Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles November 22nd, 2016

Jim Rickards and Alex Stanczyk, The Gold Chronicles November 22nd, 2016

*How Complexity Theory, Behavioral Psychology, and Bayesian models used at PGF were used by Jim Rickards to predict Trump win
*Comments on projected effects of Trump Presidency on US economy, world economy, and gold
*There are contradictory forces within the Trump administration, so projecting certain details are not yet clear
*If Trump cuts taxes and spends $1 Trillion on infrastructure without private capital it will blow a hole in the annual deficit
*Trumps economic plan is basically the Reagan plan – the current environment is very different this time facing headwinds and a much higher debt to GDP
*If the Fed accommodates Trump on his economic plan, then Trump is the “Helicopter Money” President and inflation is then guaranteed
*If the Fed leans into inflation instead it could force economy into recession
*Comments on $9 Trillion emerging market corporate debt crisis
*Jim’s new book The Road to Ruin is now available on Amazon: https://www.amazon.com/Road-Ruin-Global-Elites-Financial/dp/1591848083
*A Trump Presidency has no impact on the potential for systemic risk
*Comments on complexity theory, critical states, and catalysts
*Effects of the “war on cash” in India
*India is the 7th largest economy in the world, and is a cash based economy – these steps are leading to money riots
*Update comments on “war on gold”
*One effect of the India demonetization has been a substantial uptick in gold purchases
*Base Erosion and Profit Shifting (BEPS) – Global Taxation Plan
*Chinese $2 Billion SDR bond issuance
*Anticipated Dec rate hike is already priced into the USD/Gold price
*Trump has commented on gold favorably, potential for some sort of gold anchor or benchmark
*Regardless of some kind of gold standard, even a gold benchmark would require gold at a much higher price
*Comments on potential for gold confiscation in the next liquidity crisis
*Switzerlands advantages as a vaulting jurisdiction

Listen to the original audio of the podcast here

The Gold Chronicles: November 22nd, 2016 Interview with Jim Rickards and Alex Stanczyk

The Gold Chronicles: 11-22-2016:

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

Jim Rickards is a New York Times bestselling author, the Chief Global Strategist for West Shore Funds, and the former general counsel of Long-Term Capital Management. He is currently a consultant to the US Intelligence Community and to the Department of Defense. Jim is also an advisory board member of Physical Gold Fund.

Hello, Jim, and welcome.

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

Jon:  We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Alex is an expert in the physical gold industry dealing with the logistics chain from refinery to secure transport to vaulting, and he’s lectured globally to investors, institutional audiences, and government audiences on the role of gold both in the international monetary system and in investment portfolios.

Hello, Alex.

Alex:  Hi, Jon. It’s great to be here as well.

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

Jim, several weeks before the U.S. presidential election, you put your reputation on the line and firmly predicted a Trump win in the face of a massive consensus that Hillary Clinton had the election locked up. Congratulations, you made the right call.

Would you now give us an idea, in your view, of the longer-term implications of a Trump presidency for the U.S. and for the global economy assuming Mr. Trump follows through on his campaign promises?

Jim:  Thank you, Jon. You’re right; it was very lonely out there for a few weeks. I was traveling around the world in Australia, Europe, and North America doing TV interviews and podcasts, the sort of thing we’re doing now, and saying very categorically that Trump would win. The reactions varied. Some people just burst out laughing while other people said, “You must be joking.”

But I took them through my methodology. It was not partisan. I have my opinions, everyone has their own opinions, but I was just being an analyst looking at some of the flaws in the polls, some of the ways people misunderstand betting odds, and some of the ways that markets were misreading it. I was actually using the same techniques we use with Physical Gold Fund, we use on this podcast, and I use in my book, which we’ll talk about a little bit later.

I was in London on June 20th doing some filming when I looked right at the camera and said that Brexit was going to come out as a Leave vote. It was not going to be Remain, so investors should short sterling and buy gold. Both of those trades worked out very well in the immediate aftermath of the Brexit vote to leave.

I’d make the point that neither of these were guesses. The Brexit call and the Trump call were both made using complexity theory, behavioral economics, some of the applied mathematics we use, and Bayes’ theorem, a particular branch of applied mathematics you use in statistics when you don’t have enough information.

Anyone can solve a problem if they have lots of information. A typical bright high-school student can do that. But what happens if you don’t have much information, if you only have one or two data points, or sometimes even none, but you can’t escape the problem and you must face up to it? How do you do it? That’s what we were doing.

These are the same techniques I’ve been using all along. It’s not a crystal ball; I don’t really think I’m predicting the future. I say the future is here today, it’s embedded in the present. You might have to dig down through a lot of data, and you should understand the dynamic processes.

It’s a little bit like watching a row of dominoes. If I tip over the first domino and there’s nothing blocking the way, all the dominoes are going to fall. After the first four or five dominoes fall, you can say, “I think the last domino is going to fall,” and sure enough, it does.

You made a prediction about the future, it turned out to be true, but did you have a crystal ball? No. You could just look at the present dynamics, understand the chain reaction, and see what was going to happen next. That’s how I felt about Brexit and Trump.

Trump won. He is the president-elect and will be the 45th U.S. president. What does that mean for economic policy? It’s very interesting. First, Trump himself is trying to figure it out, so I think anyone who says, “Here’s what the policy is going to be” is probably making a mistake.

One thing we’ve learned about Donald Trump over the past year and a half is that he can reverse course; he can say one thing but surprise you with something else. So, we need to reserve judgment on how things are going to play out.

There are a lot of contradictory forces within Trump’s immediate circle of advisors. For example, there are people like Larry Kudlow and Mike Pence who clearly favor free trade, but there are other people like David Malpass or Steve Bannon who think these trade deals need to be at least renegotiated if not torn up. Those are very different views of the world, and all those insiders have the ear of Trump.

The initial indications are that he’s more inclined to tear up these trade deals. He says he’s going to issue an order withdrawing the United States’ participation in the Trans-Pacific Partnership (TPP) on the day he’s inaugurated. I think that’s a good clue as to where he’s coming from, but there are other conflicting forces.

People like Steve Moore want tax cuts, and I would put David Malpass in the same category, along with those who want fiscal responsibility maybe with tax cuts. Then you have people like Steve Bannon who want to spend $1 trillion on infrastructure.

We all want infrastructure – roads and bridges and tunnels sound good – but where is that $1 trillion going to come from? If you add $1 trillion of infrastructure spending and cut taxes – both parts of the Trump plan – you’re going to blow a hole in the deficit and be back to where we were in 2010-2011 running trillion-dollar deficits and increasing the debt-to-GDP ratio. This is very problematic and gets back to what the Fed’s reaction function will be.

This has big implications for the price of gold. I’ll talk about that in a minute, but the point I want to make is that one way to understand Trump is that this is like a replay of the Reagan revolution. In fact, a lot of the same people are involved. Trump’s inner circle of advisors – people like David Malpass, Larry Kudlow, Art Laffer, and Steve Moore – were part of the Reagan revolution in the Reagan White House in the early ’80s. At that time, they were in their late 30s or early 40s. Today, they might be in their 70s, and that’s fine – there’s nothing wrong with being an advisor when you’re in your 70s – but it’s the same people and they’re running the same playbook.

During the campaign, Trump’s behavior, some of the vulgarity, the garish headlines, made it very difficult for many people to get past Trump’s personality and look at his actual policies. Now that he is the president-elect, they are looking at the policies, and a lot of people like what they see.

This explains why the stock market is going up. What are Trump’s policies? Lower taxes, less regulation, and a lot more government spending. You see pharmaceutical stocks going up because Trump wants to get rid of Obamacare. You see names like Caterpillar and John Deere going up because Trump wants to spend more on infrastructure. You see Boeing, Lockheed, Northrop, and other big defense contractors going up because Trump wants to spend more on defense. The consumer non-durables are going up because Trump wants a tax cut. That means people would have more money to spend on eating out, shopping, and so forth.

The whole stock market is going up based on these policies. That’s understandable in the short run, but how are you going to finance it? How does that add up in the longer run? Can you actually implement that? If not, if there are constraints on that, will the stock market go right back down again once people wake up to the fact that it’s not like “happy days are here again”?

Here’s the point I make. This is the Reagan playbook, but it’s operating under very different conditions. When Reagan was sworn in in January of 1981, interest rates were 20%, inflation was 14%, and the debt-to-GDP ratio of the United States was at 35%, very close to an all-time low, at least a long-term low.

Reagan had nothing but tail winds. Interest rates had nowhere to go but down, inflation had nowhere to go but down, and Reagan could run very large deficits without bankrupting the country because he was starting from such a low debt-to-GDP level. Reagan did run very large deficits. The debt-to-GDP level went from 35% when he was sworn in to 55% when he left office in January 1989. Now, 55% is not considered a dangerous level, but that was a big increase from 35%.

We had a bond market rally because interest rates and inflation were coming down. We had a stock market rally because of less regulation and lower taxes. We had a growing economy because of some of the stimulus spending that he was able to do. Reagan had nothing but tail winds.

Trump is going to try to run the same playbook in a very different environment. He has nothing but headwinds. Interest rates are close to zero and have nowhere to go but up, inflation is close to zero and has nowhere to go but up unless we have a depression, which is not exactly a good outcome. Most importantly, the debt-to-GDP ratio today is 105%. Mark that difference. When Reagan came in, it was 35%, and today it’s 105%. Trump has much less fiscal headroom than Ronald Reagan did. In fact, a lot of economists are saying we’re already in the danger zone where additional deficit spending actually doesn’t produce more growth.

It did for Reagan and other administrations, but it won’t for Trump because there’s a phenomenon of diminishing marginal returns. Each dollar gets you a little less bang for the buck in terms of the multiplier effect, in terms of additional nominal GDP. We’re at the point where you could spend the money and not get any additional GDP but just add to the debt – not to mention the fact that you could cause a loss of confidence in the U.S. dollar. We’re already seeing the bond market back up. We’re seeing this all over the world.

The way I describe it, Reagan and Trump had the same playbook – lower taxes, less regulation, more government spending – but Reagan was running the playbook against a high school football team and Trump is running the same playbook against the New England Patriots. He’s going to have a much tougher time.

The big wildcard is, will the Fed accommodate it? Suddenly, the Fed is sitting there on Constitution Avenue with Janet Yellen looking at the White House saying, “Okay, you guys want to cut taxes, add $1 trillion of infrastructure spending, and increase the debt-to-GDP ratio from an already high level?” That is helicopter money, by the way, which is larger deficits and the Fed maintaining an easy monetary policy.

Donald Trump is the helicopter money president. This is one of the great ironies of this electoral cycle. A few months ago, Harvard economist, Larry Summers, wrote a comparison of Donald Trump to Mussolini. The irony is that Trump’s economic plan is the Larry Summers plan. All these economists – Adair Turner, Anatole Kaletsky, Barry Eichengreen, Paul Krugman, Joe Stiglitz, Larry Summers – have been clawing for the same thing, what they call fiscal stimulus.

I call it larger deficits, but most people call it helicopter money where the Fed accommodates it by money printing. If you do that, if you add $1 trillion to the debt and the Fed maintains an easy money policy, you’re going to get inflation. That’s guaranteed.

We haven’t had inflation from all the money printing before because nobody spent the money, but nobody spends money better than the government. Instead of waiting for people to go out and spend money when they actually want to save it and pay down debt, if all of a sudden the government is spending the money, that money will get spent. There’s your velocity.

Money printing is already there. If the Fed maintains an easy monetary policy, you’re going to get a lot more inflation than the Fed expects really fast. That’s going to send the price of gold soaring, because that’s what gold does in inflation.

Now, let’s consider the alternative case: Trump does the same thing – bigger deficits, tax cuts, less regulation, all this stimulus – but the Fed gets worried about inflation, so they lean into it. They’re definitely going to raise rates in December as we mentioned on the last call, but suppose they set up a bunch of rate increases, two or three more in 2017.

They’re going to lean hard into that inflation. Remember, Janet Yellen is mesmerized by the Phillips curve. She thinks with unemployment at these very low levels and that kind of stimulus on the horizon, that inflation is inevitable. She also believes that monetary policy acts through a lag (that was one of the keystones of Milton Friedman’s quantity theory of money), at least a nine-month lag, maybe a year or a year and a half.

So, she’s going to say, “With the Phillips curve analysis and big spending, inflation is absolutely coming. Monetary policy acts with a lag, so I need to raise rates right now to head off that inflation and keep it under control.”

Yet a lot of the economy is very weak, and Trump might not actually be able to do what he says he’s going to do. So, if she leans into it, you could actually raise rates a couple of times and throw the U.S. economy into a recession on top of which the whole world is slowing down.

Global trade is collapsing. When people talk about trade figures, they tend to focus on the deficit or the surplus. They say your deficit is going up or your surplus is going up, but forget about deficits and surpluses – they always add up to zero.  What I’m looking at is the absolute level of trade, which is going down.

Global exports and global imports are going down. That’s extremely rare. It happened in 2008 during the Great Financial Crisis, it also happened during the Great Depression, but it has happened very few times other than that. So, the global economy is already slowing down.

There is one last element I’ll throw into the mix here, because all of these things are important. The Fed has talked about raising rates, which they will. What does that mean? It means a stronger dollar. That’s one of the headwinds for gold. I’ve always said that the dollar price of gold is just the inverse of the dollar. If you have a strong dollar, you’re going to have a lower dollar price for gold. If you have a weak dollar, you’re going to have a higher dollar price for gold.

I’ve explained the stock rally based on all these spending plans and tax cuts. The drawdown in gold is also very easy to explain. People expect the Fed to raise rates. If you’re going to raise rates, that’s going to make the U.S. capital markets a magnet for money around the world. It’s going to flow into the U.S., it’s going to make the dollar stronger, and that’s why gold is going down.

But that is extremely deflationary and has the danger of throwing the U.S. economy into a recession on its own. Here’s another wildcard: there is $9 trillion of dollar-denominated corporate debt from emerging markets. Not sovereign debt – corporate debt. That’s an important distinction, because the IMF can bail out a sovereign but cannot bail out corporates.

This is money borrowed by companies in Turkey, Indonesia, Brazil, Colombia, Malaysia, Thailand, Philippines, countries all around the world. All these emerging markets borrowed in dollars, because dollars were free for the last seven years and interest rates were close to zero. They assumed they would have enough earnings from world growth or that the currency values would remain stable and they’d be able to pay back that debt or roll it over. What they’re discovering is that with the strong dollar, they’re not making enough in their local currency to convert to dollars to pay off that debt.

You could be looking at a $9 trillion emerging markets corporate debt meltdown – worse than the Latin American debt crisis in the 1980s, worse than the Mexican tequila crisis in 1994. That’s another one of the consequences of a strong dollar.

You have extreme dangers either way. If Trump goes ahead with the spending program and tax cuts and the Fed accommodates it, you’re definitely going to get inflation. That will send the price of gold way up.

If the Fed leans against it with rate hikes, you’re going to get a stronger dollar, deflation, and corporate debt crises around the world as part of the dollar shortage. Gold will go up in that scenario as well. Once the financial panic hits, gold will be a flight to safety.

Gold is struggling right now against a lot of headwinds because of the expectation of rate hikes and a stronger dollar. But if this leads to the kind of financial panic we’re talking about, gold is going to catch a bid as a flight to safety. It wins on the inflation bid and it wins on the panic bid, but these are all a few steps away.

This is going to play out over the next six months to a year. We’ll do this again in six months. We’ll continue our monthly call, but we’ll check back in a few months to see how Trump is doing. It might be the case that he can’t do all this, that despite the plans, Congress doesn’t approve it.

There is concern about the debt as I just described in which case the stock market is going to crash because it’s priced to perfection on the Trump plan. If the Trump plan doesn’t materialize, then it’s going to have to give back all those gains, so we have dangers all around.

Trump’s policies are interesting. They’re good in some ways and probably good for growth, but because he’s operating in a very different environment from Ronald Reagan, we can see enormous dangers of inflation, deflation or market panic.

Jon:  Thanks, Jim. That’s a very comprehensive answer. Speaking of comprehensive, you’ve just published a new book, The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis. Speaking personally as an early reader of the book, I must say I found it extraordinary.

I’ve enjoyed your previous books, they were great, but this is a whole new order of thinking and insight and information. It has a huge sweep I won’t try to encapsulate here, but I do urge our listeners and anyone who wants to understand the current world situation to read this book immediately. It’s called The Road to Ruin.

Alex, let me turn to you. I know you’ve read The Road to Ruin. As somebody immersed in the world’s precious metals markets, what are your first impressions of Jim’s latest book?

Alex:  I spend a great deal of time studying and staying in tune with markets and trends in monetary policy because of the impact on gold, but Jim has a unique gift of being able to take events, dispense data, connect the dots, and see scenarios that other people simply don’t see.

I’ve known Jim since 2012, and he’s been remarkably consistent in this. He did it with Currency Wars, which quickly became a term used around the world, and then he did it again with The Death of Money. In this latest book, the scenarios he’s showing us require serious consideration in my opinion. The potential outcomes, if not prepared for, are sobering – one could even say frightening in some ways.

I often ask fiduciaries if they have plans in place to make sure they have access to liquidity if there’s another systemic crisis. You would be surprised to learn that a lot of them do not have any plans whatsoever. The Road to Ruin shows us that we not only have to be prepared for bad outcomes, but we must also make sure we have access to liquidity, and we must do it in ways that many people aren’t even considering yet.

Jon:  Jim, I would like to ask you something directly about the book. I’m going to risk possibly covering ground you touched on in your first answer, but I think the question is begging to be asked, so I’m going to take that risk.

You give a far-reaching account in the book of why and how the world is heading over the financial cliff. Here’s my question: given Trump’s economic agenda and everything you’ve been talking about in that respect, does his election as the next president of the United States make the crisis you predict more likely or less likely?

Jim:  I don’t think it changes the equation very much. I think the crisis is coming sooner than any of us want, and I don’t think it really matters who’s president for that purpose. That’s because I’m talking about systemic risk.

One way to understand this is with an analogy I use. An earthquake doesn’t care if you’re a Republican or a Democrat. An earthquake is just an earthquake and does what it does. It’s going to destroy your house whether you’re a Republican or a Democrat. It’s the same thing with the global financial collapse. It’s a dynamic, systemic process. It’s indifferent, non-ideological, and it doesn’t care who’s president. It just happens, and it’s something you can’t stop or control.

Now, you can respond to it differently depending on who’s in the White House, but you’re not going to be able to stop it. There are a couple of things you can do as we’ve discussed before. For example, to make the system safer, you could break up the big banks, you could ban most forms of derivatives, and you could bring back Glass-Steagall and separate commercial banking from investment banking. These are things you could do that would make the system safer and this crisis less likely. I don’t feel it’s appropriate to write about the dangers without putting forward some solutions, and I do put these solutions forward in my book; however, I give them a very low probability of actually happening.

This is far from the top of Trump’s agenda. Right now, he has to finish his cabinet appointments and some of the subcabinet levels. He has big issues on his plate such as ISIS, immigration, tax policy, fiscal policy, a Supreme Court appointment, and two vacancies on the Federal Reserve. These are the things the president-elect is going to be dealing with in the next 30 or 60 days. They’re not going to get to value at risk and risk modeling and statistical properties of risk and Glass-Steagall. Maybe Glass-Steagall comes up a year from now, but it may be too late.

There are some things we could do, but I don’t see them being done; therefore, I would expect that this dynamic will continue to take hold. The question I hear most frequently is, “What’s going to cause the crisis?” I always say it’s like picking out a snowflake that causes an avalanche. It doesn’t matter which snowflake it is; what matters is the instability of the mountain of snow. That’s what comes down and kills you. If it’s not one snowflake, it’s another.

There are plenty of catalysts lying around. It could be Deutsche Bank or this emerging markets dollar-denominated debt crisis I talked about or a credit bubble in China or it could be a natural disaster. There are plenty of things it could be, but it doesn’t matter. It will be one of them, and it’ll be sooner than later. What matters is that the system is unstable and is primed for this kind of collapse.

The biggest banks in 2008 are bigger today. They have a larger percentage of the banking assets, they have much larger derivatives books, and the central banks have much less capacity to deal with it because they never normalized their balance sheets.

The Fed is a good example. They printed $4 trillion on their balance sheet to deal with the last crisis. That’s not even counting tens of trillions of dollars of swap agreements they did with the European Central Bank. Leave that aside, just the $4 trillion on the balance sheet.

The Fed started with $800 billion at the beginning of the crisis. If the Fed had somehow got their balance sheet back down to $800 billion, I’d be the first one to say, “Hey, congratulations. Nice job, guys. You did it. You saved the system and you normalized your balance sheet.”

But that did not happen. The balance sheet is still at $4 trillion. It has not been normalized, so they have lost the capacity to deal with the next crisis. What are they going to do, print another $4 trillion? You’re at the outer boundary of what’s politically possible or what you can do without destroying confidence.

This next crisis is going to be bigger than the one before for the reason I mentioned, which is that the whole system is bigger, and the central banks are not going to be able to deal with it. There’s only one clean balance sheet left in the world, which is the International Monetary Fund.

Instead of going around bailing out Egypt or Ukraine, the International Monetary Fund is going to have to bail out all the central banks in the world with these special drawing rights. SDR is the world money the IMF prints. That’s going to have profound consequence for the role of the dollar as the leading global reserve currency and for inflation.

All of this is bigger than Trump. Remember what happened in 2008. Ben Bernanke, who was Chairman of the Fed at the time, and Hank Paulson, who was Secretary of the Treasury, were watching the system collapse as Americans panicked and pulled trillions of dollars out of the money market funds. They were watching the money market funds melt down. They were watching General Electric dry up. General Electric could not roll over its commercial paper. Everyone was like, “Hey, what’s up with General Electric? I thought they made aircraft engines.” No, they were like a bank in 2008. They’re not today, by the way. They got out of those businesses, but at the time, they were a bank. They couldn’t roll over the commercial paper, and there was a global liquidity crisis.

Bernanke and Paulson walked over to the White House right next door to the Treasury, sat down with President Bush, and said, “Mr. President, you have to do this, this, and this right now or the economy is going to collapse entirely. All the major banks are going to collapse.”

What was Bush supposed to do? It was the TARP and guaranteeing the money market funds, guaranteeing the deposit insurance fund, and unlimited guarantees of all bank deposits. Of course he went along with it. What was he supposed to do confronted with that kind of advice?

What’s interesting is that in the next crisis, that same conversation is going to take place with Donald Trump. He’ll probably go along, but he might not. Trump is much less predictable. Trump might say, “To heck with it, I’m not bailing out these banks again. I’m not protecting these bankers’ phony-baloney jobs. I’m not using U.S. taxpayer money for that.” He might just hunker down and say, “Look, we’re going to get the United States through this, and the heck with the rest of the world.” Now you’re talking about a scenario that looks like the Great Depression.

Either you get the SDR bailout, which is highly inflationary, or you get this hunker down disaster scenario, which is highly deflationary. At either end, you’re talking about very extreme, dangerous outcomes.

I think gold does well in both states of the world. The inflation case is obvious, people get that. They don’t understand why gold goes up in deflation, but the answer is that central banks make it go up to restore confidence in the system, and if you have to go to a gold-backed system, you’re talking about $10,000 an ounce.

Again, Trump’s polices matter in terms of jobs and growth, and that’s what we’re all focused on right now, but they’re not going to matter that much in a systemic crisis. A systemic crisis is bigger than one country, it’s bigger than macroeconomic policy, it’s bigger than the president, it’s bigger than the central banks. All we’re going to do is study the response function.

Jon:  In one of my projects, I work with a very brilliant video editor in India. Much to my disappointment, he’s not been able to function these past two weeks because the whole country is in chaos, and here’s the reason: the Indian government suddenly withdrew and replaced the two banknotes with the highest denomination. The old banknotes were made virtually worthless overnight. This drastic measure came with little to no warning, and according to my contact, it has created absolute bedlam.

Jim, you have been talking about the war on cash for some time. What does this mean in the context of that theme, and does what happened in India have any significance for other countries?

Jim:  It has huge significance. I finished writing The Road to Ruin in the early part of September. I pushed the deadline pretty hard because I wanted the book to be very fresh and timely when it came out. I talked about Donald Trump in the book even though it was before the election, because as I mentioned, I thought he would be part of the scene. I also talked about the war on cash, closing banks, closing ATMs, money riots. But then it takes a few months to go to the printers, get printed up, put in boxes, and shipped to Amazon warehouses. I do see all these things coming, but I had no idea they would actually be happening in India the day the book came out.

The book came out on November 15th, but on November 8th, just the week before, Prime Minister Modi woke up and said, “The 1000 rupee note and the 500 rupee note are no longer legal tender.” He just said it’s not money anymore.

Those denominations – 1000 rupees and 500 rupees – are about $20 and $10 give or take, so it would be exactly like the President of the United States waking up and saying, “As of now, all the $20 bills and $10 bills in America are no longer money.” You can imagine the panic. “Wait a second. I have some $20s in my wallet. I have money over here.”

The impact was even greater in India than it would be here, because India is largely a cash-based economy. In the U.S., maybe we have a few $20s in our wallet, but we use debit cards and credit cards, direct payment, Apple Pay, PayPal, and all these digital systems. India is very largely a cash-based economy, so imagine America the way it was in the past and all the $20s and $10s are no longer any good.

What they said was that you could bring your $20 bill into the bank – your 1000 rupee note – and exchange it for smaller denominations. They actually printed up these smaller denominations, so it’s like, “Give us your $20 and we’ll give you 20 singles.”

First, the tax man is waiting there at the bank, so when you come in with this pile of money, the first question they ask you is, “Where did you get the money?” They’re looking for tax evaders. They always blame it on tax evaders, terrorists, and drug lords, but in fact, they’re depriving individuals of their liberty. This is part of the war on cash; the whole tax evasion thing is just an excuse to try to pull it off.

A lot of people don’t want to go into the bank because of the tax interrogator. They don’t want to deal with that. It doesn’t mean they’re master criminals or tax evaders; it just means they’ve been in the private informal economy, probably in a very small way, and they don’t want to bring that money in. That’s the first problem.

Let’s say you’re a commercial fisherman. Every day you buy fuel and bait for your boat, you go out and fish, bring the fish back, you go to sell it, and nobody wants your money. You couldn’t buy the fuel for your boat, you couldn’t buy the bait, you couldn’t go fishing, you couldn’t bring the fish, people were starving.

On top of that – this is the height of idiocy – the smaller denomination bills they printed to replace the bigger bills were the wrong size. They were too big to fit in the ATMs, so they’re running around to shut down every ATM in India, rip the guts out, and replace them so that they could accommodate these larger-sized bills. What were they thinking?

India is not like Cyprus. Cyprus was bad enough. India is the seventh largest economy in the world and has the second largest population in the world – one billion people. It’s a cash-based economy, and they wake up and say cash is no longer legal tender.

There were money riots. People were burning down banks, looting supermarkets, the police were out, and the whole place was in chaos. Prime Minister Modi is intelligent; he has a graduate degree in economics. I’m going to write a book someday called When Smart People Do Dumb Things, because I see it over and over.

These central bankers, these eggheads, these economists, they don’t get it. They don’t understand how markets work, they don’t understand human behavior. It’s no surprise that they get it wrong time and time again. This is exactly what I describe in my book – shutting down banks, shutting down ATMs, the war on cash, and ultimately the war on gold.

This is one of the reasons I urge people to get their gold today. Get it now while you still can, because once the war on cash is over – and it’s almost over – they’re going to realize that people who can’t get cash are taking the cash they have and buying gold. They’re storing their wealth in gold. Well, then they’re going to have to have a war on gold.

They must force you into this digital banking system so they can slaughter you with negative interest rates, confiscation, asset freezes, ATM closures, etc. If you have cash or gold in physical form, you’re outside the system. You can’t get hacked or be subject to negative interest rates or get frozen. You can hold your net worth in your hand or in a vault or some kind of safe storage.

The war on cash is well along. The war on gold hasn’t yet started, but you can see it coming, and that’s another reason to get your gold today. It’s awful what’s happening in India. I predicted it in my book although I didn’t say it was going to happen the week the book came out. I’m a little surprised it did, but here it is right now.

Jon:  Alex, is a war on gold what you see coming up? Do you see signals of that from your standpoint in the gold market?

Alex:  We’ve seen signals of this for a long time now. Our operations are international, and we see regulations coming down at an international level that affect the entire gold industry. What I can tell you is that the regulatory environment has become stricter and stricter. I don’t think this is an accident, and I don’t think it’s going away.

Speaking directly to the war on cash that’s happening in India, one of our listeners is saying that in the Indian context, it may look the same, but the difference is that there are no fake currencies in the United States. I take that to mean there is a lot of counterfeit currency in India, and that’s the reason they’re doing this.

I highly suggest our listeners read Jim’s book. If you look at all the pieces of what’s happening around the world, this isn’t happening just in India; it’s happening globally, and they’re using multiple reasons for putting this in place. Some may be counterfeit currency or money laundering or going after terrorist financing, but these are all pretenses they use. If you look at what they’re actually doing, it doesn’t quite match up. Things like having a taxman there to collect on all the money is part of the global hunt for tax dollars as well.

From a gold standpoint – and Jim mentioned behavioral psychology before – one of the effects of this has been a huge spike in gold purchases. In the nine days since the demonetization was announced, India imported $2.1 billion worth of gold. That’s over 50 tons, a huge amount. The black-market rate for gold has been as high as 61% above the official rate. The regular gold premiums official rate has been hitting – I think last Friday – two-year highs.

Ever since India’s government announced the demonetization, gold has been a strong focus for Indians who want to keep their wealth out of the banking system. From what I understand, many Indians don’t trust the government or the banks there. The Indian government has indicated that the old notes can be turned into banks to convert them for new ones, but there’s a time limit on that. Not only is there a time limit, but just as Jim said, for anything in a large quantity, they have tax people there asking questions about where it came from, and if they don’t like the answers, they might just lose that money or have it heavily taxed.

We have many examples now from around the world that the pretense of this war on cash is going after criminals, but in reality, it’s being used to shake down the populace for tax revenues. We have the global sovereign debt crisis going on, and in addition to that, setting the stage for dealing with any upcoming liquidity crisis and possibly negative interest rates.

As Jim indicated in his book, there are only a couple of options in the next liquidity crisis. One is to print money, and the other is to lock the whole system down. That isn’t conspiracy theory. China just did this last year, in June 2015, when they locked down liquidity in the crashing equities market.

I spoke to several Chinese fund managers who said that during the crash, the government ordered them to cease trading. One might not be surprised to see something like that in a communist country, but the reality is that it can happen in the West, too.

There are a couple of drivers going on here. With negative interest rates, they want to set the stage for simplified bail-ins. If it’s at all within their ability to bail in, it’ll save the banks if it comes down to that. And finally, outright confiscation of wealth under the pretense of making you safer and going after criminals. The amazing thing about it is that it seems like elites globally are coordinating on this.

Jim mentioned something called base erosion and profit shifting, or BEPS. Jim, do you want to briefly talk about BEPS?

Jim:  Thank you for mentioning that. I have a whole chapter in the book called One World Money, One World Taxation, One World Order. Let’s focus on the tax issue a little bit.

I just got back from Ireland, and they’re apoplectic because their corporate tax rate is 12%. The U.S. corporate tax rate is 35%, so all this money has been flowing to Ireland. Apple, Microsoft, and Google all have huge operations in Dublin. I took a Sunday stroll and walked by all their offices. But Donald Trump is talking about lowering the U.S. corporate tax rate to 15%, so they’re looking at all this capital and new investment flowing out of Ireland potentially back to the United States.

This is a global problem. The monetary elites, the global elites, love coming up with funny names for things so people don’t understand what they’re doing. I call this transparently non-transparent, meaning that they publish papers and you can read them, but they’re filled with jargon. Unless you have the technical expertise to understand them, it’s very hard to penetrate.

They have this thing called BEPS that stands for base erosion and profit shifting. This is the enemy they want to attack. It’s interesting how the G20 outsources to different multilateral institutions such as the IMF for the SDRs (the special drawing rights or world money we talked about), they turn to the United Nations for climate change, and now they’ve turned to the OECD (Organization for Economic Cooperation Development) based in Paris for the BEPS program.

What’s base erosion? Base erosion is when I take some of these deductions and pay interest to my foreign subsidiaries so that even though I have income in the United States, I don’t pay very much tax because I have so many deductions.

Just for the listeners’ benefit, it was later in my career when I turned to securities, loan derivatives, and hedge funds and ended up writing and doing the things I do today, plus national security work. But the first ten years of my career, I was international tax counsel at Citi Bank. We operated in 98 countries, had 2000 subsidiaries and affiliates, and had a dense network of tax treaties. I did it for ten years of my life, so I understand this stuff pretty well.

What you do is borrow money from your foreign affiliates, pay them a lot of interest, write it off, and you don’t owe very much tax even though you’re in a high-tax jurisdiction, because you have deductions. That’s base erosion.

Regarding profit shifting, you do something like Apple. I don’t want to pick on Apple because there are many examples, but they’re probably the best known. You have some invention and donate it to your Irish subsidiary. Once that Irish subsidiary owns the intellectual property, it then licenses the intellectual property to manufacturers around the world. All those licensing royalties and fees now go to Ireland instead of the United States, which is where the technology was invented, because, of course, it has a very low tax rate.

The governments are losing this game. They’re just not as nimble as the corporations, so they’re trying to fight back by having global taxation. What this plan calls for is that every corporation would have a global identification number. It’s like tagging a shark or a fish and releasing it so you can keep track of it. Every corporation would have an ID number including all its subsidiaries and affiliates. Every transaction would have an ID number, and they would all have to be reported to this global database operating on supercomputers. And then all the countries would have access to the database.

The problem right now is that if you’re a corporation and you shift your profits from country A to country B, well, country A sees half the transaction, country B might see the other half of the transaction, but nobody is seeing the whole transaction.

Under this new plan, they will see the whole transaction, because they’ll have all the data in one place. Once they do that, they’re going to pick their targets and will have the information to go after them using various anti-tax-avoidance provisions like section 269 of the Internal Revenue Code. There is lots of authority to go ahead and do this; they just haven’t had the information. Now they will.

So, they’re going to rip these corporations apart, make them pay taxes, and they’re going to make them put the income back where they want it. Germany is a leader in this, the United States is certainly involved, etc.

Governments are insatiable. They say, “We just want our fair share.” Everyone says, “Gee, fair share; that sounds fine,” but what is a fair share? What’s the limit? When governments spend unlimited amounts of money and have insatiable appetites for taxation, the fair share soon turns into outright expropriation, which is where we’re heading.

That’s going on in addition to world money, the SDR, we just talked about. It’s real. Those were invented in 1969 and were issued most recently in 2009. In July 2016, the IMF came out with a paper encouraging the creation of a private SDR market. Lo and behold, a month later, the World Bank issued a 2 billion SDR bond. Notice I didn’t say 2 billion dollars; I said 2 billion SDRs. It was denominated in SDRs, underwritten by Chinese banks, and the Chinese bought the bonds.

All this stuff is happening in real time. Taxpayers and corporations are going to have nowhere to hide, and governments are going to keep spending the money. If they can’t get inflation, they’ll raise taxation. They must do something, because they can’t pay the debt.

It’s more and more oppressive, it’s more and more omnipresent, and the question is, what can you as an individual do to preserve your wealth? The top of my list is to buy gold.

Jon:  Thanks, Jim. Alex, at this point, I’m sure you have many questions from our listeners, so over to you.

Alex:  Yes, indeed we do. Before we dive into questions, this is going back to the very beginning of the webinar when we had comments come in with regards to your Brexit call. Several people are saying “Bravo, Jim, great call. Jim Rickards is the man.” I guess these guys did pretty well out of that.

The first question is, do you expect gold prices to go down further after the Fed raises interest rates in December, or do you think this is already factored in by the market? Essentially, do you think that it’s already priced in, and thus we’re at a bottom for gold?

Jim:  The December hike is definitely priced in. Gold went down because of this increased expectation of interest rate hikes. That actually started in early October when we saw gold draw down around the $1260 level, then it started to rally back in anticipation of Trump and the Trump victory, and it got back to around $1340. Then it came down again, partly because of the stock market rally and easing financial conditions.

People said, “The Fed is definitely going to raise interest rates.” We had a strong dollar rally, and so gold is lower in dollars. By the way, it’s up in some other currencies, but it is lower in dollars because of the strong dollar. As I said, a strong dollar means a lower dollar price for gold.

The Fed will probably say some things in December to indicate that they do plan to raise rates again in 2017, so that’s a little bit of a headwind. I don’t expect to see gold go down a lot from here. It could go down a little bit and break through $1200, although I do think this is a very attractive entry point for people who don’t have a full allocation of gold.

It’s going to be very interesting early next year in the first quarter, because we’re going to face this fork in the road that I talked about earlier. Is the Fed going to accommodate trillion-dollar deficits? If they do, then I guarantee inflation, and gold is going to go up a lot once that realization sinks in. Or is the Fed going to raise again in March and really lean into this? In the short run, that’s a headwind for gold. Gold could go down a little more, but I don’t think it’ll go down a lot more.

Then a different dynamic is going to take over, which is you’re going to have this crisis I talked about of emerging markets corporate dollar debt crisis. That’s going to be just the kind of thing to get people interested in gold again because of the financial instability.

So, we have two different paths: one is a straight line to higher gold prices; the other one is a more circuitous route where it could come down a little more based on Fed hawkishness, but then the Fed is going to have to back off that or else they’re going to cause a global recession and global panic, and then gold will go up a lot.

It’s a good place to be accumulating gold. Whenever I do these forecasts, I don’t just throw a couple of balloons in the air. We have specific indications and warnings as we call them in intelligence analysis, specific things we’ll be looking for to tell us which road we’re on.

Right now, there are two vacancies on the Federal Reserve. The law of unintended consequences is interesting. Obama kept the seats vacant because he wanted to give Janet Yellen more power, and they’ve been vacant for two years. Why did the White House not fill those seats? The answer is that anyone who’s ever run a board knows that it’s easier to control a five-person board than a seven-person board. By leaving the two seats empty, they gave Yellen, Dudley, and Fischer more power, because they didn’t have these possible dissents.

Now Trump is going to fill those seats. Let’s see who he picks. If he picks hard money people – and there are a lot of people in the Republican party who would like to see that – you’re going to really throw the world into recession. If they want to lean into this inflation with some hard money picks, again, gold might come down a little bit from there, but there are going to be a lot of problems paying off this debt. If he picks easy money people, then look out for inflation.

That’s one thing I’m watching, and I’ll watch the Fed’s December statement. Of course, everybody will be looking at that. Watch for these vacancies, see what happens to the dollar, see what the Europeans do. There are a lot of things we’ll be watching.

Yet another wildcard is the Italian referendum coming up on December 4th. It’s technically constitutional reform. It’s not a vote on leaving the Euro, but it’s a package of technical reforms. It’s likely to be voted down, there’s going to be a No vote there, and Prime Minister Renzi will resign. There have been 58I Italian governments since World War II, so the Italian government resigning is not exactly the end of the world, but the political landscape has shifted. They’ll have to have new elections.

There’s something called the Five Star party in Italy that looks a little bit like the Donald Trump of Italy. They have this kind of nationalist, anti-immigration, anti-euro platform. If they get more seats in the parliament the next election, does that threaten the Euro?

And what is the implication there for Deutsche Bank? Because there’s this whole staring match between Renzi and Merkel around Deutsche Bank versus Banca Monte dei Paschi, which is the Italian bank they want to bail out. Merkel says, “Don’t you dare,” and Renzi says, “Okay, if we can’t bail out our bank, you can’t bail out Deutsche Bank,” and Merkel kind of said, “Yes, you’re right.” So, the whole Deutsche Bank crisis could come back, and that could send gold up.

I’m not trying to be wishy-washy; I’m just trying to explain that there are a lot of dynamic forces in play. We’re watching all of them. I think all roads lead to much higher gold prices, but they have different paths along the way.

Alex:  We have a question here that has been asked by several different people. They’re saying it in different ways, but I’m going to read the one from Anthony K. His question starts out with “Trump has previously expressed favorability for gold as a monetary anchor. If inflation spins out of control, do you think President-Elect Trump would enact some type of gold standard?” He adds thank you, and thanks for all the great work we’ve done here.

Jim:  Thank you. Trump is the first president-elect – and until a couple of weeks ago, the first presidential candidate – to say anything favorable about gold since Ronald Reagan. It’s been a long time. Presidential candidates have not talked about gold since 1980. He didn’t say he wants a gold standard, but he did say that maybe gold should be a measuring stick or a frame of reference or something we think about in terms of the monetary system.

Another thing I’m watching is one of his top advisors. I did not mention her before because I was talking about the tax and spending people – Malpass, Bannon, Pence, Kudlow and those guys – but one of his top advisors is Judy Shelton. Judy Shelton is a hard-shell gold advocate. She wrote a book in the 1990s calling for a gold standard, she’s a regular op-ed columnist in the Wall Street Journal, and she is a strong advocate for gold. She’s in the mix as one of the policy makers, advisors in Trump Tower, so you should really keep an eye on her. I would put more weight on the fact that Judy Shelton is in the mix than even on what Trump has said publicly.

But there’s a problem. If you want to go back to gold in any way, either as a frame of reference or a benchmark or whatever, you have to have a much higher price. If you don’t, it’s deflationary.

Again, we’ve gone through the math before. M1 (money supply) for the four major economies – Europe, Japan, China, and the United States, which is 70% of global GDP – is $24 trillion approximately. We know that number. Let’s assume 40% gold backing. You could assume more or less; that’s season to taste. I picked 40% because that’s what the U.S. had for most of the 20th century. 40% of $24 trillion is $9.6 trillion.

There are 33,000 official tons of gold in the world, so divide $9.6 trillion by 33,000 tons and you come out with a number that’s about $9000 an ounce, close to the $10,000 forecast I have. That’s the implied non-deflationary price of gold. That’s the price gold would have to be, given the amount of gold that we have, to back up 40% of the money supply.

If you have a lower price than that such as today’s price of $1200, and you’re trying to manage the money supply to that target, you’re going to have to reduce the money supply, which is extremely deflationary and depressionary. They’re not going to do that; it’s much easier to have a higher price of gold.

Probably one of the reasons we haven’t heard about this too much lately is that somebody did the math. It’s one thing to say, “I’d like a gold standard” – yes, that sounds good – but when you actually crunch the numbers and look at the amount of gold and the amount of money, make some assumptions, and do those equations, you get to $8000 or $9000 or $10000 in a heartbeat.

Maybe people are shutting up about it because they’re like, “Wait a second, we don’t want to go there,” but they may have to, whether they like it or not. It’s a very interesting question. Keep an eye on Judy Shelton because she’s the real gold bug in Trump Tower.

Alex:  I’m personally a big advocate of what I call honest money. For various reasons, I think fiat ultimately leads to an erosion of the rule of law and an erosion of morality – but that’s a completely other subject. It’s pretty exciting stuff with even a small potential for a gold standard. I think there are a lot of people who would be excited about that.

We have only a couple of minutes left and are going to go with one more question coming from Tom D. He’s from the Netherlands, and his question is, “In The Road to Ruin, you mention that after SDR printing, the dollar is worth what the G20 and the IMF decides. Only gold is immune to this. This pleads for storing one’s wealth in physical gold, but since many countries confiscate gold, is it likely this will happen in the next financial crisis?”

Jim:  It will probably happen in some places. You have to pick your countries very carefully. The United States has the Fifth Amendment, so it is unconstitutional for the government to seize property without giving just compensation.

People may ask, “What happened in 1933 when FDR confiscated gold?” Well, it was a partial, sleazy confiscation. He actually gave people $20 an ounce, the official price of gold at the time. FDR made it illegal by executive order, so you had to hand it in, but you’d get $20 in paper money for every ounce of physical gold. That’s how he got around the constitutional objection.

Roosevelt knew that he was going to raise the price to $35, so basically he stole the difference between $20 and $35, but he didn’t tell anybody that at the time. He just confiscated it at $20, raised it to $35, and then the government kept the profit.

In effect, he stole $15 an ounce from the people, but it was technically constitutional because he did it sequentially in such a way that he paid people what their gold was worth at the time.

If you want to confiscate gold today, at least in the United States, you must pay people for it. The difference between now and 1933 is that we’re not on a gold standard, so there’s no fixed price for gold. The government can’t do the bait and switch like they did in 1933, so what kind of world is it where the government is going to want to confiscate gold? That’s where gold is already going to $5000, $6000, $7000 an ounce. That’s the situation where they’re going to want to hoover up the gold, but they’re going to have to pay you for it at the market price.

I think the combination of the fact that we’re not on the gold standard and we have Fifth Amendment protection means the government will not confiscate it, but if they do, you’re going to have to get your money’s worth, so you won’t be left out in the cold.

Alex:  We have a lot of people who listen to our podcast from around the world; many are from the U.K., all over Europe, Latin America, really everywhere. What would you say are the chances of something like that happening, and would you say that maybe putting some gold in a different jurisdiction, not having all your eggs in one basket, is a smart move?

Jim:  It’s always a smart move. I talked about the U.S. because I happen to be a U.S. lawyer among other things, so I focused on this history and the constitutional objection, but you hear about it most frequently from Americans. The answer is under the Constitution; they can’t take your gold without giving you your money’s worth, so you’ll be fine at least to that extent.

My number one jurisdiction in the world for rule of law and legal safety is Switzerland for a lot of reasons. We don’t have time to go into all of them, but they haven’t been invaded successfully for over 500 years, they’re heavily armed, they have a good rule of law, they maintain their neutrality, and they have a good sense of community. They have a tradition of this.

I’m not saying there are no other good jurisdictions around the world, but you really should study them carefully. I know a lot of people like Singapore. Singapore has good rule of law, but it could come under the thumb of China. I don’t trust China at all, but I do trust Switzerland. I think they have a safe jurisdiction.

Alex:  I happen to agree. It’s our favorite jurisdiction for gold storage, as well.

With that, we’re out of time. Jim, thank you for your perceptiveness and your time as always. I also want to thank all our listeners, and thank you for the questions you’ve provided for us. We always enjoy getting those and feel like it’s a great conversation with you every time we do this. With that, I’m going to turn it over to Jon.

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

Goodbye for now. We look forward to joining you again soon.

 

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The Gold Chronicles: November 22nd, 2016 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:
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By listening to this podcast or reading its associated transcript (collectively, this “Podcast”), you agree with the following.

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

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

The Gold Chronicles: November 22nd, 2016 Interview with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles November 22nd, 2016

Topics include:

*How Complexity Theory, Behavioral Psychology, and Bayesian models used at PGF were used by Jim Rickards to predict Trump win
*Comments on projected effects of Trump Presidency on US economy, world economy, and gold
*There are contradictory forces within the Trump administration, so projecting certain details are not yet clear
*If Trump cuts taxes and spends $1 Trillion on infrastructure without private capital it will blow a hole in the annual deficit
*Trumps economic plan is basically the Reagan plan – the current environment is very different this time facing headwinds and a much higher debt to GDP
*If the Fed accommodates Trump on his economic plan, then Trump is the “Helicopter Money” President and inflation is then guaranteed
*If the Fed leans into inflation instead it could force economy into recession
*Comments on $9 Trillion emerging market corporate debt crisis
*Jim’s new book The Road to Ruin is now available on Amazon: https://www.amazon.com/Road-Ruin-Global-Elites-Financial/dp/1591848083
*A Trump Presidency has no impact on the potential for systemic risk
*Comments on complexity theory, critical states, and catalysts
*Effects of the “war on cash” in India
*India is the 7th largest economy in the world, and is a cash based economy – these steps are leading to money riots
*Update comments on “war on gold”
*One effect of the India demonetization has been a substantial uptick in gold purchases
*Base Erosion and Profit Shifting (BEPS) – Global Taxation Plan
*Chinese $2 Billion SDR bond issuance
*Anticipated Dec rate hike is already priced into the USD/Gold price
*Trump has commented on gold favorably, potential for some sort of gold anchor or benchmark
*Regardless of some kind of gold standard, even a gold benchmark would require gold at a much higher price
*Comments on potential for gold confiscation in the next liquidity crisis
*Switzerlands advantages as a vaulting jurisdiction

 

 

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

You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

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

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

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

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

 

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

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

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

Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles October 13th, 2016

Jim Rickards and Alex Stanczyk, The Gold Chronicles October 13th, 2016

*Analysis of recent correction in gold
*Market has priced in an anticipated Fed rate hike in December
*Fed will be forced to reverse course going into 2017 and ease
*This is a short term correction and is not signalling a new bear market
*Gold performance for the year
*Physical gold flows and the gold “float”
*Factors affecting short term USD/Gold price
*Factors affecting long term USD/Gold price
*Psychology of markets affecting availability of gold to the float
*Three demand spheres for physical gold flows, the West, India, and China/East Asia
*If Trump wins the election equities markets could have a substantial immediate drop, followed by a recovery
*SDR issuance is going to be highly inflationary
*Gold serves different roles in a Central bank portfolio versus an individual or institutional investor portfolio
*Gold’s role moving forward is one of insurance versus tail risks, systemic failures, and future liquidity crisis
*Gold held by central banks is the last line of defense for liquidity and confidence in central bank issued currency
*FX trading effect on gold pricing and alleged manipulation
*Gold Pool of the 1960’s, IMF coordination with the US selling gold into the market during the 1970’s
*International monetary system is missing an anchor and is considered “incoherent” by current and former officials
*Currency values continue to fluctuated wildy, this is a very unstable system
*Measuring the buying power of gold

 

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The Gold Chronicles: October 13th, 2016 Interview with Jim Rickards and Alex Stanczyk

 

The Gold Chronicles: 10-13-2016:

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

Jim Rickards is a New York Times bestselling author, the chief global strategist for West Shore Funds, and the former general counsel of Long-Term Capital Management. He is currently a consultant to the US Intelligence Community and to the Department of Defense. Jim is also an advisory board member of Physical Gold Fund.

Hello, Jim, and welcome.

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

Jon:  We also have with us Alex Stanczyk, Managing Director of Physical Gold Fund. Alex is an expert in the physical gold industry dealing with the logistics chain from refinery to secure transport and vaulting, and he has lectured globally to investor, institutional, and government audiences on the role of gold both in the international monetary system and in investment portfolios.

Hello, Alex.

Alex:  Hi, Jon. I’m looking forward to today’s discussion.

Jon:  Later in this podcast, Alex will be looking for questions that come from you, our listeners. Your questions today are more than welcome, and as time allows, we’ll do our best to respond to them.

Jim and Alex, we’ve just seen a rapid and significant correction in the dollar price of gold with a small recovery over the past few days. This leads me to ask, has gold reached its peak? Are we about to see a new rise in the dollar and a concurrent collapse in gold?

First, Jim, maybe you could give us a macro view on this.

Jim:  Sure. As our listeners know, going back to last June 23rd and 24th in particular, there was a big uptick in gold. That was the direct consequence of the U.K.’s decision to leave the E.U. – the so-called Brexit vote – and gold got a lift from around the $1260 per ounce level. At one point, it was as high as $1370 and backed off a little bit from there.

From about July 1st to September, it was trading in a range from approximately $1310 to $1365. The middle of the range or the place where it gravitated most of the time was around $1335/$1340, but it wasn’t showing any strong tendencies to break out. It would go down and then back up again. It stayed in that range centered around $1340.

Then a few weeks ago, it hit an air pocket and went down to the $1250 level where it has been bouncing around ever since. On September 6th, there was a break and it traded down to $1310, but the really decisive break was on September 26th. It went from $1310 all the way down to $1250 by October 11th, so that was definitely an air pocket.

I’m sure a lot of gold investors were discouraged, particularly those – including myself – who have been buying gold for a long time and had to live through that four-year bear market from August 2011 to late 2015. It was a long four years where we saw a lot of rallies and then they would get smashed down and then rally and then get smashed down.

I assume some gold investors saw this recent drawdown and said, “Here we go again. The whole thing was an illusion. We got smacked down again, and it’ll happen again.” Maybe there was a little bit of discouragement or pessimism that crept in.

I don’t think that’s warranted at all, because what we’re seeing is something quite different. It’s actually not that difficult to explain why I think gold will rally from here. And just to cut to the chase, this makes a good entry point for people who don’t already have their full gold allocation.

What happened was very simple. The market suddenly priced in an expectation of a Fed interest rate hike in December which I think is realistic. I’m quite sure the Fed is going to hike interest rates in December.

We had to get past that September meeting. No one really thought the Fed was going to raise rates in September; that was not a likely outcome. But the hawkishness of the statement and of a lot of Fed official comments since then has caused the market to say, “You know what? They did not raise in September. They’re obviously not going to raise in November.”

No one expects that. The November meeting is just a matter of days before the election, and whatever your view on the macro-economy or Fed policy, the Fed is going to keep their heads down. They’re certainly not going to make a big move just days in front of a US presidential election, so take November off the table.

That immediately causes everyone to look at December. There, the stars are aligned, if I can put it that way. The Fed is going to hike rates in December. I’ll digress a little bit and explain why we can be very certain about that, but to get back to the gold story for a minute, that’s what happened: gold got repriced.

In a world where interest rates are perceived to be going up and the dollar is stronger, the dollar price of gold goes down. There are other determinates of gold prices, and we’ll talk about those, but at a very simple level, a strong dollar means a lower dollar price for gold; a weak dollar means a higher dollar price for gold. Higher interest rates imply a strong dollar, so the market priced it in and – boom – there goes gold down to around $1250. It has rallied back a little bit from that and right now is closer to the $1260 level.

The question is, now that that’s behind us, where do we go from here? This is really what investors most need to know. Gold is nowhere near its peak. As our listeners are aware and very familiar with the math, gold will get to $10,000 per ounce. I’m not saying tomorrow or even next year, but sooner rather than later. We’ll come back to that during a question planned later in the podcast about SDRs and monetary confidence.

For right now, the Fed is going to raise interest rates in December. There are a number of conditions required for this to happen. A lot of people focused on the jobs report, and as far as jobs are concerned, it is mission accomplished. Unemployment is down around 4.8% or 4.9%. Job creation has been steady. I know the monthly job gains are not as big as they were in recent years, but they’re good enough. That’s really the point. They’re good enough for the Fed. We’re not losing jobs, we continue to create jobs, and unemployment continues to trend down. The labor force participation appears to be at a bottom. Maybe it’s even going to go up some. Real wages are not soaring, but they have a pulse. These are not blockbuster numbers, but they’re good enough given what’s already been accomplished for the Fed to say, “Okay. We’ve solved that part of our dual mandate.”

The other part of the dual mandate is inflation. They want to get inflation to 2%. They’re not there and haven’t been there for five years – really an outstanding failure on the Fed’s part. But that looks like it’s going away a little bit, mainly because the price of oil looks like it’s off the bottom. It’s rallied from lows of $24 a barrel in early 2016 and is back up to over $50 a barrel or so right now. I think there’s a ceiling around $60 a barrel, but you can still go from $50 to $60.

This is what Janet Yellen has been looking for. If you go back over all her speeches and comments, how many times does she use the word “transitory”? She said, “These deflationary or disinflationary pressures are transitory.” Three years is a long time to be transitory, but I guess patience pays, and now we see some of those trends reversing.

The Fed can look ahead and is always looking ahead. We don’t have rip-roaring inflation right now, but there’s some reason to believe that inflation is showing its face. At least the deflationary/disinflationary trends are over for the time being.

So you have mission accomplished on labor, inflation has a little bit of a pulse, and there’s consensus on the Board for a rate hike. Remember, there have been struggles between hawks and doves on not just the Board of Governors but also the Federal Open Market Committee. For several years, the regional reserve bank presidents have been a little more hawkish while the governors, particularly Yellen, from time to time have been a little more dovish.

At the last meeting, we saw three dissents. Three is not a palace revolution but it’s a lot of dissent. Those who dissented in September are certainly going to vote for a rate increase in December. They haven’t changed their view.

We’ve seen other views come out recently. In particular, Charles Evans, President of the Federal Reserve Bank of Chicago, widely respected, and one of the few recent reserve bank presidents who does have a lot of clout because he has some pretty good intellectual chops, which is how Yellen assesses it. He said that he thinks December is the time, and we haven’t heard anything to the contrary, so there seems to be a consensus on the Board of Governors.

The final missing ingredient was market expectations. The Fed does not want to raise rates at a time when the market is giving it a 20% or 30% probability because that means there’s shock. When you have a 20% probability of something and then it happens, you have to reprice the other 80% instantaneously. That’s the kind of market shock that can get out of control in a fragile system – and we do have a very fragile system. The Fed doesn’t want to see that, so what they’re trying to do – and it’s working – is get expectations up. Now market expectations are close to 70% that the Fed will hike rates.

The market is not always right about that. Longer-term expectations have been very wrong for seven years. The markets have consistently priced in rate hikes that never appeared. I’m not saying the market is flawless, but at a short-range, meaning two months, those expectations are important.

The Fed is saying, “Market, you have a 70% expectation priced in. We’d like to get that up to around 80% or 90% by December 15th.” There’s plenty of time to do that. They don’t want to rock the boat before the election, as I mentioned, but I would expect that as soon as the election is over, for that last four-week stretch before the December FOMC meeting, you’re going to hear one speech after another, even from the most dovish voices including Lael Brainard.

The other factor I forgot to mention was the international spillovers. Even if you think it’s all-signals-go in the US economy, are you doing something that’s going to create havoc overseas?

Just a few days ago, in connection with the IMF annual meeting in Washington, they issued a report saying that emerging markets were prepared for a Fed rate hike. These things don’t happen by accident. When the IMF comes out with something like that, that’s Christine Lagarde’s way of giving Janet Yellen a green light, saying, “We don’t think this is going to be Taper Tantrum Part 2.” Everyone’s reading from the same page of the hymnbook, so to speak.

Charles Evans is lined up, the Reserve Bank presidents are lined up, market expectations are lined up, and the IMF says emerging markets are ready for this. All the key variables are in line for a rate hike, so the down drift in gold was just a reflection of that. Gold was repricing a stronger dollar.

Where do we go from here? The problem is the Fed is raising rates for the wrong reasons. When I say “the wrong reasons,” the reason you’re supposed to raise rates is because the economy is robust, labor markets are tight, and inflation is picking up. The Fed is always behind the curve of this as they start to raise rates as a reflection of demand for money and to cool off an overheating economy.

We don’t have any of that. I described conditions that allow the Fed to raise rates. It’s not a complete disaster out there, but this is nowhere near the kind of robust growing economy that you usually have to see for the Fed to justify a rate hike.

What the Fed is doing instead is trying to raise rates so that they can cut them in the next recession. I describe this as hitting yourself on the head with a hammer because it feels good when you stop. The Fed is basically saying, “Normally you would not raise rates in such a weak economic environment, but there’s danger of creating asset bubbles. The next recession is probably going to be sooner than later. What are we going to do? How are we going to cut rates in a recession if we don’t raise them now?” That’s exactly what they’re doing, but it’s for the wrong reasons. They’re raising rates into a weak economy.

In my view, the Fed has overestimated the robustness of this economy. We are very close to a recession and may actually be in a recession, because you never know until after the fact.

What I see happening is an exact replay of what happened last year. Let’s go back to December 2015. We had almost exactly the same scenario of the Fed going all of 2015 without raising rates. Wall Street thought March 2015, then they said June, then they said September, but they were wrong every time. Of course, we on this podcast were saying the Fed would not raise rates until December, and by then it was clear they would. The market expectations were in line, and they raised rates.

What happened? The stock market crashed 11% from January 1st, 2016, to February 10th, 2016. Major stock indices were down over 11%. What happened to gold? It went to the moon. The first quarter of 2016 was the best quarter for gold in probably 30 years or certainly a very long time.

Again, the Fed looks like they’re going to absolutely repeat the blunder of 2015. They’re going to signal that they’re raising rates, and market expectations will line up. They will actually raise rates but will find out that they’re creating a stronger dollar. A stronger dollar kills exports, imports deflation, completely undoes their inflation target, and slows down the economy. The stock market will not be ready for it, because the market has to price in not only a 25-basis-point hike but also the expectation of further hikes down the road no matter what the Fed says about going slow.

This is like wash, rinse, and repeat. They are going to raise in December, and that’s what has caused gold to go down right now. They’re going to blunder; they’re going to slow down the US economy, if not put it in a recession, and they’re going to sink the stock market.

The reaction function will be that the Fed is going to have to flip to dovish to undo the damage, and that’s very bullish for gold. Gold will catch a bid, partly as a play to quality, when other things are falling apart.

My immediate forecast for the next couple of months is that gold is going to go sideways. It shouldn’t go down a lot from here because we’ve had the repricing. It could go up on a number of vectors such as the geopolitical vector, meaning the US, Russia, and Iran are very close to war in the Middle East.

The shooting has already begun. I’m sure listeners have heard about the Iranian-backed rebels shooting missiles at US ships, the US vessels responding with air strikes, Russia spreading high-tech surface-to-air missiles both in Iran and Syria, the US trying to come up with some kind of no-fly zone, the Russians saying no way, and US planes and Russian surface-to-air missiles operating at close proximity with no clear rules of engagement.

And let’s not forget, Donald Trump. Probably most people – certainly the markets and the betting odds – think that Clinton is a shoo-in, but I don’t. I don’t know who’s going to win the election, but I think it’s going to be a lot closer than the market expects. Trump, whatever else you may say or think about him, has had a kind word for gold.

We’re talking about gold in this podcast. I don’t get into politics, but I do get into markets, so a Trump victory would be extremely bullish for gold. Any flare-up in the Middle East is not good for the world but also good for gold in terms of a flight to safety.

Even if those things don’t happen, I think gold goes sideways until December. Then the Fed blunders, they have to flip to dovish probably early next year, and gold is poised for another leg up.

The short answer is that gold is nowhere near the top. I don’t think this is the beginning of a bear market or a correction. It was a one-time repricing to reflect increased expectations of Fed rate hikes. Those hikes are going to be self-defeating, the Fed is going to have to reverse course, and then gold will head up from there.

For those who are not fully allocated or haven’t invested in gold at all or are wondering if they missed the boat, this is a great entry point.

Jon:  Thanks, Jim.

Alex, we’ve heard Jim’s analysis, and now I’m curious to know what signals you’re picking up directly from the gold markets themselves.

Alex:  In regards to gold, I concur with Jim in that this is a short-term correction. I don’t think this in any way signals that gold is going into some kind of a new bear market. This correction is both normal and healthy. The run-up to the high this year was very fast paced, and I think sentiment needed the adjustment.

Let’s talk about some important basics here. First of all, many people focus on the US dollar price of gold, but we have to remember that gold is quoted in currency pairs in many currencies globally, not just the US dollar. For example, there is Indian rupee gold or Chinese yuan gold.

These pairs show that buying power measured in government-issued currency units – in other words, dollars, etc. – is fluctuating all the time. Some of these currencies are getting stronger, and some of them are getting weaker.

So far this year of 2016, even with this correction, gold is still up 18.2% in US dollar terms. In Chinese yuan terms, it’s up 22.3%. In Indian rupee, it’s up 19.2%. In the British pound, it’s up 42.3%. Even though we’ve had a correction, I’d say that so far this year, gold still performed quite well.

In terms of gold price, there are two different terms I hear in the industry. One is “the gold price” and the other is “the price of gold.”  I’d point out that the difference between the two is that “the gold price” is the price reflected of what’s happening in the futures markets, and “the price of gold” is what you actually have to pay for physical gold versus a futures contract.

Speaking specifically to the US dollar gold price, it is largely influenced in the short term by interest rates as Jim mentioned. It’s also influenced by US dollar strength and on occasion geopolitical events. For example, gold had a big boost with Brexit.

At the end of the day, there are other factors and short-term swings that are driven mostly by speculation. Over the medium- and long-term, prices are driven by the general narrative, mostly from the West, of where they think the world is heading.

Aside from strong short-term drivers in price, the physical market – which is what I pay attention to quite a bit – is largely affected by the availability and flows of physical gold and what we call the float. We’ve mentioned this before on the podcast.

The float includes, in theory, all of the above-ground gold in the world. By widely accepted measures, we’re talking some 180,000 tons or so which is basically enough to fill an Olympic-sized swimming pool.

We call this “official gold,” a lot of which is accounted for and held by central banks, etc. Quite a bit is also in the form of jewelry. In India there’s something like 22,000 tons of gold in the form of jewelry in individuals’ hands. Likewise, in China, there’s something like 10,000 tons.

Any analysis of the physical gold market that does not consider above-ground stocks that could become available for sale is leaving out a really important factor. There are substantial amounts of gold that could become available to what we call the float depending on both price movement and psychology. These are two different things that are very important.

If the price is rising, some holders of gold who bought at lower prices might be willing to sell their gold back into the market and book some gains. We can observe this by the amount of scrap that becomes available in the float when the price rises. People may sell off what some of my colleagues refer to as grandma’s gold, or old jewelry, lying around that isn’t really being used and might fetch a good price if the price is rising.

This is normal behavior when markets are stable. It’s when markets are uncertain that psychology may shift to a mindset of protection. That’s exactly what we’re seeing today because of things like the ongoing sovereign debt crisis. We have demographic trends that are worsening a collapsing tax base already. We have perpetual zero interest rates or worse. Much of the world is in negative interest rates. Some analysts and money managers are saying that we have a gigantic bond bubble going on right now of historic proportions. Some governments are now resorting to 50- and 100-year bonds.

In short, I think the psychological tone of the market is shifting towards protection. This lowers the chance that already-owned investment gold – part of the 180,000 tons I mentioned – will be made available to the float for sale, and this increases the chances of strong pressure on the physical market during periods of demand.

One really interesting thing that has occurred with this correction and I don’t recall ever seeing before is that normally, when you have corrections and pullbacks in the price, futures and spot prices should equalize with physical market flows through arbitrage.

If you think about the large gold funds around the world, some of the largest – for example, GLD – bullion banks arbitrage the amount of physical gold held in that trust based upon the price of gold, and they’re making a spread in between with that arbitrage.

Even though we’ve had a roughly $100 price correction from this year’s high, these inventories are actually growing right now. I’ve never seen this before, and I’ve been in this industry for a very long time and observed these funds ever since they were launched. I believe what this means is that the bullion banks are positioning themselves for what they think could be more demand moving forward.

There are three of what I call “demand spheres” in the physical markets, and we measure where gold is flowing around the world according to the float. The first demand sphere is the West, which is the biggest influencer. It consists of America and all of the Western financial markets that often cue off of American financial analysis. There is also China and India.

The West has been the biggest influencer on the gold price this year. There have been net inflows into gold funds in the West of over 300 tons. This is equivalent to some $12 billion-plus in US dollars.

China has been a strong buyer this year as it has for a number of years. Now they’re nearing 1000 tons. They’re off by a strong percentage of what they normally do annually, but they’re still a large factor.

India, however, is off by quite a bit. India’s gold imports this year are off by almost 60%. By this time last year, India had already brought in 658 tons of gold, whereas this year, they’re only up to 270.

What this means to me is that prices have moved impressively this year even with India being off by more than half. Remember also that it was only recently that the Chinese people were allowed by their government to buy gold at all. There was a long period of time where it was illegal for the Chinese to buy gold.

Taking a forward-looking view, the last point I would like to make is imagine what it would be like if China, India, and the West were all buying at the same time.

Jon: That’s a deep and very informative analysis, Alex. Thank you.

Let’s stay on a subject that’s clearly relevant to the future state of gold. Jim, you’ve recently been previewing your new book, The Road to Ruin. In it, you develop a theme that you wrote about in The New Case for Gold:  the coming ascendancy of the IMF’s own currency, the SDR.

We’ve talked about this on the podcast several times, but my question is, in a world where the SDR begins to displace the dollar’s dominance, what happens to gold?

Jim:  Thank you for mentioning the book. For the benefit of listeners, I do have a new book that will hit bookstores on November 15th. It’s called The Road to Ruin: The Global Elites’ Secret Plan for the Next Financial Crisis. It’s available for pre-order on Amazon now and is actually number one on the charts. Amazon has all these chart subcategories one of which is for money and monetary policy. The book is still about a month away from shipping, and it’s already number one, so it’s doing very well. Thank you.

Yes, I do talk quite a bit about the future of the international monetary system and the role of SDRs. I think many of our listeners are familiar with SDRs partly because of the work we’ve done on this podcast , but just for those who might not be quite as familiar, I’ll give a brief overview.

SDR stands for Special Drawing Rights – a slightly technical name, but it’s basically world money. I’m sure the people who created it didn’t want to call it world money because that’s a little spooky, but it is world money.

It’s not complicated. The Federal Reserve can print dollars out of thin air, the European Central bank can print euros out of thin air, and the International Monetary Fund can print SDRs out of thin air. They can act like the central bank of the world, create these SDRs, hand them out to the members, and they count as reserves.

All members of the IMF – 189 counties around the world – are bound by the articles of agreement to accept SDRs the same way you would accept dollars or euros or yuan or any other reserve currencies or gold, for that matter. It’s a way to create global reserves out of thin air.

Why am I talking about this, and why am I predicting a much bigger role for the SDR sooner rather than later? The answer is that it has been eight years since the last financial crisis – nine if you want to go back to the start of it in 2007 and a little over eight years if you want to go to the most acute phase in 2008. The history of financial crises and panics over the last 30 years is that they happen every seven or eight years.

We had a one-day collapse on October 19th, 1987, when the stock market dropped over 20% in one day – not a week or a month, but one day. That would be the equivalent of a 4000-point Dow Jones Industrial Average today. In 1994, the Tequila crisis; in 1998, the Russia / Long-Term Capital Management crisis; in 2000, the dot-com meltdown; in 2007, the mortgage crisis; in 2008, Lehman / AIG. I don’t have to go through all of them.

The point is that these things happen every seven or eight years, almost if not quite like clockwork. Well, it’s been eight years since the last one. How long do you think we’re going to go before the next one hits? The answer is it could happen tomorrow, it could happen any day.

In fact, I’ve done some research. Without taking sides in politics, I expect that if Trump wins on November 8th, we might expect an immediate 10% drop in the stock market. We might see the Dow Jones go down over 1000 points in one day, just like that, because they’re priced for a Clinton victory.

If Clinton wins, then nothing happens. It doesn’t mean the stock market is going to go up 1000 points, because they’re already priced for her victory. They’re not priced for a Trump victory, and there would be an immediate repricing that could be enough to start an avalanche of selling and contagion around the world.

An event of this kind could happen anytime, but certainly in the next couple years it is highly likely.

What happened the last couple of times we had a crisis? In 1998, Wall Street got together and bailed out the hedge funds. In 2008, the central banks got together and bailed out Wall Street. Who’s going to bail out the central banks the next time?

At the beginning of the crisis in 2008, the Federal Reserve balance sheet was about $800 billion. Today it’s closer to $4 trillion. They printed over $3.2 trillion to bail out the system the last time and a lot else besides. They guaranteed every money market fund, they guaranteed every bank deposit, and they did trillions of dollars of swaps with Europe. It was massive liquidity injection by the Federal Reserve and other central banks.

If somehow the Fed managed to get its balance sheet back to $800 billion – in other words, they created all this money to solve the problem and then they made the money go away and normalized their balance sheet – I’d be the first one to say, “Hey, great job. You saved the system and got back to normal. Nice going.”

But that didn’t happen. The $4 trillion is still on the balance sheet, so what are they going to do in the next crisis? Are they going to print another $4 trillion and take their balance sheet to $8 trillion? Legally they could and they might, but in my view, they’re going to be highly constrained. They’re going to push against an invisible confidence boundary.

This is true of central banks around the world, not just the Fed. They’re going to lose the confidence of their people who rely on the currency, their national governments’ policymakers, etc. They’re not going to be able to do what they did the last time.

So where’s the money going to come from? If you have a liquidity crisis – which I expect sooner than later – and you need a liquidity injection but it cannot come from central banks because they’re tapped out, their balance sheets are stretched, where will the money come from?

The answer is it will come from the IMF in the form of these SDRs. The IMF balance sheet is not stretched; they’re only leveraged about 3-to-1. Our friends at the Fed are leveraged over 100-to-1 so there’s not even a comparison there. The IMF will print SDRs and hand them out.

The question specifically was where does this leave gold? Gold wins one of two ways. Either way gold wins, but let me be specific about that claim.

The first way is that the SDR thing works. If people really understood it, they might have objections, but the truth is that nobody understands SDRs except a few PhDs and the people on this podcast. You can see that if you print two or three or four trillion SDRs and give them to all the countries around the world as part of the reserves, that’s going to be highly inflationary because that money is going to get spent.

A lot of the money the Fed printed did not get spent. It just got handed to the banks, and the banks gave it back to the Fed in the form of excess reserves. But SDR money that goes into reserves is going to be spent by the governments still being desperate to resort to fiscal policy, so-called helicopter money, and massive government spending.

The basic theory of Keynesianism is that if people won’t spend, the government will. So right now we’re in a liquidity trap. People don’t want to spend. They want to save, pay off debt, and put the money away for a rainy day. There’s deleveraging, so the money is not getting used. But governments are very good at spending money, as we know, and in the next crisis, they will.

They’ll recognize that you can’t have a pure monetary solution. You have to have a fiscal structural solution that will ramp up government spending. We’re already hearing about this from both candidates, Clinton and Trump.

So the IMF prints out five trillion SDRs worth about $7.5 trillion. One SDR is worth a little bit less than $1.50, so it’s somewhere between $7 trillion and $7.5 trillion. They’ll hand them out, and the governments will absolutely spend it, because that’ll be their job.

All that spending and money printing will be inflationary, so gold will go up for the reasons gold always goes up in inflation, which is you’re cheapening the dollar. That means a higher dollar price for gold. Gold is the ultimate inflation hedge and always has been.

Now let’s imagine another scenario. If the SDR rescue doesn’t work and there’s a massive loss of confidence in paper money, people will say, “You know what? We lost confidence in the dollar, the euro. You want us to accept these SDRs? We’re not accepting those, either. It’s just another fiat money bailout. It’s just more money printing by a different name. I’m out of here. I don’t trust any government money. I don’t trust any fiat currency. Give me hard assets. Give me land, gold, silver, fine art, jewels, water, energy, whatever it might be. I want to get out of the money system. I’ve lost confidence.”

Well, where do people go? They go straight to gold. They could also go to silver or art or some of the other things I mentioned, but a lot of that will go to gold.

If SDRs work, it’s inflationary and gold goes up. If SDRs fail, it’s destruction of confidence and gold goes up because it’s the only thing people will have confidence in. They are different paths but they end up in the same place, which is a much higher dollar price for gold.

Just to be clear, $10,000 gold doesn’t mean that you made five times your money in real terms. You might just be breaking even, but at least you are breaking even. In other words, you’re preserving wealth because $10,000 gold doesn’t mean that gold went up five times; it means the dollar went down 80%.

I’d much rather have gold than dollars. That’s the point of having gold: to preserve wealth. It’s not a bonanza, but at least you’re the person who is preserving wealth and are as rich as you used to be or have your savings intact when everyone else around you is getting wiped out.

If the SDR rescue works, it’s inflationary; gold goes up. If it fails, there’s a loss of confidence and gold goes up because it’s the only thing people will have confidence in.

Think of it as a horse race. Picture the Kentucky Derby with horses lined up in the paddock. The horses are named Dollar, Euro, Yuan, Sterling, Gold, and SDR. These are all the forms of money. The gate opens and they’re off. They’re coming around the track. One by one, the horses stumble or drop out. At the finish line, there are only two horses left, Gold and SDR. I think Gold wins the race.

Jon:  Thanks, Jim.

Alex, I know you have many questions from our listeners. Before you turn to those, how do Jim’s predictions here appear to you as a key player in the physical gold market.

Alex:  I have learned over the years that Jim’s forecasts are correct far more often than not, so I personally don’t tend to second-guess him too much. As you’ve mentioned before, Jim is an advisor to our gold fund, so we take what he has to say very seriously.

Almost everything he has projected in his books, from Currency Wars to The Death of Money and The New Case for Gold, has either already come to pass or there are events unfolding that would suggest they are on track to come true.

Considering gold, one thing that’s good to keep in mind is that gold serves different roles regarding central banks and monetary policy than it does for individuals and institutional investors.

For central banks of countries besides the United States, gold is a way to hedge the US dollar, but gold is also the last line of defense for liquidity and confidence backing central-bank-issued currency.

In other words, gold’s purpose in the central bank balance sheet is different than it is for an individual investor. As far as individuals go, our view of gold’s role moving forward is that of insurance versus tail risks and systemic events that could cause lock-up in liquidity or perhaps another global financial crisis.

People need to be thinking of gold in terms of what is least likely to be impacted if the engines of finance grind to a halt. It’s interesting that this discussion has been about the IMF and the SDR, because in one of its reports, the IMF said that gold is the only asset you can buy that essentially does not have counterparty risk. That’s even up and above SDRs.

Based upon our experience so far in 2016, this is exactly what has been happening. People who have never had an interest in gold or been an investor in gold are starting to take a really hard look.

For example, just over the last 48 hours or so, I’ve talked to potential investors who are representing millions and millions of dollars of investment. They’ve never invested in gold before, and they’re now starting to take a hard look.

I keep hearing a recurring theme in their language of “protect purchasing power.” I’ve heard that at least four times in the last 48 hours alone. This is a really important change in the gold markets, because in the decade that I’ve been in this industry, most of the people involved in precious metals are what many would refer to as gold bugs. These are people who were interested in gold and investing in it way ahead of the curve.

The truth is that a very small percentage of wealth is allocated into precious metals – something like 1.5%. I have always been a believer that as soon as the other 98.5% start taking a serious look at gold, then we’re looking at some major changes, so this is a very important change to me.

With that said, we have a number of different listener questions, and these are all directed at you, Jim.

The first one is, “What effect does $4 trillion dollars worth of gold traded per day in the FX markets have on gold price?” Another question about that asks, “Is it used to control the price or maybe manipulate the price?”

Jim:  The volume of trading by itself isn’t the determinant of price. Obviously, it’s the bid offer or the direction of trading or where the market price clears. But the number is important because it shows – and I’ve always found this to be true myself –that the liquidity in the gold market is very good.

Gold is a funny market. When the volume isn’t very much, most market liquidity is not good and vice versa, but gold is a market where even when volumes are low, liquidity is good, meaning you can always buy and always sell. You can’t always guarantee a price, of course, but I’ve never seen a situation where gold went no bid.

There are situations where nobody wants to buy a particular stock or bond or real estate or condo or whatever until the price goes a lot lower and the markets clear, but gold does move more like the way economists imagine markets to move, which is that there’s a bid at every level even if it’s trending down or up.

The question was, “Is there manipulation of the gold market?” The answer is absolutely yes. It doesn’t mean there’s manipulation all the time, and it doesn’t mean that every price move is manipulated.

As I explained earlier in the call, the drop – the air pocket, as they call it – from about $1360 an ounce to $1250 an ounce was not manipulated in my view. That was a fairly rational repricing in reaction to a higher expectation of a Fed rate hike, although I also explained why I think the Fed rate hike will be self-defeating and lead to dovishness, because they’re tightening at the wrong time for the wrong reasons and gold will come back up again. I don’t view that as a manipulation.

There is statistical and empirical and other evidence that shows manipulation. I’ve been involved in various ways with some class-action lawsuits and spoken to the plaintiffs’ experts as well as PhD statisticians who have done very long, ten-year and longer, studies of this. The manipulation is very clear, but it doesn’t mean that it’s manipulated all the time or every move is manipulated. As I said, the most recent one is not that difficult to explain based on market forces.

The other observation I would make is that, yes, there’s manipulation but manipulation always fails in the end. It can succeed and often does in the short run, but it always fails in the end. You just have to look at two classic cases.

Look back at the collapse of the gold pool in the 1960s when a group of the G7 countries were trying to prop up the price of gold. They agreed to pool their gold resources and be sellers if the price got high and be buyers if the price got too low.

What they ended up doing is just selling all their gold in order to support the price. It was becoming untenable, and basically it collapsed. They were trying to keep the price at $35 an ounce, and the market was demanding more and more gold. They kept selling it to try to keep a lid on the price, but it didn’t work; it failed.

Then there was gold manipulation in the late 1970s when the United States and the IMF, operating hand-in-glove, dumped 1700 tons of gold on the market. That’s a lot of gold. That failed also. The price shot up to $800 an ounce in January of 1980 when that manipulation was over.

The manipulation going on today will fail. It’s painful if you’re on the wrong side of it, but in the long run, you will be vindicated.

Someone was asking, “If you think the Fed is going to raise rates in December but then go dovish after that, should I perhaps sell my gold position right now and buy back in at a lower price in December?”

The answer is no. I said I think gold will go sideways, not necessarily down between now and December. Anything can happen; I’m not completely ruling that out, but I don’t have a scenario where gold goes down until December and then goes up again. I have a scenario where it goes sideways and then goes up after that, probably late this year or early next year.

So I wouldn’t sell into this. As I said, if anything, it’s a good entry point to buy and add to your position.

Alex:  I agree with that. As far as entry points are concerned, this is in my mind a gift.

The next question is coming from one of our international listeners in HBK Bangalore. We have quite a few listeners who dial in from around the world, and some of these folks are managing money professionally.

The question is, “Will the dollar weaken against other currencies? What are your thoughts on that if Trump were to win the election?”

Jim:  That’s a tough one, mainly because Trump is such a wild card. You never quite know what he’s going to say next.

I believe the dollar would weaken because Trump is a bit of a mercantilist which is sort of an 18thcentury school of international economics. He says, “Be an exporter. Don’t be an importer. Put up tariffs against imports. Try to accumulate wealth.” He said some kinds of things about gold. These are all things indicating he would favor a weaker dollar to promote exports, because that’s what mercantilists want to do. They want to promote exports and build up reserves and surpluses.

He has also been fairly strident in attacking Janet Yellen. I’m one of the most persistent critics of Janet Yellen around, but I’m not running for president, either. You can read about it in my books or hear about it on podcasts like this, but there is some serious concern that he might actually try to push her out.

The Fed is independent and the Chairman has a four-year term. Janet Yellen’s term is not up until January 2018. Legally there’s nothing Trump can do to get rid of her, but he can make her life really uncomfortable. He can make her the object of critical speeches, if not ridicule, and push her into an early resignation. That would likely be very negative for the dollar.

I don’t want to put a stake in the ground although I don’t mind giving definitive forecasts if I have a good basis for them. That’s how I feel about the Fed hiking in December. That’s a very solid analysis, and I’m willing to be fairly definitive about that. I don’t want to say that the dollar will go down if Trump wins, but I suspect that’s a likely scenario. I feel much more comfortable saying that the stock market will go down.

I can see the stock market going down 10% almost overnight if Trump wins but then consolidating and coming back. Once that immediate repricing and shock effect is over, people might say, “Wait a second. This guy is talking about cutting taxes, infrastructure spending, making America great again, and renegotiating trade deals. He might actually be good for the economy in certain ways.” Then we might see stocks start to come back.

I don’t want to get too attenuated in the forecast, so I think the immediate reaction is that stocks go down, not 30% or 40%, but just because they have to reprice for an unexpected outcome. Yes, I think you might see the dollar go down, too, and definitely the dollar price of gold should go up. There’s very little doubt about that.

Alex:  I found it very interesting what you just said about Trump having a mercantilist view. We’re not talking about this for purposes of the political discussion but more so for how politics affect the financial and market aspect of things.

Trump has repeatedly accused China of devaluing their currency, which I really find intriguing, because the US is constantly devaluing its currency, and so is virtually every other central bank in the world.

My question about that to you, Jim, is do you think he’s doing that as a posturing sort of thing in preparation for future negotiations with China, or do you think he really just doesn’t understand what’s happening?

Jim:  He might have an intuitive understanding. Trump is a businessman, a builder, and an entrepreneur with some success and some failure as well. It’s all pretty well documented that he has made a few turns on what you might call the Wheel of Fortune.

Having said that, I don’t think he’s an economic or monetary expert by any stretch. He does seem open to getting advice and he might just have an intuitive feel that we need a more sound form of money.

By the way, I’ve heard the same thing from Ben Bernanke and John Lipsky. John Lipsky is not as well-known, but he’s a former head of the IMF. They both told me that they viewed the international monetary system as incoherent. That was their word, not my word. This is a fancy way of saying, “You know, this is getting wobbly. There’s no anchor.”

Just think of what has happened in currency markets in the last year and a half. We don’t have to go back 20 or 30 years; just go back to the summer of 2015. We had this shock devaluation of the Chinese yuan in 2015. Then we had this complete shock revaluation, upward valuation, of the Swiss franc where the euro fell against the Swiss franc last January by 20% in one hour. Then we had the Brexit where sterling fell 14% against the dollar in about two hours. We had the flash crash in sterling last Friday, not even a week ago, where it fell about 8% in seven minutes.

Think about it. The yuan, the dollar, sterling – these are all reserve currencies; the first, second, fourth, or fifth largest economies in the world. Money is supposed to be a stable store of value, and yet it’s bouncing around to 3%, 8%, 7%, 14%, 20% in a matter of hours. That’s not money. That’s not stability. That’s a very unstable system.

In effect, Bernanke and Lipsky were saying, “We got rid of fixed exchange rates. We got rid of the gold standard. We thought we had it all figured out with these floating exchange rates. Markets could adjust. We won’t have to go through these devaluation struggles anymore. Just let the market do the work.”

The problem is that without an anchor, there’s more involved than just the market. You can have manipulation, speculators, leverage, hedge funds, exogenous shocks. There are a lot of factors all of a sudden in a world of floating exchange rates that may be transitory but knock currencies for a loop.

We have this very unstable system, and it may just be the case that Trump has an intuition that we need an anchor.

Alex:  It’s really incredible as far as the lack of stability in currency values. It all comes back to this whole thing we’ve talked about before – that there’s just no longer any anchor.

Jim:  We haven’t had very many normal days lately, but on a normal day, the foreign exchange market trades at the fifth decimal place. You don’t see percentage-point moves in currencies. You see 3/10,000ths of 1%. That’s how currencies normally trade, and yet all of sudden, we’re seeing full percentage points – even multiple percentage points – in a single day or even a couple of hours. These are earthquake-style moves.

Alex:  We thank everyone for submitting questions and are always appreciative as we do our best to get them all answered in the time allotted. We’re going to take one more that seems to be coming up quite a bit.

As I mentioned a little while ago, the people we’ve been talking to are constantly voicing concerns over protecting their buying power. John B. wants to know if you would provide some insight as to the buying power of gold.

Jim:  The buying power of gold is measured in other currencies as long as things are priced in those other currencies.

I actually foresee a day when things will be priced in gold. You’ll go to get a new car and instead of saying the car is $25,000 or $30,000 or whatever, they’ll say, “I’ll take 25 ounces of gold.” You might be able to hand over 25 ounces of gold or some kind of gold warehouse receipt or something.

That would be priced in gold, but that’s not the world we live in today. We live in a world where things are priced in some currency – dollars, obviously. I’ll be going to Australia in about ten days, and I’ll be spending Australian dollars. I’ll go to Ireland and spend euros.

The principle is how much of that other currency can you convert the gold into if you need to buy something? That’s where gold performs a lot of functions, but as a form of money, it tends to be the one that doesn’t get devalued. It tends to be the one that will preserve purchasing power.

Here’s a simple example:  If a car today costs $20,000, that would be about 15 ounces of gold, give or take. If we have a bout of inflation and the same car goes to $40,000, I would expect it would still only cost you 15 ounces of gold. In other words, the gold would be worth twice as much; the gold would be worth $2500 an ounce.

There’s no way that the price of everything else is going to double and the price of gold is going to stay the same measured in dollars. Obviously, the price of gold is going to double as an answer to the inflation, at least. If not, it’ll go up in anticipation of more inflation or loss of confidence in paper money or geopolitical shocks or some other factors.

That’s what gold does: it preserves your purchasing power.

Alex:  I agree wholeheartedly. It’s something we’ve been talking to people about for many years.

And that wraps up our time. Jim, I want to thank you, as always, for incredible insight and discussion here today.

Again, Jim has a new book coming out, The Road to Ruin, available for pre-order on Amazon right now. Please go check it out. With that, I am going to turn it back to you, Jon.

Jon:  Thank you, Alex, and thanks for your insightful contributions today.

I also want to thank you, Jim Rickards. It’s always a pleasure and an education having you with us.

Most of all, thank you to our listeners for spending time with us today. Let me encourage you to follow Jim on Twitter. His handle is @JamesGRickards.

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

 

Listen to the original audio of the podcast here

The Gold Chronicles: October 13th, 2016 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: October 13th, 2016 Interview with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles October 13th, 2016

Topics include:

*Analysis of recent correction in gold
*Market has priced in an anticipated Fed rate hike in December
*Fed will be forced to reverse course going into 2017 and ease
*This is a short term correction and is not signalling a new bear market
*Gold performance for the year
*Physical gold flows and the gold “float”
*Factors affecting short term USD/Gold price
*Factors affecting long term USD/Gold price
*Psychology of markets affecting availability of gold to the float
*Three demand spheres for physical gold flows, the West, India, and China/East Asia
*If Trump wins the election equities markets could have a substantial immediate drop, followed by a recovery
*SDR issuance is going to be highly inflationary
*Gold serves different roles in a Central bank portfolio versus an individual or institutional investor portfolio
*Gold’s role moving forward is one of insurance versus tail risks, systemic failures, and future liquidity crisis
*Gold held by central banks is the last line of defense for liquidity and confidence in central bank issued currency
*FX trading effect on gold pricing and alleged manipulation
*Gold Pool of the 1960’s, IMF coordination with the US selling gold into the market during the 1970’s
*International monetary system is missing an anchor and is considered “incoherent” by current and former officials
*Currency values continue to fluctuated wildy, this is a very unstable system
*Measuring the buying power of gold

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

You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

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

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

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

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

 

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

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

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

Transcript of Jim Rickards and Alex Stanczyk – The Gold Chronicles September 8th, 2016

Jim Rickards and Alex Stanczyk, The Gold Chronicles September 8th, 2016

*Jackson Hole Meeting Analysis
*Difference between 3.5% growth and 2% growth compounded over 20 years is the difference between a wealthy nation and a poor one
*Now looking like a rate cut by the Fed is more likely than a rate hike
*Removing cash from monetary system is now being discussed at the highest levels as a path forward to allow the US to implement negative interest rates
*Update to “War on Cash” scenario
*G20 Meeting Analysis
*China’s snub against President Obama was the 2016 version of the Kowtow
*This is a very significant G20 summit, the Hangzhou Consensus are the new rules of the road for the international monetary system
*IMF Quota being reviewed in 2017 and expect emerging market voting shares to be adjusted
*BRIC’s expected to have 15% voting power by end of 2017, which shifts the balance of influence within the IMF away from the US
*Long term effect could include rebalancing the SDR currency ratios, removing use of USD for purchase of oil, and other measures which would reduce reliance on USD as world reserve currency
*Introduction to coming war on gold
*Once the “war on cash” is over, it is expected attention will shift to gold, and government will shift attention to gold
*Buying gold may become increasingly more difficult from a regulatory standpoint in years to come
*Several non-US Central Banks are buying billions of USD worth of US stocks
*Expected longer term economic effect of SDR being re-weighted with Chinese Yuan

Listen to the original audio of the podcast here

The Gold Chronicles: September 8th, 2016 Interview with Jim Rickards and Alex Stanczyk

 

The Gold Chronicles: 9-8-2016:

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

Jim Rickards is a New York Times bestselling author, the chief global strategist for West Shore Funds, and the former general counsel of Long-Term Capital Management. He is currently a consultant to the US Intelligence Community and to the Department of Defense. Jim is also an advisory board member of Physical Gold Fund.

Hello, Jim, and welcome. It’s good to have you back after the summer break.

Jim:  Hi, Jon. Thank you. It’s great to be with you and our audience.

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

Alex:  Hello, Jon.

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

Jim, I sometimes see you as kind of an anthropologist specializing in a small tribe with its own strange language and behaviors. You refer to this tribe as the global financial elites. Well, the elites are having a busy time of it right now. They’ve recently been huddling at one of their annual rituals, the Economic Symposium in Jackson Hole, and of course, plenty of them were in attendance at the G20 summit of world leaders in Hangzhou, China.

As cracks continue to grow in the global monetary system, I’d like to take a closer look at what this powerful group is thinking and how their mindset today could impact our fortunes tomorrow.

Let’s start with Jackson Hole. In your newsletter, The Gold Speculator, you mentioned a startling paper delivered by economist Marvin Goodfriend. Would you tell us about that paper and why you find it significant?

Jim:  I’d be happy to, Jon. By way of introducing the topic, what I have said is based on reading these academic papers, speeches, releases, etc., written by policymakers but often by academics, PhD’s, and so forth. Obviously, they use quite a bit of highly technical jargon. I find a lot of that is by design really meant to exclude the everyday reader. Just as you’ve said, sometimes I feel like I’m an anthropologist going into these elite circles, listening to what they’re saying, coming back, and putting it all in plain English. Sometimes it’s just a matter of translation.

Although it is the case for people who are put off by either the math or the jargon, there’s a lot less there than meets the eye. When you get trained and actually go through it, you can find that so much of it is not that complicated and can be put into plain English. A lot of what I do is simply translating for everyday listeners. We never dumb it down, but I see no harm in putting it into plain English, yet somehow that escapes the people we’re talking about.

When we say ‘elites,’ they are elites because they are in powerful positions. I think they love to hang out with other elites whether in a place like Jackson Hole or the G20 summit recently or some of these other venues.

It’s not some deep, dark conspiracy. You don’t have to put on a tin foil hat or imagine black helicopters hovering over the horizon. We know who they are. It’s Janet Yellen, Lael Brainard, Stan Fischer, Mario Draghi, and certainly the leaders of the G20. We know who the heads of state are:  Obama, Angela Merkel, and President Xi of China. There are also a certain number of professors, maybe a little less known to the public, but this group is easily identifiable.

They collectively run the world of money and international finance. Of course, if you run the world of money, you have enormous power in the political and geopolitical sphere, so that’s what we track.

We were saying before going on air that one of the things we love about these calls is that there’s never a shortage of material. I guess the biggest problem sometimes is getting me to shut up, because I tend to talk too long and too much. The point is, we never had a shortage of material to share with the listeners and today is no exception, although I would say today is a slight exception in the sense that we probably have too much material.

We’ve had two major meetings in recent days one of which was in Jackson Hole. For our listeners who might not be familiar, this is an annual event in Jackson Hole, Wyoming, a beautiful spot in the Grand Teton Mountains, and it’s hosted by the Federal Reserve Bank of Kansas City.

There are 12 regional reserve banks in the Federal Reserve Bank system, and they each have their specialties. As I mentioned, this event is put on by the Federal Reserve Bank of Kansas City. All the major central bank heads and other policymakers are there, a certain number of select journalists, academics, and a few others.

It’s conducted like an academic symposium. That means the speakers write a formal paper with footnotes, references, charts, and all that, and then they deliver the paper. They might not read it verbatim but stand up and present it, and the paper is available.

We’ve just gone through that, and the whole world was waiting to hear Janet Yellen speak. She is Chair of the Federal Reserve and has a lot of influence. Her speech, amazingly, was the biggest nothingburger I’ve ever heard – I’ve read it!

By the way, reporters do get these things in advance. They’re embargoed, so you might get it the night before, but you’re not allowed to write about it until exactly 10:00 Eastern Time or whenever the time of delivery is. It gives reporters a chance to write their story in advance.

They race each other to get the headlines out and then release the text of the speech. I’m a slow reader so it might take me 20 minutes, half an hour, or a little longer to read it for meaning, but the way trading works today, they have these robots – artificial intelligence robots – programmed to scan it in a nanosecond and look for keywords. For example, does she say “rate hike,” “data dependent,” or whatever? Then the computers take over the trading and start trading on something Janet Yellen said.

Bear in mind, there are no humans involved in any of this. One robot is reading the speech and another robot is doing the trading. This is where our markets are. I hope listeners understand that you can still call a broker and wait for an order to fill, but you’re at the mercy of all these machines.

It takes a reader like me a little longer to digest. I actually read the footnotes and try to put it in context of other things, so I might be days before I’m really ready to talk about it. The benefit I have is that I’m an analyst, not a reporter, so I don’t have to be in a hurry; I just have to try to do a deep dive and get it right.

The theme of the conference was basically a self-examination:  “Do we need new tools? Are the tools we have working?” This is eight years of close to zero rates, seven years at zero, and now we’re going on a year at 25 basis points, three rounds of QE, a $4 trillion expansion of the balance sheet, all kinds of manipulation going in the name of forward guidance, and no growth to speak of.

We’ve had really pathetic growth all along, about 2% for eight years versus trend growth closer to 3% or 3.5%. The difference between 3.5% and 2% doesn’t sound like a lot, but it is a very big difference. Compound it over 25 or 30 years or even part of a normal lifetime, and one society will be twice as rich as the other due to compounded growth.

It’s been getting even weaker lately. For the last four quarters, growth is just barely above 1%. Weak and getting weaker is the way to describe it, and at Jackson Hole they’re saying, “Are the tools good enough?”

Surprisingly, Janet Yellen said yes. She said, “We can cut rates.” They’ve been raised 25 basis points, so I guess they can cut them.

Wall Street is spending all their time navel-gazing about the next rate hike. Not only do I not envision a rate hike as far as the eye can see, but I would put the odds of a rate cut probably slightly higher than a rate hike. No one is talking about that, but it looks like we’re heading into a recession right now. So they can cut rates, go back to a zero interest rate policy, and do more forward guidance. Forward guidance is just jawboning or words.

They may say, “Well, not only did we cut them close to zero, but we’re not going to raise them for a really, really, really long time.” Those words sound ridiculous but no more ridiculous than the words the Fed actually uses. They say things like “Extended period” and “We’ll be very patient.” There’s a whole process for how they come up with these words. I talked privately with the guy that wrote them, and he said the process is ridiculous. That was the word he used. Be that as it may, they have these code words, which are really just a way of saying to the market, “Don’t worry.”

Yellen said that the toolkit of zero interest rates, rate cuts, QE, and forward guidance will be sufficient. She might be the only person there who actually believes that, if she believes it. Let’s give her credit.

Lawrence Summers at Harvard has done a lot of good work on this. He said that when the U.S. economy is in a recession, it takes about 400 basis points of rate cuts to just get out of a recession. Historically, what that has meant is that if rates were 7% and you went into a recession, you could cut them to 3% – 400 basis points from 7% down to 3% – and that would help the economy get out of the recession, so that’s what you need to do.

What exactly do you do when you’re at 25 basis points?  If you go into a recession as it looks like we are and you have to cut interest rates 400 basis points to get out of it but you only have 25 basis points to play with, how are you going to cut rates? The answer is you can’t unless you go negative. That’s a whole other discussion; I’ll come to that in a minute. But Yellen seems to favor cutting rates, forward guidance, and saying “We won’t raise them.”

QE is back on the table.

The question of QE is interesting. A lot of critics, including myself, would give the Fed credit and say okay, that was an emergency response to a liquidity crisis, to a financial panic, so I’ll cut the Fed a little slack on QE1. But QE2 and QE3 were completely experimental.

When they went into QE2 in 2010 and QE3 in 2012, there was no liquidity crisis, there was no financial panic. This was just Bernanke’s experimentation to see if he could create a wealth effect and get people to spend more if their stocks went up. What happened was that the stocks went up but people didn’t spend more; we just got another asset bubble. Now Yellen is saying that with more QE, we can get out of a recession.

There is very little evidence for that and no reason to think it’s true. The Fed thinks they can raise rates before the recession so they can cut rates when we have a recession. It’s way too late for that. If that were true, the time to start raising rates was probably 2009. I said this at the time in 2009, but even if you want to say 2010 or 2011, the point is, they missed their chance. Now we’re getting close to a recession with no capacity to cut rates.

That begs the question:  what about negative rates? The experience with negative rates is pretty bad. It looks like they don’t work, but just because it’s a bad idea doesn’t mean the Fed won’t try it.

That’s what made the Jackson Hole conference quite interesting. For the listeners who are interested, if you go to the Federal Reserve Bank of Kansas City’s website and look up the Jackson Hole Symposium, you’ll see that there were seven or eight papers delivered, not just Janet Yellen’s.

Yellen was the only one anyone paid attention to. Being the geek that I am, I actually read all of the papers, and the one I found the most interesting was by a professor named Marvin Goodfriend. He is an academic, so just to be fair, he’s not on the Board of Governors or a policymaker; he’s an academic, and academics are supposed to come up with whacky ideas. In my experience, however, you don’t get invited to something like this unless your ideas are being taken seriously as possible policy.

If this appeared from some university in some financial journal, then I’d say, “Okay, if you want to think out of the box, that’s fine.” But when you’re standing up at the party in the Jackson Hole, among very few invitees…

The history of Jackson Hole is that very important things happen there. The best example was August 2010 when they leaked the details on QE2. QE2 did not formally begin until November 2010 when the Fed announced it and started doing long-term asset purchases, but they leaked it in August 2010. If you go back and look at the market, the stock market rally was in September and October, so important things do happen at Jackson Hole.

Professor Goodfriend gave his paper and presentation. I think I’m pretty good at coming up with out-of-the box ideas, but this is just about the craziest idea I’ve ever seen. Yet I have to take it seriously.

I want to pivot a little bit and come back to Jackson Hole. I want to pivot to the war on cash as many of our listeners are familiar with. The war on cash amounts to this:  you have to get rid of cash if you’re going to have negative interest rates. What’s a negative interest rate? You put your money in the bank, and instead of paying you interest, they take your money away.

Let’s say you put $100,000 in the bank, you go away and come back a year later, and there’s $99,000. If the negative rate is 1%, they would take away 1% of $100,000, so you would have $99,000 left. Instead of paying you interest so that you’d have $101,000 like you did in the good old days or $104,000 in the really good old days, you’ll come back and have only $99,000.

People say, “I can get around that. Heck with the bank, I’ll just take my money out, put it in a safe place, and a year later, I’ll still have $100,000. I won’t make anything, but at least they won’t take any of it away with the negative interest rate.”

People will do that, and they did it during the Great Depression. The primary reason was that they were worried banks were going to fail. People put cash in coffee cans and shoeboxes and buried it in back yards or under their mattresses, because that’s what people do. If you’re going to have negative interest rates, you’re going to have to get rid of cash, so that gives you the war on cash.

The war on cash has three vectors. The first is that banks don’t want to give you the cash. Like I’ve said before, try going down to your bank and getting $10,000 or $20,000 in cash. First of all, you might not be able to get it. They might say “Come back in a few days, because we don’t have that much cash on hand.”

Even if they do, for anything above $10,000, they will file a report with the Treasury called a Currency Transaction Report. I don’t advise this, but people think they’re being cute by saying, “I’ll get $9,000, then I’ll come back tomorrow and get another $1,000.” Forget it. That’s called structuring, and they’ll file a Suspicious Activity Report. They’ll probably put you under investigation, because it looks like you’re structuring around $10,000.

Just to be clear, don’t do it. I don’t advise it, because that’s what will happen to you. You’ll be investigated if you do that.

This is true even for modest amounts such as $3000. One of my Treasury official friends said $3,000 is the new $10,000 for a Suspicious Activity Report. You can be a law-abiding citizen and live in a town for 20 years, and you will be treated like a drug dealer.

The person behind the counter has no interest in helping you. He’s been to compliance seminars teaching how he’ll get fired for not filing money laundering reports. They’ll treat you like a drug dealer, a tax evader or a terrorist and put your name in a file next to Al Qaeda even though you’re just trying to hang on to your wealth by avoiding negative interest rates. That’s the first vector.

The second vector is more recent and more interesting. Merchants don’t want your cash. More and more vendors are saying, “We don’t take cash.” You can go up to the counter, but you’d better get out your debit card, credit card, a gift card, your iPhone with Apple Pay or something because they’re not going to take your cash. Even if you can get the cash, which is hard, you may not be able to spend it.

The third vector – and our friend Ken Rogoff, a professor at Harvard, is the thought leader on this although others have said the same – is just to get rid of the $100 bill. He has a new book out on the subject of elimination of cash. It’s not quite a bestseller but is certainly selling very well. You can Google “Rogoff” on Amazon to see his new book, which is basically a manifesto to get rid of cash.

You might be down to $20 bills, and then you say, “What can I do with a $20 bill?” Maybe you can get a latte with an espresso shot at Starbucks, but then Starbucks doesn’t even want your cash, either. In every respect, they’re attacking cash.

One way to really get out of the system, which I recommend, is to buy physical gold. If you have physical gold, you’re not going to have negative interest rates and you’re not going to be viewed suspiciously. It’s a perfectly legitimate investment and a way to get out of what I call the digital slaughterhouse where they’re trying to round up all the digital savings into a small number of banks and slaughter you with negative interest rates.

Getting back to Professor Goodfriend at Jackson Hole, he came up with another idea which is to create an exchange rate between cash in your pocket and cash in the bank. This gets into the definition of money. A lot of people think bank deposits are money. We say, “You have money in the bank.” The Fed tells you it’s money, and they want you to believe that.

A bank deposit is not money; it’s an unsecured liability of the bank, which could go insolvent. Then you get into insurance, but the insurance might go insolvent. I’m not saying to pull all your money out of the bank, and I’m not saying they’re going to go insolvent tomorrow; I’m just saying that’s not really money, as far as I’m concerned.

We also have the famous money market funds. The FTC just changed the rules so that the money market funds can suspend redemptions and not have to give you back a dollar on a dollar. It’s called breaking the buck. In the new world of money market funds, they can be like a hedge fund and not give you your money back at all, or even if they do, they don’t have to give you a dollar for every dollar you put in.

That’s ‘money in the bank.’ I don’t think it’s money, but the Fed does, so let’s call it money for a minute. Well, if you have $100 in your pocket, go up to the bank, and you deposit it, the bank gives you credit for every dollar. If you look at your statement, there’s $100 more in your bank account. Basically, the cash in your pocket has par value relative to the balance on your bank account. You can put $100 down at the counter and the deposit slip will credit your account for $100.

What this professor said is, “No, we’re going to treat that like a cross rate, like an exchange rate.” If you’re going to Europe and you buy euros, you can buy euros, but you don’t know what the exchange rate is going to be tomorrow or the next day. What we do know is that it fluctuates.

I get questions all the time from people who are going on vacation like, “Jim, should I buy my euros now, or should I wait until I get there?” depending on whether I think the euro is going up or coming down.

What the professor said is that cash in your pocket and cash in the bank can have an exchange rate, and they’re not exchangeable at par. The Fed can set the exchange rate, and the Fed is under no obligation to maintain parity.

What that means is in this future world the professor is envisioning, you could take $100, give it to the teller with a deposit slip, and the bank would credit your account $98. Your $100 in cash would be converted to $98 of deposit credits, or vice versa. Let’s say you have $100 in the bank and you said to the teller, “I’d like to withdraw my $100,” or if you went to an ATM and said, “I’d like to withdraw $100,” you would receive $98.

There would be an exchange rate between cash money and bank money. Even though people think of them both as money, it could fluctuate. That is a way of imposing negative interest rates on cash.

We already said that if your money is in the digital system, they can impose negative interest rates just by taking it away. You may respond, “Well, I can go to cash and avoid the negative interest rate.” I just explained at length why that’s really difficult, but let’s say you did. Imagine that you said, “Whatever. I don’t care if they report me to the Treasury. I’m an honest citizen. I want $50,000 in cash please, and I’m going to put it in a safe place.” You might only get $47,250 for your $50,000. It’s not worth 100 cents on the dollar.

The system is so corrupt and so extensive that they’ve even figured out a way to impose negative interest rates on cash in your pocket. With Goodfriend’s policy, you can’t take it in and out of the bank without suffering an exchange rate, which obviously would be adverse to cash.

I read his paper and thought that from a professor’s point of view, it’s pretty creative. I’ve never heard of that before. But from a saver’s point of view, this is appalling. It’s amazing the lengths to which policymakers, politicians, and now academics will go to steal your money.

It’s easy to dismiss this as the musings of some academic, but when you’re on the podium at Jackson Hole and Janet Yellen, Stan Fischer, and William Dudley are in the front row…  This is how things work; this is how they do it. They feed it out as an academic paper, then next thing you know it’s on some policy agenda. First, some economist is writing a paper, and next thing you know, it’s real.

I saw this over the last five years with SDRs. SDRs are all over the news now. Some people say “Hey, Jim, you had a whole section on this in your book Currency Wars in 2011. How did you know in 2011 that the world is moving to SDRs?” The answer is because they told me.

I went to the IMF website and found the papers. Do normal people do that? No. If you found the paper, could you necessarily understand it without technical training? Probably not. It doesn’t mean people aren’t smart; I think everyday Americans are. I always say when it comes to your money, everybody has a PhD, but you do need some technical training to understand this.

The whole SDR blueprint was laid out in 2010/2011; all you had to do was read it. What I’m saying is, don’t dismiss this as something that will never happen. The blueprint was laid out at Jackson Hole for how they’re going to steal your money one way or the other. I’m telling you now that this is coming, and when it actually happens two or three years from now, no one should be surprised, because you could see this coming.

So there actually was big news coming out of Jackson Hole. It wasn’t Janet Yellen, other than the news that she doesn’t know what she’s doing, which has been clear for a long time and made apparent from her speech. It also wasn’t the news that the Fed is completely unprepared for a recession; we can see that as well. But there was this other paper from a professor  about how they can actually impose negative interest rates on physical cash just by having an adverse exchange rate to your money in the bank.

Watch that space. I think that wraps up on Jackson Hole, Jon. I know you want to talk about G20 a little bit since there’s some news there. I’ll hand it back to you.

Jon:  Thank you, Jim. That is a startling story. I had a question for you about an event coming up on September 30th, but I don’t want to break your flow if there was something you wanted to share with us about the G20 summit.

Jim:  They’re actually connected. The September 30th event has to do with the IMF and the Chinese yuan, but that is very much related to what happened at G20. I’ll take a few minutes on G20, segue into that September 30th event, and then we’ll go from there.

The G20 conference just wrapped up. I think a lot of listeners know the G stands for group, so it’s a group of 20 countries. There are actually 24 that get invited, but it’s called the group of 20 countries of the G20. They do this once a year.

They operate at different levels:  heads of state, financial ministers, central banks, technical staff, so-called Sherpas, and a lot of other things contribute, but this was the leaders’ summit. It included President Xi of China, Theresa May, Prime Minister of the U.K., Justin Trudeau, President Obama, and the rest all there for about three days.

It’s a rotating presidency, so a different country takes a turn every year. Last year was Turkey, next year is going to be Germany, and this year was China which made President Xi of China the president of the G20.

The G20, I’ve said for a long time, is basically the board of directors of the world. Even more powerful than the United Nations, more powerful than the IMF, the World Bank, and these other multilateral institutions of various kinds, this is the group that runs the world.  The G20 is the most powerful group get-together that exists.

The Chinese are very caught up in appearance and ceremony and protocols, so nothing escapes their attention in this regard. When the President arrives on Air Force One, they wheel up a big two-story staircase. There’s a top door on Air Force One that opens, and the President comes down the staircase to meet whatever dignitaries are waiting for him at the bottom of the steps. The Chinese did not let him do that.

There’s a back door on Air Force One. It’s like a hatch that comes down the back with stairs that are much shorter and closer to the ground. It’s very unimpressive-looking. They made the President do that, so right away they’re kind of insulting the President.

This is the 21st century equivalent of the kowtow. The kowtow is a ceremony when you approached the Chinese Emperor back in the days of the empire. You had to lie flat on your face then rise and bow and crawl on your hands and knees like 20 feet, lie flat again and rise and bow again. You’d keep doing that for a long distance as you approached the emperor. They didn’t make the President kowtow, but making him come off the back of the plane was a 21st century kowtow, so to speak. It was Xi saying to Obama, “I’m the boss.”

The summit was two days, and again, there was a communiqué. It was pretty long at about 15 pages or so with lots of points. When you explore these things as I do, there’s the communiqué, but there are 40 separate working papers that come out of this.

There’s the tax group, the structural reform group, the SDR group, the climate change group, etc., and every one of those groups produces its own report. These reports are anywhere from 20 to 100 pages long, so you’re literally talking about 1,000 pages of very dense, technical material coming out of these G20 summits.

I haven’t read 1,000 pages, but I’ve read quite a few pages in the particular areas that are of interest to me, which are SDRs, financial risk, and taxation. It’s amazing what’s there. I would say this is the most significant G20 summit since the Pittsburg G20 summit in September 2009. There were three in a row:  Washington in November 2008, London in April 2009, and Pittsburg in September 2009. Those three in a row were the response to the global financial crisis.

There have been some significant developments since then, but this is by far the most important G20 summit since September 2009. I’ll mention a couple of things just to be specific. The leaders announced what’s called the Hangzhou Consensus. Hangzhou is the name of the city where this took place. As I said earlier, nothing happens by accident. The word “consensus,” which is the English translation, was very much by design.

Going back to 1989, there was an article by a think-tank scholar in Washington called the Washington Consensus. The Washington Consensus was also called Bretton Woods II and was basically the blueprint for running the world after the collapse of the original Bretton Woods.

We all know Bretton Woods broke down in August 1971 when Nixon suspended redemptions of dollars for gold. The 1970s were a period of chaos, and the 1980s were a period of the dollar reasserting itself under Volcker and Reagan – the new “king dollar” period. The dollar was quite strong at an all-time high in certain industries in 1985.

By 1989 with the fall of the Berlin Wall, the end of the Cold War, and king dollar, the U.S. looked like a global hegemon. At a time when U.S. power relative to the rest of the world was probably at an all-time high, this scholar came up with what he called the Washington Consensus.

It was basically ten rules of the road. You have fiscal reform, floating exchange rates, open capital accounts, etc. There was a list of policies, and it more or less said, “This is how Washington wants to run the world. My way or the highway. If you don’t play by these rules, don’t expect an IMF bailout, don’t expect foreign investment, don’t expect to participate in free trade deals, etc.” The Washington Consensus was basically Washington dictating to the world.

Clearly, that has broken down a little bit in this century when we saw weakening in the global financial crisis, etc. I’ve been talking quite a bit about the diminution in the role of the U.S. dollar and the rise of the SDR. A lot of the stuff about U.S. power eroding has been in the air not just financially, but militarily, and we all know what’s going on in the Middle East with Libya and Syria. We don’t need to belabor all that.

When I saw the words “Hangzhou Consensus,” they literally jumped off the page at me and hit me in the eyes. I said, “Okay, this is the coming out party. There is no more Washington Consensus by the fact that it was named after a Chinese city.”

I understand that it’s the G20, the U.S. is a signatory, the U.S. isn’t going away, and the dollar is not disappearing overnight. I’m not saying any of that. What I’m saying is that there has been a changing of the guard. We have global rules of the road named after Washington, the capital city of the United States, and then suddenly a new set of rules come out named after a city in China. Hangzhou is not the most important city – it’s not Shanghai or Beijing, maybe that’s what made it palatable to the U.S. – but the Hangzhou Consensus is the new rules of the road of the for the international monetary system. I haven’t seen anyone report this or pick up on this, but the symbolism is unmistakable.

I’m trying to share with our listeners the stuff you won’t hear on CNBC or read in the New York Times or the Financial Times. This is the stuff that goes right over the reporters’ heads, and the people who do get it don’t talk about it. Christine Lagarde understands this, but she’s not going to tell you this, so I’m trying to share this analysis with the listeners.

What’s in this Hangzhou Consensus? We have these new rules of the road. One of them explicitly says that the G20 runs the world. I’ve been saying this for five years, and sometimes I get laughed at with, “The G20 is just a conference, who cares.” No, they outsource to the IMF and intersect with these other multilateral institutions. They don’t have a permanent secretariat – that’s what the IMF is for – but they do have all these working groups, and they’re coordinating with other agencies such as the OECD on taxation and the IMF on the SDRs.

They have a finger in every pie, but they explicitly say, from a governance point of view, “We, the members of the G20, agree that we run the world.” It didn’t say that in so many words, but it kind of did say that. Of course, this is self-appointed, self-perpetuating, unaccountable, and non-democratic. There are kings and dictators, communists; this is not necessarily a nice, warm, fuzzy group, but that was explicit.

What was implicit for years has now become explicit. Think of this as two things:  1) a charter for the board of directors of the world, and 2) a new set of rules of the road named after a city in China announced under the auspices of President Xi who happened to be the president of the G20. This is like saying he’s king of the world. Again, the symbolism here is unmistakable.

There is a third thing just to put a finer point on this. Our old friend, the BRICS were back. BRICS is an acronym going back to 2000. Jim O’Neil of Goldman Sachs came up with it as a marketing device. It’s the only marketing device I’ve ever seen that became a political reality, but it speaks to the power of branding.

BRICS stands for five emerging markets – Brazil, Russia, India, China, and South Africa. South Africa is kind of a rounding error on this, but the five of them together led by China add up to 22% of global GDP. At almost a quarter of global GDP, it’s not insignificant.

Everyone was talking about BRICS four years ago.  The BRICS have a reserve fund, they have a development bank, and they were building their own Internet. It looked like the BRICS were going to tell the U.S. to shove off, and then suddenly, in 2014/2015, you didn’t hear as much about the BRICS. What you really did hear about was China going their own way with the Asian Infrastructure Investment Bank and some other initiatives. It looked like China was going to run away from the rest of the BRICS.

The BRICS are suddenly back, and here’s why. The IMF has to reform their quota every five years. Like I said, they can’t speak in plain English; they have to make up words. Quota is a vote in the IMF. As stated in the Articles of Agreement, they have to review it every five years and make adjustments. Right now the BRICS are 22% of global GDP, but they’re only 14.9% of the IMF quota, so clearly, they are under-represented.

The Hangzhou Consensus, this final communiqué of the G20, says, “We acknowledge that the IMF is going to review the quota in 2017, and we acknowledge and expect and are in accord that the percentage quota of emerging markets will increase.”

Well, if you’re at 14.9% and the Hangzhou Consensus says you’re going to increase in 2017, all that’s laid out; obviously you have to be at least 15%. My guess is it’ll be a lot more than that, but you can’t increase from 14.9% without hitting 15%.

Fifteen percent is a very significant number. That’s the percentage vote you need to veto an important action by the IMF. In other words, the big deal things need 85% or more to pass. It’s a supermajority. You need 85% to issue SDRs or amend the Articles of Agreement. If one country has more than 15%, they can therefore block it, because you can’t get 85% if the guy with more than 15% is holding out.

There’s only one country in the world that has 15% or more right now, and that’s the United States, so the U.S. has always had this veto power. No single country has that. The BRICS suddenly acting together, holding hands – and they actually do hold hands in the group pictures – are going to have at least 15% by this time next year. That’s in the G20 final communiqué and means they can block. It doesn’t mean they can make stuff happen, but they can prevent stuff from happening.

Let’s just play out this scenario. Next year, the IMF does the quota review, which they have to do. You get a bump in emerging markets representation, which they agreed to. The BRICS have 14.9%, which means you’re going to blow past 15%. That gives you veto power.

The world is in a financial panic, there is a liquidity crisis worse than 2008, and you can see that coming a mile away. Central banks are stretched, because they never normalized the balance sheet after the last crisis. The only clean balance sheet in the world is the IMF, so the only way you’re going to reliquify the system is by issuing SDRs, and you have to have a vote.

Now the BRICS can sit there and say, “We’re not voting for the SDRs. We’re going to use our veto power unless we get what we want.” What they want is the diminution of the role of the dollar – no more pricing oil in dollars, no more dollar being the dominant reserve currency, etc., whatever their wish list is.

So the BRICS can turn to the IMF and say, “If you want our votes on the SDR to save the world” – because at this point, the world will be burning down metaphorically, if not literally – “you’re going to have to give us what we want.” They will have the leverage to run the dollar off the road by this time next year.

It’s happening anyway in slow motion, but this would be a very specific tool, a very specific percentage, and a very definite event that you can see coming where all these things could fall into place.

I look at Jackson Hole, Yellen is clueless, this professor has just said that my cash isn’t worth par value anymore, and I look at G20 where they’re saying they have new rules for the game called the Hangzhou Consensus. No more Washington Consensus; they’re going to upgrade to the BRICS having veto power, and by the way, they run the show. There was also language in there about SDRs.

These are hugely significant events back to back, just to share with the listeners the stuff that you won’t read. I like all these outlets and reporters; I’m not dinging anybody, but you won’t read this stuff on Bloomberg, the Wall Street Journal, or the FT, because it’s way down in the weeds. This was the significance to me, Jon, so you’re right; a very eventful past several weeks.

Jon:  Thanks, Jim. That’s another rich transfer of information for us. I’d like to turn the conversation over to you, Alex. I know you have some great questions from our listeners, but first, there is another topic Jim has been writing about recently in what he’s calling the beginnings of a war on gold. We’ve heard about the war on cash; Jim has been starting to warn us about a potential war on gold.

This is such an important question, Alex, so I really think we should give it priority today. From your perspective, would give us a brief update on the gold market and tell us how this concept of a war on gold resonates with your own experience there on the front lines, and then let’s hear from Jim on this.

Alex:  From my perspective dealing in the gold industry, we’ve seen this happening over a period of years. When I say over a period of years, it’s been slowly happening for almost a decade now.

Our team differs from other gold funds in that we come from the physical side of the industry, which means dealing with refineries, dealing with secure logistics, moving gold around the world, vaulting, etc. Over the last few decades, we’ve had access across multiple jurisdictions and on three continents, so it’s given us a view into the changes in regards to regulations impacting investors on a global scale.

We’ve observed changes in banking and regulatory requirements that are pointing to the direction of full transparency and full regulation of individual wealth. Without diving too deeply into all of these details, here’s a brief list:

In 2010, the Foreign Account Tax Compliance Act was passed in the United States and signed into law. This is also known as FATCA; some of you might recognize that acronym. FATCA requires foreign financial intermediaries and foreign financial organizations such as banks, funds, and anything having to do with finance and investing to comply with this law globally. In 2010, the U.S., France, Germany, Italy, Spain, and the U.K. all made a joint announcement that they were going to be implementing FATCA.

In 2013, VIA MAT – which is now Loomis, one of the largest private vaulting custodians in the world – announced that it would no longer allow U.S. persons to have individual accounts or store valuables with them. They were specifically citing U.S. tax liability issues.

In 2014, a staff report issued to Congress by the Committee on Oversight and Government Reform for the U.S. House of Representatives identified a federal executive administrative program that was forcing banks to close accounts of businesses across a wide range of industries. They came out and created this list of what they considered high-risk merchants.

These types of industries included things like ammunition sales, coin dealers, credit repair services, firearms sales, money transfer networks, payday loans, pharmaceutical sales, surveillance equipment, telemarketing, and tobacco sales. These are all legitimate and lawful businesses in these industries, but many of these businesses were notified really without any advance warning that their banks were closing their accounts. Few, if any, banks will open new accounts for businesses in this area. It’s become very difficult.

This is not just happening domestically; this is happening globally. We’ve seen it in a number of jurisdictions. While this doesn’t bear directly on investors, it does show the extent to which governments are going to control the flow of finance regarding anything including industries it doesn’t approve of.

With that in mind, Jim, I know that you have recently talked about a coming war on gold. Would you like to elaborate on that a little bit more?

Jim:  That’s a great summary, Alex. The only thing I would add is that it just strikes me as funny or curious at least that the war on cash is going full steam ahead. We talked a lot about that, but gold is actually something citizens around the world can transact fairly freely.

You’re right, it’s clear that Swiss banks don’t want U.S. accounts, but U.S. citizens can go buy gold. You need a reputable dealer. You have to be careful because some of the markups are too high. A proper markup is maybe 1% up to 4%. That’s a little steep, but that’s a normal markup.

Some of the markups, unfortunately, are 20%. I feel that people who are interested in gold get ripped off or taken advantage of by some of those dealers. Avoid the 20% guys; look for the guys who are less than 5%. A dealer deserves a commission, so I don’t mind paying a markup if I buy gold.

U.S. citizens and foreign citizens can buy it freely. Foreign citizens can use Swiss vaults, but U.S. citizens are going to have to find U.S. vaults although the government hasn’t really done anything. I think the government has spent so many decades telling you that gold is not money that they started to believe it themselves.

I think gold is the best form of money, and I think every investor should have about 10% of their assets allocated to physical gold. My point being the government is going to win the war on cash. It won’t be pretty; they’ve almost won it already. Sooner than later, you’re not going to have cash or be able to get cash, but for now, you can get gold. That’s the way to get around negative interest rates and avoid the government stealing your money.

I think once the war on cash is over, maybe a year or two or less from now when you actually don’t have cash and you’ll have to use debit cards or prepaid cards or whatever, the government is going to wake up and say, “Wait a second, we won the war on cash, but how come all of these people are buying gold? Obviously, we need to do to gold what we just did to cash. We need to make that hard to get, we need to clamp down on dealers, and we need to increase reporting, just do a whole bunch of stuff that has been around forever in the cash world.”

Right now the government has their hands full attacking cash and they are ignoring gold, so in my view, it’s a good opportunity to get gold relatively hassle-free. If you wait a year or two from now, you might find that you’ll be treated like a drug dealer for buying gold.

It’s ridiculous. I don’t know why honest citizens can’t have any kind of money they want whether it’s a bank deposit, physical notes, physical gold, derivatives – take your pick. I don’t know why people can’t express a preference for various forms of money, but the government is going to stamp them out one by one.

There are a lot of reasons to get gold today including the fact that when you really want it, there will be actual, physical shortages. We’ve spoken about that before; independent of government action, you just might not be able to get it, period. That’s just one reason. Another thing is that the price might run away from you. A third reason is that the government might decide that they don’t want to let you do it, so I would always make preparations when the sun is shining; don’t wait for a rainy day.

Alex:  I very much agree with that sentiment. In fact, we’ve been recommending that type of thing to people for many years now.

We have about a dozen really good questions here in the queue, but I think we only have time to get through a few of them.

The first one is coming from Duha M. In fact, several people are asking this exact same question or something similar. He’s saying “I’m sorry this is a bit long; I haven’t found the answer anywhere else. There has been a lot of talk about central banks buying a lot of stocks –the Bank of Japan, Swiss National Bank, and others. My question is, is it possible that central banks can prevent market crashes by just printing fiat money and buying equities as much as needed? And why does the Swiss National Bank have something like $1 billion in gold stocks?”

Jim:  The answer is yes. If you want to bid up the prices of stocks, you can prop them up. What is the stock market index? It’s just a formula applied to a bunch of closing prices. If you want to print money and buy stocks, go ahead and do it now.

That is unbelievably unsound and will cause a loss of confidence in money. I’d want no part of the stock market unless you’re a really expert trader. If you’re an expert trader and you’re looking for rifle shot opportunities on over- or under-valuation and that sort of thing, that’s one way to tiptoe in, but as an allocation in my portfolio, I have no publicly traded equities.

I obviously have gold, silver, cash, and land. I do own stocks, but they’re private companies I invest in – tech startups and venture capital type situations where I know the people involved – it’s contracting, investing in hedge funds, rental properties, farmland, and fine art. There are lots of things to invest in, but the stock market is a huge bubble mainly because of central bank intervention.

I did an analysis a couple of weeks ago where I could see that the yen was going to get a lot stronger. Everyone was expecting B of J intervention and QE whatever in Japan, and that the yen was going to be weaker. I said, no, the yen is going to get a lot stronger and trade through 100, which it did briefly with the dollar.

I saw that and then took it a step further. I said if the yen is strong and the large Japanese corporations get a lot of their earnings from overseas outside of Japan, when they take these local currency earnings and translate them back to yen, they’re going to have fewer yen because of the strong yen. That’s going to reduce their earnings, so that’s going to be bad for Japanese stocks.

I was completely wrong. The Japanese stock market went up. I was like, “What did I miss?” What I missed was that the Central Bank of Japan was buying stocks. In other words, my fundamental analysis didn’t matter because the Bank of Japan was just waking up and buying Japanese stocks.

They don’t care about earnings, translation losses, earnings per share from foreign exchange translation, and all of the things fundamental analysts look at. They were just bidding them up.

So the answer is, yes, central banks can print money and buy stocks and prop up markets, but I wouldn’t touch it with a ten-foot pole. That is very non-sustainable, very fragile, and subject to collapse based on confidence, based on psychology, and so it will fail in the end, but it can succeed in the short run.

Alex:  Another question we have is from Adeeb:  “What economic effect, if any, can we expect when the Chinese yuan joins the IMF reserve currency status in October?” I think what he’s saying is as the SDR gets reweighted with the Chinese yuan as a component, are we looking at any specific economic effect from that?

Jim:  We are in time. These things play out very slowly, and the elites behind it want it to play out slowly, because they don’t want you to notice. We already talked earlier in the call about how so much of this is technical, but it’s hiding in plain sight. You can find all these source papers on their websites, but good luck reading them or understanding them.

Just to be clear on what’s going to happen, the value of an SDR right now is calculated with reference to poor currencies. A lot of people think there’s this big basket or pot of hard currencies backing up the SDR. There isn’t; there’s nothing backing up the SDR. It’s just another form of fiat currency. The IMF prints them and hands them out, there’s nothing behind it, but you can take an SDR and exchange it for your euros or dollars.

I can take dollars and buy euros, and I can take SDRs and buy euros or dollars, but it begs the question, what is the exchange rate? This basket we talked about is used to calculate the exchange rate. Right now, there are four currencies in the basket:  dollars, sterling, yen, and euros. Effective the close of business September 30th or waking up October 1st – take your pick – the Chinese yuan will be included in the basket.

Now, it doesn’t mean your dollar is worthless on October 1st. It does not mean you’re going to wake up on October 1st and the dollar will have disappeared; that’s not how these things work. What it does mean is that China is on the bus. In the 1960s, there was an expression, “You’re on the bus or off the bus.” Well, so far, China has been off the bus, but on October 1st, they’re going to be on the bus meaning they’re going to be part of probably the most exclusive club in the world, because you have five members.

This means that in the next financial crisis when you need to reliquify the world, as I said earlier, central banks can’t do it because they never normalized the balance sheet and they’re at an invisible confidence boundary, and “Oh, another $4 trillion from the Fed, nothing to it?” I don’t think so; at some point, you’re just going to get out of the dollar and out of all these other currencies.

Where is the money going to come from? When you have to print money because everybody wants their money back, where is that money going to come from? It’s going to come from SDRs, except China would not approve that unless they were on the bus.

The significance of what happens on October 1st is once China is in the club, they would then have a vested interest and community of interest in improving and expanding the use of SDRs, which we’re already seeing.

For the first time in 40 years, the World Bank issued an SDR bond issue underwritten by Chinese banks, by the way, in the Chinese market.

That’s not the IMF printing SDRs; that’s a separate multilateral institution borrowing in SDRs by issuing bonds denominated in SDRs. If you want to buy the bonds, you have to pay for them in SDRs.

So the SDR is now being expanded in private use, so called market use. It’s going to be expanded in terms of the composite currencies including the yuan. It was specifically referred to in the Hangzhou Consensus and the G20 final communiqué that we talked about earlier. This is not in the lab anymore; this virus has been released and is going to sink the dollar.

It won’t happen overnight, but it could happen quickly if we have a financial crisis soon, which is possible. But even if that doesn’t happen, it will happen over the next several years.

People seem to think, “It’s happening in slow motion, so call me when it happens.” No, it’s happening. What are you waiting for? My point to listeners is if you want to ride the stock market thing or whatever, if you’re waiting for the day when everything I’m describing happens, it’s going to be too late.

It’s going to happen faster than you think. It’s going to happen overnight. You’re not going to be able to get gold. The dollar is going to plummet. Now is the time to diversify your portfolio to include physical gold.

Alex:  Chris T. is asking when this recording will be posted stating, “There’s so much material to re-listen to here, so much content.”

We will be posting the recording on http://physicalgoldfund.com/podcasts/. We will also send out an e-mail to everyone letting them know when that’s available.

We are about out of time, but there are a lot of questions in regards to portfolio allocations to gold, how to buy gold, and lots of questions about precious metals.

Jim, would you like to just very briefly talk about your last book, The New Case for Gold? I know a lot of these kinds of questions are answered in this book.

Jim:  At the risk of sounding like a book salesman – but I guess I am – I have a book that came out in April and is still available in book stores and on Amazon. It’s called The New Case for Gold. It has history, economics, analysis, and also has a very practical side: How do you buy gold? How would you store it? What’s the best way to own gold? What’s the recommended allocation? All the types of questions some of the listeners are asking are covered in the book.

We don’t have time to go through it all on the call, but for those who are interested, just go to Amazon: The New Case for Gold by James Rickards. It’s easy to find. I thank everyone in advance who purchases a copy. You’ll find quite a bit of information there and also other resources to follow up on.

Alex: Thank you, Jim, for your time. It’s been an excellent discussion. I appreciate your points about the war on cash, the war on gold, and SDRs.

With that, I’m going to turn it back over to Jon.

Jon:  Thanks, Alex, and I’m glad we got to at least a couple of those great questions from our listeners. Of course, we’d love to have tackled more of them, but I think it’s clear we’ve been discussing some momentous developments today.

Thank you, Jim Rickards, once again. It’s always a pleasure and an education having you with us.

And most of all, thank you to our listeners for spending time with us today. Let me encourage you to follow Jim on Twitter. His handle is @JamesGRickards. Goodbye for now, and we look forward to joining you again soon.

 

Listen to the original audio of the podcast here

The Gold Chronicles: September 8th, 2016 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: September 8th, 2016 Interview with Jim Rickards and Alex Stanczyk

Jim Rickards and Alex Stanczyk, The Gold Chronicles September 8th, 2016

Topics include:

*Jackson Hole Meeting Analysis
*Difference between 3.5% growth and 2% growth compounded over 20 years is the difference between a wealthy nation and a poor one
*Now looking like a rate cut by the Fed is more likely than a rate hike
*Removing cash from monetary system is now being discussed at the highest levels as a path forward to allow the US to implement negative interest rates
*Update to “War on Cash” scenario
*G20 Meeting Analysis
*China’s snub against President Obama was the 2016 version of the Kowtow
*This is a very significant G20 summit, the Hangzhou Consensus are the new rules of the road for the international monetary system
*IMF Quota being reviewed in 2017 and expect emerging market voting shares to be adjusted
*BRIC’s expected to have 15% voting power by end of 2017, which shifts the balance of influence within the IMF away from the US
*Long term effect could include rebalancing the SDR currency ratios, removing use of USD for purchase of oil, and other measures which would reduce reliance on USD as world reserve currency
*Introduction to coming war on gold
*Once the “war on cash” is over, it is expected attention will shift to gold, and government will shift attention to gold
*Buying gold may become increasingly more difficult from a regulatory standpoint in years to come
*Several non-US Central Banks are buying billions of USD worth of US stocks
*Expected longer term economic effect of SDR being re-weighted with Chinese Yuan

 

 

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 – The Gold Chronicles July 15th, 2016

Jim Rickards , The Gold Chronicles July 15th, 2016

*Post Brexit analysis
*Elite economic class is forecasting substantial problems for the global economy
*Summary history of the Bank of England
*Role of the Bank for International Settlements (BIS)
*Analysis of total debt monetization in Japan compromising Shanghai Accord

Listen to the original audio of the podcast here

The Gold Chronicles: July 15, 2016 Interview with Jim Rickards

 

The Gold Chronicles: 7-15-2016:

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

Jim Rickards is a New York Times bestselling author, the chief global strategist for West Shore Funds, and the former general counsel of Long-Term Capital Management. He is currently a consultant to the US Intelligence Community and to the Department of Defense. Jim is also an advisory board member of Physical Gold Fund.

Hello, Jim, and welcome.

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

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

Hello, Alex.

Alex:  Hello, Jon. Likewise, it is great to be here.

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

Jim, your warnings were vindicated; Brexit happened. The United Kingdom voted to leave the European Union contrary to the market’s expectations and to the betting odds they seemed to be counting on.

It was a grand drama, and there were plenty of alarmist prognostications. But, of course, the 24-hour news cycle moves on. We have new events consuming our attention now, some of them quite terrible, and the drama of Brexit seems largely to have slipped from view.

My question to you, has it all been much ado about nothing?

Jim:  That’s a great question, Jon. It has multiple parts, so I’d like to break them down a little bit and take them one at a time, because there is a lot to say on this. Definitely much ado, but not much ado about nothing; much ado about quite a few significant things. I’ll take them one at a time.

First, a recap because the Brexit vote and the market reaction happened since we did our last Physical Gold Fund podcast. I know listeners have had a chance to learn about this, read about this, and absorb it from a variety of different sources. I assume most of the listeners are familiar with this series of events, but we haven’t really had a chance to talk about it on this podcast.

Just to recap briefly, on June 23rd, there was a referendum in the UK to remain or leave the European Union (the EU). It was that simple; the only question on the ballot. You could vote Remain or Leave, and each camp had very well organized campaigns. The vote was a shock to the markets.

I think it’s important for the listeners to understand why it was a shock. Not just to review the history, but also because, going forward, the type of analysis we did to warn people what was going to happen is the way I do a lot of analysis for gold markets and capital markets in general.

We were using the same tools prior to Brexit that I use all the time. It’s worth spending a minute on how the market “got it wrong.” It’s never really right or wrong; they are what they are. They’re information – aggregated information. The trick is not to think about it in terms of being right or wrong, but to think about it in terms of what the market is telling you.

I’m active on Twitter and have publications, and I was out on other channels on June 20th through the 22nd, the two or three days leading up to Brexit, saying, “Buy gold, short sterling. This is going to be a shock.” We were very well ahead of it.

The reason I said that is because the polls were actually too close to call. I did think that they were going to vote to leave, but I wasn’t hanging my hat on being able to call the outcome. What I was relying on was the fact that the market had decided that Remain was going to win, so the market priced for Remain.

What does that mean in practical terms? In the last couple of weeks prior to the vote, prior to June 23rd, gold dropped about $40/ounce. It went down from about $1,300/ounce to $1,260/ounce. Sterling staged a major rally from about $1.40 to $1.50. It was a 7% – 8% rally.

The markets were fully priced for Remain. I looked at that and said, “Gee, that’s odd. The polls are telling us this is too close to call, and yet the markets are pricing it at an 80% chance that Remain will win. What’s up with that? How do you reconcile those two things?”

The answer, or at least part of the answer, was that the betting odds were showing 80% Remain. There are a couple of big betting venues in the UK with a lot of punters as they call them. There are betting parlors on almost every street corner almost like ATMs in the US. I think Ladbrokes is the biggest, but there are online betting services such as Betfair and some others.

Those were showing 75% odds that Remain would win. The markets were saying, “Okay, we’re going to use those odds and say Remain’s going to win. We’re going to price for Remain.” That’s why sterling went to $1.50 and gold dropped to $1,260.

I said, “Wait a second. What’s going on here? The polls are showing it too close to call, but the betting odds are showing it with an 80% chance of Remain, and the markets are acting accordingly.” I say this not disparagingly, but there’s an old maxim, “A little learning is a dangerous thing.” And it’s true. I like to say that if you’re ignorant of something and you know you’re ignorant, that’s okay. You’re going to be cautious and aware of your own ignorance. If you’re an expert in something and use your expertise with the right amount of humility, that’s a good thing, too. It’s okay to be ignorant if you know you’re ignorant; it’s okay to be expert if you know you’re expert. The danger zone is when you think you know something and you actually don’t.

That’s what happened in this case. A lot of traders, probably in their 30s, had heard about the Wisdom of Crowds phenomenon. It says that somehow if you aggregate a bunch of opinion, that result will be better than other sources of information or other expert opinions.

They were looking at the betting odds, applying the Wisdom of Crowds formula, if you will, saying, “Ah ha, the market is telling us 80% chance of Remain,” and they priced accordingly.

That was a complete misapplication of what the Wisdom of Crowds really teaches and how bookies work. If you know anything about bookies and betting, bookies don’t try to make money on the outcome. They just try to make money on the spread. They try to set odds so that they either make money (which is their first choice) or certainly not lose money.

The amount of money being bet was very heavily in favor of Remain. What was interesting was if you disaggregate that and say, “How many people are betting Leave and how many people are betting Remain?” the answer was that it was about 5:1 in favor of Leave. In other words, five more bets were being placed on the Leave side then on the Remain side.

The problem was the money. Leave bets were little bets: five quid, ten quid, or whatever. The Remain bets had people betting 1,000 pounds. I saw one instance of a woman who bet 100,000 pounds on Remain. The bookies had to give Remain short odds so they didn’t get wiped out.

If you know how bookies work, how odds are set, and you looked at those odds, you wouldn’t necessarily say that the Wisdom of Crowds was saying that Remain was going to win. What you would say is that the bookies were giving Remain short odds because they don’t want to lose a lot of money.

The other key point is that the betting pool generally was not a good reflection of the voting pool. There is self-selection going on. First of all, if you’re going to bet, you have to have money to lose. Not everybody has money to lose. Not everybody has 1,000 pounds they can throw on some bet, no matter how right they think they are. But everybody can vote, because voting is free.

The real Wisdom of Crowds experiment was to guess the weight of the cow or how many jellybeans were in the jar at a county fair. In the classic experiment, some expert would go up to the jellybean jar, get out a ruler and calculator, calculate the diameter and height of the jar, the cubic measure of the jar, the size of an average jellybean, and take into account the curvature of the jellybean, the open space, do all that math, and come up with a number. Generally speaking, that number would not be as good or as accurate as 1,000 people just saying, “I think there are so many jellybeans in the jellybean jar.”

That’s the Wisdom of Crowds. The way it works is that the extreme guesses filter out. Somebody says, “I think there are ten jellybeans in the jellybean jar.” Somebody else says, “I think there are a million jellybeans.” Those two are the outliers that cancel each other out on average. The fact is the average number tends to be highly accurate.

There are a lot of differences between the jellybean experiment I just described and the betting pool. Number one is the fact that there are no barriers to entry in the jellybean contest. You can do it for free. You don’t have to pay to do it, whereas in betting you do.

The other and more important thing is that the people actually stepping up to bet were city bankers. They were people with a vested interest in the outcome, so they were expressing their own biases.

There were a whole bunch of reasons why the betting odds were not a reflection of the actual vote, or a reflection of the polls, for that matter. But the market followed the odds, and that’s where the opportunity was.

The minute I saw that the outcome was 50/50 but the odds were 80/20, that’s the easiest trade in the world. I love those trades, because if you position for Leave and you’re wrong, you’re not going to lose much, because the markets are already priced for Remain. But if you bet Leave and the market is priced for Remain and Remain loses, you’re going to make a fortune. The market has to suddenly re-price and swing the other way.

It wasn’t so much about putting a stake in the ground on Leave versus Remain as saying you want to do the Leave trade with short sterling/long gold, because if it is Leave, the market has to re-price and you’re going to make a ton of money. If it’s Remain, the markets are already priced for Remain and you’re not going to lose very much. We had this “heads I win, tails you lose” situation, which are the best kind of trades.

The lesson here is that going forward, we’re going to have a national election in the US as well as some very big elections coming up in Germany and France next year. I do see these market participants, with a little knowledge of the Wisdom of Crowds but not really expert knowledge, using betting results the wrong way, assuming that’s the Wisdom of Crowds when it’s really the Wisdom of Bookies, and therefore drawing the wrong conclusion.

I’m going to be looking for this. There will be other opportunities like this. As I said, a little learning is a dangerous thing. Sorry to digress so much, but I think that lesson in statistical science, the Wisdom of Crowds and the difference between opinion polls on the one hand and betting odds on the other, is quite significant.

When you show up to vote, all votes are equal. When you show up to bet, the guy with a 1,000-pound bet is going to have a lot more weight than the guy with the five-pound bet. That’s one big difference right there.

That’s part of the reason why markets got it wrong. It was a fascinating thing to watch. I was incredulous and was like, “Wow, look at the pound at $1.50. Look at gold at $1,260. Man, if Leave wins,” which was a very good bet, “these things are going to snap back.” And they did.

Now to the second part of your question, “The news cycle has moved on – is it safe to go back in the water?” The answer is, absolutely not. The media shock is over and the markets re-priced. We instantly had a 14% drop in sterling and about a 5% rally in gold, literally within hours of the polls closing at 5:00 PM New York time, 10:00 PM London time on June 23rd.

Actually, the first poll results tended to favor Remain. Everyone was like, “Yes, see, we told you.” Then, boom. I think it was Sunderland and some other districts started coming in. It was clear after a few hours that Leave was going to win, and the markets re-priced violently.

They did not wait for Friday morning in London. The markets are 24 hours, gold is traded 24 hours, and currencies are traded 24 hours. The Tokyo markets were open, so the re-pricing began immediately, and we saw those shocks on Thursday night.

To watch a currency drop 14% and gold go up over 5% in hours were shocking developments, but they were what we warned investors about and told investors to position for in advance.

That’s over and now they’ve bounced back a little bit. Gold is up; it’s high. Sterling is off its lows, not too extreme, but to some extent. Things have calmed down. The Conservative Party has made a very smooth leadership transition, and we have a new Prime Minister, Theresa May. I wish our Presidential transitions were as smooth and well managed as the British, because they did that without too much difficulty in a very short period of time.

All that has happened is that they have now settled on a team. The thing about the Leave group – Boris Johnson, Nigel Farage, Michael Gove and others – is that they were campaigning for Leave, but they didn’t have a Day 2 plan. They didn’t know what they were going to do if they won. There was no plan as to what to do if Leave won.

Well, Leave did win so they had to come up with a plan. It was clearly being improvised, but now there is new leadership. Theresa May has committed to the Brexit which will probably take a year and a half to negotiate.

All that’s really happened is they have a team. That’s a good place to start, but they don’t have a plan or a strategy, so there’s going to be some improvisation. Europe itself is divided as to what should happen. Initial indications are the French want to take a hard line. Sadly, the French have more things on their minds right now than Brexit. Germany wants to be a little less punitive and make this thing work.

The US is coaching from the sidelines, although I would say that the US should keep out of it. I think Obama going over there and telling Leave they’d be at the back of the queue if they voted Leave probably did more harm than good in terms of the Remain vote.

For all these reasons, we’re just going into a lot of uncertainty. On top of that, it looks like the UK may be headed for a recession. This would have a lot to do with the vote to leave. I’m not saying the two things are unrelated, but the UK may be in a recession before we ever get around to the serious negotiations on Brexit.

Why is that? It’s because of uncertainty. Economists actually have a name for it called Regime Uncertainty. When you’re trying to plan capital expenditures, you’re a global portfolio manager trying to allocate among various currencies, markets, and jurisdictions. There are too many other choices out there.

This will hurt direct foreign investment going into the UK and will hurt expansion. There are some winners to offset the losers. The fact that sterling came down so much will give a little boost to some UK exporters making goods to ship to the continent. They’ll probably get a few more orders because they look a little bit cheaper at the moment.

On the whole, uncertainty tends toward recession because people don’t want to spend, corporations don’t want to invest, and foreign capital does not want to come in. It’s not that it’s all bad, it’s just that there’s too much uncertainty, so they shy away.

These are the ingredients of recession. The UK probably had a property bubble going on independent of Brexit, and three major property funds have shut their doors. That doesn’t mean they’ve lost all the money, but they’ve suspended redemptions. If you’re an investor in those funds and you thought you could get your money out, guess again. You’ve been informed that you can’t get your money out until further notice. That could be years, depending on how liquidity goes.

There is plenty of reason to take the view that the UK is heading into recession. There will be surprises. Scotland is pushing hard for another referendum on Scottish independence. The last referendum was not extremely close, but it was close enough to believe that when you put Brexit on the table, if the Scots had to do it again, they would vote to leave the UK.

With the UK leaving the EU and Scotland potentially leaving the UK, that’s disruptive in its own way. Does that mean Scotland joins the euro? Very likely, in my view, because what are you going to have? A Scottish pound? You could. Leave aside the fact that what little gold England has remaining, I doubt they’re going to ship Scotland’s share, whatever it might be, to Edinburgh or Glasgow. And Northern Ireland is in play once again – it’s been in play for 100 years.

No, I don’t think it’s safe to go back in the water. We’ve got some signals pointing in the direction of recession, and the pound has a lot further to fall. I understand it’s bounced back a little bit. It got to a low of around $1.25 and has struggled its way back to about $1.33.

That’s fine, but again, with the uncertainty, the lack of gold, the economic recession at least in Europe, the upcoming polls, and the French, among others, looking to be punitive towards the UK, there’s good reason to think that sterling will go a lot lower from here.

The shock effect is over, the market re-pricing is over, and the leadership vacuum is over, but all that does is set up a blank sheet of paper to start the negotiation that’s going to go on for a year and a half with a lot of uncertainty.

I think it’s still a problem for global markets. Global markets have a lot of problems already with the slowdown in China and the United States, what’s going on in Brazil and Russia, sanctions, not to mention, sadly, the war on terror and terrorist attacks. The world has enough problems – put it that way – without one more, but we do have one more.

Jon:  Thanks, Jim. Let me turn to a slightly different topic although there is a subtle overlap. In the last issue of your newsletter, Strategic Intelligence, you wrote at length about what you call the “global monetary elites.” At first sight, it might seem a rather vague concept, but in that article, you actually give it a very precise definition.

Would you take a moment and tell us what this phrase, the “global monetary elites,” mean to you? And what should it mean to us?

Jim:  I’m happy to expand on that. First of all, I have been using the phrase “global monetary elites” and “international financial elites” – there are variations usually with the word “elite” in there somewhere – for years going back to my first book, Currency Wars, which came out in 2011, and even earlier.

I remember at the time I first started using it, I got a lot of pushback from readers, friends, colleagues, and editors, saying, “You know, Jim, you’re throwing this word ‘elite’ around. It sounds a little mysterious. It sounds like a tinfoil-hat conspiracy, something like a scene out of Spectre, the James Bond movie. Are you sure that’s a good way to describe it?” I felt strongly that it was, and I still do.

What’s interesting is how frequently I’m seeing the word “elite” from the elites! You read it from Larry Summers, Anatole Kaletsky, Adair Turner, and other commentators. I’m sure most people know who Larry Summers is. Adair Turner and Anatole Kaletsky are the Chairman and Director of a think tank called the Institute for New Economic Thinking financed by George Soros, which is one of the leading venues, if you will, for financial ideas in terms of the New World Order. These people are using the phrase “elites.” Gillian Tett, Martin Wolf at the Financial Times, and others.

Of course, everyone I just mentioned is part of the elite, but they’re talking about elite failure starting with Brexit, which was a little bit of an English-driven popular revolt. Jon, you know England far better than I do. When I say, “England,” I use that very advisedly.

Americans tend to take England, Britain, and the UK and mush it all together. That’s not true. England is a part of the UK, a part of Britain, with deep historical roots and the tradition of English independence. Scotland is Scotland. Wales and Northern Ireland are different parts of the UK.

We may be getting back to England. If Scotland goes its own way, if Northern Ireland sees some opportunity for reconciliation with the Republic of Ireland (I’m not so sure about Wales), we may be getting back to some concept of England.

My point being that if you look at the way the Brexit vote skewed, Scotland, Northern Ireland, and London were heavily in favor of Remain. Where did the Leave vote come from? It came from smaller cities like Humberside and Leeds – the countryside far west of England, Cornwall, and elsewhere. It was really an English vote as much against their partners in the UK as their partners in the EU. This was considered an elite failure. Why did the elites not see it coming? Why did the elites not do a better job of appealing to the everyday English subject, etc.?

You hear it with regards to Donald Trump. The Trump phenomenon is amazing. I’m not going to get into the politics or pick sides. That’s not what I do; there are others with plenty of radio shows and podcasts to cover that ground. But I would point out that, at least in the United States, you go back a little over a year to early June 2015, when they first said that Trump wouldn’t run. Then he announced he was running, and they said, “He’s a joke.” Then he turned out to have a serious campaign, and they said, “Well, he can’t win primaries.” Then he started winning primaries, and they said, “Well, he’s capped at 30%.” Then he blew past 50%, and they said, “Well, he won’t get the nomination on the first ballot.” Now he’s locked in the nomination on the first ballot, and they say he can’t beat Hillary.

Where I come from, if you’re wrong five times in a row, I’m not supposed to listen to you the sixth time. In other words, the elites have been wrong every single time: whether he would run, whether he could win, whether he could get the nomination, etc. I think they may well be wrong about whether he can beat Hillary. That remains to be seen.

The point being the Remain elites were wrong in the UK. The US elites were wrong about Trump. There’s a lot of soul-searching among the elites as to how out of touch they are. They are out of touch. The problem with being in the bubble is you don’t know you’re in the bubble.

Let me step back a second and talk about who the elites are. I’ll come back to the subject, because it’s an important one. This is not some vague, amorphous, hooded conspiracy meeting around a boardroom in a dimly lit milieu. We know who they are by name. It’s Christine Lagarde, head of the IMF, Larry Summers at Harvard, Mario Draghi at the European Central Bank, Janet Yellen, Stan Fischer, and Bill Dudley of the Federal Reserve Bank. It’s think-tankers. It’s people like Anatole Kaletsky and Adair Turner, whom I mentioned.

It’s a combination of policy-makers, government officials, think-tank experts, professors, and some journalists. I’ll throw the journalists in for good measure. We know them all by name. It’s not a mystery, because we know who they are.

Their biggest problem is they hang out with each other. Christine Lagarde is not on this call listening to you and me. She’s probably talking to Larry Summers. If you don’t get it, if you’re out of touch and the only people you talk to are other people who don’t get it and are out of touch, then you’re never going to get it.

This is what I mean when I say when you’re in the bubble. You hang out in Georgetown this time of year, Nantucket or the Hamptons. Or in the winter you go to Davos and in August you go to Jackson Hole. In the spring you go to the Milken Institute and all these elite venues. When that’s your world, and you’re in the world of private jets, private dinners, and only talking to your own ilk, then you actually are out of touch. You don’t understand.

One of my favorite lines is from an old song by Bob Dylan called Ballad of a Thin Man. The refrain is, “There’s something happening here, but you don’t know what it is, do you, Mr. Jones?” Our listeners should be grateful I didn’t try to sing it, because I can’t sing, but I can recite the line.

There’s something happening in the world, and the elites don’t know what it is. They’re finding out the hard way. They’re starting to come up the learning curve, because when they start losing some big events, like Brexit, and possibly the election of Trump, they’re going to have to learn fast.

That’s who the elite is. They do run the system. I’d like to say that they are transparently non-transparent. What I mean by that is, again, they do not operate in secret. Yes, there are secret meetings and dinners on the sidelines of G20 and IMF meetings. I understand that, but they actually are bigmouths. The publish papers, they give speeches, they do interviews, they have websites, they’re actually putting out a lot of material. That’s the transparency side.

The non-transparency side is nobody understands it. They have a very specific jargon. You have to be a trained expert to know what all these terms mean. I’m not saying they’re incomprehensible. I’m saying you actually have to be an expert to know what they’re talking about.

They’re not that widely read compared to this podcast, for example, or some of the things we do. Not that many people go to Larry Summers’ website. I do, because I’m a geek. I’m not an elite, but I am a geek, so I’ll go read what Larry Summers has to say, but most people have better things to do on a Friday afternoon in the summer.

What they’re really doing is writing for each other. Larry Summers is writing in the Financial Times so that George Soros can read it. Anatole Kaletsky is writing in Project Syndicate so that Christine Lagarde can read it. They’re talking to each other. What they’re saying is fascinating; they’re saying that the system is close to collapse.

When you actually read papers from people like Claudio Borio, at the Bank for International Settlements, he’s the Chief Monetary Economist at the central bank for central banks. How geeky is that, but he’s a really thoughtful guy and a good writer. Read his stuff. He’s saying that the debt situation is not sustainable. It’s getting worse by the day. We can’t tax people anymore, we can’t get growth, we’re stuck in stagnation, and debt-to-GDP ratios are going up. We’re going to have waves of defaults coming from emerging markets like China, the energy sector, etc.

Christine Lagarde won’t go on television and say, “Hey, people, run for the hills. This is all going to collapse.” But if you read between the lines and understand the jargon, that is kind of what she’s saying. I’ve said this before. Sometimes I feel like an anthropologist going into the Amazon jungle, speaking the native languages, and then coming back and reporting what they’re actually saying.

Because I went to the graduate schools in economics where people are trained for the IMF, and most of my career was spent in banking, including more meetings at the Fed than I care to remember, and I’ve studied quite a bit, my training, background, and experience give me the facility to understand all this. I guess I’ve got the stamina to actually read it all, although some of it is painful. Then all I do, really, is put it in plain English.

When I give warnings, it’s not me making things up. It’s not me trying to frighten people. Some people have accused me of scaring people. I’m not scaring anybody, because they’re already scared.

I’m trying to shed a little light on the situation and maybe put people’s minds at ease in the sense that there may be some frightening things out there, but if you can understand it, it’s a little less frightening. Most importantly, there are steps you can take, including buying physical gold, to preserve your wealth when this all comes tumbling down.

Once more, there is an elite, but they’re not mysterious. We know who they are. They’re actually out there yakking away or writing away, but it’s a little bit in code, so you’ve got to get your translator decoder ring out to understand what they’re saying. A lot of their dialogue is not for the benefit of everyday citizens. They’re actually talking to each other, bouncing policy ideas around.

By the way, that’s how you can predict policy. When you see seven or eight elites in seven or eight different publications all saying the same thing, you know they’ve been passing the Kool-Aid. You know they’re in the hallways and closed dining rooms where it is hard to get into, and among themselves they’ve said, “You know what? Monetary policy, quantitative easing, and negative interest rates are not working. What we need is debt monetization, structural change, fiscal stimulus, helicopter money.”

When you see it coming from seven or eight different sources, you know it’s coming. That makes it easy to predict policy.

To sum up, I would say there is an elite, and we know who they are. With the right training, we can follow what they’re saying. They are issuing warnings, but there are things people can do. We’re not helpless.

Jon:  That’s really illuminating. Thank you. Before we move on, what you said about England intrigued me, because I’m an Englishman. Actually, it’s only in the United States I’ve had to learn to call myself a Brit, not a term I would ever have used at home.

Jim:  Exactly.

Jon:  Speaking of which, included in your definition of the global monetary elites is the Governor of the Bank of England. I wondered if we can turn our attention to that institution just for a moment. I also have a sentimental interest, because I went to school within walking distance of Threadneedle Street.

Two more serious reasons:  First, historically, it would seem that the Bank of England helped give shape to the modern central bank. Then looking forward, Mark Carney, the bank’s current Governor, will have his hands full managing the fallout from Brexit with all the global repercussions you’ve mentioned.

I’m wondering if you can share your thoughts about the Old Lady of Threadneedle Street?

Jim:  I’d be happy to. If the listeners are not familiar, the Old Lady of Threadneedle Street is the nickname for the Bank of England, because it’s located on Threadneedle Street in the City of London.

I distinguish between the Bank of England as a historical institution, really the first central bank formed in exactly the way it was formed – fabulous monetary history, great institutional memory, great traditions, and all of that – from what have today, which is really just a pale shadow of what the Bank of England used to be.

There is this dichotomy between old and new. We’ll talk about that a little bit, but let’s start with our friend, Mark Carney. As the Governor of the Bank of England, he is, in effect, the equivalent of Janet Yellen, who is the Chairwoman of the Board of Governors of the Federal Reserve System.

He doesn’t have the sole word – there is something called the Monetary Policy Committee of the Bank of England. People go on and off it. Howard Davies was on it at one time, and David Blanchflower, a professor at Dartmouth these days, was on it. People kind of come and go from the Monetary Policy Committee, in effect the equivalent of our Federal Open Market Committee, which, on a collegial basis, get together and set rates. There’s no doubt that Mark Carney is, by far, first among equals. As I said, he performs a role similar to Janet Yellen.

What people may not know is that before he was Governor of the Bank of England, Mark Carney was Governor of the Bank of Canada, the central bank of Canada. I think there ought to be term limits, maybe geographic limits. I don’t think you should be the head of two central banks. That seems a little bit over the top, but he was.

I don’t know of anyone else who was the head of central banks in two different countries. Actually, Stan Fischer comes close. He was head of the Bank of Israel and today is the Vice Chairman of the Board of Governors of the Federal Reserve System. He was #1 in Israel and #2 at the Fed, but Mark Carney was #1 in Canada and #1 in the UK, so I think he takes the prize.

He’s sort of a super-elite, meaning not only was he the head of two different G7 central banks, he’s a board member of the Bank for International Settlements.

I call the Bank for International Settlements (BIS), based in Basel, Switzerland, a tree house for central-banking boys and girls. They meet there once a month and have a lunch overlooking the river that runs nearby. No minutes, no notes, no press releases, no statements, no press conferences, nothing. They just close the doors and talk among themselves.

This is really where the central bankers rig the system. It’s completely beyond the scope of any jurisdiction. It’s legally formed in Switzerland, but when the charter was set up, Swiss law agreed that they wouldn’t exert jurisdiction over the BIS. It might as well be in outer space or planet Mars or something in terms of legal jurisdiction. It’s almost like no country in the world, including the country where it is located, can tell them what to do.

It’s about as secretive, autonomous, and non-responsible as you can imagine. One of the things they do is function as secret broker for gold between countries and banks. If the Federal Reserve wants to lease gold to JPMorgan for the account of the IMF, the transaction would run through the BIS so that we would never see it.

You can look at the footnotes of the BIS financial statements and find evidence that they do this activity, but you won’t find the specific names or the specific transactions. They just disclose that this is what they do.

It’s where the physical gold market is manipulated. The paper gold market just goes to the COMEX, but physical gold is manipulated. Gold is moved around among central banks at BIS. Global policies are coordinated at BIS. It’s a super-secret institution.

Mark Carney is on the Board of the BIS, Governor of the Bank of England, former Governor of the Bank of Canada – a kind of super-elite. He’s had an interesting role.

By the way, until 1971 – well, technically 1973 when the IMF demonetized gold – the Bank of England did operate a gold standard. There was discretionary monetary policy side-by-side with the gold standard. There were numerous devaluations of sterling. I’m not saying it was a flawless performance by any means, but technically they were on a gold standard.

Prior to 1914, it was a very rigorous gold standard. We’re talking about a period from the early 17th Century until 1914, almost 300 years, when the Bank of England ran a gold standard with about 20% gold. Actually, not that much. It was enough to stand up to the market, but nowhere near 100% of the currency. Yet the pound sterling, the Bank of England note, was considered as good as gold.

They also had a gold coin issued by the Royal Mint called the sovereign. The sovereign is a one-ounce gold coin. It was not 24 karat, which is the not practical. It was 22 karat, exactly like the American Gold Eagle, which means it had a little bit of alloy. You still had your ounce of gold, but the alloy was there to give it some durability so it wouldn’t wear out as it was getting passed around. Gold is soft, so a 24-karat coin wears out, which you don’t want.

As an example, in 1898 an Englishman boarding a steamship in Southampton heading for Bombay (today Mumbai) in India, part of the British Empire at the time, would have taken a certain number of Bank of England notes and a certain amount of physical gold sovereigns with him or her. On arrival, that would have been good money.

That was world money. You could go anywhere in the world. It didn’t have to be a British colony. It could be China, Russia, South America or the British Empire at the time, later the Commonwealth of Australia. That money he put in his pocket in London was money good anywhere in the world.

It was the last time the world really saw a global monetary standard, at least one that was stable. They had price stability through that whole time. There were a couple of suspensions, which one would expect, during the Napoleonic Wars. Nothing wrong with suspending convertibility during wartime. War is existential, so you have to do whatever is necessary. To their credit, the Bank of England went back to the gold standard not long after the Napoleonic Wars ended in 1815. Then it again maintained it under the classical standard all the way up to 1914.

They understood banking. What amazes me today is how central bankers don’t understand banking. When I say that, I’m not being facetious or derogatory. They’re PhDs who went to MIT and Harvard. They understand financial economics, or they think they do. They understand some version of financial economics that bears very little relationship to the real world. That’s what they know. That’s what they got their PhDs in.

They’re not actually bankers. I wish we had more bankers in the central bank, but we don’t. We’ve got academics. I was fortunate to have started my career in banking in the ‘70s when the idea of banking still meant something.  Back in the day, bankers understood it was all based on confidence.

Every banker knew there were never enough liquid assets to pay the depositors. There was never enough gold to cash in every note. What you had were some liquid assets and some gold, so you could meet some demand, but you knew it was never enough if it got out of control. So you did everything possible to maintain confidence and integrity.

That’s all gone by the board. Today, bankers have squandered their integrity. I call JPMorgan the world’s largest criminal enterprise. They are an extended exercise in greed who put themselves first instead of the customers. In my day, the customer always came first. You figured you put the customer first, and you could make money. Unfortunately, all this has been turned upside down. Today, it’s like, “How do I make money? To heck with the customer.”

It was all based on confidence; that’s the classic banking function. Today, bankers don’t worry about confidence, because they know the central banks will bail them out. They know that if they get in trouble – which they do like clockwork, because banks always screw up – the central bank will be there with tens of trillions of dollars of new liquidity, easy money, zero interest rates, negative interest rate, currency swaps, guarantees. In other words, whatever it takes.

I have enormous respect for the economic and financial banking history of the Bank of England. For anyone who studies that history, I would particularly recommend a book about the UK money markets called Lombard Street by Walter Bagehot. Walter Bagehot, interestingly, was a journalist. He was not a trained academic, but he was one of these people who understood banking.

All of the things we’re talking about on this podcast – gold standard, lender of last resort, how do you maintain confidence, how do you maintain integrity, the importance of character – these are all covered in that book. It’s a short book, not too difficult to read, so if you want to know what banking used to be like and may be again (hopefully), that’s a good book to read.

Unfortunately, all that’s gone by the board. What we have are people like Mark Carney, Janet Yellen, and Stan Fischer. They’re not bad people, they’re not dumb people, and they’re a lot smarter than I am, but they kind of know the wrong things. They know a version of financial economics that does not correspond well with the real world.

Jon:  Thanks very much, Jim. What a great tour of that significant piece of history and its implications for the present.

Now, over to you, Alex. What questions do you have today from our listeners?

Alex:  Thank you very much. Jim, back to the fascinating points you were just making about the Bank of England. I’m a big fan of history myself.

You mentioned that they were on a gold standard for 300 years, and you stated that it was world money. I would contend that, based upon a little anecdotal point, it’s still world money.

Unless the US Air Force changed its procedures since the last time I checked, to my knowledge, they put an ounce of gold in the survival kit of Air Force Pilots when they are deployed overseas. My guess is that they can use this as money if they go down or if they crash. It’s accepted worldwide no matter where they are.

Jim:  That’s right. There are a few global phenomena. One of them is the word “beer.” It’s the same in every language. Spanish is cerveza, but even in Japan, it’s bīru, and everywhere else you go, it’s some version of “beer.” That’s a universal. The other universal, in addition to beer, is gold. I agree with that completely.

Alex:  The first question is coming in from Joel H. in regards to the Shanghai Accord. Joel, by the way, is something of a celebrity with almost 250,000 followers on Twitter, and we’re glad to have him on the webinar today.

His question is, “Does the threat of perpetual bonds in Japan disrupt the Shanghai Accord?”

Jim:  That’s on the table. Ben Bernanke was there earlier this week meeting with Abe and recommending helicopter money. No surprise, from Helicopter Ben.

There’s some reporting in the last couple of days that when he was there on an earlier visit in April, he had spoken to the Japanese about perpetual bonds. This is a variation on modern monetary theory, monetization, a version of helicopter money. It goes by a lot of different names.

The scenario is something like this:  What’s wrong with spending money? Why don’t we just have bigger deficits. Then we run these bigger deficits. We spend the money on whatever, infrastructure, build some new highways and airports. We need all that.

I’m not saying that infrastructure isn’t a need. Of course it is, but the US has 100% debt-to-GDP ratio, Japan has a 250% debt-to-GDP ratio, Greece is somewhere between the US and Japan, but Japan takes the cake. Maybe some infrastructure spending is fine. Maybe at these low interest rates, it’s not even a bad idea. But what is the outer limit on debt? How much debt can a country issue before investors lose confidence in the currency and in the debt itself and just start dumping it? In that scenario, the currency collapses and interest rates go to the moon.

It’s an interesting question. I’m certain there is a limit, and I am equally certain that I don’t know what it is. I can’t pinpoint it, but I look at the dynamic. I look for clues that we’re getting closer. I look for evidence that the collapse is coming. In intelligence, those are what we call indications or warnings. We look for it to try to figure these things out even though we don’t know the exact hour and day.

Modern monetary theory, and actually what Bernanke and Adair Turner and others are saying, is this: “No, it’s all good. You don’t have to worry about the confidence boundary. As long as the central bank can print the money and buy the debt, it’s all good.”

Governments should just spend as much as they want and hopefully put it to good use. I don’t really count on governments to do that, but that’s the theory, anyway. Once again, the theory and the reality tend to be two different things.

You have these deficits and ask, “How do I cover the deficit?” The answer is issue bonds. Have your Minister of Finance, your Treasury Department or your fiscal authority issue bonds. Then you ask, “What if nobody wants the bonds?” No problem. Just have the central bank buy them.

The last part of that puzzle is to say, “Okay, but it’s a two-year note. In two years, we’re going to have to refinance it, because that’s going to mature. We’re going to have to give the central bank their money back, and then we’re going to have to refinance the two-year note. What if conditions are rocky two years from now when I have to roll over my two-year note, or five years from now when I have to roll over my five-year note? What am I going to do then? What if interest rates are too high?”

Hey, no problem. Make it perpetual. Never pay it back. That’s the theory Bernanke was talking about. In theory, Japan would get its economy moving by spending money on infrastructure, they would cover the deficit by issuing bonds, the bonds would be perpetual, the Bank of Japan would print the money, buy the bonds, and hold them on their balance sheet forever.

The modern monetary theorists look at me and say, “What’s wrong with that, Jim? Tell me what’s wrong with that?” It’s a tough question, but I can tell you what’s wrong with it. You’re ignoring behavior, you’re ignoring history, you’re ignoring psychology. To put it in more scientific space, you’re ignoring critical thresholds, recursive functions    …….

Jon:  It seems we’ve lost touch with Jim. Alex, can you hear Jim?

Alex:  No, we have lost him. That does happen from time to time on webinars like this.

Jon:  Listeners, I regret we must call it a day here with apologies to those of you whose questions we didn’t get to. We’ll be sure to make extra time in our next podcast. Meanwhile, thank you, Alex, and our thanks to Jim as well. It’s always a pleasure and an education having Jim with us.

Most of all, thank you to our listeners for spending time with us today. Let me encourage you to follow Jim on Twitter. His handle is @JamesGRickards. Goodbye for now, and we look forward to joining you again soon.

 

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The Gold Chronicles: July 15, 2016 Interview with Jim Rickards

 

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

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 15, 2016 Interview with Jim Rickards

Jim Rickards, The Gold Chronicles July 15, 2016

*Post Brexit analysis
*Elite economic class is forecasting substantial problems for the global economy
*Summary history of the Bank of England
*Role of the Bank for International Settlements (BIS)
*Analysis of total debt monetization in Japan compromising Shanghai Accord

 

 

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

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http://physicalgoldfund.com/category/transcripts/

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

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

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

Transcript of Jim Rickards – The Gold Chronicles June 23, 2016

Jim Rickards , The Gold Chronicles June 23rd, 2016

* Full commentary and analysis on Brexit (referendum for the UK remaining in the EU or leaving it)
* In British history this will stand out as a momentous day
* Betting pools are not a good proxy for UK citizens views on Brexit, bad science
* Gold prior to vote is priced for the UK to vote to remain in the EU
* A leave vote will cause gold to skyrocket and the GPB will lose 10% overnight
* Economists have a terrible forecasting record, and there is no reason to believe their projections will play out re Brexit
* The EU is a result of 60 years of work on a political project, not an economic project
* The currency wars arent going away.
*If you wait for a panic to get your gold, you wont be able to get your gold.
* Gold is beginning to reverse flows into London, averaging 60 tons per month since Feb 2016 creating tightness in the wholesale gold market at the refinery level
* If the UK leaves the EU, Scotland will likely leave the UK and join the EU

 

Listen to the original audio of the podcast here

The Gold Chronicles: June 23, 2016 Interview with Jim Rickards

 

The Gold Chronicles: 6-23-2016:

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

Jim Rickards is a New York Times bestselling author, the chief global strategist for West Shore Funds, and the former general counsel of Long-Term Capital Management. He is currently a consultant to the US Intelligence Community and to the Department of Defense. Jim is also an advisory board member of Physical Gold Fund.

Hello, Jim, and welcome.

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

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

Alex:  Hello, Jon. Likewise, it is great to be here.

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

Well, Jim, here we are, June 23, 2016. Back home – for me, that is, not you – it’s Brexit Day. As we speak, my fellow countrymen in the UK are deciding whether or not to leave the European Union. It’s a cliffhanger. Opinion polls have been too close to call. Voting ends in just under four hours, and as for now, we don’t know how this will turn out.

Jim, you’ve recently returned from a trip to London to promote your book, The New Case for Gold. I am sure you heard a lot about Brexit from your contacts in the financial markets there. What can you tell us? What’s your firsthand feel of the situation?

Jim:  That’s right, Jon, I just got back from London on Monday night. It was a fascinating visit and a very interesting time to be there. Of course, I love London, period, so there’s never a bad time to be in London, but this was an especially interesting time for the reason you mentioned.

Brexit is a big deal. It’s not quite the Battle of Hastings or Agincourt or D-Day, but I think in British history, this will stand out as a momentous day. I’m sure most of our listeners are pretty well informed, but as a bit of background, Brexit is short for “British Exit.” This is a referendum, i.e., an up-or-down vote by the British people on whether they should remain in the European Union or leave. Those are the two camps and what the campaigns are actually called, “Remain” or “Leave.”

I had the occasion to speak to someone who is an economist. He volunteered for one of the local polling stations to be a vote counter, because I guess they were short of volunteers, and he filled me in a little bit.

Here’s the lay of the land:  This is the only issue on the ballot, so it’s not a cluttered ballot. There are no other elections going on. It’s very simple – you vote ‘leave’ or ‘remain.’ The question is worded in a straightforward way.

The polls close at 10:00 PM London time which is 5:00 PM New York time. They’re using paper ballots, so they’ll take a while to count, and there are no exit polls by the government, the BBC, or the networks. I’ll come back to that in a second, because there are some privately commissioned exit polls that could play a role, but we won’t have access to those unless they’re leaked. There are no media exit polls like the kind we are used to in the US.

Depending on how it goes, which votes are counted first and the distribution, we may get results by about 10:30 tonight, New York time. Let’s call that 3:30 AM London time, if I did the math right. If the count is really close, it could be as late as breakfast time in London on Friday morning, which would be closer to 1:00 AM here, somewhere after midnight. It could be a long night. It may be faster than that, so we’ll see how it goes.

As you know, in US elections they get the votes in, but they have these exit polls. Statistically, they can compare them and make a projection long before the votes are counted. That will not be the case here. They’re going to have to count the votes. Again, if it’s lopsided, we may know by 10:00 – 11:00 tonight, New York time. If it’s close, we won’t know until after midnight our time and breakfast time in the UK.

Why is this a big deal? It’s a big deal for a number of reasons. No one has ever left the EU. This has never happened before despite all the stress in Greece, Spain, Italy, and the Euro sovereign debt crisis throughout 2010, 2011, and 2012. We don’t have to revisit all the drama around Greece, but the fact remains, nobody left and things were worked out.

This would be the first time, so we have to revisit the issue. If there’s a way out as simple as a referendum, could others leave as well? It would call into question the integrity of the entire EU.

The Europeans are – without being vulgar – I’ll just say they are extremely angry at David Cameron, the British Prime Minister, for even doing this. It was a little bit of a stunt. They had an election in the UK two years ago, and it wasn’t clear if Cameron’s party, the Tories, the conservative party, would win. They weren’t in great shape.

He said to the voters, “If you elect me, I’ll give you a referendum.” The people said, “Okay, we like that,” so Cameron and the Tories were in fact elected in a bit of a landslide. But then he was on the hook to deliver the goods.

Now we’re up to the referendum day, but people in Europe are saying, “Wait a second. Why are you playing with the future of Europe for your own electoral prospects?” It’s a good example of short-term political thinking with long-term disastrous consequences. Why are we surprised when politicians do that? That’s what they do best, which is put their own interests ahead of the interests of larger groups.

There is quite a bit of annoyance in Frankfurt, Berlin, Paris, Madrid, and elsewhere around Europe that this is even an issue, because it does open the door to more people leaving. Beyond that, there are a lot of knock-on effects. Let’s see what happens.

Right now it is really is too close to call based on all the polls. You can pick your poll. There are certainly some polls that have shown Remain ahead and other polls have shown Leave ahead. A lot of polls, particularly recent ones, are within one or two percentage points both ways all within the statistical margin of error.

As an American, I think it’s a bit easier for me to detach my analysis from any personal preference I might have. That’s always difficult to do psychologically, but being objective about it, I think the fair thing to say is this is too close to call. I don’t know what’s going to happen. David Cameron said he doesn’t know what’s going to happen and Nigel Farage and others on the Leave side have said the same thing. It truly is too close to call.

A very interesting development has taken place, which I think has the potential to rock markets. While the polls are close along the lines I’ve described, there’s another source for information. I’m referring to bettors, betting parlors, with Ladbroke’s being the most prominent. There are others including Betfair, Ladbroke’s, some are online, and some with retail locations.

The odds-makers and these betting parlors have set the odds very heavily in favor of Remain. They’ve said there’s a 75% – 80% probability that Remain will win, so they’ve given Remain bettors very short odds and long odds to people who want to bet Leave.

There’s a phenomenon called the wisdom of the crowds. This is based on a book by James Surowiecki from five years back. Excellent book, by the way. He’s a good writer who did his homework. I read the book and use it myself in my own writings.

It says that if you have a very large group of people, even though they’re not expert and may not be that well informed, if you have enough of them and ask them to express a view on something, and you average that view, that is very likely to be the most accurate estimate you can get of the outcome of some uncertainty. It does better than the experts. I’m going to spend a minute on this because it’s really important to understand and it gets right to whether you should buy gold, believe it or not.

The classic case is guess the number of jellybeans in a jellybean jar. They’ll put a big jar of jellybeans on display and invite passersby to guess how many jellybeans are in the jar. Some physicist or engineer will sit there and calculate the volume of a single jellybean, the height of the jar, the circumference of the jar, make allowance for the space between the jellybeans because they’re irregularly shaped, write the equations, and all that. That’s the scientific way of doing it, but that guess will usually be worse than people who just say, “Ah, I think it’s 1,000,” “I think it’s 10,000,” “I think it’s 100,” etc.

The reason for that is if you have a large enough group, some people are going to make ridiculously high guesses and some are going to make ridiculously low guesses. Most people are going to try their best without the benefit of the science.

When you aggregate them all and average them, you’ll actually get a very accurate result whereas the engineer, with all his lines of code and calculation, will make some error that throws him off a little bit. This has been proven in many, many experiments.

That’s the basic theory of the wisdom of the crowds. Large groups of everyday citizens guessing produce better results than experts expressing a single point of view. That’s good science, and that’s true.

This is a good example of the old saying, “A little learning is a dangerous thing,” which means if you’re ignorant of something and you know you’re ignorant, you can take precautions. You can say, “I just don’t know what I’m doing here, so I’m going to be careful.” Conversely, if you’re genuinely an expert and confident in your expertise, you can use that accordingly. There’s nothing more dangerous than the person who thinks he’s an expert but isn’t really and goes ahead with great confidence and makes a blunder. That’s a pretty good description of the Federal Reserve. It’s a very, very problematic situation.

What has happened here, as best as I can tell, is that people take this wisdom of the crowds concept, this idea that somehow an average of a bunch of people acting together is better than any expert view, and they’ve applied it the wrong way. They’ve applied it to betting odds as opposed to the polls. The polls tell us it’s too close to call, but they’re looking at these 70% – 80% odds in Ladbroke’s or Betfair and saying, “See, it’s clearly Remain.” The markets have now priced in Remain.

Let me just spend a minute on what’s wrong with that, why you can’t take the wisdom of the crowds science, which is good science, and apply it to betting.

Number one, you’d have to assume that the betting pool is the same as the voting pool, because in a vote, all votes are weighted equally. In betting, I can come in and bet 10,000 pounds on Remain while somebody else could come in and bet 5 pounds on Leave. They’re going to give me short odds and they’re going to give the other guy long odds, because they don’t want to be wrong.

Bookmakers are pretty smart. They don’t want to take a beating. They just want to make a little bit on the difference, so they have to balance out the odds. That’s why they’re going to give me short odds in that situation. But that doesn’t mean it’s an expression of 70% of the people voting Remain. It just means that I put down a lot more money than the other guy.

Think about that for a second. Who has big money to bet? Bankers, elites, maybe journalists, people in London, and people who clearly favor Remain. Who’s going to bet a fiver or a tenner? It’s going to be the pub owner, the everyday citizen, etc.

When you look behind the numbers, it’s interesting that there are far more bets on Leave than there are on Remain. If all the bets were weighted equally (which they are not), Leave would have 80%. That’s because the big money is on Remain and you have to shorten the odds.

In other words, the betting odds are a reflection of how betting works and how bookmakers set odds so as not to lose money, but it doesn’t mean that there’s a 70% – 80% probability that Remain wins. What they’re really saying is there’s a 70% probability that Remain gets 50.1% of the vote, because it’s a binary outcome.

Those odds are not equal to an expected vote; they’re equal to a weighted vote of a non-representative pool of bettors. Remember, bettors are not betting what the voters are doing; bettors are betting what they think the voters are doing. You’ve got all kinds of cognitive biases in there.

There is also the filter of needing money to bet. You don’t need money to vote, but you do need money to bet. The betting pool is skewed in favor of people who have money to lose whereas the everyday citizen (or subject in the UK) might not have that.

When you do these wisdom of the crowds experiments, there are no barriers to entry. Anybody can go up and guess the number of jellybeans in the jellybean jar or guess the weight of the cow at a county fair, and so forth.

I spent ten years developing prediction markets for the CIA, so this is something I know a lot about. They are enormously powerful, but they have weaknesses. It’s like a kid playing with dynamite. You have to understand how the dynamite works or else you’re going to blow yourself up. I think there’s been a misinterpretation of what these betting odds really mean.

That doesn’t mean Remain won’t win. Like I said, it’s too close to call. I don’t know what’s going to happen. It could be Remain or it could be Leave. What I do know is that the markets have taken this betting data and misinterpreted it or over-interpreted it, and they’ve priced for Remain.

Right now, markets are priced for Remain. Gold has gone down, British sterling has rallied, and stocks have rallied. There’s a whole set of market consequences that have priced themselves in expectation of Remain winning, which in turn is based on the betting odds, which, in my view, is an over- or misinterpretation of what those odds really mean.

Everyone is leaning on one side of the ship. This is a fantastic trading opportunity for those who are interested. The thing is priced for Remain. What does that mean? If Remain wins, not much is going to happen, because the markets have already priced in that result. The markets have said, “We think Remain is going to win,” so if Remain wins, it’s like, “Okay, now what do we do?”

There’s always something going on in the markets, some volatility, but gold and silver are about where they would be if Remain wins. You’re not going to get a lot of juice out of those trays if Remain wins.

On the other hand, if Leave wins, that’s an earthquake. You’re going to see pound sterling drop 10% almost instantaneously, the biggest one-day drop of any major currency at least since the Washington Accord of 1971 when they devalued the dollar by 17%. You could see that coming.

I would expect gold to super spike up 10%, again almost instantaneously. Gold mining stocks might go up 20%. We’re not here as investment advisors, but as an analyst, I would say that you’re going to see earthquake-type moves if Leave wins.

I’m looking at this and saying that the polls and everything I hear tell me it’s 50/50, but the markets have decided, for whatever reason, to price big time in one of those two outcomes. If Remain wins, nothing else happens, but if Leave wins, look out below.

The markets never close, so sometime late tonight London and New York will be closed. Actually, London will just be getting ready to open and Asia will be open. Gold and currencies – these things trade 24 hours a day, so we’re not going to have to wait until Friday morning in New York time to see the impact of this. If Leave wins, that earthquake is going to start in Tokyo and rumble around the world.

This would give us the potential for contagion, which means, as the saying goes, what happens in Britain doesn’t stay in Britain. Why should a currency move 10% in one day? That is what’s going to happen if Leave wins. There’s no good reason for that, so it just shows you how unstable the monetary system is. There’s no anchor, there’s no gold standard, and there’s no fixed exchange rate. It’s just jump all, so sterling goes down 10%.

When things like that happen, somebody goes out of business. I’ve seen it too many times where somebody’s on the wrong side of the trade. Some hedge fund will fail, some dealer will close his doors, some house will close, as they say in the UK. Then the counterparties will say, “Where does that leave me?” Everyone is going to want their money back.

I’m not predicting this, but I’m saying you have the makings of a global liquidity crisis where the central banks are going to have to step in. It could start to look like 2008 although be uncertain whether it will go all the way, whether they will snuff it, or whether it will even happen.

I do agree if Remain wins, not much will happen, because it’s already priced in. Basically, you’re looking at a coin toss:  50/50, Leave/Remain. If it’s heads, not much happens, but if it’s tails, we could be looking at instantaneous 2008. That is a crazy situation. Thank you, Prime Minister Cameron.

I bought some gold the other day because, well, I like it anyway. I like it at this level. If Remain wins, not much happens to the price of gold, but I like my position. If Leave wins, I could make $100 an ounce in a heartbeat.

It’s a very volatile, very unstable, very interesting situation with a lot of stuff behind it, a lot of drama. Put the coffee on, stay up late, folks, because it’s going to be an interesting 24 hours.

Jon:  Thanks, Jim. In a way, that clarifies an understanding about the gold situation. There’s just one thing about the gold part I don’t quite understand, which is with all the uncertainty and this toss-up situation, wouldn’t we expect the price of gold to have risen somewhat? Do the betting odds alone account for this slight depression in the price of gold? It seems a little strange to me.

Jim:  As far as I can tell, yes. We all know that gold has been on a roll since late last year. It’s the best-performing asset of 2016. But we have evidence; it’s not just guesswork. The middle of last week, around June 15th, polls were showing a pretty healthy lead for Leave. It wasn’t a slam dunk, but the polls were leaning Leave. People seemed to be trending Leave.

That’s when gold went up to $1,305 or somewhere around there. It may be a little higher than that, but it was somewhere around $1,305 and $1,310 per ounce. Then the polls shifted a little bit to Remain, and gold went down a lot. It went down $50 an ounce to around $1,260.

That tells us, in the short run anyway (this is not a long-run analysis), that gold is trading based on the market view of Leave and Remain. The only point I’m making is that the market view is based on the betting odds, which are not a reflection of the polling data.

The real odds should be 50/50 in an equally weighted contest, but because of the composition of the betting pool, wishful thinking, cognitive biases, the wealthy favoring Remain, the everyday UK subject favoring Leave, somebody’s 10,000-pound bet versus somebody’s 10-pound bet, and how bookies function …. you’ve got to understand all this to know what these odds really mean.

That has skewed the market. Gold right now is priced for Remain. Anything can happen, we all understand that, but the more fundamental trend, and the reason I’ve got gold going up, is going back to the Shanghai Accord, which we talked about earlier, and that is this weak dollar play.

As I’ve said before, the dollar price of gold is just the inverse of the dollar. If you expect a strong dollar, look for a lower dollar price of gold. If you expect a weak dollar, look for a higher dollar price of gold. I expect a weak dollar, because the US economy is not too far from recession. They don’t want China to break the peg. China needs help. The whole thesis of the Shanghai Accord was that the dollar and the Chinese yuan would hold hands and stick it to the yen and the euro, which would then have to be the strong currency.

I did not have sterling in the Shanghai Accord because it wasn’t that important. As I mentioned, US, China, Europe, and Japan are almost 70% of global GDP. They’re the main event. That weaker dollar, higher dollar price for gold trend, let’s call that the meta-trend, is why I like gold at these levels.

Intervening in that was a short-term down draft clearly related to the odds of Brexit and people bidding up the price of gold because of the impact of Brexit and then letting it get knocked down again, as Remain seemed to prevail based on the betting odds from Betfair and Ladbroke’s. The higher-price trend is still intact, my long-term target of $10,000 an ounce and a collapse of confidence in the international monetary system is still intact, and my intermediate and long-term higher trends are intact. I see a short-term down trend because of Brexit.

To me, it’s a better entry point. Like I say, if Remain wins and tomorrow is a non-event, I haven’t been hurt; I still like gold. But if Leave wins, you could make a ton of money in one day.

Jon:  Thanks for that clarification. Let’s shift for moment from the monetary aspect of this to the economics. Apart from a few advocates of the Leave campaign, the academic economists as a community seem to have taken a pretty unanimous stance on Brexit. They predict nothing but trouble from the UK leaving the European Union. Do you share that pessimism, economically?

Jim:  You’re right, Jon. Just to summarize, mainstream economists (the MIT, Oxford, Cambridge, Polytech crowd) have described what will happen to the UK as a result of Leave as a cross between the Great London Fire of 1666 and the invasion by William the Conqueror. Yes, it’s the worst thing that’s happened in the history of the UK.

My retort to that is, can someone please tell me the last time economists were right about anything? If we could all raise our hands at once, I would love someone to raise his or her hand and tell me the last time an economist was right about anything.

I don’t put much weight on what economists say because, as we’ve said before in prior podcasts, they’re working with obsolete models. They don’t understand the dynamics of risk, of markets, and of economics, for that matter. That’s why they’ve been wrong about the impact of QE1, QE2, QE3, operation twist, currency wars, negative interest rates, and economic forecasts. They’ve been wrong about everything by orders of magnitude for about ten years.

They missed the crisis in 2008 and they missed the crisis in 1998. They’ve missed everything. They get every forecast wrong and every policy prescription wrong, so why should we believe them about Brexit? That’s one answer.

Another answer is there is a problem here. If they leave, sterling is really on its own. I said it would instantaneously go down 10% because the markets have, I think, mispriced the risk of leaving. Beyond that, or even if it remains and sterling stays where it is, I would expect it to go lower for other reasons.

This has to do with the UK’s lack of gold. They don’t have much gold. As our listeners know, the UK sold over half their gold at 45-year low prices, about $200 an ounce, in a series of auctions between 1999 and 2001. However, they are in the European Union.

They could probably join the euro on an emergency or expedited basis if they wanted to, if they needed to, if there was some collapse in confidence in sterling. Europe has 10,000 tons of gold and is a big, fat lifeboat. Think of sterling as the Titanic about to hit an iceberg. If the UK needed to hop in a lifeboat, Europe’s got a lifeboat with 10,000 tons of gold in it. But if they leave the European Union, they give up that option.

I wrote an op-ed published today in a publication called The Daily Reckoning. It said there are two things that might make sense:  leaving and buying gold, or remaining and joining the euro. They make sense in different ways.

The one thing that doesn’t make sense is remaining and staying on sterling, or leaving and not buying gold. Of the two, leaving and not buying gold leaves them the most vulnerable because there is no anchor, nothing to back up their monetary position. There are dangers in leaving, not necessarily the dangers the economists are talking about, but other dangers they are not talking about. There will be some immediate impacts.

As mentioned earlier, I was just in London where I heard a lot of stories on the ground that you don’t get on websites, podcasts, and things like that, except for this podcast, because we tell it like it is. What I heard was that bank CEOs and managers issued memos to their staff basically telling them they have to vote Remain, their job depends on it. If Leave wins, there will be massive layoffs. They more or less threatened their own employees to vote Remain. Again, I’ll avoid vulgarity, but one guy said, “To heck with it, I’m voting Leave.” He had been threatened by memos from the boss but was going to vote Leave anyway.

As a quick aside, I did not meet anyone in London who was voting Remain. I talked to taxi drivers, shopkeepers, media people, and everyday citizens. That’s not scientific, not a poll, but it’s anecdotal. I understand that, but I was kind of struck by that. I was like, “Isn’t there one person here for Remain?”

The Remain crowd are the elites. A lot of these threats are coming from CEOs more worried about the interest of the bank than the interest of the employees. Let’s see if the layoffs actually materialize, but they might. People have announced contingency plans to relocate to Dublin, Edinburgh, Paris, but not so much Berlin. It’s funny, nobody wants to go to Germany, but they don’t mind going to Paris.

The point is, it’s not clear how much of those are just threats to get people to vote Remain and how much of that will actually play out. This remains to be seen, but it’s a big deal either way. I’m not going to make light of it. The thing I’m most focused on is the markets and how basically a 50/50 bet have all leaned to one side. That sets up a very interesting dynamic if they’re wrong.

Jon:  Can I ask you one broader question? Does this drama around the Brexit bring to light a fundamental problem in the European structure – monetary union with the euro without having fiscal union? There are all these different governments with their own spending and taxation systems. That issue has never been resolved. Is this bringing that issue more to the fore in your mind?

Jim:  It is in a different way. First of all – and I’ve said this repeatedly, but it doesn’t seem to sink in – the European Union as it exists today is the result of 60 years, 60 years, of progress in this direction starting with the European Coal and Steel community, the European pre-trade area, the EC (European Community), finally the EU, the Maastricht Treaty, and the European Central Bank.

This is all incremental and has huge economic implications. It has always been a political project, but it has never been an economic project. It is leading to a United States of Europe, something no expert really denies.

That’s one of the criticisms of the Leave camp. You hear it from Nigel Farage, Boris Johnson, and others that it is leading to a United States of Europe of which UK does not want to be a part. That’s really one of the main arguments for Leave.

The UK has this kind of convenient, halfway position, “Well, we’ll join the EU, but we won’t go to the euro. We’ll keep sterling and we’ll keep the Bank of England. We won’t do this but we will do that.” Europe is kind of sick of it, by the way. They’re like, “Hey, are you guys in or out?”

They’re asking the same question that the British voters are asking today, which is, “Are we in or out?” The answer is, they’ve always been halfway. One thing where David Cameron is being a little disingenuous is if Remain wins, the next logical step is to join the euro. They haven’t told the voters that, so it’s a little bit of dishonesty there.

Getting back to the Continent, you’re right; they have a combined monetary policy but they don’t have a combined fiscal policy. But guess what? They’re working on a combined fiscal policy. They just came up with a unified bank regulation and unified bank insurance scheme. The banking system is now more integrated than ever.

What does that mean? It means that if an Italian bank is failing, depositors, to the extent they’re insured, are going to get bailed in. You’re going to lose your money, or part of it, as is happening in Greece and Cyprus, but to the extent you’re insured, that insurance fund is backed up by the combined resources of all the countries in the European Monetary Zone. That’s not fiscal policy; it’s regulatory policy, but it’s not monetary policy. Good luck if you’re not insured or over the insured limit.

It’s an example of the kind of integration I expect within three or four years when they’ll have euro bonds. When I say “euro bonds,” I don’t mean the old dollar-denominated bonds issued in Europe. I mean bonds denominated in euros backed by the full faith and credit of the European Monetary Zone members led by Germany.

Germany knows this is coming, so they want to impose high standards. In other words, they’re saying to Greece and Spain, “We’re not going to backstop bonds unless you guys get your act together. Show us balanced budgets. Show us sustainable fiscal paths. Show us deficits below 3%, debt-to-GDP ratio below 60% or, if above that, trending in that direction. Show us all of that, lock it in, and then we’ll step up and have euro bonds backed by the full faith and credit of the European Monetary Zone.”

At that point, if everyone’s playing by the same rules, you basically might as well have a central European Ministry of Finance. If you’re all subject to the same budget constraints and debt-to-GDP ratio constraints, then why not have a unified finance ministry?

You can see it coming. That’s definitely where Europe is going. The UK is going to have to come along too, unless they hop off the bus today. It’s a big deal, but it does raise all those issues and is exactly why they’re not saying this publicly. They can’t. But the Europeans are livid with Cameron for putting all this in play. As the saying from that old movie goes, “Cameron has tampered with the primal forces.” This thing may spin out of control.

Jon:  Speaking of primal forces, I have one last question that you’ve touched on already. Would you expand briefly on what the implications might be for the currency wars with either Remain or Leave?

Jim:  I guess what I’m asking myself now, because I try to update my analysis, is whether currency wars are going nuclear. The currency wars are not going away. I say that because it’s the only thing that kind of works in the short run for a given country. It definitely does not work in the long run.

Currency wars don’t do anything for global growth. Cheapening your currency is not a sustainable policy option. However, in the short run, cheapening a currency can give you a little lift in exports. It can import a little bit of inflation and help nudge you towards your inflation targets in the very short run.

In the long run, you don’t get sustainable higher exports. You don’t get more jobs, because you import too much inflation. Inflation overwhelms the real benefits of the other things.

More to the point, other countries retaliate. They’re say, “Hey, we’re watching.” Japan is a classic example. The yen has been getting a lot stronger. It’s come up from 1.25 to the dollar to about 1.04 to the dollar. That’s more than 20% increase relative to the dollar in a little over a year with a lot of that just in the past month or so.

The yen is strengthening, and everyone is running around and saying, “Wait a second, you have to intervene. You have to cheapen the yen. Japan’s economy is a mess. They’ve got too much deflation, and we need a cheap yen.”

Yes, you might like it, but you can’t get it. They had it for three years, and they blew it. Japan had a cheap yen from 2013 to 2016. They had the opportunity but did nothing. They did no structural reforms, no real significant fiscal stimulus.

They could have opened up immigration from the Philippines, empowered women, or they could have reformed their retail distribution network. They didn’t do any of those things. They just relied on cheap currency.

Now the G7, the G20, and Jack Lew are saying, “Sorry, you had three years and you blew it. Now we’re going to stick it to you. Now you’re going to have a strong yen.” All these analysts running around waiting for intervention shouldn’t hold their breath. Japan has been told that they cannot cheapen the yen. That was the Shanghai Accord, February 26, 2016, Shanghai, China, G20 at the Central Bank Finance Ministry Summit on the sidelines. That’s what happened there.

The currency wars are alive and well. When I say, “go nuclear,” sterling drops 10% in on day, which I expect to happen if Leave wins. I’m saying it’s a coin toss, but if Leave wins, boom, what is that? That’s currency wars on steroids. At some point, the system spins out of control and investors throw up their hands and say, “You know what? I’m out of here. I don’t know what’s happening with sterling, dollars, yen, or yuan. I don’t want to know. Get me some physical gold. That’s money. Put it in a safe place. Go to the sidelines and just let this thing take its course.”

It’s happening already and is why gold has been on a strong run so far this year because of efforts to weaken the dollar. It’s diminishing confidence in Central Bank money. It’s happening anyway but that could accelerate.

My advice to investors is what are you waiting for? Get your physical gold now. Put it in safe, non-bank storage. Sit tight. It’ll do fine. Why are you waiting for the panic to make your move when you’ll find that you won’t be able to get gold.

We haven’t really talked much about my visit to Switzerland. I was in Zurich, Paris, and London over a ten-day period. I spent as much time in Switzerland as I did in London and heard some stories there straight from the horse’s mouth and people directly involved in the business that would make your hair stand on end. I will mention two briefly.

One is the big refiners are all located in Switzerland. There’s PAMP, Valcambi, Argor-Heraeus, and a number of others. One of them cannot source doré. For the audience’s benefit, doré are gold bars that come straight from the mines. It’s not pure gold but about 80% gold.

Refiners take the 80% gold bars and refine them into 99.99% gold bars of a different size as the market demands. They take one kind of gold and turn it into another kind of gold of greater purity.

This one refiner can’t get doré, which means the mines can’t give him gold. That’s how short the supply is. They have a waiting list of buyers and cannot fill all the demand from the buyers. There are shortages on the supply side.

How do you reconcile that? Well, economics 101 says a higher price is how you reconcile it. A higher price will draw more scrap. Scrap is bracelet, necklaces, jewelry from housewives and folks around the world. You’re going to have to raise the price to get people to part with their earrings, so to speak. That’s one way to do it.

The other source of gold in Switzerland has been gold coming from London vaults, so-called good delivery bars, 400-ounce bars. Swiss refiners have three sources:  good delivery bars from London, scrap from everywhere, and doré from mines. Doré and 400-ounce bars are starting to dry up. Guess what? They’re flowing back to London, because GLD – the main gold ETF – keeps their gold in London. They’ve got to get the bars.

Gold has been flowing from west to east. We’ve heard that hundreds of times, that’s true. For years, gold has been flowing from west to east and is still flowing to the east. It’s slowed down a little bit, but it’s still flowing to the east. The east is not disgorging their gold. There’s no gold coming out of China. Talk to a refiner in Switzerland. He’s never seen a gold bar from China. They’re just not letting go of it.

Meanwhile, it’s starting to go the west again. Not coming out of the west, but going to the west. Where is that gold coming from? Some of it’s coming from scrap, but that’s going to be at much higher prices. Some of it’s coming from Dubai. Dubai has kind of stepped in as an emergency oxygen supply, but there’s not that much in Dubai.

I talked to a dealer in London who pulled a four nines (99.99% percent pure) gold 1-kilo bar out of his pocket and handed it to me. It’s about a $45,000 piece. I passed it around and said, “That’s really cool.” He leaned over and said, “Jim, you know, for a couple million dollars” – I didn’t have a couple million on me – “you could buy every 1-kilo bar in the UK.”

I said, “You’re kidding.” He said, “No, there aren’t that many. I’ve got some, and other people have some, but it’s all been shipped to China. You’ve got one in your hand right now. For a couple million bucks, you could buy every 1-kilo bar in the UK.”

I certainly thought the first person knew what he was talking about, but I asked someone else. The other person said, “Yeah, you’re right.” That’s how short the supply situation is.

That means only one thing. The price goes up. A shortage of supply is a vector pushing the price up. A weak dollar policy is a vector that will push the price up. If Leave wins, then forget it. It’s just going to go to the moon instantaneously. These are very interesting times in the gold world.

Jon:  Thanks, Jim. That’s really some amazing and significant insight and information about gold. You mentioned your visit to Switzerland, and Alex was there. Let’s turn to Alex now for questions from our listeners. Maybe first you’d like to tell us a little bit about what you and Jim discovered there in Switzerland.

Alex:  As you just mentioned, Jim and I were in Switzerland about a week or so ago. We conducted what we call a surprise inspection of Physical Gold Fund’s gold bars. I’m going to pop up a couple of pictures on the screen for you.

The one we’re looking at here is inside one of Switzerland’s most secure private vaulting facilities. You can see us holding roughly 400-ounce good delivery gold bars. This was part of what we did while we were there. There’s a close-up so you can see what those look like.

I’m not going to talk too much more about that. Essentially, we were just there to do a quick little surprise audit. As expected, everything was there and checked out properly. All the bar numbers were appropriate. We pulled a couple of bars for weighing, etc., and everything was just fine.

This whole Brexit conversation has been really fascinating. There has obviously been a ton of commentary on this particular subject from different sources, but our listeners today have been treated to a really in-depth view and analysis of what’s going on. I think our listeners definitely appreciate it.

Speaking to that, we currently have a record number of people on the webinar who have dialed in from all over the world. Many of our listeners traditionally are professional money managers, etc.

I was thinking that if the number of people on the webinar today is any kind of indication of how closely the world is paying attention to what’s going on with this Brexit situation, how does that feed into the idea that there could be a big contagion? Jim, do you have any thoughts on that?

Jim:  Contagion is an interesting thing. You don’t know where it’s coming from. The mathematics are the same as the spread of a disease, so that’s why they call it contagion. It’s not just a metaphor; it actually proceeds in the same kind of exponential way. That’s the problem with contagion. You can say that someone is going to get infected, but you don’t know where.

The problem I see is that this will start in the UK if Leave wins. The two immediate impacts will be gold and sterling. But then you have to ask, “What are the knock-on effects?” The biggest supporters clearly in favor of Remain are the people of Scotland.

If the UK leaves the EU, then I would expect Scotland to leave the UK. They had their own referendum on that a year ago. They narrowly voted to remain in the UK, but that was based on the fact that the UK was in the EU.

Take the UK out of the EU, and Scotland will probably have another referendum, at which point they would leave the UK and probably join the euro. What are they going to do? Have a Scottish pound? They have no gold. I doubt England is going to give Scotland any gold.

You could have musical chairs where the UK leaves the EU, Scotland leaves the UK, and Scotland joins the euro. Who’s got the gold? Beyond that, even more short term, there’s just momentum. The whole system is set up like a row of dominoes.

I don’t know where sterling is at right this second, maybe $141, $142 or somewhere in there. If all of a sudden it gaps down to $130, that’s a 10% move, a monster move. People have stop losses at $135, but if it blows right through the stop, people have to sell. They’re out. That’s more selling that didn’t exist when it started to go down from $142 but is triggered conditionally on the market hitting $135. Then that starts asset selling, which feeds on itself.

If I’m wrong about the 10%, it just means it could be even more. Then we get margin calls, because there are leveraged players. With a margin call, I can’t sell the thing I’ve got the margin call on, because obviously that’s falling into the Grand Canyon.

The one thing I want to sell the most, I can’t sell. It goes no bid because it’s gone too far, so I’ve got to sell something else. I’ll sell the most liquid thing I have to get cash to meet the margin call on the thing that’s falling into the Grand Canyon. That could be anything. It could be Japanese stocks if I think that’s the liquid market or it could be US Treasuries if that’s a liquid market.

All of a sudden the selling pressure shows up in completely unrelated markets because people are trying to get cash to meet margin calls on things that are sinking like a stone. Then whenever it ends, they all want their money back. That’s a liquidity crisis. We don’t have the time to do the mathematics of it, but believe me, when you actually do look at the math, it’s scary stuff, recursive functions.

That’s how contagion spreads. That’s how panics start. That’s how they get out of control. That’s how they pop up in unexpected places.

It’s one of the reasons, in addition to gold, that I’ve always recommended 30% cash, because the person with 30% cash can do two things. One, you won’t lose on the cash, and two, you can go shopping in the ruins.

Alex:  A quick comment before we jump into these listener questions here. We were talking a little bit about the gold flows east to west and now reversing into London. The average right now, since February, has been 60 tons a month flowing into London.

A segue data point is GLD inventory as a leading indicator. For those who are not familiar, GLD is a gold ETF trading on US exchanges. There are bullion banks that trade gold to the trust, and in exchange they get shares to sell on the market. There’s a lot of commentary around the idea that if people are putting money into GLD, then that means it’s topping.

Watching the inventory – I’m talking about the actual gold they have – if it is a leading indicator, this is a really interesting thing. They’ve added 13.37 tons since the 16th, which is 429,000 plus some change, troy ounces, and the equivalent value of $543.7 million. In other words, that means the bullion banks think Leave.

Now to our questions with the first one coming from Alex P. as a statement he wants you to comment on. “Only Parliament can officially vote to drop out of the European Union. Eighty to ninety percent of the members of Parliament are for staying in, even a huge majority of the conservatives. Does this mean the peoples’ vote is utterly meaningless?”

Jim:  No. Our listener, Alex, is correct. Just voting Leave doesn’t mean they’re out of the EU the next day. That can only be an act of Parliament, and Parliament is heavily weighted for Remain.

A very good article on this has said that you would expect politicians, being politicians, to drag their feet. They’ll set up a commission to study how they’re going to leave. “How do we leave? Let’s have a two-year commission on that. We’re going to have to negotiate terms of withdrawal from the EU.” Then maybe a new government will come in and say, “It wasn’t our referendum. It was Cameron’s referendum, so forget them.”

There is this possibility of dragging it out for years and maybe not doing it at all, which would negate the vote, but at some point, people pick up pitchforks and torches and burn the place down. How often, how egregiously can you ignore popular opinion in favor of elite opinion before there is a reaction? The referendum itself is a reaction, so ignoring the results of the referendum would be even worse.

Maybe there would be a long, drawn out scenario where they’re still in the EU technically, but I would add that the markets don’t care. Markets are going to re-price as if you had left the EU tomorrow, even if you’re not or even if it’s a one- or two-year process.

Markets don’t wait around; they re-price immediately. If Leave wins the vote, markets will instantaneously re-price for Leave and then say, “Wait and see. Give us two years. Maybe we’ll re-price to Remain over the next two years if we can see that politicians are dragging their feet.” But they’re not going to wait for that.

There is a process to follow. The will of the people may not be honored in the fullness of time, but the markets don’t care. If Leave wins, the markets will instantaneously re-price for Leave.

Alex:  Another question in regards to leaving has come from Anthony K. He starts out with a quick comment that says, “Thank you, Alex and Physical Gold Fund, for the greatest podcast series.” You’re welcome, and thank you for the kind words. His question is, “If the Leave camp ends up victorious, do you see a trend of euro-skeptic parties across Europe gaining popularity?”

Jim:  I would not necessarily extrapolate from the UK leaving to Spain, Italy, and others leaving. The divide between the UK and the rest of Europe is unique and profound, much greater than the divide among European countries themselves even though they have different cultures, different languages, different histories, etc.

They have enough in common for some cohesiveness. They like the euro. Going back to 2011 – 2012, Nouriel Roubini, Paul Krugman, and Joe Stiglitz were running around, as they say, with their hair on fire. Greece was trying to leave, Spain was going to quit, and the euro was going to fall apart creating a northern tier and a southern tier.

I said, “Nonsense. Nobody is leaving, nobody is getting kicked out.” I was right about that. I based that in part on my travel to these countries. Everyone sits here in the United States reading The Financial Times and thinks they’re getting news from Europe. They’re not. They’re getting news from London, and people in the UK hate Europe.

You need to go to Greece or Germany or Italy. I’ve been to all those places and talked to people on the ground. One thing that struck me is that they polled the people in Greece and asked, “Do you want to reject the Germans?” to which they replied, “Yeah, we hate Germany. To heck with the Germans.”

But then they asked them, “Do you like the euro?” They said, “Yes, we like the euro.” The reason is obvious, which is for many years they were on the drachma. The government kept printing drachma and stealing their money. The euro, under German leadership, is very stable. They said, “We finally have the money that we like.”

Of course, Greece wanted it both ways. They did not want austerity, but they did want the euro. Well, you can’t have the euro unless you’re in the European Union. That’s the binding force, which the UK doesn’t have because they’re on sterling.

The second, more profound force, I believe is – and I’ve never heard this discussed, but I’m a lawyer so I’ll put my lawyer hat on – is the difference between civil law and common law. Mainland Europe has a civil law tradition going all the way back to the 6th century Code of Justinian, updated through the Napoleonic Code, through to modern legal codes.

The European approach to everything is if you need to figure something out, write a rule. If the rule doesn’t work, write another rule. If that doesn’t work, write another rule. Just keep writing rules until you figure it out. That’s codification law.

In the UK and the United States, Australia, Canada, and the Anglophone world, we have common law. We have rules and regulations, probably too many and we’re probably getting too much like Europe, but tradition allows for something called equity. Equity is a branch of law that says judges get to make things up.

Even if a strict law of contract says, “You should lose your case,” a judge looking at the case can say, “I know what the strict law of contract says, but there may have been mitigating circumstances. There’s unconscionability. There are other factors.” Judges have always had discretion to bend the rules to achieve justice or at least what a common law system sees as justice.

That’s a profound difference. The average pub keeper in Liverpool is not going to give you necessarily a dissertation on the difference between code law and common law, but intuitively they get it. They just don’t like being told what to do, but Europeans will say, “We have to tell you what to do, because that’s how we do things.”

That gap is profound and really unbridgeable unless the British simply want to give up their identity, which they don’t. I don’t see Brexit as a prelude to other countries leaving the European Union. What binds them is greater than what separates them, whereas in the case of the UK, with keeping their currency and keeping the common law, I think they’re too far apart.

Just to give a really quick example of this, when I was in Switzerland, I was out to dinner with Alex and my daughter. My drink was served, and there was a line on the glass and an official government seal on the line. I said, “What the heck is that?” It was the pour line. Some EU regulation from Brussels was telling some bartender exactly how much to pour, no more, no less.

I like going to bars where you have what I call a tall pour when the bartender gives you a little extra. I suppose some bartenders give you a little less. If you’re supposed to get a three-ounce glass of wine, you sometimes get two ounces, you sometimes get four. To me, that’s life, but I figure out the guys who give me a tall pour, and I go back.

Here was a line on the glass. I suppose you could say it wasn’t a rule; it was consumer information so I would at least know if I was going to be shortchanged. It’s an example of no end to the rules, no end to government intrusion, and that’s contrary to British culture.

I do think the Brits are different; they feel it in their bones. They kind of want to leave. It’s too close to call, but let’s get together in five hours and see what happens.

Alex:  Some very good points you made there, Jim. This wraps up our time, so I want to thank you for your commentary and your time with us. Here’s to tall pours.

With that, I’m going to turn it back over to Jon.

Jon:  Thank you, Alex. I’m going to underline what you said about that. When I grew up as a little boy in England in the 1950s, you’d hear people speak of going to Europe as you might speak of going to Japan. Europe was perceived as a huge, faraway place full of rather unreliable people who speak funny languages and eat strange food. I think that feeling has never really gone away even though London has become much more cosmopolitan, thank goodness, and our food has improved as a result.

Thank you, Jim, for tremendous insights. Alex and listeners, let me tell you that there’s another treat in store for you today. It’s a full day indeed. Coming up shortly on Bloomberg TV at 4:40 PM Eastern, Jim will be participating in The Great Gold Debate. That’s a special event scheduled at 4:40 PM Eastern on Bloomberg TV.

Jim will be debating Barry Ritholtz. Barry is a financial writer with a large international following, and he has a notoriously negative view of gold. You can expect some intellectual fireworks on that show. Just Google “The Great Gold Debate on Bloomberg,” and you’ll find your way there. It’s an encounter you surely won’t want to miss.

Meanwhile, our special thanks to you, Jim, on what I know has been and continues to be a very busy day for you. It’s always a pleasure and an education having you with us. Good luck in the upcoming debate on Bloomberg.

Jim:  Thank you, Jon.

Jon:  Most of all, thank you to our listeners for spending time with us today. Let me encourage you to follow Jim on Twitter. His handle is @JamesGRickards. Goodbye for now, and we look forward to joining you again soon.

 

Listen to the original audio of the podcast here

The Gold Chronicles: June 23, 2016 Interview with Jim Rickards

 

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

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

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

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

 

The Gold Chronicles: June 23, 2016 Interview with Jim Rickards

Jim Rickards, The Gold Chronicles June 23, 2016

* Full commentary and analysis on Brexit (referendum for the UK remaining in the EU or leaving it)
* In British history this will stand out as a momentous day
* Betting pools are not a good proxy for UK citizens views on Brexit, bad science
* Gold prior to vote is priced for the UK to vote to remain in the EU
* A leave vote will cause gold to skyrocket and the GPB will lose 10% overnight
* Economists have a terrible forecasting record, and there is no reason to believe their projections will play out re Brexit
* The EU is a result of 60 years of work on a political project, not an economic project
* Gold is beginning to reverse flows into London, averaging 60 tons per month since Feb 2016 creating tightness in the wholesale gold market at the refinery level
* If the UK leaves the EU, Scotland will likely leave the UK and join the EU

 

 

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

You can follow Alex Stanczyk on Twitter @alexstanczyk

You can follow Jim Rickards on Twitter @JamesGRickards

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

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

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

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

 

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

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

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

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