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

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”

 

 

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

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

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

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

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles July 2017

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Topics Include:

*US war with North Korea still on the table
*Commentary on physical gold
*Why gold stores value over long periods of time
*Institutional Money Mangers views are shifting towards concerns over insuring portfolio assets will have liquidity under market stress
*The critical mistake in due diligence when investing in gold funds
*3 Factors which would cause the Fed to pause its rate hiking schedule
*Inflation vs Disinflation
*Slowing Economy and Fed Policy

 

Listen to the original audio of the podcast here

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

 

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

 

Alex:  Hello, this is Alex Stanczyk. Welcome back to another podcast of The Gold Chronicles. I have with me today Mr. Jim Rickards. Hello, Jim.

Jim:  Alex, how are you?

Alex:  Excellent, thank you very much. We covered quite a few topics on our last podcast including the risk in cryptocurrencies. We also talked a little bit about the G20, Syria, and North Korea.

On the topic of North Korea, you’ve been saying for several months now that at some point, the U.S. will go to war with North Korea to eliminate the risk that Kim Jong-un might actually nuke a U.S. city. You even mentioned it live on Bloomberg at one point in the last few weeks. The staff there was skeptical of the idea; however, an hour later, North Korea test-fired its first ICBM.

Jim:  That was one of those amazing coincidences. I wouldn’t have said one thing differently if I had known about the test in advance (which of course I didn’t). Whether it was happening or not, I wouldn’t have said one thing differently.

They say it’s good to be smart and better to be lucky, and sometimes things converge in a way that that plays out. Yes, it’s a serious subject. Literally, I was on the air live with Bloomberg Asia, interestingly.

Bloomberg has a 24-hour cycle. They don’t have separate networks for their different regions. They just keep going, so it was 7:00 at night where I was in Montreal, 7:00 AM in Hong Kong and Singapore. We were live on the air, and with two billion people in Asia, it was potentially a big audience.

That’s exactly what I said. It was with a great interviewer and a cohost. I always say it’s not the anchor’s job to make me look good; that’s my job. They’re there to hold your feet to the fire, and there was a fair amount of skepticism.

I was very categorical about the march to war. Then literally minutes later, the news broke that they had just fired an ICBM. People weren’t sure it was an ICBM when it went off although it looked like one. Subsequently, that was verified by a number of sources. It was certainly not a good development.

When I do these interviews including our podcasts, I’ll put them out on Twitter to try and expand the audience a little bit. I can see some but not all of the clicks while Bloomberg will obviously see more than I do.

That interview got more clicks than anything I’ve ever done outside of a couple things that just went super viral. Normally, if you get 1,000 or so views, that’s pretty good interest. This one went off the charts at over 6,000 views in 24 hours, which is a lot for a TV interview. That definitely got a lot of attention.

What was interesting was that my cohost, a very well-established, reputable money manager, was sort of disparaging gold, and I was taking the pro-gold side.

Then I went into the thing about North Korea to which he said, “Well, if we’re going to war with North Korea, you would definitely want to own gold,” as if we weren’t going to war. Again, not an amusing exchange, not an amusing topic, unfortunately, but my point was, “We’re going to war.”

It was a really good example of the cognitive dissonance or denial and complacency of professional money managers. It’s like, “Oh, yeah, if we’re going to go to war with North Korea, I’d load up on gold.”

Well, we are. It’s happening in front of your eyes. You can see it with a six-months to one-year lead time, so why don’t you get some gold now at an attractive entry point? What are you waiting for?”

The answer is they always wait until the first shot is fired. Gold will be, who knows what, $500 or $1,000 an ounce higher. Then they’ll run out and buy some at $1,375 – $1,400 an ounce when you can back up the truck right now and buy it for $1,240. I never understand it, but it is what it is.

Alex:  Yes, that’s pretty typical. For our listeners, if you haven’t heard our previous two podcasts when we talked about the North Korea situation in depth, I recommend you go check them out as well as the last one we just did when we talked quite a bit about the risks in cryptocurrencies, which I think people are starting to explore further.

(PhysicalGoldFund.com/podcasts)

For today’s topics, we’re going to begin with a few thoughts on physical gold. We’re also going to discuss the U.S. economy, what the Fed is watching in terms of its metrics, Fed policies in terms of easing or tightening, and we’re going to wrap up with some discussion on a little-known problem in the Chinese financial markets.

Beginning with physical gold, I recently returned from a family vacation where we spent some time panning for gold in the Black Hills of South Dakota. Jim, as you well know, panning for gold is a labor-intensive process. Our little group of seven people spent about four hours moving earth.

We would dig buckets of earth out of these massive tailings piles left over from the gold excavation operations in the Gold Rush back in the 1870s. A tailings pile is leftover dirt that they sifted through looking for gold. The thing was, the screens they used to find the gold had huge holes in them. Back then, they expected to find gold nuggets of much larger size than we find today.

Our tailings pile made up the entire side of the riverbed we were on. Even with all of the time and energy we expended – again, there were seven of us working for four hours doing this – we ended up with less than a gram of gold.

Some of this reflects the concept of what’s called high grading, which means that all of the super-high ore deposits in history have mostly already been discovered. In everything we’re doing in mining operations today – I’m talking large-scale mining – it’s not uncommon for a large-scale operation to move a ton of earth to find just 1 – 1.5 grams of gold.

The point I’m trying to make is that gold is actually stored energy. The energy cost of extracting gold from the earth is now, and has always been, considerable. I contend that, along with physics, these are the two primary reasons gold retains its purchasing power over thousands of years.

Jim, you do a bit of panning yourself in your top-secret personal location. I’m not going to ask you to divulge where that’s at, but tell me a little bit about your experiences there and why gold’s physical properties make it ideal for storing value over millennia.

Jim:  I should make it clear that I do it for fun and to teach my grandchildren a little bit about where gold actually comes from and how scarce it is. We do it as a recreational thing. I’m not trying to pay my property taxes with my gold output.

You, at least, had the benefit of tailings where there was some reason to believe there was gold around. I pan in an area where there is gold, but certainly not in commercially viable qualities. It’s also a very environmentally sensitive place, a very green place, which is a good thing. It’s unimaginable to me that anyone could ever get a permit to open a mine.

There are old mines from the 1850s in my vicinity. There is gold in them thar hills, as they like to say. In fact, this area was affected by Hurricane Irene in 2011, and there was a bit of a gold rush. People were buying gold pans from the local stores and, believe it or not, running down to parking lots of shopping centers where the earth had literally been stripped off the face of the surrounding area, and it drained into these lower-lying areas. There were mud piles and water caches and so forth. People were panning for gold in these parking lots and finding some.

There is gold there, and I find it. A gram would be a lot to me, but if we found a couple flakes, that would be good. We do it for fun. It does underscore the point you were making, which is that this is a known goldmining area, at least back in the 19th century, and it is extremely scarce.

I recently visited commercial goldmining operations up in Northern Quebec where they have real goldmines with real development. There’s a lot of drilling going on and equipment moving in, but even there, you’re exactly right. It takes a ton of ore – rock and earth and so forth – to get maybe a gram if you’re lucky. That would actually be quite high, because it’s usually measured in fractions of a gram. That’s how scarce it is.

It would be one thing if you could just say, “I’ll get a gram of gold per ton of ore,” in any place you dug up, but you can’t. What I’m talking about, as you said, is a high-grade location. Those locations are few and far between and seem to be getting scarcer.

The other point I would make about goldmining output is that we’re talking about very long lead times.

Gold had a magnificent run in one of the great bull markets in history from 1999-2011. I’ll use round numbers and say it went up from about $200 an ounce, maybe $199 an ounce at the low, to almost $1,900 an ounce. That was 1,000% gains, ten times your money, in a relatively short period of time. Then it had a measured correct. It came down about 50%, which is interesting.

I think I’ve mentioned my conversations with Jim Rogers in past podcasts. He’s one of the great traders, period, but particularly one of the great commodity traders of all time. He was cofounder of the Quantum Fund along with his partner at the time, George Soros.

Jim told me he’s bullish on gold. He owns gold, he holds gold, but he’s never seen a long-term bull market that didn’t have a 50% correction along the way. He said that’s just the way it is. You get to $1,900, and gold’s back down. The interim low or cycle low was $1,050. That was just over a 50% correction if you use $200 as your baseline or starting point. It’s been going up over 20% since then. It looks like that is behind us and we’re on to bigger and better things.

Here’s my point. You can only imagine the gold rush fever that was going on in 2010/2011 not just in Canada but around the world. People were investing, capital was easy to raise, a lot of mines were opening up, etc., but a lot of that was priced at $1,300-1,400 an ounce, or not really feasible when gold went down below $1,100.

You can well imagine the gold fever that was going on when gold was soaring up to $1,900 an ounce. If your production costs were $1,100, $1,200, $1,300 an ounce, you could get financing, you could bring marginal properties back into production, etc.

When gold went down to $1,300 by April 2013, then even lower by 2015, those mines were suddenly not economic. There were a lot of bankruptcies, a lot of projects were called off or halted in midstream, other projects went bankrupt, and so forth. There was no – or at least very little – exploration mining going on in 2013, 2014, and 2015 as the price was treading water.

What’s happened now, with the price back up at $1,250 and a good upward trend, is that mining fever is picking up again. But you can’t just pick up where you left off.

If you’re talking about a greenfield, which is you have an attractive opportunity (you get the mining rights or you lease it, you start exploring, you start drilling, you do your feasibility studies, you get your financing and stuff), that takes 5 – 7 years before you can bring ounces onto the market. With some opportunities, the time horizon is shorter than that, because you’re maybe stepping into the shoes of somebody who went bankrupt at a much lower price point and you pick up where they left off or there are some mines that were never shut down.

As far as new production, we’re in a trough right now. It’s going to take years to get production up close to where it was in terms of capacity if you even could. We all know that demand is sky high as we see in Russia, China, India, and elsewhere, and supply is tight.

Alex, you and I have been around the world. Whether it’s meeting refiners, miners, vault operators or dealers, we hear the same story everywhere. It’s amazing. It’s really, really hard to fulfill orders or get your hands on gold.

The technical setup on the physical side could not be better. Of course, we have our old friend, the COMEX. Anyone can sell 60 tons of paper gold with a phone call to a broker with no actual gold involved. That’s happened occasionally, but that will fade in time.

Alex:  Yes, I totally agree.

To wrap up our gold commentary, I’d like to make a quick observation. I’ve noted a continual shift in the views of institutional money managers when it comes to what they’re allocating to. When they’re evaluating the risk in the ability to get liquidity on their assets, it’s starting to become a big concern. This makes sense, considering the fact that very little has been learned from the past couple of crises.

I was recently looking at your latest book, Jim, where you were talking about this concept that Wall Street is basically still clinging to the notion that net exposure is what matters, when gross exposure is where the risk really lies. Wall Street hasn’t come around to this view yet.

For any financial professionals and money managers listening to this podcast, if you’re conducting due diligence on gold funds, one area I would encourage you to look into specifically is how those funds are buying and selling their gold. That’s the Achilles heel. I think you’re going to find that they all do it through banks, which is, in our opinion, a big mistake.

Jim:  They are either doing it through banks, which leaves you very vulnerable, or they’re buying paper gold and expecting to be able to convert it to physical gold. The big gold banks are the members of the London Bullion Market Association (LBMA). There aren’t that many. I don’t know the exact number, seven or eight, but they’re familiar names such as Goldman Sachs, HSBC, and a few others.

When they sell gold – and again, you must read the contracts carefully – they do it on what’s called an unallocated basis, which means all you really have is paper price exposure. They don’t have the actual gold. They might have 1 ton of gold and sell it 20 times over. They’re short 20 tons of paper gold backed up by 1 ton of physical gold.

What happens if the longs – the holders of the 20 tons of physical gold – all show up on the same day and say, “I’d like to convert my unallocated to allocated, and I’d like to take physical delivery. I’m sending my Brinks truck, and they’ll be there in 15 minutes”?

There’s no way they can satisfy those deliveries, no way. What they would do is essentially terminate those contracts and send you a check for the price differential. You would get your paper profit up to that point.

This is the conditional correlation Wall Street does not seem to understand or at least does not want to understand. The world in which the holders of the 20 tons of paper gold all call up on the same day to take physical delivery is a world where gold’s going up $200 – $500 an ounce per day, stocks and other paper assets are crashing, and there’s blood in the streets as they say. There’s a panic.

When you most want your gold is when you will least be able to get it if you don’t already have it. That’s why I’ve always encouraged those who want exposure to gold to have physical gold in safe, non-bank storage. You won’t have to worry about delivery or fine print and contracts. You’ve got your gold.

Obviously, make sure you’re dealing with a reputable fund or provider or a fund that’s backed up 100% by physical gold with no delay. I’m not saying there’s anything dishonest about any of this. What I’m saying is that people don’t read the contracts or, if they do, they assume that they can convert when the time comes. They’ll find out the hard way that they can’t.

With some of ETFs, you buy a share of an ETF, and that’s a secondary market transaction. You’re not buying gold; you’re buying the GLD share on the New York Stock Exchange. When the seller sells to a buyer, that has no impact on the amount of gold in the ETF itself. That only happens when one of the authorized dealers chooses to issue new shares. They have to buy gold, deliver it, and then they get some new shares so they can expand the floating supply of shares, if you will. But there are leads and lags in that process. They can issue the shares, and then it can take up to 28 days or so to deliver the physical gold.

The point is, whether it’s the ability to terminate a contract on other force majeure clause or a mature adverse change clause, the ability to delay acquisition of physical gold, the possibility of closing banks, the possibility of futures exchanges order and trading for liquidation only, there’s just a whole long list of things that can go wrong. None of them are a substitute for physical gold.

Alex, we talked earlier about my Bloomberg interview when I was on with a money manager. It was supposed to be a pro-gold/anti-gold debate with him against gold and me for it, but it turned out that when we talked it through, he said, “We’re not totally anti-gold. We allocate from time to time. We’re in and out of it the way we’re in and out of other things. We’ll occasionally take up to a 5% allocation.”

I said, “That’s interesting, because I’ve never recommended more than a 10% allocation.” I’ve said put 10% of your investable assets in physical gold, not 50% or 100%, but 10%. I said, “If you’re occasionally a 5% guy and I’m a 10% guy, we’re actually not that far apart. This is a bit of a phony debate, because we both see a role for gold in portfolios.”

Institutional exposure is 1%. Whether you’re with this money manager, who occasionally does 5%, or whether you’re with me and I recommend 10%, they’re both a far cry from 1%. If the world of institutional investing even moved from 1% to 2% or 3% –  forget 5% – 10% – there’s not enough gold in the world, at these prices, to satisfy that demand.

Alex:  Again, I totally agree.

Circling back around to the risk part of clearing gold through banks, my perspective as a manager of a physical gold fund is that if I’m a gold fund that has gold assets and there are investors needing liquidity so they want to sell gold assets, to me the biggest risk is if their prime broker is a bank. That’s no different to me than what just happened in China recently with their stock markets melting down or what happened in the 2008 global financial crisis.

If I was a hedge fund and my primary dealer was a bank and that bank was frozen up or locked up or unable to trade for whatever reason, I’m basically frozen out of the market. In my view, that’s a very bad place to be.

Jim:  That’s exactly what we’ve seen. Lehman Brothers was the most famous example to file for bankruptcy on September 15, 2008. There were billions of dollars of frozen accounts where the accounts were fully paid up, fully margined. Those securities, instruments, physical gold, whatever it was, were owned by the client and simply in safekeeping at the broker. But all the accounts were frozen. We saw that with MF Global as well. These things do happen in the real world.

Alex:  Our next topic is the slowing economy. Contrary to optimistic thoughts, there’s still a strong concern that the economy – I’m talking globally – isn’t getting better overall.

The average person and sovereign governments are continually going further into debt right now in order to make ends meet. The U.S. national debt is approaching the $20 trillion mark. Who would have ever thought that would happen? Other countries are continuing to pile on the debt, as well. The compound annual growth rate in global debt over the last 15 years is around 6%.

Jim, what are your thoughts about whether the economy is slowing or strengthening in the short to medium term?

Jim:  The evidence is very good that the economy is slowing. The best thing you can say about the economy is that it’s weak. The worst thing you can say is that we’re on the edge of a recession and may actually be in a recession before the end of the year.

This was a completely predictable consequence of the Fed’s blunders by raising interest rates in a weak environment. The Fed is always in the process of making a mistake. It’s just that they keep making different mistakes at different times.

Let me unpack that a little bit and talk about what’s going on. In past podcasts, we’ve talked about my basic Fed model and my modal forecast for Fed activity. I won’t go into that in great detail, because we have done it before, but here’s the short version of it.

The Fed is on track to raise interest rates four times a year from now until the middle of 2019. It will be 25 basis points each time in March, June, September, and December. That times four, 1% a year through the middle of 2019, will get interest rates up to around 3.25%, which they would consider normalized. That would be a normal interest rate environment for this late in the business cycle.

However, that path is subject to three pause factors. Yes, they’re set to raise four times a year, but there are three reasons why they wouldn’t raise, three very specific pause factors.

One is if you see job creation dry up so it’s below 75,000 a month – not 150,000 or 100,000 or even 90,000, but below 75,000 a month. That might cause them to pause. The second factor is strong disinflation, moving away from the Fed’s 2% inflation target. The third factor would be a disorderly stock market decline.

I emphasize the word ‘disorderly.’ If the stock market went down 10% over six months – 2,000 Dow points or 200 points in the S&P – the Fed could care less. If it went down 10% in two weeks, they would care, and that would cause them to pause. That’s the difference between disorderly and orderly. It happens in a very compressed period of time.

If you see job creation dry up, strong disinflation or a disorderly stock market decline, the Fed will not raise the rates; they will pause. If you don’t see any of those three things, they’re going to raise rates.

This is the easiest Fed I’ve ever seen to forecast. It’s actually very straightforward. Why more people don’t get it, I don’t understand. Why Wall Street doesn’t get it and they get all spun up over some recent Reserve bank president like Jim Buller making a speech or something – I know Buller. He’s a nice guy, but his speech is irrelevant to monetary policy. I just gave you the model to forecast Fed policy.

I said this a few months ago, but I’ll repeat it for the listeners: The Fed is not going to raise rates in September. There’s a July meeting coming up, but they’re certainly not going to raise in July. There was never any significant chance of that.

They’re not going raise rates in September, and they’re not going to raise rates on November 1st at their next meeting. For December, I would put it way below 50%, so if I had to call it right now, I would say they’re not going to raise rates in December. They’re done raising rates for the year. I’ll update my December forecast as we go along, but right now it’s very clear that they’re not going to raise rates in September.

I just said they were going to raise them in March, June, September, and December. Now I’m saying they’re not going to raise in December. Why is that? Which one of the pause factors applies? The answer is disinflation.

It’s not job creation, because job creation is still strong. Over the past year and a half, it’s trended down from way over 200,000 to the low 100,000 range with a lot of volatility in there, but that’s still good enough. The stock market is reaching new highs every day. That’s not a reason for the Fed to pause.

The reason is disinflation, the second of the three pause factors. Where do we see that? I said that the Fed has a 2% inflation target, but there are dozens of inflation measures such as CPI, PPI, PCE, deflator core, non-core, and trim mean. Without getting too technical on all those, there are many ways to measure inflation.

The one the Fed uses – and this is the one you need to watch if you’re trying to forecast policy – is core PCE (Personal Consumption Expenditure) deflator year-over-year. It’s not month-over-month, quarter-over-quarter, non-core, etc. but core PCE deflator year-over-year. That’s the one they watch, and they want it to be 2%.

Note the time series of the data. In February, it was 1.8%. The Fed’s looked at that and said, “See, we told you it’s going to 2%.” In March, it came down to 1.6%. In April, it came down to 1.5%. In May, it was 1.4%. We don’t have the June data yet, because it won’t be out until the first week of August.

Based on data from other inflation metrics – not the ones the Fed bases policy on, but important ones nonetheless including PPI and CPI that both show downward trends – they’re at higher levels. They’re running hotter than PCE core year-over-year, but they are showing a downward trend.

Based on that data, there’s every reason to think that the PCE core year-over-year will be at best 1.4%, maybe even 1.3%, and maybe lower. That’s a big deal. That is moving in the wrong direction from the Fed’s 2% goal, and it’s moving very strongly. Most important of all, it’s moving persistently.

What was Janet Yellen saying about that in March, April, and May? I always remind readers that I don’t have secret data. We’re all looking at the same data. The only thing that separates us are our models and analytical tools and maybe different ways of looking at things.

Yellen is looking at the same data, but what was she saying in March, April, and even May, when this was coming down? She was using the word ‘transitory.’ “Well, yes, I see it, but I don’t really believe it. It’s not going to persist. They’re temporary factors,” etc.

One time it’s oil. Well, oil is not part of the core. It’s part of the overall index but not part of the core index. If oil is going down, it does have ripple effects in other parts of the economy, so there might be reason to believe that. If you think prices are going back up, which I don’t, that might be the reason to call it transitory, but that has persisted.

There’s a price war in telecommunications carriers, your cell phone carriers like T-Mobile, Sprint or AT&T. There’s a price war going on there. They actually referred to that as transitory, but I don’t know if it’s transitory or not.

I think she has the Gilda Radner problem. Remember her character Roseanne Roseannadanna from Saturday Night Live? Her punchline was, “It’s always something.” That’s Yellen’s problem. She can look at one factor and say it’s transitory, but it’s always something. There’s always something coming along. It could be healthcare, etc.

This is persistent. She threw in the towel recently in her Humphrey-Hawkins testimony to the House of Representatives a week ago Wednesday when she acknowledged and said words to the effect that it might not be transitory. She didn’t quite come out and go full Monty and say, “Oh, no, it’s moving in the wrong direction. We have a problem.” She didn’t say that in so many words, but she was as explicit as she ever gets about the fact that this is now a problem. They hit the pause button to see what happens.

Interestingly, the Fed doesn’t move on a dime. I just gave you four data points (February, March, April, and May PCE core) that would be very bad for the Fed. You say, “The June number is going to come out in early August. What if it goes up? What if it goes up to 1.6%?” That will not be enough to get them to raise rates in September.

The reason is it takes a long time to get Yellen to turn, but it takes just as long to get her to turn back. In other words, she’s now flicked the switch. She’s in “Disinflation is a problem. We need to pause” mode. She won’t reverse that based on one data point.

Again, if she sees June, July, August and it’s trending, then maybe she’s back on track for a December rate hike, but we’ll see. As of now, September is completely off the table. By the way, I said that a while ago. We told our listeners that even in the last podcast a month ago, and now I see a lot of economic analyses have come around to that conclusion.

This is a reaction to the fact that they had four rate hikes. They raised them in December 2015, December 2016, March 2017, and June 2017. They put four rate hikes on the table, and I would argue strongly that they began the tightening in May 2013.

The so-called liftoff or first rate hike was December 2015. “Jim, what are you talking about? What do you mean they started in May 2013? That was two years before the liftoff.” The answer is there are a lot of ways to tighten. You can do it with forward guidance or with tapering.

That’s what they did in May 2013 when Bernanke gave the famous taper talk. We practically had an emerging markets currency and stock market meltdown. Then in December 2013, they started the taper that persisted through November 2014.

In March 2015, Janet Yellen removed the last bit of forward guidance. They had been including the word ‘patient’ in their statement meaning, “We’re going to be patient about raising rates,” which means, “We’re not going to raise rates until we give you a heads-up.” They took that out, and that was the heads-up. Then they didn’t actually raise them until December 2015.

That whole sequence of warning about taper, starting the taper, staying through the taper, and moving forward guidance were all tightening moves. I remember people saying, “Tapering is not tightening because you’re still printing money.”

Yes, but if you’re printing less money than you were the month before, that’s a form of tightening. It’s not extreme tightening, but at the margin, if I’m printing $80 billion a month and I go down to $40 billion a month, which is what they did in stages, that’s a form of tightening. You can’t say that expanding QE is ease but somehow contracting QE is not tightening. That’s just illogical and also not empirically correct.

Here’s the key, Alex. Our friend, Milton Friedman, reminds us that monetary policy operates with a lag that can be 18 months to two years. If you start tightening in small ways in 2013 and aggressively in 2015 and 2016, you should expect the economy to perhaps go into a recession in late 2017. Here we are, right on time.

The Fed is always the last to know. They’re going to try to undo the damage by pausing, but that will probably not be enough. If we go into a recession, they’ll have to throw the whole show in reverse, which means actual rate cuts and getting back down to zero then QE 4.

This is extremely bullish for gold. I know we talked about gold earlier in the podcast before we switched to the Fed, but when people talk about gold going up or down, what they’re really talking about is the dollar price of gold.

I think of gold by weight. That’s the right way to think about gold, because I think gold is money. For those who think of gold in terms of a dollar price, well, the dollar price of gold is just the reciprocal of the strength of the dollar. A strong dollar means a lower dollar price for gold as we saw in 2012/2013. A weak dollar means a higher dollar price for gold, and that’s what we’re starting to see now.

The dollar has come off the top, but when the Fed switches to ease along the lines I just described, when we get to September, they don’t hike, and perhaps they offer some forward guidance and say, “We’re not going to hike in December,” this will weaken the dollar. That’s very bullish for gold.

My advice to gold investors is that you’ve got a great entry point here. Don’t wait until it’s back up over $1,300. You might still want to buy then, because it’ll go even higher in the long run, but it’s a great entry point right now and a very good reason to buy gold based on this Fed forecast.

I’ll mention Lael Brainard who’s also a member of the Board of Governors and voting member of the FOMC. He gave a speech before Yellen’s testimony. Yellen testified on July 13th, but Brainard gave a speech on July 11th. It’s a little bit technical but absolutely fascinating and indicates that the Fed still doesn’t get it.

Alex:  Speaking of policy lag and how that affects the value of the U.S. dollar, you just mentioned that the U.S. dollar and the U.S. dollar gold price is basically an expression of U.S. dollar buying power.

There’s a common point of confusion here considering that central banks have injected something like $15 trillion U.S. dollars of currency into the economy over the last decade, but it really hasn’t shown up in price inflation. The area where we’re seeing inflation is in financial assets.

If you talk to Austrian economists, for example, they will tell you that asset price inflation is actually the precursor to consumer price inflation. That could still be in the cards. If we see that, it will definitely be an expression of the loss of buying power in the U.S. dollar.

Jim:  I study Austrian economics and think it has a lot to offer. I don’t consider myself an Austrian economist. I consider myself a complexity theorist and a few other branches of science that I bring to capital markets. That’s how I understand capital markets.

The Austrians have a lot to offer. Asset price inflation certainly can be a precursor to consumer price inflation. I wouldn’t rule that out. If they keep going, eventually it will be, but asset price inflation results in bubbles. If bubbles burst, you have financial panics. You could have deflation in nominal space, but a financial panic would mean a major run to gold as a safe-haven asset.

Maybe other things would be collapsing. Maybe even consumer prices would be coming down in a recession or a financial panic, which they would, but gold and treasuries would be going up as safe havens.

I remind people that the greatest period of sustained deflation in American history was the Great Depression from 1929-1933. Yet in the Great Depression, gold went up 75% from $20 an ounce to $35 an ounce. The best-performing stock on the New York Stock Exchange was Homestake Mining. It rallied when the market was going down from top to bottom over 80%.

Gold is a funny thing. Because it is money, it can perform very well even in environments when everything else is falling apart, because people want money.

Alex:  Exactly. We are out of time. We did have on the agenda for today a certain disturbing trend that’s going on in China, but we’re going to have to leave that for our next podcast.

As always, I appreciate you being on with me. It’s been a great discussion that I think our listeners are going to enjoy very much.

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

 

You have been listening to The Gold Chronicles with Jim Rickards and Alex Stanczyk presented by Physical Gold Fund. Recordings may be found at 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: July 2017 Interview 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: July 2017 Interview with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles July 2017

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Topics Include:

*US war with North Korea still on the table
*Commentary on physical gold
*Why gold stores value over long periods of time
*Institutional Money Mangers views are shifting towards concerns over insuring portfolio assets will have liquidity under market stress
*The critical mistake in due diligence when investing in gold funds
*3 Factors which would cause the Fed to pause its rate hiking schedule
*Inflation vs Disinflation
*Slowing Economy and Fed Policy

 

 

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 June 2017

Jim Rickards and Alex Stanczyk, The Gold Chronicles June 2017

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Topics Include:

*In depth look at potential risks of cryptocurrency
*Why cryptocurrencies are still in their infancy and are not yet comparable to gold, US dollars, or other currencies
*Why ICO’s and crypto currencies are not protected from government regulation or enforcement
*How most cryptocurrency ICO’s are not compliant with international AML/KYC reporting frameworks
*Which tools regulators have for enforcement of breaches in regulation and why cryptocurrencies are not beyond regulatory reach
*How a distributed ledger works
*How Bitcoin mining works
*What is an Initial Coin Offering
*Trustless dis-intermediation still has chokepoints that regulators can act against
*SWIFT transfers
*Tax implications of cryptocurrency ownership
*G20 Update
*Syria Update
*North Korea Update

Listen to the original audio of the podcast here

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

 

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

Alex:  Hello, this is Alex Stanczyk. Today I have with me Mr. Jim Rickards. Jim, welcome back to the podcast.

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

Alex:  We have a number of different subjects today including cryptocurrency. We’re also going to talk about the G20, Syria, and North Korea.

Let’s start with cryptocurrencies. We have listeners who are interested in crypto but are not what I would consider seasoned crypto-enthusiasts. For the portion of the audience who are not highly technical, there’s a desire to know more about crypto in terms they can understand. We’re going to discuss that a bit today.

I would like to lay down a few thoughts to set a foundation for the topic. First of all, this is not about cryptocurrency bashing. I personally like the idea of a distributed ledger; it’s fascinating technology. The potential for the blockchain technology is quite interesting.

This also isn’t about whether gold is better than cryptocurrency or vice versa. The truth is, crypto is still in its infancy. It does not yet come close to gold in terms of practical application.

Gold’s market cap is in the neighborhood of $7.4 trillion as of the last estimates we received from our sources. Other currencies, Global forex for example, are multiple times this in size. All crypto combined is sitting at a market cap of about $112 billion. While the technology has great potential, cryptocurrencies themselves have a long way to go before global markets take them seriously as a money alternative with any depth and liquidity.

There’s been a lot of buzz surrounding crypto that, from my perspective, does not take into account the reality of the global regulatory landscape we live in today. For example, because it’s crypto or because it’s an ICO (Initial Coin Offering), if this ICO is in a country outside the U.S., there seems to be this belief that it’s somehow protected from regulatory reach.

One of the things I want to talk about today is that this is either a lack of understanding of how regulatory enforcement works on a global level, or possibly there may be a little bit of confirmation bias going on that’s blinding people to how things really work.

I want the listeners to keep in mind that I’m not pretending to be any kind of technical expert on cryptocurrency. What I’m addressing is what appears to me to be gigantic, gaping holes in the attention given to regulatory compliance and this idea that crypto is somehow beyond the reach of government.

Jim, I’m going to be asking you for your input on this in a moment. But for now, let me just add a little more foundation.

Right now, ICOs are popping up like crazy. It’s kind of like the Wild West. An ICO is a brand-new cryptocurrency people are pouring money into. My observation is that the majority of these ICOs may not understand the legal implications of what they’re doing in the area of what regulators could view as issuance of securities or, with a lot of them, being in noncompliance with international AML/KYC frameworks such as FATCA, CRS, and IGA. FATCA is the Foreign Account Tax Compliance Act, an intergovernmental treaty framework the U.S. has pushed. CRS is an OECD framework, and IGA is put forward by the UK.

These things all need to be taken seriously. There’s a host of regulatory bodies from several countries that are monitoring what’s happening in crypto. Even if they’re not aggressively pursuing enforcement actions, they’re well aware of activity in the space.

From the U.S. specifically, the regulators who have potential oversight are the SEC, the CFTC, and particularly the FinCEN. FinCEN stands for the Financial Crimes Enforcement Network.

All it would take would be for crypto to be classified as a primary tool for terrorist financing, and then all kinds of risks start to open up. I want to be clear here that I’m not suggesting crypto is a primary channel for these kinds of activities. What I’m saying is that if a regulator such as FinCEN claims that it is, that’s all it’s going to take for this to have serious potential repercussions.

At this point, some people who are familiar with crypto might make the argument that, just like gold, if it’s used in total isolation, it works, which I grant is true, but not for any serious liquidity. For example, you can bury gold in the backyard, but in serious quantity, who are you going to sell it to later and expect it to remain secret or safe during such a transaction?

With crypto, you can avoid digital exchanges by going point-to-point directly. You can try to avoid interfacing with anything that touches USD transactions. In doing so, your world of potential transactions and, importantly, options for liquidity and size diminishes substantially if an actor tries to take this isolation route.

Jim, considering that regulators could take the view that ICOs are acting as noncompliant financial services entities, what are your thoughts in this area in terms of the tools regulators bring to bear on U.S. dollar transactions in cryptocurrency or other risks you see here?

Jim:  Thanks, Alex. That was a great introduction. The first thing I would say is that this is a huge topic. We say, “cryptocurrencies,” “blockchain technology,” “initial coin offerings,” “safe contracts” or “smart contracts,” and the various uses and legal regulatory regimes which I’ll talk a little bit more about.

Each thing I just mentioned is a big topic in itself, and they all fall under the banner of crypto. For those not familiar, this all originates with a certain kind of technology, a certain protocol called the blockchain.

Blockchain is basically a recordkeeping, a ledger. Right now, certainly for hundreds of years but still true today, if you bought a property from somebody, you’d show up at the closing (or your lawyer would) and the seller would have a deed. They would sign it over to you, and you or more likely your lawyer or a clerk or somebody would go down to the town hall and hand that to the town clerk.

The town clerk would literally write it down. Maybe they’d type it in a ledger, a land record, and put a stamp on it. They would give it back to you or mail it back to you so you could put it in your safe-deposit box. That deed would be your legal document representing your title to that land.

Think about all the steps I just described. The fact that there’s paper involved and it’s got to go through many hands: lawyer, clerk, the town clerk, back to you, buyer, seller, etc. It’s legally binding and recognized by the courts. It’s the way things are still done today.

These are public records. You can go to the town hall on your own and pick out a lot number and a block number. (That’s usually how they’re categorized, e.g., Block 22, Lot 15.) You could look it up, find out who owns it today, and who they bought it from all the way back to whoever, maybe the Revolutionary War for that matter. That’s an example of a ledger and a recordkeeping method to establish title.

The blockchain does a couple things. First, it’s completely digital, so forget the paper side of it. Second, it’s heavily encrypted with what’s called military-grade encryption, which is (at least as far as I know) unbreakable. If there’s any way to break it, I promise you, it is the most closely held secret of any government in the world.

People are certainly working on it all the time, but for all practical purposes – again, as far as I know – it’s unbreakable unless you give away your key. You have a certain alphanumeric code that is your key. As long as you keep that private and don’t give it away, then you’re the only one who can unlock the encryption.

It’s heavily encrypted; it’s digital; it’s virtually free to move it around. Most importantly, it’s distributed. ‘Distributed’ means that this ledger resides on thousands, millions, or potentially tens of millions of computers and servers all over the world.

That’s a big deal, because if there were a fire in the town hall and all those paper records I just described were destroyed, you’d have a heck of a time recreating all that. But if you literally blew up a computer that had this ledger on it, it wouldn’t matter. The same ledger exists on all these other computers. It’s the community as a whole that verifies it.

If one party says, “I own this certain asset” (it could be Bitcoin or any other asset which we’ll talk about in a minute) and the whole community says, “No, you don’t. We all have the same ledger, and we see that this went to a certain party from A to B, and Ms. B is the owner,” that’s that.

You have the benefit of digitization, encryption, and distribution. These three very powerful tools are the blockchain technology. Now, what can you do with blockchain technology? One thing – and this has been done – is to create a cryptocurrency. Bitcoin is the most famous or best known, but there are many of them out there.

I was involved with one working group, and we identified 90. That was some time ago, so I am sure there are many more than that. Some of them have larger amounts in circulation, larger followings, if you will, than others. Greater liquidity is the way I think about from an economic perspective, but they’re all out there.

How do you get some of this currency? How do you get a Bitcoin? Well, you can sell something and accept Bitcoin payment. I have a store on my website, The James Rickards Project, that accepts Bitcoin. You could pay me in Bitcoin for one of our goods, etc.

You can sell things for Bitcoin, and you can go buy a Bitcoin. You can take dollars or euros for that matter and go to a Bitcoin exchange (exchanges are popping up all over) to buy Bitcoin.

You can also mine them. The word ‘mining’ obviously is a reference to, or at least an analog of, gold mining. Of course, it’s nothing at all like gold mining. I’ve been in gold mines, and it’s one of the grittiest, most physical business you can imagine.

You have to drill cores and walk around in remote areas that are either freezing, equatorial swamps, or deserts. It’s a nasty business with all kinds of machines, backhoes, and all that stuff. Gold mining is a very hands-on, gritty business.

Mining Bitcoin or any cryptocurrency is quite the opposite. It takes massive computing power. To simplify it, the Bitcoin protocol is basically solving very difficult math problems that take a lot of number crunching, a lot of computing power, and a lot of energy.

By the way, one of the criticisms of Bitcoin is that the amount of energy being sucked up to create Bitcoin, to do this mining, is itself a waste. We’re burning a lot of coal somewhere in the atmosphere, or nuclear power or some other things people don’t like, to generate electricity so Bitcoin miners can go about their work. I’ll just leave that as an aside.

Some big Bitcoin mines are, at this point, a very large warehouse-sized facility with lots of servers and processing power going on. Some are being put in Iceland, because it’s cool in Iceland, and you generate a lot of heat with that much computing power. Also, energy is relatively inexpensive there, because they have geothermal and a couple other things. That’s the kind of Bitcoin mining.

These math problems I described get harder. Every time somebody mines a Bitcoin, the next problem gets a little bit harder. It grows exponentially to the point where the last few Bitcoins that ever get mined, the amount of processing power that goes into it, is going to be enormous.

As a miner, if you solve the problem, you get Bitcoin. That becomes your reward. I haven’t verified this myself, but I heard from third parties that today it costs about $1,000 to mine a Bitcoin. Bear in mind, we’re pretty far down the road with these things. Originally, it would have been far less than that. Now the Bitcoin are selling on exchanges for between $2,000 – $3,000. It’s volatile.

I guess it’s like gold mining. If I can mine gold for $800 an ounce and sell it for $1,200 an ounce, I can make some money. If I can mine Bitcoin for $1,000 and sell it for $2,000 – 3,000, obviously I can make money doing it. That’s the currency part of it.

Now, let’s talk a little bit about Ethereum and ICOs. I said there are many cryptocurrencies other than Bitcoins. These initial coin offerings are groups of developers not unlike any Silicon Valley startup. In San Francisco, San Jose, Silicon Valley, New York or anywhere in the world associated with Silicon Valley, you can find teams of developers. Maybe some of them have experience at one of the big, successful startups whether it’s PayPal, Uber or some of these new apps they’re working. You name it, there’s an app for it, of course.

They need to fund themselves, because they have salaries, overhead, rent, equipment costs, etc. no different than any other startup. The traditional way is to meet with venture capitalists, ask your mother or family and friends, knock on doors or do a private placement. There are traditional ways of funding any startup.

More recently, we’ve seen what they call crowdsourcing or crowdfunding where you throw it out there on a certain Internet site and get people to give you money. With original crowdfunding, they’d give you a T-shirt, a ticket to a movie if they could produce a film, whatever it might be.

These ICOs are really nothing more than crowdfunding or crowdsourcing. Here’s how it works: If I choose to subscribe to one of these, I send in hard dollars, $100 or $1,000 or whatever. In return, I receive one of these coins. They also call them tokens or some name like Dow and Mastercoin, for example.

I’ll get one of these coins or maybe a bunch of them because I put a lot more money in. What do I get for my coin? Here’s where it gets interesting. In a normal startup, I’ll sign a subscription agreement, send my money in to the promoter, and I’ll get shares, units, limited partnership interest, LLC member’s interest, stock, or something.

It goes on the ledger (a capitalist will say a cap table). From then on, I’m an equity holder. If the company fails, my equity goes to zero, tough noogies. If it succeeds, maybe I just bought into the next Google at $1/share and someday it’s at $1,000/share. That’s why people do it hoping for those big gains.

With the coin or token I get, it’s not really a share. I don’t get any voting rights or dividends. That’s where I’m jumping ahead a little bit to the regulatory regime you talked about, Alex, and where the securities laws get tricky.

If I’m the creator, the programmer, and the developer of this, I can define the token any way I want. It’s certainly possible that a token could walk and talk like a share of stock. The minute you tie the value of the token to the success of the enterprise, it’s probably a security.

For purposes of application of the ’33 Act and ’34 Act securities laws (the ones we’re familiar with in the U.S.) and similar securities laws in Europe, the UK, and Japan, the definition of a security is a little bit technical. It’s usually tied to some stake in the success or failure of the enterprise and defined as the earnings of the enterprise.

What if my token says, “No, Jim, you don’t get any stock. You get no votes. You have no equity in this thing. What you do get is to use the app for free,” or “You get to sell it to somebody else,” or “If the app is successful, you’re going to get certain privileges,” or “You can intersect something you’re doing with what we’re doing so these things are compatible in certain ways.”

I realize I’m being a little vague right now, but the area is vague, because there are a lot of ways to do this.

I might create a token that looks just like a security, in which case, unless I follow the private-placement rules 506(b), 506(c) and some other laws, I could be breaking the securities law if I’m not careful.

On the other hand, if the token is not much more than a token and the person buying it is hoping for the best – that the token becomes more valuable because they’ve got a front-row seat on the next new app and can sell it to somebody else – it might not be a security. It’s some kind of property right, it’s some kind of speculation, but it might not be a security. This is very new, very grey.

I can imagine traditional securities lawyers pulling their hair out over this trying to figure out what it is. I was involved in the very early days of the swaps market. Swaps and derivatives are commonplace today, but going back to the late ‘70s and early ‘80s when these things were literally being invented, I was international tax counsel at Citibank. We knew how to write them, but we didn’t know how to treat them in terms of tax treaties.

If you paid a swap payment, was that interest? Was it a dividend? Was it insurance premium? You could argue that it was any one of those things. We were operating in a grey area and have a lot more clarity around that today, but it’s the same thing with these ICOs.

What are these apps you’re funding used for when you buy a token in an ICO? One of the big applications today are what are called safe contracts. Because transfers through a distributed ledger are both encrypted and irrevocable, if not un-hackable or at least sufficiently widely distributed that they’re reasonably safe, it’s considered to have the potential to solve a trust problem in any transaction.

Go back to cavemen and cavewomen and imagine you just killed a mastodon. You’ve got some fresh meat, and I just picked a bunch of berries. We want to barter. I want to give you some berries, and you’re going to give me some of the mastodon meat. Well, what if I give you the berries first and you run away or you give me the meat first, and I run away? It might start a war or whatever.

It’s the “who goes first?” problem that applies even in modern times. Maybe in the 19th Century I’m going to buy something from you, I hand over the money, and you don’t deliver the goods. You keep my money and don’t deliver the goods, or vice versa.

This happens on a much larger scale when you’re doing multibillion-dollar corporate takeovers. How do you handle all that? The answer is that through centuries of law and contracts, precedent and court cases, enforcement, and other things, we have developed tried and true ways of dealing with all these problems.

If the buyer and seller are remote and not face-to-face for a simultaneous exchange, you can use an escrow agent. You can use insurance, a third-party bank or a lot of different trust counterparties to solve that problem.

I worked on one of the biggest problems like this in history when we were obtaining the release of the Iranian hostages in 1979/1980. Iranian militants broke into the U.S. Embassy and took a bunch of Americans hostage around the time of the Ayatollah Khomeini and the Iranian Revolution after the fall of the Shah.

Because it was sort of spontaneous, they hadn’t really thought through where a lot of their money was. It turned out that a lot of it was in U.S. banks, so all that money was immediately frozen.

After a year or so of negotiations, the U.S. obviously wanted the hostages back. Iran had gotten enough propaganda value out of it, and they wanted their money back. The U.S. was not going to pay ransom, but took the attitude that, “It’s not really ransom; it’s your own money that we’ve frozen. We’ll just be giving it back to you if you give us back our citizens.”

That was the deal, but the problem was neither the Iranians nor the United States (there were other Western banks involved, but I’ll just say the United States) trusted the other enough to go first.

The U.S. said, “If we send you the money, you guys are going to take it, keep the hostages, and poke a stick in our eye.” The Iranians thought the same thing, “If we release the hostages, you Americans will never give us the money. How can we trust you?”

We solved that by saying, “The obvious way to solve it is to get an escrow agent.” You give the money to the escrow agent, he sits on it, observes the release of the hostages, and when the hostages are released, the money is forwarded to, in this case, Iran. They’re no longer trusting the United States; they’re trusting the escrow agent.

Then the problem was, who in the world was trusted by both sides? Who could the U.S. trust enough to send the money to in the first place, and who could the Iranians trust enough to know that they would get the money if they released the hostages? It turns out, the answer was Algeria, the Central Bank of Algeria. They were sufficiently Western and sufficiently Islamic that both sides were happy.

It’s a long story and an interesting one, but my point is, that’s how difficult it can be to solve this “who goes first?” problem in any exchange. With Ethereum and some of the apps being developed under some of these initial coin offerings, that problem is solved through the protocol.

That is, if I pay you, there is going to be some verification that you ship the goods. When that happens, you automatically get paid. You’re no longer relying on me to send you the money. You know the money is waiting for you once you ship the goods.

These are called safe contracts. A lot of people are working on apps for those. I question whether they’re not solving a problem that doesn’t exist in the sense that Amazon does quite a bit of business. When I use my credit card to buy something on Amazon, I don’t really worry that I’m not going to get my merchandise. If I don’t, I know I can get the credit card charge reversed.

It would be rare if that were not true, so I don’t consider there to be much of a problem. If there’s an improvement on that, maybe Amazon would buy the technology. Who knows? This is just an example.

I realize I’m going on at length here, but I’m trying to make the point that there’s the blockchain technology, there are cryptocurrencies, and there are ICOs issuing coins or tokens that could be currencies but are really property rights of some kind, hard to define, in a new app. The apps themselves are performing these kinds of ledger or safe contract role.

I don’t want to mush it all together, because I think there’s too much of that. People are kind of glib in the conversation, but I think it’s important to make all these distinctions so we’re not just throwing the word crypto around without a lot of content. We should know exactly what we’re talking about.

Alex:  I think the idea with the whole trust lists thing is that it removes intermediaries. In particular, it removes banks as intermediaries and the focal point of control of the transactions.

That’s one of the things I was trying to get at here. Any of these cryptocurrencies you’re transacting in are cross-rate or cross-currency. In all forex, there’s a cross-rate. Either it’s USD/RMB, it’s USD/CHF (Swiss francs) or it’s USD/gold, for example. That means you’re converting these cryptocurrencies in and out of other types of currencies, and this is where your risk is at. This is where there is potential for regulators to control that.

Jim, talk a little bit about how SWIFT works and how anything that’s done, really in U.S. dollars, how that happens and how regulators can use that.

Jim:  Let’s say I’m Deutsche Bank, the biggest bank in Germany. A lot of my business is in euros, but I deal in all major currencies. You’re sitting in New York and are Citibank, one of the biggest banks in the United States.

I have to send you $2 billion, because my dealers bought foreign exchange from your dealers or we had a bunch of transactions or customers wanted a little money. Whatever it is, I want to send you $2 billion. How do I actually do that?

One thing you don’t do is go to the ATM, get a bunch of cash, put it in FedEx, and send it. That’s obviously ridiculous, so we can cross that off the list. I could send you some kind of commercial paper, negotiable instrument, by courier, but that’s slow and pokey. It wasn’t so long ago that that’s the way things were done.

The way they do it now is to send a message through SWIFT (Society for Worldwide Interbank Financial Telecommunications). They don’t consider themselves a payment system, and they’re certainly not a bank or a financial institution. They compare themselves to the phone company and say, “We handle message traffic. To get in SWIFT, you must agree to abide by all the protocols of SWIFT.”

As Deutsche Bank, I want to send Citibank $2 billion. I would do that by sending a message through the SWIFT system. Think of SWIFT as a giant digital switchboard. They have forms that can all be done online that go by the name MT (Message Traffic). There’s an MT101, MT102, 202, etc., lots of different kinds.

Here’s the thing about SWIFT. Assuming I’m an authorized participant, you’re an authorized participant, we both have the right protocols and passwords, we go on and fill out this MT form, somebody hits “Send” and Deutsche Bank just sent you $2 billion. That’s irrevocable. I can’t say, “Whoops, sorry, I pushed the wrong button,” or, “Oh, gee, I filled out the form.” Too bad; that’s on me now. If I actually do that (mistakes do happen), the bank must call the other bank to explain what happened. Maybe they can sort it out, maybe they can’t, maybe there’s a lawsuit. Who knows?

SWIFT says, “We have nothing to do with it. We’re not your referee or your escrow agent, we’re just the phone company. We connect the switchboard, and the message goes through.” That’s the way things are done today. It’s rather efficient and certainly a lot better than the way it used to be, but it still takes a lot to maintain SWIFT.

SWIFT is subject to government intervention and government control. It’s rare, and they don’t like it, because they like to keep out of politics. Obviously, there could be all kinds of squabbles among all the SWIFT members. They don’t like to get in the middle of that. However, there have been several instances most famous of which was in 2012/2013, right in there.

As part of U.S. sanctions on Iran because of the Iranian nuclear weapons and uranium enrichment programs, Iran was kicked out of the SWIFT system. The board of governors or the supervisory board of SWIFT said that Iran could not use the system. SWIFT didn’t really want to do it, but there was pressure put on them for that reason.

That was a big deal. Iran could ship oil, which they do, but they could not get paid in dollars, euros or any other hard currency through the SWIFT system, and they had no other way of doing it.

They could get Indian rupees deposited in an account in an Indian bank if they wanted rupees, but it’s kind of limited in terms of what they could do with that. They couldn’t transact in dollars, euros or anything else anybody really wanted.

Iran did workarounds, such as barter, and gold was a big part of it. They could put a bunch of gold on a plane, fly it to somebody and unload it, and there’s payment. There’s nothing digital about it and no way to interdict it other than shooting the plane down, but then the gold would just land on the ground. That’s the great thing about gold – it’s pretty much indestructible.

The point is, that was a real burden on Iran. It brought them to the negotiating table and led to an agreement under the Obama administration. I don’t want to do a deep dive on the agreement, but those financial sanctions were very effective. Today, North Korea is the one that’s kicked out. Again, it is rare and SWIFT doesn’t like to do it, because they like to keep out of politics.

The blockchain – particularly for applications created on the Ethereum platform –  offers the kinds of transfers I’m describing with no trusted counterparties, no heavy infrastructure.

A lot of people are looking at this. JP Morgan is working on it, Blythe Masters (formerly head of commodities trading) is in a joint venture or enterprise with some other founders looking at it, Marc Andreessen, the Winklevoss twins, other major banks, the IMF, and Russia are all looking at it.

There’s good reason to be enthusiastic about the technology. I’ve voiced a lot of concerns, reservations, and some criticisms of various things going on in crypto and immediately get branded as, “You’re a Neanderthal, you’re from the Stone Age. What’s wrong with you? Baby Boomers, you don’t get it,” etc.

The fact is, I’ve been studying this for years. I’ve read the technical papers, and I do keep up with it. I’ve been involved, for example, by working with the U.S. Military in interdicting the use of cryptocurrencies by ISIS. I’ve seen ways this stuff can be interdicted, which I can’t really discuss in any detail since some of this information is classified. The point is, there’s more there than maybe some of the fans want to believe or tell themselves.

I’m not technophobic at all. Like you, Alex, I find it fascinating. I try to learn about it, but I’m not a cheerleader, either. I don’t get the pompoms out and say, “Go buy this stuff.” I think for people who do, it’s maybe self-interested, because if you own some, you probably want the price to go up. I would say Bitcoin doesn’t have a price; it has a cross-rate to other forms of money.

That aside, there’s a lot of self-interest and trolling involved. There are people who are a little overly enthusiastic and don’t see the dangers in all this. That’s why I think it really does pay to be thoughtful.

Alex:  I agree. At the end of the day, what it comes down to is that any cryptocurrency that’s going to interface with another currency, for example if it touches the U.S. dollar ecosystem, that’s the chokepoint. Any wire transfer or transfer that’s sent in U.S. dollars around the world goes through an intermediary bank in New York City. Well, that is on U.S. soil, and they have complete control of that.

There’s a big difference between regulation and enforcement. Ultimately, lawmakers can pass any law they want, but if it can’t be enforced, it doesn’t really have any teeth. The reason banks and financial services entities all over the world are complying with extra-sovereign regulatory oversight is that the enforcement tools regulators have at their disposal do have teeth. Anyone who thinks that cryptocurrencies are outside the reach of that, aside from these direct transactions we talked about, are fooling themselves. By the way, this oversight compliance is costing them billions of dollars.

Jim:  Right.

We’ve touched on securities law, counterterrorism, any money laundering, the Financial Crimes Enforcement Network (FinCEN), and all the things you mentioned, but there’s another 500-pound gorilla in the room, which is our friends at the IRS. A lot of people don’t realize that if you could go out and buy a Bitcoin for $200 – it’s shot up so much, but it wasn’t long ago you could get one for $200 – and today it’s worth $2,000, you can use it to buy something. You don’t even have to cash it in for dollars. You can buy a plane ticket or just about anything with Bitcoin.

In my example, you just had an $1,800 gain you have to put on your 1040 income tax return. Bitcoin is some kind of property. I query whether it’s a capital asset or not, but it doesn’t matter. It could be an ordinary account or capital gains, but you have a $200 basis, $2,000 of value of proceeds, and an $1,800 gain. You must put it on your tax return and pay the tax.

How many Bitcoin users are actually doing that? I don’t know the answer, but I’m guessing it’s not that many. All those who are not are tax evaders, at least if you’re U.S. citizens. If you’re a citizen of another country, that may be different, but for U.S. citizens at least, it’s got to go on your tax return. That’s the law. If you don’t do it, it’s intentional, willful, and possibly a felony. They didn’t get Al Capone for murder or bootlegging but for tax evasion.

Now, is there enforcement? I haven’t heard of much, but the IRS is a funny organization. They’ll see things like this and lie in wait. They’ll sit there and say, “Why chase after a couple of little guys? It’s all new. Why don’t we just wait and let it build up for years. Let the amounts involved get into the billions and then go scoop them all up at once.” They’d need a test case or some probable cause, but they’d serve a subpoena on the major Bitcoin exchanges and demand all their books, records, and identities of all counterparties. It would be resisted and end up in court where they’d probably get a court order enforcing that.

Well, suddenly the exchanges are giving up all this information. The Bitcoin fans might say, “So what? I’ve got a digital wallet. All they’re going to do is get a code they can’t crack.” Maybe, maybe not. The point is, you can kind of go from there. They can start to find purchases or they can subpoena the sellers. If it happens to be Amazon, they’re not a rogue organization, so they’re certainly going to comply with a subpoena. On and on it goes.

I’m not saying this is easy or happening tomorrow morning, but I’m saying we’ve seen this before. I was a tax lawyer, and one of my favorite cases in law school was when the IRS tried to impute the income of a house of ill repute, but the brothel didn’t keep any books and records.

Their defense was, “You can’t prove how much income we had, so you can’t assess us.” The IRS got the laundry bill, looked at how many times the sheets were cleaned, figured out the going rate, and came up with an income. The judge said, “That’s good enough for me in the absence of anything else.”

The IRS does not let the absence of information stop them. They will come up with the worst set of facts for you and put the burden of proof on you to prove otherwise. They’re pretty resourceful in that way. That’s another pitfall for the young crypto community to bear in mind.

Alex:  We have a little bit of time left for a couple of other subjects, so let’s move into geopolitics. The G20 has a meeting coming up on the 7th and 8th in Hamburg, Germany.

There was a recent article that portrayed Germany and China linking up as globalization partners. I’m going to read a quote from a professor at the Chinese School of Journalism and Communication who is a Fellow for the National Academy of Development and Strategy of Renmin University:

“In the global context of increasing uncertainty due to the U.S. and Britain’s actions of antisocialization, isolationism, and nationalism, the G20 can forge ahead for more stable, more sustainable, and more responsible global economy only if the two groups of countries unite.”

Jim, what’s your take on this, and is there anything else happening regarding the G20 that you think is important to note right now?

Jim:  Yes, I do, Alex. As you mentioned, it is coming up July 7th and 8th in Hamburg, Germany. G20 stands for “G” or “group” of 20 nations although it’s more like 24. They invite Norway, Spain, and a couple other hitters plus some multilateral participants: the IMF and the European Union. I call it “G20 and Friends.” They get about 30 key players at the table.

The leaders meet once a year. They used to meet twice a year, but as we get further away from the crisis, they’ve dialed that down to once a year. There are G20 meetings throughout the year at levels below the leadership or the President, if you will. The central banks, finance ministers, and other technical working groups meet a couple of times a year. The G20 never sleeps. Their work goes on around the clock even though these big summits only happen once a year.

A lot of people shrug and say, “What the heck does the G20 mean? It seems like a boondoggle.” I disagree. I have a long section in my book, The Death of Money, about the G20 where I make the point that it’s really the board of directors of the global economy. Think of the highly integrated, connected, densely networked global economy we have because of globalization and some of the things we talked about earlier such as digitization and so forth. It has a central bank, which is the IMF, and the IMF has a board of directors, which is the G20.

It’s actually a very powerful organization even though they don’t agree on every little thing. They have a rotating presidency. This year, it’s Germany, so that’s why the meeting is in Hamburg. Last year, it was China with the meeting in Hangzhou in September. The year before that was Turkey and so forth as it moves around.

This one in July is a very important one. You mentioned China and Germany. President Xi Jinping of China and Chancellor Angela Merkel of Germany are probably the two leading globalists, or pro-globalist, figures. They don’t have much else in common since China is communist and Germany is a pretty healthy democracy, but at least they are the two leaders who still espouse a traditional globalist view.

It’s funny, because they claim to love free trade, yet Germany and China have the largest trade surpluses relative to GDP of any major economy – embarrassingly large. The point being, they say they like free trade, but truthfully they like a rigged game that favors their exports whether it’s the GP or the GP1 at various points in time.

Anyway, we’ve got these two big globalists, Merkel and Ji, holding hands, and we also have the two most powerful nationalists, who are Trump and Putin. I think that’s going to be the big story coming out of G20.

This is the first face-to-face meeting of Trump and Putin. Of course, you can’t go online, turn on the TV or radio or pick up a newspaper without hearing, “Russia, Russia, Russia,” “Russian collusion,” “Russian interference with the elections,” “Hillary lost because of Russia,” and all this other nonsense. America seems to have a Russia paranoia or fixation going on.

Some of that, at least in my view, is attributable to the fact that if you’re a globalist, you really want to keep Trump and Putin separated. You really want these guys at each other’s throats, because they are the two most powerful nationalist leaders in the world. If the two of them ever do set out a common agenda or strike up a good working relationship, that’s going to give a powerful boost to the anti-globalist nationalist forces.

You’ve got the two leading globalists, Ji and Merkel, and the two leading nationalists, Trump and Putin, who are going to be meeting on the sidelines. The G20 has a formal agenda and formal plenary sessions with a class photo and all that stuff, but a lot of the most important action happens on the sidelines in these little bilateral and trilateral meetings where two or three leaders go off to the side and work on some deals.

These are busy people. It’s not like they see each other all the time, so this is a good opportunity for that. BRICS (Brazil, Russia, India, China, South Africa) always have a minisummit on the sidelines of the G20. They do have their own BRICS summit at a different time of year, but since they’re all in the G20, it tends to be a good opportunity for a little BRICS summit.

The other bilateral relationship I’m watching is called Mackerel, after the fish, involving Emmanuel Macron and Angela Merkel. Macron and Merkel mashed together gets Mackerel. Despite some early warnings, it looks like Merkel is in pretty good shape for the election on September 24th and appears to be cruising to reelection as Chancellor. Although he’s a lot younger, Emmanuel Macron was just elected as the President of France in a very convincing way.

Their mantra is More Europe. I think this is the friendliest, most productive, potentially most important period of Franco-German relations going back almost to Konrad Adenauer and Charles de Gaulle. You’d have to go back to the ‘50s and early ‘60s to find greater Franco-German cooperation.

Alex, you know from prior podcasts that I’m very bullish on Europe and the euro. I have been and still am. When a lot of economists – Paul Krugman and others – were running around with their hair on fire saying Europe is falling apart, I was the one saying, “No, they’re going to stick together. Greece is not getting kicked out, and Spain is not going to quit. The euro is strong and getting stronger.” Things have played out exactly along those lines, but that doesn’t mean it’s all good.

There are some problems and reforms needed in the European Union. They need unified banking regulation, which they’re getting, but above all, they need unified fiscal policy. They’ve had unified monetary policy since the Maastricht Treaty in 1992 and the rollout of the euro in 1999/2000, but they need unified fiscal policy.

Germany has not wanted to backstop that until Merkel saw some kind of fiscal discipline. It goes by the name ‘austerity,’ but she would call it ‘prudence.’ She’s saying, in effect, “Germany is not going to underwrite Greek debt, Spanish debt, Italian debt or Portuguese debt unless we see some evidence that all you countries are getting your house in order in terms of debt-to-GDP ratios and deficits as a percentage of your GDP.”

That’s been happening in a very positive way, so now I think Germany is ready to take the next step. There’s been some talk about a fiscal parliament, common fiscal policy, a euro-zone finance minister, and a unified budget.

These are all very significant advances that will solve the problem of the euro once and for all, because you’ll be combining fiscal and monetary policy the same way we do in the United States. It looks like Macron is in favor of all that, and he’ll find a willing partner in Merkel. That’s a big deal too.

So, I’m watching the Trump-Putin relationship, China and Germany, which you mentioned, always keeping an eye on the BRICS, and I think Mackerel will be another thing well worth watching.

Alex:  It’s going to be interesting to see how this all plays out. We have just a few minutes left for two quick topics we want to hit. Let’s move on to Syria. A few days ago, a U.S. F/A-18 Hornet, which is a first-tier fighter bomber, shot down a Syrian Su-22 that had dropped some bombs near the American-backed fighters south of Tabqa.

The American commanders on site indicated that the aircraft was shot down in compliance with standard ROE (Rules of Engagement) and that they had notified Russian forces prior to engaging the aircraft. They do that to mitigate any chances of accidental escalation.

Afterwards, a statement from the Russian Ministry of Defense warned that any aircraft or objects in flight west of the Euphrates, which includes Coalition and American aircraft, would be followed by Russian air-defense systems as targets.

I reckon the whole situation over there is confusing to most. There are so many forces in place, so many different factions, so many different motivations. I know this is a huge topic, but just in a few minutes, would you talk about your view on the events, the players, and possible outcomes?

Jim:  Obviously, this is serious. During the Cold War, Russia (the Soviet Union at the time) and the United States were armed to the teeth with thermonuclear weapons and intercontinental ballistic missiles and also commanded control systems that could have completely destroyed life on the planet. Somehow, we got through that time with no Russian or American ever firing a shot at each other.

Sure, there were lots of other wars with allies, proxies, and so forth (Vietnam, Angola, Cuba) and there were revolutions and assassinations. I’m not saying there wasn’t bad stuff going on. There was, but there wasn’t a single time when Russians and Americans shot at each other. That was not by accident. It was because the two sides knew that the first shot could escalate and end up destroying the planet. Nobody wanted to go there.

I think those lessons are still understood, but what you’re describing, Alex, is a little scary and dangerous. There’s good reason to believe that some of this is posturing. Shooting down a Syrian jet is not posturing – somebody got blown out of the sky on that one – but the Russian complaints may be just to hold up their end and show some support for Syria.

This is going to get worse, though. Right now, Russia and the United States have a common enemy, which is ISIS. The Russians support Assad, we support the rebels. We support the Kurds, the Turkish want to destroy the Kurds. There are a lot of conflicting cross-currents, but the one thing everyone agrees on is to destroy ISIS.

What happens when ISIS is destroyed? The threat will never be completely wiped out, because they’ll just go underground and conduct terror. However, in terms of a state or holding territory, they’re not quite mopping up in Mosul, but that’s getting close to being done. Then Raqqa is next and then cleaning up the Euphrates River Valley.

At some point, ISIS won’t exist as a state. Then the U.S.-backed rebels and Kurds on the one hand and the Russian-backed Syrian army on the other are going to be face-to-face in the battle for Damascus.

This is a good example – North Korea is another one; Ukraine is another one – of why the Russians and the U.S. should be talking to each other, improving relations, building bridges, and opening lines of communication. Instead, we’ve got this Washington DC beltway circus of Hillary’s whining about why she lost the election, which is nonsense, and for some reason, if you talk to the Russians, you’re colluding to beat the Democrats.

We should be talking to the Russians every day. I like to say that it’s smart to talk to the Russians, but it’s dumb to lie about talking to the Russians. I don’t know why Jared Kushner couldn’t fill out his forms correctly. There’s been a lot of amateurish work and inexplicable bad behavior by some Trump administration officials for no good reason, because we should be talking to the Russians.

Hopefully, we’ll get past some of this hysteria, build bridges to Russia, and help to alleviate some of the tensions you’re describing.

Alex:  Yes, I very much agree.

Our last item is North Korea. Recently, there were exercises in South Korea involving over 100 F-16 fighters. Also, U.S. F-35s have been deployed to South Korea, and there have been several defense briefings in Guam where they station a lot of the B-52s for power projection in that theater.

On our last podcast, you said something that really struck me. You expect that the U.S. will be at war with North Korea by 2018. What are your current thoughts on what’s going on in North Korea?

Jim:  There’s no change in that assessment. I pointed out that in March 2003, we jumped off on the road to Baghdad and invaded Iraq. I’ll use General James Mattis, today’s Secretary of Defense, as an example. At that time, he was commandant of the 1st Marine Division. In 2002, he was told, “Get ready. We’re going into Iraq. Get your guys ready.”

The point is, you don’t go to war overnight. There’s at least a year, perhaps longer, of preparation. Now, just because you start the preparation doesn’t mean you pull the trigger. To me, 2017 looks like 2002 in Iraq. We’re going to try sanctions, diplomacy, and engaging with allies.

Notwithstanding that, the orders have been passed to get ready, particularly the Navy, the Strategic Air Command, certainly other special operators, and others. We’re on the path to war, and I expect it in 2018.

The only question is, what could change that outcome? There are really only two things:

  1. Kim Jong-un gives up his nuclear programs and missile programs in a verifiable way. I don’t expect to see that happen, because he thinks that’s essential to his own survival.
  2. Somehow Russia and China put enough pressure on North Korea to get them to do it anyway. I don’t see Russia doing that partly for the reason we just discussed, which is that the U.S. is barely talking to Russia. That’s too bad, because there are issues of war and peace at stake.

As far as China is concerned, Trump sent a tweet the other day. I sent a tweet in response saying, “This is the most important tweet the President has ever sent.” I’m paraphrasing because I don’t have it in front of me, but he said, “It looks like China is not having much success changing North Korean behavior. Too bad, but at least they tried,” or words to that effect.

He wasn’t overtly, blatantly criticizing China, but in a pretty clear way he was saying, “Okay, I gave you guys a chance. You didn’t do anything, so time’s up. Now we’re going to turn on North Korea ourselves.” That’s how I read it, and I think that’s the right interpretation.

China has not been able to do anything, we’re barely talking to Russia, and Kim Jong-un will not be deterred. We’re not going to risk Los Angeles, based on his good intentions, if he ever has any. The only thing left to do is to go in and take it out.

Some people have pointed out that they have a lot of antiaircraft capability. The significance of Guam is that long before fighter attack aircraft and other forces get into theater and long before the Nimitz-class aircraft carriers get within range of North Korean anti-ship missiles, we will have suppressed all of that with our long-range bombers, the B-52s and the B-2s.

I think the war will start out of Guam using very heavy bombing before we then come in with carriers and some of the smaller, nimbler aircraft.

Alex:  Unless doctrine has changed since I was in the military, that’s standard procedure. They’ll gain control of the battle space, particularly the air space, first, and then move from there.

Jim:  Right.

Alex:  Jim, I appreciate the discussion today. It’s been very insightful, as always, and I look forward to doing it again next time.

Jim:  Thank you, Alex.

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

 

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

 

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles June 2017

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Topics Include:

*In depth look at potential risks of cryptocurrency
*Why cryptocurrencies are still in their infancy and are not yet comparable to gold, US dollars, or other currencies
*Why ICO’s and crypto currencies are not protected from government regulation or enforcement
*How most cryptocurrency ICO’s are not compliant with international AML/KYC reporting frameworks
*Which tools regulators have for enforcement of breaches in regulation and why cryptocurrencies are not beyond regulatory reach
*How a distributed ledger works
*How Bitcoin mining works
*What is an Initial Coin Offering
*Trustless dis-intermediation still has chokepoints that regulators can act against
*SWIFT transfers
*Tax implications of cryptocurrency ownership
*G20 Update
*Syria Update
*North Korea Update

 

 

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

Jim Rickards and Alex Stanczyk, The Gold Chronicles May 2017

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Topics Include:

*Forecast for June 13th, 14th FOMC Meetings
*Cryptocurrencies – bubble or bull market?
*Update on IMF SDR’s
*Fed’s plan to normalize the balance sheet
*Expecting confluence of rate hikes and tightening monetary conditions to create recession and force easing by end of 2017
*Why North Korea has to be taken seriously
*Forecast for war with North Korea by 2018
*Trump, Russia, and media bias
*Physical gold market flows Q1 2017
*Dangers of the mirage of portfolio diversification and conditional correlation (Scholes)
*Why todays portfolios are at risk in the same way as LTCM
*Gold price behavior during liquidity crisis
*Liquidity in the gold market

 

Listen to the original audio of the podcast here

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

 

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

 

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

Jim:  Hi, Alex. How are you?

Alex:  Excellent. Thank you.

We are recording this podcast heading into the Memorial Day weekend. For those of you not from the United States, Memorial Day is a U.S. holiday honoring those who have fallen during military service going all the way back to the American Civil War, so we want to take a moment to acknowledge soldiers who have fallen on the battlefield.

Now let’s dive right into our podcast with an area our listeners are always interested in. We have another series of FOMC meetings coming up on June 13. In the event that I don’t talk to you on a podcast before then, would you make some comments about that and what you think you see happening there in terms of rate raises, etc.?

Jim:  The Federal Open Market Committee (FOMC) is the subset of the Federal Reserve Board members and Regional Reserve Bank presidents who set interest rate policy.

They always hold two-day meetings with the next one being June 13 and 14. The second day of the meeting, the 14th, is when the fireworks happen, so they’ll be in a conclave locked in the boardroom at the Fed Building on Constitution Avenue. When they come out, they’ll issue a kind of press release or statement that covers whether they raised rates or not. I’ll tell you right now that they’re going to raise rates 25 basis points, so we can already see that coming.

This is a significant meeting because it’s one where Janet Yellen has a press conference. The FOMC meets eight times a year, but only four of those have a press conference associated with it where she’ll sit sometimes for two hours and take reporters’ questions. That gives her an opportunity to expand on the statement with the new ‘transparency.’ They say we like to do communications, and obviously they overcommunicate, but be that as it may, this is her chance to signal whatever she wants about the economy and what the Fed is doing.

A lot of these questions are planted. I’m not denigrating the press; I think they do a great job, but reporters like Steve Liesman, CNBC, and others – I shouldn’t pick on Liesman – have certain questions they know the Chairman wants to hear because it gives her a platform to explain what they’re doing. This is one of those press conference meetings where they tend to do big things such as announce new policies or reaffirm existing policies.

We know they’re going to raise interest rates. I guess a different way to put the question is what would it take for them not to raise interest rates? Bear in mind it’s less than three weeks away at this point, so it’s really hard to imagine. When the May Jobs Report comes out next Friday, June 2nd, it would have to be below 75,000 or even negative or something to throw the Fed off their game. No one expects that. I don’t know what the number is going to be, but whether it’s 200,000 or 100,000 (that’s a big range and a lot of jobs), any of those numbers north of 75,000 puts the Fed on track to raise.

There’s not much inflation data coming out. Even if we saw a bad print in the inflation data, meaning it was disinflation, these inflation numbers are coming in below expectations. I do expect that and think disinflation leaning towards deflation has the upper hand now causing those numbers to get weaker, but that’s not going to be enough to throw the Fed off because they’ll use the word ‘transitory.’ Even if we get a weak number, they can say, “It’s only one month. We think it’s going up for all these other reasons like unemployment is slow, Phillips curve, etc., so we’re not going to pay much attention to it.” Even that won’t throw them off.

The only other thing in the model that would cause the Fed to ‘pause’ – that’s the operative word – on their rate-hiking path would be a severe drawdown in the stock market that looks disorderly and scary. Even if the stock market went down 5%, let’s say 1,000 Dow points or 100 S&P points, the Fed absolutely would not care. Even if it went down 10% or 15% over three or four months, the Fed wouldn’t care about that.

If it went down 7% or 8% like in three days’ trading sessions where it looks scary kind of the way it did in August 2015, that might be enough to get them to pause, but even then, I would say it would have to be a pretty rough ride. Ruling that out, I think they’ll dismiss weak inflation numbers as transitory, and job creation doesn’t have to be great, it just has to be good enough, and that’s really the important thing. They’re going to raise rates in June.

The model I just described is what I’ve been using for several years with very good results. Last December, we forecast that they would raise rates in March. By March, everybody knew they were going to raise rates in March, but if you look at the Fed Fund Futures implied expectation of a rate hike through the months of January and February up until the last couple of days of February, the considered wisdom of the market crowds, all the participants, were giving it a 28% to 30% probability. We were at 80% and 90% and indeed, they did raise it.

The model we’re using is the one I just described, which is the Fed will raise rates four times a year, 25 basis points per time from now until the middle of 2019, to get rates to about 3.25%. It will be like clockwork unless one of three things happen: a disruptive stock market, a severe disinflation that looks persistent and not transitory, or job growth well below 75,000 or even negative. If you don’t see those three things, they’re going to raise, so it’s an easy forecasting model.

Alex:  The model and forecasts on what the Fed is going to be doing have been really great. We’ve had some feedback and commentary from professional money managers on that as one of the things they always like to pick up on in particular from this podcast.

Jim:  One thing that’s unique about the model is that it’s completely different from what you hear from Wall Street economists, mainstream economists, commentators, bloggers, you name it. It’s a very different model. It’s not a complicated model; it’s very simple as I just described. The reason it’s different is that people are looking at the Fed raising rates and the minutes of the May meeting released a couple of days ago making it clear that they’re going to raise rates. The market is assuming that raising rates is related to a stronger economy – they equate that to a stronger economy. It’s one of the reasons stocks are going up, because they rely on regressions and correlations. They think that in the 38 business cycles since the end of World War II, every single time the Fed raised rates was because the economy was getting stronger.

That data is true and that correlation exists, but it’s not true this time. For the first time since 1937, the Fed is raising rates into weakness, and they know it. Why are they raising rates? The answer is they must get rates to 3% or more before the next recession comes so they can cut them 3%, because that’s how much it takes to get out of a recession. If you don’t have interest rates at 3% – 3.25% before the next recession starts, you’re not getting out of the recession, because they can’t cut them enough. They would have to have to go back to QE4, and they know it.

This is all a long-winded way of saying they should have raised rates in 2010 – 2011. They didn’t because of Bernanke’s cockamamie QE experiments, which is evidence that they didn’t help at all. What it did do is prevent the Fed from normalizing interest rates. That brings us to where they’re going with this. Just because they’re raising rates, I don’t take that to mean the economy is strong. In fact, there’s a lot of evidence that the economy is weak, but they’re doing it anyway for different reasons.

Alex:  Let’s move on to cryptocurrencies. This is a controversial topic in some circles right now, because some people I consider to be very smart believe that cryptocurrencies are in a huge bubble right now. What do you think about this?

Jim:  They’re definitely in a bubble, there’s no doubt about that. If you do have any doubt about it, I recommend something you can do at home. Just get the latest bitcoin chart. Ethereum is another one that’s performing the same way, but bitcoin is the leader in this. The bitcoin chart is going vertical right now from $1,000 per bitcoin to $2,000 per bitcoin in about a week or less.

Now get a NASDAQ chart from 1998 – 2000 and a Nikkei 225 chart (a Japanese stock index chart) from 1988 – 1990. Take the Nikkei chart, the NASDAQ chart, and the Bitcoin chart and overlay them. It’s the same chart. They look exactly the same with one difference, which is that the other two – Nikkei and NASDAQ – both crashed and lost 80% of their value in a very short period of time, most of it in months and then all of it within a year. Bitcoin hasn’t crashed yet, but this pattern of increases and the rate of increase, the second derivative of the rate of increase skyrocketing, is completely characteristic of bubbles.

Having said that, there are two things I know about bubbles. Number one, they can go on a lot longer than you think. It’s easy to say, “It’s a bubble; it’s going to crash.” What’s not so easy is knowing when it is going to crash. I have no interest in owning them or being part of this madness, but I wouldn’t short it. I don’t know if you can short bitcoin. Maybe Goldman Sachs would write you a derivative, the new big short, but I don’t think you can short it, which is interesting.

It just occurred to me that one of the reasons it’s going up so much is because there’s no short interest. If the stock market behaved this way, there’d be somebody, Jim Chanos or Kyle Bass or somebody, who would be shorting the heck out of it. There’s no short interest in bitcoin as far as I know unless someone’s extending credit, which makes this even crazier. That’s one of the reasons it’s kind of feeding itself.

I just arrived back east this morning from San Francisco. As always in San Francisco, you end up meeting with engineers and the Silicon Valley crowd. I talked to one very seasoned guy who has a young team of engineers working for him doing some apps and things. He said, “One of my guys came in the other day and said, ‘I went out and I bought some bitcoin. I paid $1,000.’ He bought four or five, and maybe put $4,000 or $5,000 into this. ‘It’s already up to $2,000, I doubled my money.’” He couldn’t be happier although he probably never heard of bitcoin until a few weeks ago, but that’s the kind of mentality you get.

Here’s the point. You can say it’s a bubble, that’s easy, but you don’t know when it’s going to end. It can go on a lot longer than you think. The other side of that is when it cracks, it cracks hard and fast, and you’re kidding yourself if you think you can get out. If you bought it for $1,000 and sold it for $2,000, lucky you, nice job and well done. But that’s no way to invest, it’s no way to make a living.

The reason is you have to think of these things on a risk-adjusted basis. You can’t just look at returns. Let’s say you had a whole bunch of money, hired me as major money manager, and I said, “Okay, leave me to it.” I go to Las Vegas, go to the roulette table, and I put all your money on red. It comes up red, I double the money, and I come back to you and say, “I doubled your money, I’m taking my 20% management fee or performance fee, and here’s the rest.” You think I’m a genius, “Jim’s the smartest guy in the world. He’s got a 100% return, and net of fees, I got an 80% return.”

No, I’m not. I’m an idiot. The point is, I could have lost all your money. If you don’t know how I do it or if you just look at the return (in my example, I doubled your money) but you don’t know how much risk I took, you think I’m a great money manager because I doubled your money. But on a risk-adjusted basis, I’m a complete idiot because I could have lost all your money.

When you get into bitcoin, yes, it could go up. Could it go up to $4,000? Just to be clear, I’m not predicting that at all, but I’m not going to say that can’t happen. It could happen. When is it going to crack? $2,500? $3,000? $3,500? $4,000? I don’t know, but I do know it will crack. It will crack hard, and I wouldn’t want to be around when it happens.

Alex:  Let’s dig into another topic area. I understand you recently had some new insights into IMF special drawing rates. Another way of saying that is SDRs. You plan to include these insights in your next book that’s upcoming. By the way, this is the first hint. I knew you were probably working on another book but recently had a first hint that this was going to be coming, so I’m looking forward to that. Without giving away the secret sauce of what this is all about, can you share anything about this?

Jim:  Yes, it will be in a new book. I’m not talking much about it because the publication date right now is October 2018, so we’re more than a year away, which is good, because it’ll take me that long to write it. As you know, Alex, you don’t just write a manuscript, hand it in, they print it up, and they send it to the bookstores. With my publisher, and this is one of the things I like about them because they’re very high quality, it takes four or five months, sometimes longer, for not just proofreading and normal editing where there’s a back and forth with your editor, but also for what they call copyediting. Copyediting is the person who decides what’s capitalized and whether it’s a comma or semicolon and all that stuff. I just keep writing and hope someone else can figure it all out. Then comes legal and then binding. There’s a lot to it.

This book is going to come out in October 2018, so there’s not much to talk about right now, but I did have a one-on-one conversation at an apartment in New York with former Treasury Secretary Tim Geithner. I had some quotes from him in my second book, The Death of Money, indicating some very favorable impressions of SDRs. Geithner is one of the people who knows more about SDRs than anybody.

We went to the same graduate school, the School of Advanced International Studies in Washington (SAIS), which is intellectual boot camp for the IMF. About one-third of each class goes to work for the IMF, for the World Bank, so there’s a very close affiliation there. We received similar training although my class studied gold because I was the class of ‘74. Gold had been abandoned by the time Geithner came along, but we had the same background and training. Unless you have that specialized training, it’s hard to really get your mind around SDRs.

He said some very favorable things, and I quoted him on that. In the last crisis that started in the spring/summer of 2007, it peaked and backed off and peaked and backed off, and then finally it went completely thermonuclear on September 15, 2008, with Lehman Brothers. There was an emergency issuance of SDRs for the first time in 30 years. The last time they had issued SDRs was in the early 1980s and then none at all until August of 2009.

It went pretty much unnoticed, because you have to be a bit of a geek to see that happening. I was certainly attentive to it, but in analyzing a future financial crisis, which again, is kind of like the bitcoin bubble, you can see it coming and estimate the magnitude, but timing and specific catalysts are more difficult.

What are the central banks going to do? When we talked about the FOMC raising interest rates in June, one of the things we didn’t talk about that was in the minutes of the May meeting is normalizing the balance sheet. The Fed did not just take interest rates to zero and hold them there for seven years. They expanded their balance sheet from $800 billion to $4.5 trillion basically by printing money and buying bonds.

They still have the $4.5 trillion on their balance sheet. Not only did they not normalize interest rates, they’re about a third of the way to normalizing interest rates. Using the Taylor rule, interest rates should probably be 2.5% – 3%. They’re at approximately 1%, so they have a little way to go. At least they’ve started, but they haven’t taken any steps to normalize the balance sheet, so they’re now talking about that also.

The way they’re going to do it is not by dumping bonds. The Treasury bond market is big but it’s not that big. They’re not going to sell a single bond. What they are going to do is let them run off, let them mature. Let’s say you bought a five-year note five years ago. Sometime in the next month or so it’s going to mature. The Treasury sends you the money and, just as when the Fed buys bonds, they pay for it with money that comes from thin air. The same is true in reverse. When the Treasury sends the Fed money to pay off the bonds, the money disappears. It reduces the money supply.

The Fed is just going to sit there. This happens now anyway, these bonds mature all the time, but the Fed then takes the money and buys a new bond. They’re not expanding the money supply; they’re maintaining the money supply and buying new bonds all the time to maintain the balance sheet. What they’re going to do is stop that reinvestment. They’ll take the money, the money will disappear, they won’t buy a new bond, and little by little, the balance sheet will run off. They’re going to do this very gradually. They have all this jargon and use words like ‘background.’ They say this is going to run on background, and steady Eddie, and we’ll be transparent about what we’re doing, and no one is going to notice. It’s just going to happen, and over my estimate of seven or eight years, the balance sheet would get back down to $2 trillion. Arguably, that’s a normalized balance sheet.

Again, that assumes no recession, which is a false assumption. We are going to have a recession in the next several years, but the Fed doesn’t really deal in reality. In Fed world, there’s no recession, there are no recessions, and they’re going to run the balance sheet off over seven or eight years.

This is called QT. Everyone knows about QE, quantitative easing, and this is QT, quantitative tightening. That’s what happens when bonds mature, the money supply is reduced, you don’t buy new ones, and the balance sheet shrinks. It’s like watching paint dry or holding an ice cube in your hand and watching it melt. It happens very slowly, but it does happen.

The interesting thing about this is the whole time the Fed was doing QE to the tune of taking the balance sheet to $4.5 trillion, they told us that this was stimulative. By buying intermediate-term securities, they were keeping a lid on the middle of the yield curve, it helped mortgage rates and that helped stock prices and home prices and all that wealth effect, and they let people borrow because that’s all collateral and they’d spend more money. This was the story, but none of it was true. The wealth effect was weak or invisible or maybe even negative this time around. They did create asset bubbles, so they were good at that, but not much good at stimulating the economy or at least returning to trend growth on a sustainable basis. That did not happen.

We were supposed to believe that it was somehow stimulative and when they do it in reverse, it’s not supposed to be contractionary. I don’t understand that at all. If you reduce the money supply, that’s a tightening of financial conditions, that’s contractionary. I’m not saying by itself it’s going to put the U.S. economy into a depression. We’ve been in a depression since 2007, so they’re kind of hitting the economy with a double whammy. They’re raising rates, which we already talked about, and I’m guessing probably before the end of the year, they haven’t said but maybe as early as September, they’re going to start reducing the balance sheet. My estimate is for every $50 billion of balance sheet reduction, that’s equivalent to one 25-basis-point rate hike. Like I say, you can’t have it both ways. You can’t say printing money is expansionary but making money disappear is not contractionary. Sure it is.

We’re going to get hit with rate hikes and tightening monetary conditions, reduction of the money supply. The economy is weak to begin with, so my estimation is that this will cause a recession later this year, probably by the summer. It will become apparent, but the Fed will be the last to know. A lot of people will see it before the Fed, but maybe by August/September when that happens, the Fed is going to have to pivot and do a 180.

I said earlier that they’re going to raise rates four times a year – March, June, September, December – like clockwork for the next three years unless something bad happens. The bad things are what I mentioned – the stock market falls out of bed, job creation dries up or you see disinflation. I think you might see all three.

We might see strong disinflation. The PCE core deflator is the Fed’s preferred inflation metric, which after about six years has finally gotten to 2%. They were hoping the whole time to get it to 2%, it finally got there, and it immediately headed south down to around 1.7%, give or take. If you see that going to 1.5%, 1.4%, 1.3%, and job creation falls below 75,000, maybe we even start to lose a few jobs or get a negative GDP print, and then the stock market wakes up and says, “Whoa, we’re way out over our skis here. We invested in this Trump trade, and we thought the Fed raising rates was a sign of a good economy. It turns out the economy stinks, we’re in recession, and Trump’s not delivering on any of his promises,” boom – there goes the stock market.

We could see all this. Everything I’m describing is based on I’ll say a conditional forecast. My expectation is that some of these conditions will fail and that by September, they’ll have to go back to easing mode. How do they do that? They’ll probably still be reducing the balance sheet, so I estimate they’ll stop raising rates in September, and they’ll use forward guidance to take a pause, so you’ll be hearing about ‘pause.’ They’ll raise in June for sure, pause in September, and then we’ll see about December and how it plays out.

This is what happens when you manipulate the economy for eight years. You can’t get out of it. You can’t un-manipulate the economy, because the economy is completely dependent on Fed policy and signaling and expectations and herd behavior and everyone following the Fed. They just can’t get out of it.

Alex:  It sounds to me like 2018 and 2019 are shaping up to be pretty interesting. As you mentioned, the Fed has announced it’s not going to be reinvesting government debt. It’s basically going to let that roll off the balance sheet. From 2018 to 2019, I think that number is going to be close to $1 trillion. In addition to that, I’m going to share some information in a little bit when we start talking about the physical gold market that will dovetail into that. It’s going to create some interesting conditions for our space in particular.

Jim:  I completely agree with that and am interested in hearing more on your analysis, Alex, but 2018 is when we will go to war with North Korea. That’s not on the calendar for 2017 unless Kim Jong-un is even crazier than we think. The story is well-known, so I don’t know why people are not more attentive to it. He’s out to build an intercontinental ballistic missile (ICBM) capable of reaching Seattle, Los Angeles, San Francisco, not to mention all of China, Japan, South Korea, and Taiwan. They’re not there yet, but they’ve tested more complex intermediate-range ballistic missiles that have some of the multi-stage technology and liquid fuel that you need to have in an ICBM, so they’re getting there and are making steady progress.

Sometimes these missiles go off course, they wobble or they blow up on the launch pad and people laugh them up like ah, they’re idiots, they don’t know how to launch a missile. But they don’t think of it as failure; they think of it as a learning experience. Every so-called failure is a way to learn something to make the next one better. Recently, the tests have been succeeding and have produced better results, so they’re making progress in miniaturization.

They have the fissile material, the uranium, and the plutonium. They’ve mastered the enrichment cycle but need to weaponize that, because you can’t just put a truck-sized device on a missile. You have to get it down to the size of a grapefruit or a basketball, but it looks like they’re just about there on that and a couple of other pieces of technology. All this is coming together faster than analysts estimated. The four-year estimates I was reading about six months ago have now turned into three-year and in some cases two-year estimates. That’s what he’s doing.

It is crystal clear that the United States will not let this happen. We are not going to sit here and let him perfect this technology, put a warhead on a missile, test it in some credible way, and say, “I can now nuke Los Angeles. You guys better hope you can shoot it down. I’ll send up 10 and your success rate in shooting down or intercepting ballistic missiles is probably 50% if you’re lucky (which is pretty darn good, by the way), but that means five of them go through and I just killed 10 million Americans. Don’t mess with me.” That will be his message. We’re not going to let that happen. We’re not going to put ourselves in that position. We’re not going to gamble with Los Angeles.

One or two things must happen: Either he must voluntarily give up this program or we’re going to destroy it militarily. I see no signs that he’s voluntarily giving it up, because he thinks differently about it. What he’s saying is that the guys who had nuclear programs and gave them up – Muammar Gaddafi and Saddam Hussein – are both dead. Libya and Iraq had a nuclear program. They gave them up and they both got killed. One was shot in the eye, and one was hanged. The guys who didn’t give up their program are the Iranians, and they’re still standing.

Kim Jong-un looks at this and thinks, “Well, this is simple. If you give up your program, you get killed, but if you don’t give up your program, your regime survives.” From his point of view, he’s going to keep the program. The other reason he wants to keep it is he sells the technology to Iran for gold. They’re not moving dollars through the global payment system. They’re putting physical gold on planes and shipping it either to North Korea or some of it is held in custody in Russia. The point is, he’s not giving up the program, and we’re not going to let him go too far; therefore, war is inevitable.

President Trump, Defense Department Secretary Mattis, and Secretary Tillerson are now conditioning the battle space. You don’t just go in guns blazing; you prepare. That involves diplomatic efforts and preparing the American people. When Trump basically invited the entire Senate, 100 Senators, to come over to the White House a couple of months ago, they boarded buses up on Capitol Hill and took them down to the White House. A lot of people made light of it, but that was getting buy-in from the Senate. Trump is saying, “We’re getting ready to do this when I share what we see and how we’re thinking about it,” Nikki Haley is bringing it up at the United Nations, and Trump’s talking about it with our NATO allies.

All the pieces are in place. This feels like Iraq in 2002. We invaded Iraq in March 2003, but the preparation was in place in 2002. I look for that war in 2018 after a year of warning and preparation, last clear chance, etc., so we all know what that’s going to do to the price of gold.

Alex:  I thought it was interesting the comment you made about when they’re developing this weapons programs and have failures, that people tend to laugh about it and say it’s not a serious thing.

A lot of people don’t know that the same technology needed to fire an ICBM, an intercontinental ballistic missile, is essentially the same technology that’s necessary to put objects into orbit. You talked about the rate of success for shooting down things like that. They’re moving at about 6.951 miles per second. These things are really cruising along, and to figure out how to do that is no easy thing.

People forget that even in the U.S. space program, it wasn’t like success after success. There were a lot of failures on the road. I think you’re right, there’s an incredible threat that they are continuing to develop and move along.

Jim:  I remember in the late 1950s and early 1960s when the U.S. was trying to catch up with the Russians. We had the Mercury Redstone program, then the Gemini program, then Apollo, and then the Space Shuttle and all that. In the early days of testing rockets for Mercury Redstone, the American rockets used to blow up on the launch pad. One didn’t work and they would try it again, but as I say, these were all learning experiences. You’re exactly right.

Not to pile on, but the Pentagon announced yesterday that they’re considering shooting down a missile with a missile as a test. What we would do is fire one of our missiles, then there’d be an antimissile battery, and their job would be to shoot that missile out of the sky as a demonstration that we can do it. The message to Kim Jong-un is: “Don’t waste your time.” Now that’s a high-stakes gamble, because what if we shoot our missile and our antimissile misses? We’re controlling the whole thing, so hopefully they rig it in our favor, but even if it hits, which hopefully it does, I think anyone who is fair-minded about it would say, “Your success rate is never going to be north of 50%.”

Alex:  Continuing in this vein of geopolitics, there is a hot topic I don’t really consider a hot topic, but the media seems to be making a big deal out of it. There’s this idea that Trump improperly shared intelligence with the Russians. Is this an issue? Is it a nonissue? Is the media blowing this up or is there real substance here? What do you think?

Jim:  The media is definitely blowing it up. I’ve heard people saying, “Trump leaked information to the Russians.” First of all, the President can’t leak anything. The President can reveal information or share information. He’s the Commander in Chief and can do whatever he wants with that intelligence. The President has the last word on what’s classified or declassified or shared with anybody. The President revealed information, but he didn’t leak information.

You do see the word “leak” used a lot, but that’s just incorrect and in the fake news category. Let’s come back to what he did do, which is he revealed some sensitive intelligence to the Russians that would otherwise have been classified. Good idea, bad idea – that’s debatable. A lot of people say that’s a horrible idea, he gave up sources, we can’t trust the Russians, they’ll tell the Syrians, etc.

That’s an argument I’m not dismissing, but the other side of the argument is, if we’re getting ready to confront China and getting ready for war with North Korea, we better have the Russians at our side. We better make friends with the Russians, because there are really only three countries in the world that count. I hate to break it to the Brits and Germans and a lot of others, but China, Russia, and the United States are the only three countries that really count. They’re three of the five biggest by land mass, among the five or six biggest by population (Russia is a little smaller by population), and the biggest in energy output, but most importantly, in military capability and nuclear arsenals, they’re the three superpowers in the world.

In any three-handed game, be it poker or Risk, it’s always two against one whether that’s explicit, implicit, behavioral, whatever. The oldest joke in poker is if you’re at a poker game and don’t know who the sucker is, you are the sucker. In the old board game, Risk, you’d start out with five or six players, quickly get down to three, and then two of them would one way or the other gang up on the third one, wipe them off the board, and then turn around and fight each other to see who won. That’s just how you play a three-handed game.

If we’re going to confront China, which we are, we better be friends with Russia. We don’t want to be confronting Russia and China at the same time. We don’t want to be in a war in North Korea and some kind of shooting match in the South China Sea without having a relationship with Russia, because they’ll just roll through Ukraine, parts of Central and Eastern Europe, maybe roll up the Baltic. You want to fight a war in Korea and the Baltics at the same time? The Pentagon’s worst nightmare is the two-front war. Going back to the ‘70s, we used to be able to fight what we call two-and-a-half wars. Two-and-a-half wars meant we could fight a war in the Pacific or Asia, a war in Europe, and a half a war somewhere else, maybe Africa or Cuba or someplace like that. Today, we’re lucky if we can do one-and-a-half wars, but we can’t do two wars.

This was the thinking behind Trump’s people. Jeff Sessions, Jared Kushner, Mike Flynn, all of them reaching out to the Russians during the transition and meetings with the ambassador was about getting relations with Russia back on track so we can prepare to confront China.

Where it blew up is they all lied about it. This is idiotic in my view. I don’t see why you have to lie about it. What I just described can be taken right out of Henry Kissinger’s book, New World Order. This is balance of power politics 101. If you’re going to mix it up with China, you better have Russia. So, we should have been talking to the Russians.

My view is that talking to the Russians is really smart and lying about talking to the Russians is really dumb. The reason Flynn got fired and Jared Kushner is now reportedly under FBI investigation and Jeff Sessions had to recuse himself is because they all lied and misrepresented one way or another their contacts with the Russians. That was just stupid, in my view, and I don’t know why they were hanging their heads about it. I would have been up front and say, “Hey, it’s a dangerous world. If you think Putin’s a thug, well, meet President Xi Jinping of China.”

China has more human rights abuses, they have firing squads, they have slave labor, they have child labor, they killed 25 million girls in the one-child policy. None of these people are particularly nice. If you want to pile on Putin, fine. He’s a bad actor, he’s a killer, but that’s the world we live in. All I know is if you’re going to confront China, you want to build bridges to Russia. I think that was a smart policy by Trump.

It’s blown up for two reasons. Number one, his people mishandled it by hiding in the shadows, in the bushes, and lying about it. Then, two, it fed into this separate, completely ridiculous narrative that somehow Putin won the election for Trump. Did the Russians use sources, methods, operatives, hacking, and other tools to influence public opinion in the United States maybe in a way that disfavored Hillary and favored Trump? Of course they did, absolutely. We do that to them. You don’t think we were in Ukraine working actively to depose the pro-Russian of Ukraine? This is how the game is played.

That comes as no surprise, but beyond that, the idea that we were seeking to improve relations doesn’t strike me as odd or problematic or uncalled for, but boy, did they mishandle it. Now they can’t even be seen in public with a Russian, which is too bad.

What’s interesting is that coming up on July 7th and 8th in Hamburg, Germany, is the G20 meeting. That’ll be the first face-to-face meeting between Trump and Putin, so that’s certainly going to get a lot of attention.

Alex:  Basic diplomacy is what it comes down to.

Jim:  Yes, basic diplomacy. With intel sharing, again, he’s the Commander in Chief if he wants to tell the Russians something. By the way, this faux outrage is laughable. You and I have a background in intelligence. Intelligence gets shared all the time. The Jordanians pick up some pocket litter from a prisoner and give it to the Israelis, the Israelis share it with us, or we get something from the Turks and we slide it to the Israelis. Intelligence operators trade intelligence the way kids trade baseball cards. They swap it around all the time, usually for some quid pro quo, because intelligence is usually a two-way street. This idea that somehow he uniquely and clumsily revealed some hypersensitive stuff is just nonsense and a good example of media bias.

Alex:  Yes, I agree. Now let’s discuss physical gold for a little bit. I’m going to give a brief snapshot on what’s going on in the physical gold markets for the year up until now. After that, we can get into some material from your last book, The Road to Ruin. I want to ask for your commentary on how that dovetails into gold.

Right now, gold flows are still going west to east. This is no news to anybody on this podcast, but it’s continuing. U.S.-based gold funds have been pretty flat as of late. In Q1, Germany and the UK actually led the investment in gold funds. We’re talking as much as six times as much capital was invested in gold through Germany and UK as was coming from the United States in Q1.

In addition to that, export data has shown us that India is basically back on top of the stack in terms of gold flow from Switzerland, so they’re taking more right now than Hong Kong and China combined. We’re talking from Switzerland, not all sources. They’ve been the top destination from January through April.

Overall though, Asia is accounting for about 74% of Switzerland’s total gold exports, which means it’s still a one-way street in terms of physical flow. If we look at China specifically, in Q1, Chinese gold imports were up something on the order of 64.5%, and their domestic production is actually dropping. The premiums so far this year have skyrocketed unlike anything in the last two to three years.

And then finally, here’s something I found to be quite interesting. Our sources are projecting that mining production is going to start dropping off after 2018. This is sort of a combined consequence of very sharp cuts in capital expenditure for new production.

Total CapEx for companies in the HUI index, for example, declined by about 65% between 2012 and 2016, and there really haven’t been any new significant discoveries. Adding that to what we were talking about a little while ago in terms of the Fed balance sheet rolling off, the deflationary effect, and the fact that it looks like mining capacity is going to start dropping off, is an interesting scenario.

Let’s talk a little bit about systemic risk. I’d like to read an excerpt from your book, The Road to Ruin. For those who don’t know, Jim was the chief counsel for Long Term Capital Management and negotiated the Long Term Capital Management bailout with Wall Street and the Federal Reserve at the time. This excerpt is about that time during the crisis period and looking at how things were constructed:

“LTCM had 106 trading strategies involving stocks, bonds, currencies, and derivatives in 20 countries around the world. From the outside, the trades seemed diversified. French equity baskets had low correlation with Japanese government bonds, Dutch mortgages had low correlation with Boeing’s takeover of Lockheed. The partners knew they could lose money on a given trade, yet the overall book was carefully constructed to add profit potential without adding correlation.”

In the next paragraph it says:

“This diversification was a mirage. It existed only in calm markets when investors had time to uncover value and cause spreads to converge. However, there was a hidden threat running through all 106 strategies that Scholes later called conditional correlation. All the trades rested on providing liquidity to a counterparty who wanted it at the time.”

Jim, what are your thoughts on what you’re seeing and how portfolios are constructed today? Do you see similar risks that apply? Maybe not necessarily the exact same vehicles but in terms of how the portfolios are constructed versus systemic risk. And what are your thoughts on gold and how it factors into this?

Jim:  I absolutely do, and let me expand on that briefly. By the way, the Scholes you mentioned in that excerpt is Myron Scholes, winner of the Nobel Prize in Economics in 1997, and one of our partners at Long Term Capital Management. I worked in the same office with Myron for six years.

Yes, that conditional correlation was meaning it’s not normally there, but it’s there when you least expect it, and it’s what takes you down. I definitely see this happening again. Having lived through the Long Term Capital experience in 1998, I had a front row seat. I saw the PNLs every day, I knew all the positions, I negotiated the bailout, I talked to the banks, the Treasury, the Fed, so really, almost no one knew about it better than I did. Not because I was the head trader, the risk manager, but because I wrote all the contracts and then had to unwind them all and do the bailout.

I was a lawyer and am still a lawyer technically, but at the time I was acting in a legal capacity. That’s why I did the bailout. For years afterwards, I was very unsatisfied with my understanding of what had happened from a risk management point of view. I spent a decade studying physics, complexity theory, network theory, graph theory, applied mathematics, behavioral economics, every field I could find to help explain what happened, which I ultimately did, and then was able to move forward from there and build new models that worked much better.

Beginning in 2005, I ran around warning about the next crisis. I didn’t say, “On September 15th, 2008, Lehman Brothers is going to file for bankruptcy.” I wasn’t that granular, but I didn’t need to be. I could just look at the macro and see the size of the balance sheet, the fact that they had gotten rid of derivatives regulation so you could trade derivatives on anything, the fact that Basel II had basically gotten rid of serious capital constraints and banks could do valuate risk as their capital measure, the FCC getting rid of the 15:1 leverage ratio on certain assets, they repealed Glass–Steagall so banks could act like hedge funds.

Every single thing they did between 1999 and 2005 was the opposite of what you would have wanted to do if you wanted to make the system safer. I was lecturing at the Kellogg School at Northwestern at the time and the School of International Studies, and I did a lecture with the Applied Physics Laboratory. I have all those old lecture notes, and I said this system was going to blow up and it’s going to be worse. Sure enough, that’s what happened.

I see the same thing happening again. Now, it’s always the same and it’s always different. Let me explain what I mean by that. Every financial panic is the same. The best description I’ve ever heard of a financial panic is everyone wants their money back. People think they have money that’s not really money, so you’ll hear them say, “I’ve got money in the stock market. I’ve got money in the bond market. I’ve got money in real estate.”

No, you don’t. You have stocks, bonds and real estate. You don’t have money. If you want money, you must sell that stuff and get the money. And guess what? When you do, everyone else is going to be selling at the same time, the prices are going to be plunging, there’s going to be fear, blood in the streets, and your so-called money is going to be disappearing.

That’s what happens when people want to liquidate assets and get out. They want to do it all at once. It feeds on itself and they want their money back – real money, not dollar-denominated assets that are melting before their eyes. That’s what a financial panic is, and that’s what I mean when I say they’re all the same behaviorally.

But they’re all different, because there’s a different catalyst every time. In 2007, there were the subprime mortgages. I can’t imagine subprime mortgages being a problem now. We barely even have subprime mortgages.

There were $1 trillion of them in 2007, and then $6 trillion of derivatives on the subprime mortgages, slightly better but still pretty junky mortgage. So, it’s not a problem now. The banks are tough, the regulators are tough, the down payments and credit standards have gone up, so the next problem is not going to come from the mortgage market.

Could it come from Chinese credit? It probably won’t come from bitcoin, that’s too small and will get ugly when the time comes. It could be emerging markets, currency crisis, a Chinese credit crisis or the U.S. stock market suddenly crashing because they wake up and realize that none of what Trump said he was going to do has actually happened. Look at how the stock market went up between November 8th and March 1st: 15%. It has gone sideways since then with a couple of highs, but pretty much sideways. But 15% on those three months based on Trump’s promises of tax cuts, Obamacare repeal, the wall, infrastructure spending – not one of those things have happened and may not happen this year or even next year, because it’s an election year. Let’s see how it plays out.

I understand the difficulties, and I’m not blaming Trump. I’m just saying that the market priced a lot of good things that haven’t happened, meaning it’s very vulnerable to repricing, and that could get disorderly. So, it could come from a lot of different sources.

There’s $100 billion more leverage in the system, or more debt, I should say. There’s leverage all over the place when you count derivatives. So, the scale of the system, the concentration of assets, the use of leverage, the use of nontransparent derivatives, all of those things are worse than they were in 2008. That by itself would tell you that the next crisis will be exponentially worse and beyond the ability of the central banks to cure, because as we said earlier in the podcast, they haven’t normalized the balance sheet yet.

But there’s something worse than that. Worse than saying this is a bigger, badder replay of 2008 is the rise of robo-investing and passive investing, indexing in ETFs. I’m not talking about high frequency trading. That has its own dangers, but passive investing. Here’s why.

You have passive and active. Passive is just, “I’m going to buy the index and go take a vacation.” Whatever the index does, it does, because you can’t beat the market, you never have better information, you’re never fast enough or smart enough, so just track the market. Even if it goes down, it’ll come back and I’ll make money in the long run. This is the Warren Buffet, John Bogle, Jeremy Siegel mantra.

But there are a certain number of active investors who wake up. Whether they’re hedge fund mavens like Stan Druckenmiller, Kyle Bass or Ray Dalio who have incredible track records or even others who maybe don’t have such good track records but they’re trying, these are the people who engage in what’s called price discovery. They’re taking money, committing capital, taking a view, engaging in transactions to see where the value is by buying, selling, holding, and seeing how it works out. Maybe they have tight stops and they buy something, it blows up in their face and they get out of it, but that’s what’s called price discovery.

Think of price discovery as a healthy body. Active investing is a healthy body, and passive investing is a parasite that jumps on the back of the healthy body and sucks it dry, because that’s what passive investors do. Well, a small parasite on a large creature will carry on. The creature won’t die and the parasite will thrive. What happens when the parasite gets to be bigger than the creature? You have more and more passive investing on less and less active price discovery, active capital commitments. That is an inverted pyramid and is a highly unstable situation. That’s what’s new – the passive investing piece is now I believe larger than the active investing piece and getting larger all the time.

What that means is that when the psychology changes and people want to bid, the number of active traders out there will say, “Yes, I’ll take them, I’ll buy them,” the way the old New York Stock Exchange specialists used to do. As a specialist, your job was to buy when everyone else was selling and sell when everyone else is buying. You took the other side of the market, and that’s how markets maintained some liquidity. It wasn’t foolproof, but it worked pretty well for almost 200 years.

That’s gone. It’s long been gone in the stock market. I talked to Steve Guilfoyle, his nickname is Sarge, and he’s the Head of Floor Operations at the New York Stock Exchange. I was down on the floor of the stock exchange with Sarge when he said, “Jim, there is no liquidity down here. Don’t let anyone tell you otherwise.” I said, “I kind of thought that, but hearing it from you, I know it’s true.”

Even for the upstairs traders and the hedge funds, there are fewer and fewer of them, so things are going to go “no bid” so fast it’ll make your head spin. That’s going to make this crash worse.

Gold is where you want to be, but not 100%. The listeners know I recommend 10% of your investable assets in gold. There’ll be a flight to quality that will start out in treasuries. In the early stages of a panic, a lot of people sell gold. The reason they sell it is interesting. It’s not because they don’t want the gold, because they wish they had more. They sell it because it’s liquid.

Alex:  Yes, exactly.

Jim:  That’s contrary to everything I said. I said everything becomes illiquid. Gold can go up and down, but I’ve never seen it go illiquid or “no bid.” People sell gold not because they want to but because they have to.

But that passes quickly, and then it’s just, “Hey, get me some gold. Where is the gold?” Gold goes up, and Treasury bills go up. There may come a time when Treasury bills hit the wall because you’re like, “Wait a second, I’m getting out of everything else into Treasury bills, but is that a smart idea?” If the central bank is tapped out and people are losing confidence in the United States and the dollar, then maybe not. So, then the demand for gold goes up even more.

It’s obvious that’s how it plays out. A lot of people say, “Call me when that happens, Jim. Call me the week before, and I’ll sell some stocks and buy some gold.” My answer is twofold. Number one, I’m not going to know the week before. I’ll see it coming using the models I’ve developed, and I’m actually warning you about it right now on this podcast, but it’s not like I’m going to know the exact minute or the day. I won’t; I just prepare for it in advance.

What I say to those people is, “What are you waiting for? You know this is coming.” Beyond that, even if I could pinpoint it a little bit, when this hits and you go out to get your gold, you might not even get any. There might not be any available. There’ll be a price, you’ll be able to watch it on TV, but you won’t be able to get the physical gold. Again, one more reason to get it now.

Alex:  Let me add a little bit to that, and then we’ll wrap this up. One thing I found interesting in what you were just saying is that the common thread there is always liquidity. I was in Minneapolis recently meeting with some money managers, and it’s interesting how often that question comes up. “How liquid is it? How liquid is gold?”

I’m saying this for the benefit of our listeners who don’t understand how deep the gold markets are. It’s basically a $7 trillion market cap. If you took all the above-ground gold in the world, it’s worth about $7 trillion. Annually, we see tremendous liquidity and depth. For example, China and India alone are consuming close to 3000 tons a year, and the amount of liquidity that’s available is pretty high.

The other thing you mentioned is that gold will initially drop down because of its liquidity properties. It’ll sell off a little bit. That’s exactly what happened in the 2008 financial crisis. It went down initially with everything else, but it ended up 6% on the year, which was the only asset in the world that did that.

Jim:  Right.

Alex:  That about wraps up our time. Do you have anything you want to add about that last part there?

Jim:  My advice is pretty much unchanging, which is to allocate 10% of your investable assets to gold. In defining investible assets, I always say take your home equity and your business equity. If you’ve got a pizza parlor or an auto dealership or you’re a doctor, a lawyer or a dentist, whatever, you’ve got some business equity. Put that and your home equity to one side, because you don’t want to be betting with that. Whatever you have left are your investable assets. I recommend 10% of that for gold. If nothing happens to gold, you’re not going to get hurt with a 10% allocation, but if the kind of scenarios I’m describing do happen, it may be the winner that protects your losses against the entire rest of your portfolio.

Alex:  Jim, I appreciate your time. This has been a great discussion as always. I look forward to doing it again next month. Enjoy your weekend, and thank you for being on the podcast.

Jim:  Thanks, Alex.

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 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: May 2017 Interview 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: May 2017 Interview with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles May 2017

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Topics Include:

*Forecast for June 13th, 14th FOMC Meetings
*Cryptocurrencies – bubble or bull market?
*Update on IMF SDR’s
*Fed’s plan to normalize the balance sheet
*Expecting confluence of rate hikes and tightening monetary conditions to create recession and force easing by end of 2017
*Why North Korea has to be taken seriously
*Forecast for war with North Korea by 2018
*Trump, Russia, and media bias
*Physical gold market flows Q1 2017
*Dangers of the mirage of portfolio diversification and conditional correlation (Scholes)
*Why todays portfolios are at risk in the same way as LTCM
*Gold price behavior during liquidity crisis
*Liquidity in the gold market

 

 

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 April 2017

Jim Rickards and Alex Stanczyk, The Gold Chronicles April 2017

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Topics Include:

*Commentary and analysis of military action in Syria in response to what appears to be nerve gas attacks on civilian population
*US President Trump authorized release of 59 Tomahawk Land Attack Missiles targeting Shayrat airbase
*Discussion of the USS Carl Vinson carrier group deployment towards the north west pacific in the vicinity of North Korea
*What triggers cause countries to go to war in history
*Are current events a series of unfortunate mis-calculations
*Discussion of North Korea’s nuclear weapons capability
*When analyzing potential threat, there are two factors: Capability, and Intentions
*How US policy regarding nuclear weapons programs has possibly sent the wrong message to Kim Jong-Un
*The intersection of kinetic, cyber, and financial warfare, and role of fiat payment transfer systems as opposed to gold
*Why the US will never allow North Korea to achieve inter-continental ballistic missile technology
*Why the level of intensity of military action that may be used versus North Korea could be substantial
*How the US could target specific Chinese banks for removal from the USD global payments system if China fails to cooperate on North Korea
*Sources indicate that China has moved the Peoples Liberation Army to the border between China and North Korea along the Yalu river
*Commentary on upcoming FOMC rate hikes, and the formula Jim uses to predict a change of course for the Fed

Listen to the original audio of the podcast here

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

 

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

Alex:  Jim, welcome to today’s podcast.

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

Alex:  The last podcast we did was a touch on the gloomy side, and this one – sadly – may not be much brighter. There are several serious events happening in the world today that could escalate quickly, and it feels to me that the U.S. is heading towards a war footing.

As you know, there has been widespread video footage of what appears to be attacks on civilian populations in the Syrian city of Khan Shaykhun. Hospital staff in Turkey where some of the victims were taken said that the symptoms are consistent with sarin gas, which is a deadly nerve agent.

On a personal note, I believe you know I’m a combat veteran. Back before Desert Storm, I went through a safety briefing as we were steaming into the Gulf. The briefing was on the effects of sarin gas. In my opinion, I consider it up at the top of the list of the worst ways to die.

Trump responded to this by authorizing TLAM (Tomahawk Land Attack Missile) strikes from two U.S. Navy guided missile destroyers, the USS Porter and the USS Ross. These two ships commenced firing at 03:45 local time and deployed 59 TLAMs. The missiles were fired at Shayrat Airbase where it’s believed the gas airstrikes were launched from. They targeted runways, hangars, ammo depos, the control tower, and radio installations.

This represents a pretty serious escalation for the United States, and it’s the first major test of Trump exercising military authority.

Russia has indicated it’s not so pleased with this and have stated so publicly. They responded by committing an additional navy frigate, a couple of corvettes, and support ships to bolster the fleet already on patrol in the Mediterranean.

What is your view on all of this? What do you think the potential scenarios are here, and what are the ramifications going forward?

Jim:  Alex, I am as fascinated by the details you just provided as I’m sure our listeners are. I’m a strategic and geopolitical analyst, but I don’t claim to be a military expert in the sense of true expertise to know those systems, so that’s a great introduction.

I happen to be involved in some business development with another veteran, a retired lieutenant colonel army ranger with a lot of experience in the Middle East. He was in the wars in Afghanistan and Iraq.

After that gas attack in Syria became known, he e-mailed me and said of all the threats in the world, of all the things you have to confront and ways to possibly die, he said that is the worst. It certainly confirms your analysis of the horrific nature of this. These attacks in the Middle East and really around the world are all pretty horrific, but I guess if there’s a scale of horrific-ness – if that’s a word – then this is high up there.

I’d like to take a step back. I don’t really see the Syrian situation as an escalation so much as a response – a very specific, very narrowly focused response to the gas attack. Now, we know back in maybe 2011 but I think 2012 there were some prior gas attacks.

There had been several going all the way back to Saddam Hussain in Iraq prior to 2003. Both dictators, Saddam and Assad, used chemical biological weapons and gas attacks in the past, so these have been occurring for a while. This certainly wasn’t the first one.

But President Obama drew the famous red line and said in effect, “If you use gas, there will be a price to pay.” He wasn’t specific about what it was, but clearly, military action was implied. Assad did use the gas, and Obama did nothing. Instead, they got into a long negotiation, etc.

I don’t want to rehash that history since listeners are familiar with it, but the point is, this opened the door to a lot of things. It really was the beginning of the rise of ISIS and of Russian intervention in Syria.

Russia has always had ambitions and some access to warm-water ports, but since then, they’ve built two major ports. Russia is a big country with a big coastline, most of which is frozen much of the year, so the significance of warm water and the ability to get vessels in and out of Mediterranean ports is a big deal.

They built an airbase and put in Spetsnaz special forces, so they’ve got a big footprint in Syria, as does Iran. With Obama’s actions, that was basically the United States saying, “We’re checking out; we’re out of here.”

There’s an old saying in both physics and geopolitics. In physics, it’s ‘nature abhors a vacuum.’ In geopolitics, it’s ‘power abhors a vacuum.’ It’s the same thing, which is when you create a vacuum whether physical or political, it’s not like nothing happens. What happens is something else rushes in. You may leave, but something else is coming in.

Once the U.S. checked out of the Middle East, it didn’t mean peace, love, and understanding in the area; it meant that somebody else was going to come in. That somebody else was Russia and Iran.

Now let’s flash forward. Assad used chemical weapons again, but this time when he crossed the red line, Trump struck back. Just to pick up on the escalatory dynamic, the question is, “What happens if Assad uses chemical weapons again?” You can’t rule it out.

I would expect Trump would strike again except this time with more force and against more targets. I believe there were six airbases, and he disabled one, so he has five to go. Maybe they’ll take out two, three or all six the next time. That would essentially ground the Syrian air force and eliminate what’s left of Syrian air power. Syrian air power is not a threat to U.S. air power; it’s just a threat to its own people, but of course, that’s what Trump is trying to stop.

Let’s see what happens. Secretary of State Rex Tillerson is in Moscow as we speak meeting with Lavrov and Medvedev. It’s not clear if he’s going to meet with Putin, but I’m sure there are plenty of back-channel communications going on whether the U.S. and Russia can come to some kind of joint arrangement on the future.

This all remains to be seen, but for now, I don’t think the U.S. is going to do more. We do have boots on the ground in Syria. When people ask, “Does this mean boots on the ground?” the boots were already there but not in Damascus or the places we attack. They’re special forces – special operators as they’re called – working with Syrian rebels and other forces including Turks and Kurds to defeat ISIS and particularly in preparation for the battle of Raqqa, which will be one of the big events of 2017. Raqqa is the de facto capital of the Islamic Caliphate or the Islamic State. That’s what ISIS is all about.

There’s going to be a lot more fighting in Syria. The U.S. is involved, we do have boots on the ground, but we’re certainly not going to send a Marine expeditionary unit in to liberate Damascus or take out Assad. That will be done through diplomacy, but we certainly have a very tense situation subject to escalation.

If it was a chess game, Assad made his move, Trump made his move, and now it’s Assad’s turn. Let’s see what he does. Hopefully, he got the message and this is the end of chemical weapons, but we’ll see.

Again, Syria is critical, so I’m not diminishing the importance of that at all, but I think we have a much more dangerous situation in North Korea. That’s what I’m focused on, Alex.

When I look at gold and stocks and other markets, they have many drivers. Geopolitics is one of them plus all the normal fundamentals in supply and demand – economic things we talk about on this podcast all the time. But sometimes geopolitics comes to the fore. It’s always there in the background, but when you look at day-to-day movements particularly in gold, you say, okay, we have a couple of things.

We have physical supply in demand as we’ve talked about in the past. We have Federal Reserve interest rate policy, because gold famously has no yield. Of course, my answer to that is it’s money; it’s not supposed to have a yield.

Money has no yield. If you want yield, you have to take risk and you’re in the world of investing. When it comes to money, whether it’s a dollar bill in your pocket or a gold coin, it’s not supposed to have a yield because it’s a medium of exchange.

That said, gold does compete for investment dollars with interest-bearing investments. As interest rates go up, that can be a headwind for gold – not always, but it can be. So, you have the monetary vector and geopolitics.

You basically have three vectors:  basic supply and demand, monetary policy, and geopolitics. All three can be pointing up at the same time or down or you can have a mixed bag. Right now, geopolitics is certainly a big driver, but in my view, the driver is North Korea more so than Syria although Syria does have that kind of potential.

Alex:  Speaking of North Korea, President Trump has ordered a U.S. carrier group to steam in the direction of the northwest Pacific in the vicinity of North Korea. The carrier group consists of the USS Carl Vincent (a Nimitz-class nuclear powered aircraft carrier), a Ticonderoga-class guided missile cruiser, two Arleigh Burke-class guided missile destroyers, and an unknown number of submarines.

North Korea’s response has been a threat of nuclear attack on the United States. That’s not anything new; they’ve been saying that for a long time now. And also, they’re warning that their nuclear capability – if we can call it that and is of a much greater concern in my opinion – is targeting U.S. military bases in South Korea.

Trump’s comments regarding China’s role in theater were that it would be better if China solved the North Korea problem themselves. He tweeted out that if China decides to help, that would be great, but if not, we will solve the problem without them.

Do you see this simply as strong talk, or given the action in Syria, do you think Trump is prepared to back that up? What does it mean for the overall Korean theater? And as a follow-on, how does this affect the rest of the world?

Jim:  I followed it closely and don’t see any of this as just talk or even strong talk. I think it has real potential to spin out of control and do something; certainly a possibility of nuclear war with Korea and maybe something much worse as I’ll talk about in detail.

By the way, I’m not sure if all the listeners know about your own military background and expertise, and I appreciate that rundown of the elements of the aircraft carrier strike force.

Reuters is a great news service; I use it all the time because it’s very reliable. They published something on this and illustrated what’s in a strike group, what these vessels look like, and so forth. These kinds of infographics are very popular and useful. Jane’s Defense Weekly and all the other military publications have graphic silhouettes of aircraft or vessels. Well, Reuters had the Arleigh Burke-class destroyer and the cruiser backwards. They had the cruiser in the destroyer column and the destroyer in the cruiser column.

As you know, cruisers are a little boxier and destroyers are more lean and mean. They’re both very potent; anything with cruise missiles onboard is a potent vessel. But it just goes to show that even the experts can get it mixed up, so we’re always glad to be the beneficiary of your expertise, Alex.

Let’s talk about North Korea. The thing about wars is that most of the time, they don’t happen because anybody thinks it’s a good idea; they happen because of strategic miscalculation. Sometimes wars are started on purpose. The Islamic State just wanted to go out and kill people and start a war, so they’re ones who I don’t think are very strategic; they’re just doing whatever they can to inflame tensions and start wars.

Sometimes that happens or it’s a quick land-grab, etc., but often wars – particularly big ones – start through a series of miscalculations. There’s no better example of that than World War I. I’ve studied World War I very closely. There have been a number of times I picked up a 700- or 800-page book on World War I and got about a third of the way through it before I just threw it down and shook my head. I couldn’t finish it or I had to at least put it off for a while, because it just made no sense.

The history is good. You can understand the history, you can follow the chronology, you can learn about the battles and all that and you’ll know what happened, but there is really no good answer to why it happened.

For example, in early June 1914 when tensions were high, if you had sat down with the crown heads of Europe including Franz Joseph, emperor of the Austro-Hungarian Empire, Kaiser Wilhelm II, emperor of the German Empire, Tsar Nicholas, emperor of the Russian empire, and the Sultan in Istanbul, Constantinople, the Ottoman Empire  and said, “I’ve got a good idea. Why don’t we start a war that will kill 20 million people, cause all four of your empires to collapse, put every one of you either in a grave or in exile in the next five years, bankrupt France and England, and destroy Europe as a world power. Who thinks that’s a good idea?” I don’t think you would have had very many takers.

Yet that is exactly what happened. The war started, 20 million were killed for no real discernible reason, all four of those empires collapsed, all four of those emperors were dead or in exile in a matter of years, and European power has never been the same.

It shows that there was no strategic calculation, foresight or real understanding of what they were doing. They just got caught up in an escalatory dynamic. Everybody thought the war would be short, that they would win, etc., and none of that turned out to be true.

It was the same thing with the Iraq war in 2003. All Saddam Hussain had to do was let the weapons inspectors in. He didn’t have weapons of mass destruction although he definitely had in the past. This is not debatable; it’s all very well established. He did have a nuclear weapons program and chemical and biological weapons programs.

It’s all well documented that Hussain used those chemical weapons, but he had given them up by the time 2003 came around. His WMD was one of the famous reasons for invading Iraq, but it turned out he didn’t have those.

Some do question whether he had stockpiles of chemical and biological weapons that were moved across the border into Syria in the weeks and months before the U.S. invasion, and whether perhaps some of those weapons are the very ones being used by Syria today.

I’ve spoken to people with top secret and beyond security clearances trying to probe that a little bit but haven’t been able to get good answers. If you don’t get a straight answer, it tells me that maybe it’s true, but I can’t prove that. It doesn’t matter. The point is, by the time we got to Iraq, those weapons were gone and the evidence was clear that he had given up his nuclear ambitions in the early 1990s. There were no WMD in Iraq; that’s just a fact.

The question is, if Saddam didn’t have any WMD, why didn’t he just let the inspectors in? Remember, Bush 43 said, “If you let the weapons inspectors in, we won’t go to war.” Saddam didn’t, we did go to war, and he ended up hanged. After fighting, hiding, being captured, and put on trial, he ended up hanged. He didn’t let inspectors in because he didn’t believe it. He thought Bush was bluffing. He said, “You guys will never be dumb enough to come in here. Besides, I’m your checkmate against the Iraqis.” He wanted to pretend he had WMD so that the Iraqis wouldn’t mess with him, but he got it wrong.

I spoke to one of the few people who interrogated Saddam Hussain after he was captured, before he was hanged, while he was a prisoner and available for interrogation. I was told that he just miscalculated.

The point is, really bad things happen not because anybody thinks it’s a good idea but because they simply miscalculate. Now take that historical background and bring it over to Korea. Are we witnessing a series of possibly tragic miscalculations? I think the answer is yes.

Let’s start with Kim Jong-un, the leader of North Korea.

I’ll distinguish for the listeners the difference between a nuclear device and a nuclear weapon. A nuclear device is when I take fissile material, create a controlled chain reaction, have some detonators, let it explode, and I get an atomic explosion. This can be detected with seismographs, intelligence sources, and other technical means.

There’s no doubt that North Korea has that. They’ve detonated a number of these nuclear explosions. They have highly enriched uranium and plutonium, which is fissile material. An atomic bomb can be made out of either highly enriched uranium or plutonium. It’s estimated that they have enough for 10 weapons.

They’ve mastered the enrichment cycle, have fissile material, and shown they can blow it up. That’s all pretty bad, but the next step is to weaponize it. Can they take that fissile material and put it in the form of a weapon that furthermore could be put on a warhead or missile?

These devices are the size of trucks. You could put it on a truck and drive it around, but where are you going to go with that? They can’t, so they have to weaponize it. They have to do something else, which is they have to ruggedize it.

‘Ruggedize’ means to strengthen for better resistance to wear, stress, and abuse. Even if they have something that’s a weapon that will work and detonate in a warhead, they have to shoot it into space. There is enormous stress during the liftoff phase, then it goes into space, and then it must re-enter the atmosphere. It needs a heatshield. It has a very rough ride before it reaches the target, so they have to weaponize and ruggedize it.

The evidence is that North Korea is very far along in that. I won’t say they’ve mastered it, but they’ve put some models on display which experts have looked at and said, “Yes, it looks like they know what they’re doing.” Who knows exactly where that is, but no reason to think that they’re not pretty far along.

The other thing they need is a missile that can reach a target. They can get South Korea because they have fairly reliable short-range missiles. The next step up is intermediate-range missiles that’ll go out maybe 500 to 1000 kilometers and be capable of reaching all of Japan and parts of China.

That’s been hit or miss – no pun intended – but they do seem to have nearly mastered that technology. They still have times when it blows up on the launchpad or it launches, goes off course, and lands who knows where.

It’s not clear how much of that is imperfect technology on their part and how much might be sabotage on our part. Let’s hope it’s the latter. Actually, let’s hope it’s both, but they seem pretty far along in intermediate-range missile capability.

The last leg of that triad is an intercontinental ballistic missile. This is the one that could hit Los Angeles or a lot of big cities in the United States. It’s much longer-range, has to go into space, and come back again. It doesn’t go into orbit, it’s kind of a suborbital ballistic path, but it’s very long range. They have not mastered that although they’re trying and making good progress.

So, where do we stand? They have the enrichment cycle, the fissile material, and the ability to create atomic explosions. They have short-range to intermediate-range missiles and are working on miniaturization, weaponization, ruggedization, and ICBMs.

They’re not that far away and seem to be making very good progress. They are probably four years at most, maybe three years, from being able to fire an atomic weapon at Los Angeles and kill 3 or 4 million Americans. That’s the capability.

Whenever you do this strategic analysis, you have to look at capabilities and intentions. If you know the capability, then all the talk in the world doesn’t mean anything if you can’t do it. If you do have the capability, you still have to ask about intentions. India has nuclear weapons and missile capability, but do they intend to strike the United States? Nobody thinks that.

It’s a combination of the two, capability and intentions. They’ve come very far down the capabilities path and are getting dangerously close to being able to nuke L.A.

Now let’s talk about intentions. Kim Jong-un has stated his intention to attack the U.S. with nuclear weapons. I see no reason not to believe him. He doesn’t quite have the capability yet, but that’s a dangerous combination.

What is he thinking? It’s impossible to know. One line of analysis I’ve read recently, which is not reassuring, is that he’s actually crazy. It’s probably the worst possibility when you have a crazy guy with nukes.

Maybe he’s one of these people who’s very cagy, not crazy but acts crazy to keep everybody off guard, something called strategic ambiguity. Going back to World War I case history, it’s the confusion about other people’s intentions that causes strategic miscalculation. Jong-un is looking around the world and saying a couple of things.

Let’s look at different nuclear weapons programs in rogue states. Iraq was working on nuclear weapons programs. Again, they didn’t have them when we went in, but they were working on them as evidence clearly shows. They gave it up, and Saddam Hussain got hanged. Gaddafi in Libya was working on a nuclear weapons programs. He gave it up and he got a bullet in the eye. The lesson is, if you have nukes and you give them up, you get killed.

The Iranians are working on a nuclear weapons program and they’re still standing. Kim Jong-un’s takeaway is, “If you work with the United States and give up your nukes, you get killed. If you keep your nukes, they don’t mess with you.”

It’s a totally bad message and major blunder the U.S. foreign and military policy has created in three cases – Iraq, Libya, and Iran – where if you work with us and give up your nukes, you get killed, but if you keep them, we don’t mess with you. That’s the wrong message, but it’s what we sent, and that’s what Kim Jong-un has internalized, so he’s saying, “All right, I’m going to keep going on the program.”

I’ve done a lot of work on North Korea. It’s an illegitimate regime, a brutal regime, a thuggish regime run like a crime family. They actually sent a cable to their embassies saying, “All you embassies, we don’t have the money to pay for you, so you have to pay your own bills. We suggest you do it with criminal rackets like counterfeiting or drug smuggling in diplomatic pouches.”

It’s run like the mafia with the same ethic of the mafia, which is basically to kill anyone who looks at you cross-eyed including your own family members. That’s the best way to understand what’s going on there.

The first thing Kim Jong-un is thinking is to keep going with the nuke program because the U.S. won’t mess with him. If he actually perfects it meaning he has reliable ICBM technology, miniaturization, and all the things we just talked about, he’ll think, “You definitely won’t mess with me. If you do and you don’t disable the whole program, I will send a nuclear missile to Los Angeles and kill millions of Americans, so good luck with that.”

The second thing he’s thinking is, again, being illegitimate – how to keep this thing going. How do you keep any racket going? Well, the main way you keep the racket going is to pay your people, but how does he earn hard currencies? He’s been shut out of the banking system; he’s been de-SWIFTed.

As a quick footnote on that, SWIFT is fundamentally the central nervous system of the international banking system. It’s a message traffic system run in Brussels where all the big banks in the world exchange money. When Deutsche Bank is sending a billion dollars to Citibank, it goes through SWIFT. When someone is exporting an oil tanker and waiting to get paid however many hundreds of millions of dollars for the cargo, that goes through SWIFT. Whether it’s dollars, euros, Swiss francs, yen, etc., all that message traffic goes through SWIFT.

In 2012 during what I call the first Iran-U.S. financial war, we worked with our allies to what we call de-SWIFT Iran or kick them off the SWIFT payment system. They could ship all the oil they wanted but couldn’t get paid.

North Korea is the second country to be de-SWIFTed. It’s a pretty extreme remedy much like cutting off oxygen to a patient in an intensive care unit; they’re probably going to suffocate. That’s what’s happened to them.

There are ways around that, however. They can use front banks. Maybe a Chinese bank is willing to send message traffic, wire transfers really, on behalf of North Korea without disclosing the beneficial party.

You’re supposed to disclose. There are forms – MT201s and so forth – where you put the sender, recipient, account information, amount, currency, all that stuff. There’s a line at the bottom for beneficial holder if you’re acting as an agent for somebody else.

Leaving it blank is one kind of fraud. The Chinese might leave those blank for North Korea and the Russians. I just saw the other day that the Malaysians have been doing something similar.

Be that as it may, the U.S. obviously knows this as part of our intelligence gathering. Going back to the escalatory dynamic, what we’re saying to the Chinese banks is, “If you front for North Korea, we’re going to kick you out of the U.S. payment system.” That’s a big deal, because these Chinese banks obviously need access to the dollar payment system.

That’s really putting the screws to North Korea. I’m sure that’s what was discussed in part between President Trump and President Xi at the Mar-a-Lago summit a few days ago behind closed doors which is, “We’re about to get serious, and we will put pressure on you directly if you don’t help us.” Trump has been tweeting about this. He leaves out the details, you can only do so much on Twitter, but it’s pretty clear what’s going on.

As another aside, the way North Korea gets money to pay their people is by selling weapons to Iran. North Korean scientists are further along than the Iranian scientists. Iranians have the enrichment cycle down, and they’re under a lot of scrutiny. Their missile program is coming along, but the North Koreans seem to be further along than the Iranians with all the technological items I mentioned – weaponization, ruggedization, miniaturization, ICBMs – so the North Koreans are selling their technology to the Iranians. That’s a separate story I’ll save for another day, but they’re getting paid in gold.

This is why there’s very strong physical demand for gold. Something that has emerged that I’ve written about for one of the think tanks in Washington is what I call the axis of gold involving Iran, China, Russia, and Turkey, and I would include North Korea as an auxiliary member.

The story of Russia and China acquiring gold as an alternative to the dollar, to build up their reserves as insurance against inflation, and all the reasons any investor might want gold, which all apply, is a big story. We’ve talked about that a lot in the past, but there’s another reason, which is to avoid sanctions or interdiction.

Physical gold is not digital, you can’t hack it, you can’t erase it, you can’t interdict it. It doesn’t go through SWIFT. You just take the bars, put them on a plane, and fly them to Shanghai, Pyongyang, Moscow, Teheran or wherever they happen to be going. You need very good intelligence to know where it is, and even then, are you going to shoot down a plane? Probably not, so that gold gets around.

It’s how these guys are paying each other outside of the message traffic system that is de facto controlled by the United States. There’s a big demand for gold coming from that vector. North Korea is getting gold they can use to bribe people and pay them off or to buy other things.

It can be used it to buy imports, and they like luxury goods. The North Korean military leaders, intelligence assets, and the people Kim Jong-un has to keep happy like their fancy watches and fancy cars as much as anybody. You can import that stuff with gold, so there’s a gold trade going on there.

Kim Jong-un has two big reasons to keep his program going:  1) He believes that if he perfects it, the U.S. won’t mess with him and he can perpetuate his regime, and; 2) He can sell the technology for gold to keep his people happy and protect his regime. He’s like the Godfather sitting up there.

The problem is, the United States is not going to allow him to nuke Los Angeles. He might say, “I just want the capability so you guys won’t mess with me,” but the answer is, “No, you’re not going to get the capability.”

You can’t gamble with Los Angeles. You can’t even take a 1% gamble with Los Angeles. You can’t even take a fraction of 1%. This is something Dick Cheney called the 1% doctrine, which meant that when the risks are existential, you can’t take even a minute fraction of 1%. You can’t make that bet; you have to eliminate it.

Kim Jong-un is on a course to get the weapons, and the U.S. is on a course to prevent him from getting the weapons. Each side misreads the intentions of the other. Now, here’s where it gets really interesting and I think war could be imminent:  How do you actually root out this program?

There’s an old saying, If you shoot the king, don’t miss, meaning if you try to assassinate a leader – shoot the king, in other words – and you miss, you’re dead. They’re going to come back to you.

This is what happened with Hitler and the Wolf’s Lair plot when they actually got a briefcase bomb two inches from Hitler. It blew up, but the briefcase had been moved behind an oak panel at the last minute. Hitler was injured and wounded but not killed. Of course, that was bad news for all the perpetrators, because they all got killed.

If you shoot the king, don’t miss, so if we, the United States, are going to take out the North Korean nuclear program, we must get it all. We can’t leave them with any fissile material, any missile launch capability, any reactors, etc., because they’ll just come back and get us.

There are ways to do it. I’ve been talking about the ICBM in Los Angeles as the existential threat, but they could unleash a military barrage on Seoul. I’ve been to Seoul a number of times, and it’s very close to the North Korean border.

It would be nicer for them if they were down around Busan or someplace further away, but they’re not. They’re well within artillery range. I’m not talking about bomber range; I’m talking about artillery range of the North Korean border, and they will be massively bombarded. Then North Korea could use even their short-range missiles to attack U.S. bases in Korea and the region.

Even if they can’t reach L.A. because we hit them before they can get the ICBM, they can easily kill a lot of Americans in the region. That’s exactly what they’ve threatened to do and have the capability of. If we hit them, we have to take out everything, or else the retaliation on us, the South Koreans, probably the Japanese, and others will be pretty horrendous. So, if you shoot the king, don’t miss.

What does it mean when I say don’t miss? The North Korean stuff is underground buried in mountains and heavily fortified. We do have GBUs (bunker buster bombs) and have been working on that, but if we give them more time and let them burrow in deeply and dig more tunnels, we might have to use tactical nuclear weapons.

Now, atomic weapons. I’m switching back and forth between atomic and nuclear weapons to distinguish between Hiroshima-type bombs and thermonuclear devices, which North Korea is not even close to getting. Russia and United States have them.

Atomic weapons are the kind used in Hiroshima and Nagasaki. August 1945 was the last and only time these weapons were used in warfare, but obviously, they’ve been tested up until the 1960s.

There are some smaller-yield, tactical nuclear weapons called sub-nuclear, which are pretty powerful. They get up to a certain critical stage and unleash a lot of energy. I don’t want to get too technical on all this, but the point being, those are obviously more powerful than the bunker busters.

Will we have to use those to wipe out the North Korean program to make sure if we shoot, we don’t miss? All I know is the more time that goes on, the more likely that becomes. If you’re the United States and are saying “We don’t want to use tactical nuclear weapons, because that crosses a separate red line that gives Russia permission to use them elsewhere,” then you’d better act sooner rather than later.

Here’s the dynamic:  Kim Jong-un is on a course where he says, “I’m keeping my nuclear weapons to perpetuate my regime and so that the U.S. won’t mess with me.” The U.S. is on a course that says, “We have to take out your program sooner rather than later because it’s an existential threat.” That’s a recipe for war sooner rather than later.

My view is we’re on that course. This is not saber-rattling or bluster or talk. Just to connect the dots all the way back to Syria, Trump has shown that he’s decisive and is willing to shoot.

Not to be glib, but when you have a forward-deployed military with as much weaponry, technology, and capability as the United States, the generals don’t totally mind taking out a Syrian airfield. In some ways, it’s target practice.

Again, I’m not being glib; I’m just saying that when you have all this stuff, you have to use it every now and then to make sure it works, and you know that very well. So, the military is primed. They had a nice live-fire exercise in Syria. Trump has shown he’s decisive. We’re on a collision course with North Korea.

To cut to the chase, this is one of the drivers of gold right now with physical gold prices in particular in addition to the other things we mentioned. I think the gold market and the smart money has this figured out. Institutional investors and retail, unfortunately, are usually the last to know, but I think some of the hedge funds, some of the sovereign wealth funds, and some of the big players are going to gold because they see this happening.

Alex:  This has brought up a couple of different thoughts we should talk a little more about. One is you had mentioned that kicking China out of SWIFT is a potential move on the chessboard. This seems to me to be a pretty extreme action. What I’m wondering is could it backfire and the blowback of that be cause for an acceleration of seeking alternatives to SWIFT? In other words, looking for other ways to transfer money around or looking at gold as being the axis of gold you mentioned.

Gold is a two-edged sword here in that it’s the only form of money I’m aware of that governments are unable to control. Gold is completely fungible. Even though a gold bar has serial numbers on it and may be tracked in certain systems, you can take it out of those systems, melt it, recast it into a bar, and sell it anywhere in the world as completely untraceable.

What do you see there? Could that be an accelerant to moving away from the U.S. dollar as a form of transaction globally?

Jim:  Just to be clear, Alex, I don’t foresee kicking China out of SWIFT. I think that’s the equivalent of using tactical nuclear weapons, so I don’t think that’ll happen. To be more specific, what I was talking about is the United States kicking certain Chinese banks out of Fedwire, which is the U.S. dollar payment system.

There are two major payment systems. One is the U.S. dollar payment system completely controlled by the Fed and the U.S. Treasury operating through Fedwire. Even if you’re a smaller bank or a foreign bank and you’re not in Fedwire, you can’t move dollars around without going through a correspondent bank that does.

The U.S., whether through OFAC or other sources, tells our banks “This Chinese bank is on the list because we think they’re fronting for North Korea. All of the banks in the world are not allowed to move dollars through our system for that bank.” It’s targeted kind of like Syria.

Alex, you have a military background, I do a lot of strategic work, and we both obviously have a financial background. It’s interesting to note how we’re moving back and forth between kinetic war and financial war. These are not simply metaphors.

I just led a seminar for the Advanced Strategic Art Program at the U.S. Army War College. It was really an honor to be invited. When I say “college,” don’t think of undergraduates running around in blue jeans; the U.S. Army War College is graduate-level instruction only. There is no undergraduate division.

The people in my seminar – about 15 of them – were mid-career officers, so majors, captains, lieutenant colonels, all with brilliant academic backgrounds. It was a handpicked group, and the quality of the students at the U.S. Army War College is pretty high to begin with.

This was a select group of people who have been identified for their potential as strategic thought leaders, so these will be the future generals and end up in the National Security Council, cabinet level, under-secretary level positions, NSA, etc. Really the crème de la crème of strategic leaders.

I was invited in to do a financial warfighting seminar at the historic 69th Regiment Army in New York. The U.S. Army War College is in Carlisle, Pennsylvania, but this group came to New York because they were meeting with other financial people.

After my lecture, their next guest lecture was Secretary Geithner, so we had a little fun talking about that. I said, “You’re going to get a very different view of the world from Secretary Geithner than you got from me, but that’s okay. That kind of diversity is good.”

This is exactly what we were talking about, how the lines between kinetic and financial and cyber and financial are being blurred. They’re all part of the battlespace.

To come back to this, just as we targeted one airfield and not six in Syria, so the U.S. can target one bank, not 20, and one payment system, not all of them. So, China as a country will not be de-SWIFTed, but certain Chinese banks may be kicked out of the U.S. payment system if they’re carrying water for North Korea. I do expect that.

Having said that, your bigger point is absolutely correct that this has been well vetted. Russia and China are building up their gold reserves and are starting to do business in each other’s currency. If Russia ships energy to China, they’re willing to get paid in yuan; if Russia then wants to buy certain technology exports – it could be iPhones for that matter –-from China, China is willing to take yuan back or rubles, etc. They’re already getting away from the dollar, but they’re also building payment systems.

One of my favorite central bankers in the world, Elvira Nabiullina, head of the Central Bank of Russia, recently announced that if Russia were de-SWIFTed, they would kind of shrug and say, “No big deal. We have other alternatives good to go.”

I don’t see Russia and China getting de-SWIFTed, but one of these alternatives, as I mentioned, is gold. In Russia’s case today, their reserve position is about $400 billion. China is in a whole different league at about $3 trillion of reserves. I’m using dollars as a numéraire, but it’s not all in dollars. That’s the point. Some of it is in euros, some of it is in each other’s currencies, and increasing amounts are in gold.

Take Russia, for example. If their reserve position is $400 billion, they don’t spend it all at once. It’s $5 billion here, $10 billion there, a billion here, a couple of hundred million there to settle payments and payment obligations with trading partners or if their own corporations need access to hard currency. Gold is a part of that. If Russia owes some money to China, put some gold bars on a plane, fly it to Shanghai, done.

I was recently in Shanghai and met with two of the five biggest physical gold dealers in China. They’re banks, of course. One of the things I asked them was, “I have pretty good information that the People’s Liberation Army moves the gold around in armored columns and so forth. Why is that? Why don’t you guys move the gold around? Can’t you get some armored cars, Brinks or whatever?”

They just looked at me and said, “We’re not allowed to have guns.” I said, “Oh, right, you don’t have a second amendment. In the U.S., you’re allowed to have guns.” You can’t very well be in the business of having an armored car business if you can’t have guns, so that’s one reason. There are multiple reasons, but that’s one reason they use the PLA, because they’re the only people who are allowed to have weapons.

The government, the PLA, and the banks are all working hand in glove. This system is very far along, so again from the gold investor’s point of view, rising geopolitical tensions is one reason to have physical gold.

Consider the efforts of Russia and China and others to build alternatives to the dollar payment system. The euro has its issues. You can switch from dollars to euros and Swiss francs, which is what Iran did. When we kicked Iran out of the dollar payment system in 2012, they said “No big deal.” They just switched to euros. “We’ll ship the oil, pay us in euros or pay us in Swiss francs.”

It was only when they were de-SWIFTed and couldn’t transact in euros, Swiss francs, yen, and other hard currencies that they came to the bargaining table and started talking to Obama about their nuclear program.

Russia and China aren’t going to wait for that. They’re not going to be vulnerable to that or held hostage. In addition to all the other reasons we mentioned, this is a very strong demand vector for gold, which is it’s the one thing you can’t freeze, seize or interdict.

Alex:  Going back to something we were talking about earlier, you mentioned reading about World War I and the reasons countries go to war. You also mentioned Kim Jong-un acts a little crazy sometimes, and it’s possible that instead of being crazy, he’s just acting this way to keep people off guard.

It occurs to me – and this is complete speculation and opinion on my part – that Trump maybe does a little bit of the same thing. If that’s true, what we have is two individuals who act a little crazy, but at the end of the day, they’re playing with very serious stakes and both of them to some degree or another have a need to prove that what they’re saying is the truth and should be taken seriously.

That seems to be a pretty volatile mixture. What do you think about that?

Jim:  I agree completely that it’s volatile and unpredictable. I wouldn’t overdraw the parallel, meaning Trump is pretty smart in my view. He’s not crazy. When we say he acts crazy, what we really mean is that he acts in an unpredictable way. That can be a good thing. Keep your opponents and adversaries off guard. People will never know what’s coming; it forces them to pay attention and listen to you.

I would describe Trump as situational, mercurial. He has certainly shown his ability to do a 180 and not look back. There’s no better example than Chinese currency manipulation. Remember during the campaign he said, “China is a currency manipulator. They’re stealing our jobs, and when I’m president, on day one, I’m signing an executive order declaring China a currency manipulator.”

Bearing in mind that that’s not the president’s job; that actually comes from the Treasury Department. The Treasury Department can take instructions from the White House if need be, and it’s twice a year (April and October) that currency manipulator label comes out in a report required by Congress.

The April report is coming out in a matter of days. The best information is that China will not be declared a currency manipulator, nor did the president do anything on his first day in office, nor has he mentioned it very much recently. The reason is obvious, which is he’s now engaged in dialog with China and needs their help on North Korea.

Alex, you mentioned the deployment of the aircraft carrier strike group to Korean waters which is a very big deal. The best information not verified from multiple sources but from at least one reliable source is that China has mobilized the People’s Liberation Army to move them to the Yalu River on the Chinese side of the North Korean border. That has echoes of the Korean War when General MacArthur miscalculated Chinese intentions with regard to crossing the Yalu.

Whether this is a pincer movement where you have ground troops on the Yalu River and sea forces in Korean waters ready to strike on land, sea, and air if Kim Jong-un doesn’t back off, that’s possible.

It’s a very interesting scenario. The last time we mixed it up in Korea, it was the U.S. and the South Koreans versus China and the North Koreans. The next time, it could be South Koreans, U.S., and China versus the North Koreans. That would be an interesting twist, but that’s only one possibility.

Another possibility is that China is kind of signaling the U.S., “Don’t attack North Korea, because we’re sitting there on the border. We’ll come back into Korea and stabilize rather than destabilize the regime.”

I think it’s probably the former rather than the latter, but you can’t rule anything out. All I know is that you have dangerous escalation occurring on land, sea, and air with U.S. and China boxing North Korea in from a couple of different directions.

Again, this is all about these potential miscalculations. I think Trump knows what he’s doing. He has reversed course. That’s a way to understand Trump, not as crazy but as I say, situational, mercurial, a little unpredictable.

Kim Jong-un is another case. Whenever you have to say to yourself, “Is the guy actually crazy or is he just acting crazy?” listen to your own question. What’s the difference between a guy who is crazy and one who acts crazy? The fact is some crazy people act pretty sane, like serial killers and others.

I don’t know, but here’s what I do know:  You cannot gamble Los Angeles on getting the right answer to that question. You have to treat him as perfectly capable and having the intent to start World War III, and you have to stop that before it happens.

Alex:  Let’s turn to economics as we wrap this up. The next FOMC meeting is scheduled for three weeks from now. What track is the Fed on in terms of raising interest rates, and what are the factors we need to be watching that could impact this process?

Jim:  We have just a couple of minutes left, and that’s something I could probably talk for an hour on without pausing for a breath. We don’t have time for that, but I’ll give you the short version.

Fed policy is the gift that keeps on giving. There’s never a time when we run out of things to say on the Fed, so maybe we will make that a big topic in the next podcast. Here’s the quick version: The Fed will raise rates four times a year – 25 basis points each in March, June, September, and December – every year from now until the middle of 2019 until they get to 3.25%. That’s the baseline scenario and what they’re going to do.

There are three reasons why they won’t actually do it in a particular case. Assume they’re going to raise them in June, September, and December 2017, and March 2018. They’re going to keep going unless one of three things causes them to pause.

‘Pause’ is the key word and the one Dudley used the other day not by accident. ‘Pause’ is one of those buzzwords that means we don’t raise at a particular meeting, we might pause for one meeting, and we might pause for two meetings.

In 2016, they paused for seven meetings. They raised them in December 2015 but did not raise them again until December 2016. There are eight meetings per year, so that was a seven-meeting pause. These pauses can be pretty long.

‘Pause’ means one of three things has happened, and we’re going to stop raising rates until the situation is rectified. So, what are the triggers for a pause?

One is if job creation falls below 75,000. Even 100,000 – which these days is considered a weak jobs report – will not cause the Fed to pause. If you don’t see that, then they’re still going to raise.

The second one is disinflation. The Fed believes it has achieved its inflation targets or will shortly. Their preferred measure is PCE price deflator core year-over-year. That’s about 1.8% right now, but their target is 2%, so they’re just about there. If you see that back off and go down to 1.5, 1.3, etc., then that’s another reason for them to pause.

The third reason is the stock market falls out of bed. Anything short of a 5% drawdown, they don’t care. If the stock market Dow goes down 1000, the Fed absolutely doesn’t care, but if it goes down more than 1000 points, it starts getting closer to 10%, it looks disorderly meaning it could just feed on itself and create a panic momentum, then they will pause. But that’s it. So, look for those.

Going along with the job point I mentioned, if GDP completely falls out of bed and goes negative… By the way, we’re close to negative right now. The forecast for first quarter looks like maybe six-tenths of 1% or certainly below 1%. So if you see job creation below 75,000 or GDP going negative, if you see a disorderly rout in the stock market of between 5% and 10% heading south, or if you see disinflation where PCE core deflator year-over-year starts going significantly back down to the 1.5% area, or certainly any two of those, then the Fed will pause.

Right now, I don’t see those things happening. I have them raising rates in June, and I’ll take September one step at a time, but if those things don’t happen, then they would raise in September.

Here’s the problem:  The Fed is raising rates for the wrong reason. Historically, there is a high correlation between Fed rate hikes and an expanding economy. That makes sense, right? The Fed sits there, they watch the economy grow, unemployment goes down, labor markets get tired, inflation picks up, the whole thing is getting a little hot, the Fed thinks they must cool it down, so they raise rates. And then the same thing in reverse. They raise them too far, the economy cools down, unemployment goes up, inflation cools down, and they say, “Gee, we better cut rates.”

That’s the normal business cycle. The Fed does not lead the business cycle; they follow it. They raise rates when the economy is hot, and they cut rates when the economy is cool. Pretty simple.

That is not what’s going on right now. The market thinks it is, which is one of the reasons the stock market is going crazy, but that is not what’s going on. What’s going on is the Fed is raising rates exactly as I described. They’re playing catchup because they failed to raise rates in 2010, 2011, and 2012 when they should have.

Bernanke skipped a whole rate hike cycle in the early 2010s because he was doing all these nutty experiments with QE and ZIRP, zero interest rate policy. Now the Fed has to catch up. Why? Because they have to cut rates to get out of a recession.

We could be in a recession any time. How do you cut rates 3% if they’re only 1%? The answer is you can’t. You have to get them up to 3% or 3.25% so you can cut them again to get out of a recession.

The Fed is doing this very strange finesse where they’re raising rates not into strength but into weakness, and they’re raising rates to prepare to cure a future recession without causing the recession they’re trying to cure. That’s the finesse.

I don’t think they’re going to do it. They are going to try, but I don’t think they’re going to pull it off. I think they’re actually going to cause the recession. We talked about Trump flip-flops, but the Fed could flip-flop as early as this summer.

I do look for the June rate hike, but by then it could very well be the case that they’ve thrown the U.S. economy into a recession, you see one of these factors I mentioned, and they have to pause by September. But let’s take that one step at a time.

The pause is bullish for gold because it’s monetary easing, but even the rate hikes don’t seem to have stopped gold because of the geopolitical factors we mentioned. Also, these are nominal rate hikes. Gold investors need to focus on real rate hikes. As long as inflation is ticking up, then the real rate is actually going down even as the nominal rate goes up.

We’ll leave it there. I know that’s a lot to unpack, but listeners can always play the recording back and hear it again. I hope that’s helpful.

Alex:  I’m sure it will be.

Jim, we’ve covered a lot of ground on today’s podcast. This has been a great discussion I’ve enjoyed a lot. I want to thank you as always for your time and insight. I appreciate it and look forward to getting together with you again next month.

Jim:  Thanks, Alex.

Jon: 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 can 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: April 2017 Interview 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: April 2017 Interview with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles April 2017

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Topics Include:

*Commentary and analysis of military action in Syria in response to what appears to be nerve gas attacks on civilian population
*US President Trump authorized release of 59 Tomahawk Land Attack Missiles targeting Shayrat airbase
*Discussion of the USS Carl Vinson carrier group deployment towards the north west pacific in the vicinity of North Korea
*What triggers cause countries to go to war in history
*Are current events a series of unfortunate mis-calculations
*Discussion of North Korea’s nuclear weapons capability
*When analyzing potential threat, there are two factors: Capability, and Intentions
*How US policy regarding nuclear weapons programs has possibly sent the wrong message to Kim Jong-Un
*The intersection of kinetic, cyber, and financial warfare, and role of fiat payment transfer systems as opposed to gold
*Why the US will never allow North Korea to achieve inter-continental ballistic missile technology
*Why the level of intensity of military action that may be used versus North Korea could be substantial
*How the US could target specific Chinese banks for removal from the USD global payments system if China fails to cooperate on North Korea
*Sources indicate that China has moved the Peoples Liberation Army to the border between China and North Korea along the Yalu river
*Commentary on upcoming FOMC rate hikes, and the formula Jim uses to predict a change of course for the Fed

 

 

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.

Global Perspectives: March, 2017 Interview with Alex Stanczyk and special guest Willem Middelkoop

Physical Gold Fund Hosts Global Perspectives with Alex Stanczyk and special guest Willem Middlekoop March, 2017

GP-Middelkoop

Welcome to Global Perspectives, a new podcast featuring some of the sharpest minds in the world. We delve into the key concerns, opportunities, mindset, and practices of some of the most successful professional money managers, entrepreneurs, and world class personalities today.

This episodes special guest is Willem Middelkoop.

Willem Middelkoop (Geneva, 1962) is a successful entrepreneur, investor and publicist. At the end of 2008, he gave up his journalistic work as a market commentator for Dutch National TV and started the Commodity Discovery Fund (www.cdfund.com). He also started Amsterdamgold.com in that same year, a web shop for gold and silver bullion, which was sold to the listed Value8 in 2011, after yearly sales grew to over 100 million euro.

Willem is a member of the Advisory Board of the London based Official Monetary and Financial Institutions Forum (OMFIF). He is also a founding shareholder of Startupbootcamp Amsterdam, a business accelerator program.

Besides this, he is author of eight books covering financial markets and the economy. At the end of 2013 he published The Big Reset (Amsterdam University Press/University of Chicago Press). He sold a total of over 150,000 books in seven languages, including Arabic and Chinese.

Topics Include:

*Financial assets versus real assets
*Central banks east of London are buying and repatriating gold
*China and Russia are preparing for the next phase of the international monetary system by buying gold
*Why the world is in need of substantial deleveraging, and needs a new monetary anchor
*How technology developments in energy and transportation are leading to breakthroughs that will completely disrupt current paradigms
*Central Bank governers comments on gold being the worlds premier currency

You can follow Willem Middelkoop on Twitter @wmiddelkoop

You can learn more about Willem Middelkoop at: http://www.willem-middelkoop.nl/en/


You can follow Alex Stanczyk on Twitter @alexstanczyk

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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