest rates in September. They pushed the liftoff back to December, got involved in forward guidance happy talk, and the problem went away, but it was pretty bad there.

The second time was December 2015 when China did a stealth evaluation. They learned their lesson on the shocked evaluation, so they were doing it in baby steps, but again, the U.S. market reacted badly from January 1st to February 10th, 2016. It again fell 11%.

There you have two examples of what is called in-state contagion. That’s a good word. The IMF uses the word “spillovers” when one bucket spills over into another bucket. Pick your metaphor, but to say that the U.S. markets are isolated, immune or pristine relative to the Chinese evaluation or the natural market events is false. We have two examples of stocks almost spinning out of control based on Chinese actions, so let’s come back to the WMP.

I’ll take a minute to explain what a WMP is. It stands for wealth management product and is a simple concept. As a middle-class Johnny saver, you’re not a Princeton or an oligarch, but you and your spouse have a good job and have some savings.

You walk into the bank and the bank officer says, “We have two products. You can make a bank deposit and we’ll pay you 2% interest or you can buy a WMP and we’ll pay you 7%.” Most people think about that for two seconds and say, “I’ll take the 7%, thank you very much,” and they do.

What gets lost in translation, even in Chinese, is that these wealth management products are not bank products. They’re not liabilities of the banks. They’re off-balance sheet special products very much like CDOs.

Banks take the money people put into the WMPs, bundle it, and buy junk bonds or equity in real estate, state-owned enterprises, bankrupt companies, speculative land deals, ghost cities, and you name it. They’re out there buying all this garbage, so they look like these Lehman Brothers CEOs from the 2006, 2007, 2008 period, which of course, almost brought down the world.

They don’t really tell that to the customer. I’m sure there is some disclosure somewhere in the fine print that no one reads. I’ve seen interviews with everyday savers, people walking out of a bank, and a reporter says, “What did you do with your money?” “I bought a WMP.”

They’ll say to the person, “Don’t you know that’s not the equivalent FDIC insured, that’s not a bank liability, and it’s not guaranteed by anybody?” Some people don’t know that, but some people say, “I know that, but Beijing will bail us out.”

Alex:  That is the attitude in China, absolutely.

Jim:  I’ve been to China several times. I’ve been out in the boondocks of China, I’ve met with provincial Communist party officials, and I’m very frank with these guys. I was having tea in an office near one of these ghost cities, and I said to one these guys, “Can you build seven cities here?” As I’m looking at them, they’re all vacant. Every building I’m looking at it is vacant, and he did it all with debt.

I said, “How are you going to pay back the debt?” He replied, “We can’t pay back the debt. That’s impossible. Beijing is going to bail us out.” You hear this over and over from government officials to a man or woman on the street.

Be that as it may, these WMPs are Ponzis, and I don’t just throw that word out there lightly. Let’s say I bought a two-year WMP two years ago, I go back to the bank, and it’s maturing. They say, “Okay, Mr. Rickards, we can roll your WMP over into a new two-year WMP.” I might say, “Fine, I’m collecting my 7% interest,” but Bernie Madoff investors collected their interest also. They just didn’t know that their money was gone.

But what if I say, “My kid is going to college in the States so I need the money,” and I cash out my WMP? They have invested in these junk assets, so they can’t really cash out the WMP. What they do is sell a new WMP to the next person who walks in the door, take that money, and give it to me.

The new person is happy because she’s getting 7%. I’m happy because I got my money back. Meanwhile, the money isn’t there. You must sell the new ones to pay the old ones, and what you really hope is that the old ones roll over so your net inflows are positive and you don’t have net outflows. This is a Ponzi.

By the way, the Chairman of the Bank of China in an interview said, “It’s a Ponzi.” I quoted this in my book, The Death of Money. It happens to be my analysis, but it’s not just my analysis; we have it on record from China’s officials.

That’s where we are. We know that all Ponzis fail eventually. They collapse and cause a panic. That’s coming, but it doesn’t have to be tomorrow. This Ponzi can walk for a long time. Madoff ran his Ponzi for 20 years. The guy is spending the money on himself, losing it in other things, but convincing investors that it’s all good. As long as you pay the coupon, sheep will feel good about it.

I saw an article, a chart, and analysis last week showing that the amount of WMPs is going down. This was taken as a positive by the analysts who said, “This is great. China is finally stepping up to the plate. They’re finally getting things under control. It’s good that the leverage in the system is going down. Isn’t this wonderful that the WMPs are going down?”

I said, “No, that’s a nightmare. That’s like Bernie Madoff saying, ‘My assets under management are going down.’” If you don’t have the money and you get into negative cash flows or net outflows in a Ponzi… If it was a real product that was wisely invested and you saw it going down, you might say to yourself, “That’s good. There’s more liquidity in the system. They’re reducing leverage. They’re not acting as crazy on real estate.”

It would be a good thing if it wasn’t a Ponzi, but people forget that it is a Ponzi. When you see assets in a Ponzi going down, that means the run on the bank has started and this fire is about to spin out of control. To me, that’s one of the scariest indicators I’ve seen and one more reason to expect that China is about to implode.

Just to be clear, nothing is happening in China until either the end of this year or early 2018. The reason for that has nothing to do with economics and everything to do with politics. There is a national Communist party, Congress, that hasn’t set the exact date, but it’ll be late October or early November when President Gee is going to be anointed, if you will, as the big G, the big man, the most powerful Chinese leader since Mao Zedong. He doesn’t want to rock the boat ahead of this party Congress, so no crises are going to break out in China between now and November. They can back that up because they still use firing squads if they have to.

Once we get past the party Congress and Gee has achieved his power goals, we’re into 2018, and yet two plus two does not equal five. I think you’re going to see some of these chickens come home to roost.

If you asked me, “How does this play out? What do they do?” I would expect a maxi-devaluation of the currency, because devaluation of the currency solves the capital outflow problem. You can reopen the capital account, because people are not as anxious to get their money out. Once you steal their money, you can’t steal it twice, so they say, “I might as well sit here. I’m not sure how to get my money out.”

I would expect a maxi-devaluation to boost exports and export-related jobs and cure the capital outflow issue. For right now, they’re squashing everything, so don’t look for drama from China before the end of the year. I would look for a lot of drama in the next year.

Alex:  You mentioned that they all believe the government is going to bail them out if there are problems. That reminded me of my many trips to China talking to money managers, government officials, and others.

Before 2015, I made a trip and talked to five of the largest fund managers in China. They all said the same thing – they weren’t concerned about the banks or the markets. Then in June of 2015, I’m sure you remember there was the Chinese stock market crash.

The government basically froze everything and told them, “You can no longer trade. You’re not allowed to sell.” They were even going so far as to making criminal investigations into fund managers who were selling positions during that time, and they locked down liquidity.

You’ve mentioned something like that in terms of Ice-Nine in your recent books. That’s a big deal right now. The prevalent question on the mind of every professional money manager I talk to nowadays is, “What’s the liquidity like?”

Adding to that, keep in mind that secondary markets, stock markets, etc. can get shut down by governments at any time. If things are going badly, it can happen, and if you’re frozen out of markets, be super careful.

Jim:  I had a conversation with an investor just the other day and pointed out that on October 19, 1987, the major U.S. stock market indices, which is now referred to specifically as the Dow Jones Industrial Average, fell 22% in one day. Not a month or a week, but one day.

In today’s Dow points, a 22% drop would be 4,000 Dow points. Not 400, which would be a really bad day. The other day it was down 275 and everybody was all spun up. Four hundred would dominate every headline. Imagine 4,000 Dow points.

The person I was talking to said, “Yes, but they wouldn’t let that happen. They’d change the rules. They have circuit breakers and would close the Exchange.” I said, “You’re right. They would close the Exchange.”

You tell me. Which makes you feel better: a 4,000 point drop or a closed Exchange? At least with a 4,000-point drop, I can still trade or get out at a price. I might not like the price, but things are still transacting. If you shut the market, that’s Ice-Nine.

My thesis was that when you shut one market, the demand for liquidity moves to another market, probably money market funds, and you have to shut that down. Then it moves to another venue, which would probably be a run on the bank, and you must shut the banks down, etc. It spreads, so, I wouldn’t be too glib or sanguine about the fact that you can close the Exchange, which you can, because then you should say, “What’s the next move?”

As far as the Chinese bailout is concerned, the fact is, Beijing will bail them out. What drives me crazy about Wall Street analysis is they’ll say, “Yes, but Beijing will bail them out,” and I’ll say, “But what does that mean?” It’s going to cost $1 trillion to do this bailout we’ve been talking about.

Chinese has approximately $3 trillion in reserves. About $1 trillion of that is illiquid. It’s real money. I’m not saying it’s fake wealth, but it’s in the stock market, it’s in hedge funds, it’s in private equity. Try getting your money back from Henry Kravitz. He’s not going to give it to you, at least not until your seven years or whatever are up.

Take $1 trillion off the board because it’s there and it’s illiquid. Then there’s another trillion that has to be held in liquid form as a precautionary reserve to do this bailout. If you use that money, then you don’t have the money you need to do the bailout.

That means there is really only $1 trillion in reserves in China that is not already spoken for either in the form of illiquid assets or precautionary reserve. When the reserves were going in 2016 at a rate of $50 billion a month, you’re broke in a year.

China is in a much more precarious situation than people realize. You can’t just throw the $3 trillion number around without thinking about how much of that is already spoken for (the answer is $2 trillion). That’s why I expect the devaluation would be the answer, because that does solve the capital account problem.

Alex:  If you’re the Chinese government, why would you blow your dry powder on trying to prop everybody up and bail everybody out? As they’ve already proven, you can just shut it down and threaten people with criminal investigation if they try to trade.

Jim:  I think that’s right.

Alex:  Obviously, you and I have been banging the table on why you need to take a hard look at physical gold for a long time. I think these are all reasons that you have some of the smartest money managers in the world, like Ray Dalio, talking about it.

Moving on to our last topic. Jim, in our private discussions, you’ve mentioned something to me called The Myth of August. For our listeners, would you elaborate on what that means?

Jim:  The Myth of August started as kind of a fun thing with me, although it’s not fun in the sense of the specific events I use to illustrate it. Here we are two-thirds of the way through August, so there isn’t too much time left but plenty of time for fireworks.

The idea is, August is a very popular vacation month. As the last month before kids go back to school, it’s a great time at the beach or the mountains, etc. From Europe to North America to around the world, a lot of people take their vacations in August. Everyone, at least in my part of the world, are in the Hamptons, the Jersey Shore, Cape Cod, or wherever. Offices empty out, whole industries, publishing is almost practically shut down, and nothing happens. It’s just quiet. We all come back to work and are rocking and rolling on Labor Day. That’s the myth.

The myth persists, yet the reality is quite different. Look at the things that have happened in August. They’re not just newsworthy; they’re among the most momentous events in history and financial history. Most famous, tragically, is what Barbara Tuckman, a great writer and historian, called the guns of August, which was the outbreak of World War I.

Even in more recent times, on August 15, 1971, Richard Nixon ended the gold standard. It was August 7, 1990, when Saddam Hussein invaded Kuwait and George Bush, 41, said, “This will not stand.” We sent troops to Saudi Arabia, airlifted them in to the Land of the Two Holy Places, as the Muslims say, literally the next day, which gave rise to Al Qaida.

It was August 1998 when we had the double embassy bombings in Kenya and Tanzania, and Bill Clinton responded with cruise missiles. August 1998 was also the famous Russian default which led straight to the global financial crisis meltdown involving Long-Term Capital Management. As their General Counsel, that landed in my lap, and I negotiated that bailout.

August 1991 was the Solomon Brothers trading scandal when Solomon, the largest U.S. bond dealer in the world, almost went bankrupt which would have started another financial crisis. Warren Buffet came in as a white knight, bailed them out, and the Treasury backed off in the threats against Solomon. The crisis did not go further, but it certainly had the potential to do so.

August 1991 was also a Russian coup. Some crazy KGB guys kidnapped Mikhail Gorbachev. Remember that one? I think the coup was busted because they got drunk on vodka, so their situation awareness was not the best, but they did kidnap the General Secretary of the Communist Party in an attempted coup. And we had Hurricane Katrina in 2005.

I don’t need to belabor it, but I’m very wary in August. A lot of very nasty things have happened. We’re in the home stretch here, just about ten days left, so hopefully it’s quiet, but given everything we mentioned at the beginning of the podcast about North Korea, I’m not so sure it will be quiet.

If the U.S. goes ahead with this military exercise, which I expect, and Kim Jong-un responds with some kind of test, whether it’s a submarine-launched ballistic missile, nuclear device or an ICBM aimed at Guam, which I also expect, then we’re not going to make it out of August without a financial earthquake. Let’s see what happens, but I wouldn’t put my feet up quite yet.

Alex:  I think these are all good reminders.

Revisiting the whole liquidity thing, many people are heavily invested in what you and I call paper products that require some kind of counter-party to perform. In a recent paper, the IMF said that gold is the only financial asset you can buy that does not require a counter-party for it to have and retain its value.

I wasn’t going to share this, but I’m going to mention that I had a conversation earlier this week with the head of a trading desk who has 15 people under him. They’re running a lot of money as one of the largest financial houses in the world. If I mentioned the name, everybody would immediately recognize it, so I’m not going to say who this person was.

In a candid moment of discussion, he mentioned to me that they are pretty nervous about this kind of stuff. They listen to our podcasts on a regular basis and don’t miss one, so thanks guys. We appreciate the support.

He mentioned that if it were up to him in regard to all the paper investments – in other words, the ones with the counter-party risk and the ones that rely on exchanges to trade, etc. – he’d sell it all right now.

Jim:  Personally, thank you if you’re listening, and thank you and your team for joining us.

The one thing I would say, Alex, is there is a name for restorative value that does not have counter-party risk. It’s called money. People say, “I have money in the bank.” No, you don’t. You have a bank deposit which is an unsecured liability of an occasionally solvent financial institution. Even a Federal Reserve note, if you read it, says, “Federal Reserve note.” Where I went to law school, that means it’s a liability, which it is.

People don’t think hard about what money is. They take a lot of things for granted and assume it’s money when it’s not; it’s something else.

Again, to go back to where we started, people say, “I’m nervous about buying gold.” I say, “I’d be nervous if I didn’t have any.”

Alex:  That wraps up today’s podcast. Jim, thank you for your time. The discussion has been invigorating. We covered some really great material, and I very much look forward to our next one.

Jim:  Thank you.

 

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

 

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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.

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.

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