Get ready to dispose of your preconceived notions regarding the Federal Reserve and its take on gold! Is it possible that the Fed wants a higher gold price after all? That is what Jim Rickards reveals in this riveting interview with Palisade Radio.
Upon quick review, the Federal Reserve today looks like a really bad hedge fund with leverage of roughly 100:1. However, Jim made a discovery in the Fed's balance sheet, revealing a treasure trove of gold at Fort Knox and West Point worth a staggering $300,000,000,000!
Adding $300 Billion to the Fed's capital account reduces Fed leverage from 100-to-1 to a much more respectable 12-to-1, the capital ratio for most well-capitalized banks. This hidden asset is more than enough to absorb the mark-to-market losses on the bond portfolio when they arise.
"Countries around the world are acquiring gold at an accelerated rate in order to diversify their reserve positions. This trend, combined with the huge reserves held by the United States, the Eurozone, and the IMF, amounts to a shadow gold standard!" - The New Case for Gold
The historical changes of the way gold was used in banking led to the formation of the gold deposits at Fort Knox. Unlike many today, Jim Rickards believes the gold is indeed in Fort Knox but has not been audited to avoid drawing attention to it and to downplay its role. There is no proof of its absence.
China is probably suppressing the gold price through the COMEX market in order to build up more physical supplies itself. Once they have a sufficient supply, equal to the United States, they will no longer care what the price is and the price is likely to skyrocket after the expected reset of the international monetary system.
There are extreme physical shortages of gold. All the elements to cause a bull run are in place. Jim even talks about gold stocks, an area he believes is set to outperform and in a big way!
"The confidence of the entire global system of finance rests on the U.S. dollar. Confidence in the dollar rests on the solvency of the Fed's balance sheet. And that solvency rests on a thin sliver of… gold. This is not a fact anyone at the Fed wants to acknowledge or discuss." - The New Case for Gold
Palisade Radio Host, Collin Kettell: Welcome to another episode of Palisade Radio. This is your host Collin Kettell. On the line with us today is Jim Rickards, bestselling author of Currency Wars and the Death of Money. He really needs no further introduction so Jim, welcome to the show.
Editor of Strategic Intelligence, Lawyer, Economist, and Investment Banker, James Rickards: Thank you, Collin, great to be with you.
CK: Jim, your latest book, The New Case for Gold, I believe is slated for release on April 5th, just about a week away. Pre-orders via Amazon are already being accepted. I was fortunate enough to get my hands on a copy. I believe the book to be as captivating as your first two. Its release also comes at a very prescient time with gold and other commodities starting to get a lift. One way that I would summarize The New Case for Gold is a defense of gold in the modern world. A lot of people - and Warren Buffet included - brushed it off as an ancient relic and you begged to disagree. Jim, can you start off by spending maybe just a couple minutes expanding on the role of gold in today's monetary system?
JR: Sure. Collin, you are right. First of all, thank you for the introduction. The book is called The New Case for Gold. Obviously, I have a copy with me. But it is available for pre-order on Amazon right now. The title itself has a little bit of history. It is called The New Case for Gold. But you go back to the late 1970s, around 1980, of course, Pres. Nixon suspended the redemption of dollars for gold with US by US trading partners in 1971. It took a couple of years for gold to be completely pushed out of the international monetary system.
It was in 1974 when the IMF officially demonetized gold and we went into this brave new world of falling exchange rates. But in the 1980 Presidential campaign that was Ronald Reagan versus Jimmy Carter, not that long after the events I just described, they really are just about eight years or so. There was a lot of pressure, strong movement to go back to a gold standard. Of course, Ronald Reagan was conservative and has been pushed in that direction. What Pres. Reagan did after he won the election he did not say we would go on a gold standard, but he said he would appoint a commission to study, which he did; a high level blue ribbon bipartisan commission - Republicans and Democrats - and they studied the situation, report it back, and the commission as a whole came to the conclusion that the US should not be on a gold standard. But there was a very strong minority on that commission consisting of some prominent Americans including Ron Paul, Lou Lehrman and others who, of course, felt that we should be on a gold standard.
It so often happens they were allowed to write a minority report. The majority report recommended no gold standard, but this minority report recommended the opposite. Well, that was a public record because it was a commission. The minority report, some enterprising publisher, took the minority report and published it as a book called The Case for Gold. That was a minor classic, sort of cult classic among gold bugs also refer to the book The Case for Gold. So my book, The New Case for Gold, obviously plays on that title and is a tribute to the original work on that, The Case for Gold, which was, as I said this minority report.
Now what is new in The New Case for Gold? There are sort of the old arguments that have been around for decades and I talked about those. But there are also some new arguments for owning gold that were not around at the time of the minority report in 1981. They were not even around ten years ago, not even 5 years ago. These involve things like cyber financial warfare. As you may know I do quite a bit of work for the US Intelligence community and national security community and the defense department in the area of financial war and financial threats and cyber-financial threats, all very important subjects.
You bump in to a certain number of billionaires and I will ask them. I say, "Tell me about your portfolio," and they say, "Well, I own these stocks and these bonds and I have got this and I have got that." I say to them, "Well, no, what you have are electrons. You may get a paper statement in the mail from your broker or your bank once a month, but all your assets are digital and all of them are completely vulnerable to hacking by enemy cyber brigades that Vladimir Putin has a six thousand-member cyber brigade operating on the outskirts of Moscow, working day and night to be able to hack, disrupt, destroy, delete and otherwise shutdown US exchanges, US financial assets, etc."
If your wealth is digital, be it stocks or bonds, it can be completely wiped out overnight and good luck restoring it. Whereas if you have some physical assets, and it can be gold but also silver, fine art, land or private contracts, you know private equity is a contract, you do not need a digital certificate to prove it or digital exchange, that is just a contract. These are all kinds of assets that are not vulnerable to hacking, not vulnerable to being wiped out. I say things like this and people would go, "Oh, well, that would never happen." Well, it happens all the time. I mean there is financial warfare going on right now between Russia and China involving Ukraine. The United States Justice Department just indicted five Iranian hackers last week for attacks on US banks.
Talk to the country of Bangladesh. I mean Bangladesh is one of the poorest countries in the world. They just lost one hundred million dollars to a cyber theft. By the way, that money was on deposit with the Federal Reserve Bank of New York. It was not on deposit with some local bank or Bangladesh bank or Indian bank or even a prominent US commercial bank; it was on deposit at the Fed and one hundred million dollars disappeared that they could ill afford. Of course, if they have had those assets in gold they would still have the gold today.
That is an example of an argument that was not around in the '70s, '80s and '90s or even ten years ago, but is very prominent today. There are other arguments also involving the war on cash which I spend a lot a conversation about. We can talk about that if you like. But there are classic arguments in favor of gold, but there are new 21st century arguments in favor of gold. That is why I called my book The New Case for Gold.
CK: Thanks for that, Jim. I think that you have a fascinating writing style whereby you start out with a unique story or discovery in each of your books. As an example, in Currency Wars that was, of course, as many of our listeners will remember the war game at the Pentagon where you talked about how a currency war might play out between the major powers of the world. In The New Case for Gold you discuss your findings about the Fed balance sheet. This is going to lead into some other questions I have, but reportedly the Fed has a high rate of leverage, 75 to 1. But you found a very interesting call it area of the balance sheet most people do not look at which has to do with the gold at Fort Knox. Can you talk about that a bit?
JR: Sure. I always say that the Federal Reserve today looks like a really bad hedge fund. It is highly leveraged with a duration asset/liability mismatch in duration and maturity and technically insolvent if you just look at the bond portfolio on a market to market basis from time to time. The Fed has got a pretty crummy balance sheet. By the way, the 75 to 1 leverage, which is extraordinary, I mean banks are leveraged depending on the metrics about 8 to 1 or 12 to 1. Wall Street firms are not allowed to leverage more than 15 to 1. The Fed was leveraged for 75 to 1, but about a month ago they gave back about $40 billion to the treasury and they cut their capital from roughly $60 million down to a number somewhere around $35, $40 million. Actually they have a little bit more than $60 million and gave a big slice back to the treasury about $40 billion and they are down to around $40 billion or so today.
When you take that into account their leverage is actually over 100 to 1 today, so a pretty lousy balance sheet. But one of the items on the balance sheet is a gold certificate and you say, "Well, how did that get there and what is the history of that?" Well, the history is interesting. Going back to 1913 when the Fed was created, there were actually gold coins in circulation at that time. It was not that unusual for someone to reach in her pocket or his pocket and pull out a one ounce gold coin to pay for something. But most of the gold was held at commercial banks and there was paper money in circulation, but that paper money was backed by gold and convertible into gold.
Beginning right around World War I little by little banks started melting down the gold and turned it into 400 ounce bars. You could still have private gold but they made it more and more inconvenient. They will say, "We do not have coins anymore." You can own gold but nobody is going to obviously walk around with a 400 ounce bar in their pocket. That was step one getting the gold out of private circulation into the banks. Step two was the Federal Reserve banks which- by the way it is, of course, a private system. I think most listeners know this. The Federal Reserve banks require all the commercial banks to hand over their gold to the Fed. Now, suddenly, the gold went out of the commercial banks into the Federal Reserve Bank. Well, the Treasury had the last laugh because in the 1930s the Treasury ordered the Fed to hand over the gold to the treasury. This was at the time when the Treasury was confiscating all of the private gold in the country. In fact Fort Knox was built in 1937 partly to house all this gold that the Treasury was scooping up. They used to keep it in vaults in the basement of the Treasury on having them placed right next to the White House. But they ran out of space so they built Fort Knox to do this.
By the way, people think all the treasury gold is in Fort Knox. That is not correct either. About half, a little more than half, is at Fort Knox, but the rest of the US gold is at West Point at the Hudson River in New York. Occasionally, people say to me, "Well, Jim, who controls the US gold? Is it the Fed or the Treasury?" I say, "Well, neither one; it is the US army because both Fort Knox and West Point are army bases. The army has got the gold under lock and key." But technically, legally, it belonged to the treasury.
You can see the sequence. Step one: take the gold out of private hands, put it in private banks; step two: take the gold from private banks, give it to the Fed; step three: take it from the Fed and give it to the Treasury. But remember the Fed is private and the Treasury is the US Government and the Fifth Amendment of the Constitution prevents the government from taking private property without just compensation. To get around that the just compensation was this gold certificate that the Treasury gave to the Fed. To this day the Fed carries that on its balance sheet.
Now the Fed values that at $42 an ounce which, of course, is that is the historic cost. That is historic cost convention, but that was last revalued in the 1970s. Of course gold today is around $1200 an ounce so a little bit higher. But if you take the face value, the historic cost of the gold on the Fed balance sheet and divide it by $42 an ounce and come up with a number of ounces and convert that into tons it comes out to almost exactly eight thousand tons, which is interesting because that is how much the treasury owns. The Treasury says they have eight thousand tons. It is as if the Treasury cannot sell anymore gold because they need to hold that much gold at least in order to back up this paper certificate that they gave to the Fed way back when to get around the Fifth Amendment of the Constitution. That is how it is significant because what it means is that the treasury cannot dump anymore gold. If they want to suppress the price they have to twist arms to get other people to do it.
By the way, you look at the history of the Treasury ownership of gold; in 1950, the United States had 20,000 tons of gold. By 1970 we were down to 9,000 tons. Where did those 11,000 tons go? Well, it went to our trading partners under Brighton Woods: 3,000 tons to Germany; 2,000 tons to France; 2,000 tons to Italy, and so forth; smaller amounts to The Netherlands and Japan. That was where the gold went. It was around then, just a year later in 1971, when Pres. Nixon- there was a run on Fort Knox. Clearly, the United States was going to be out of gold in a matter of years or less. Pres. Nixon shut the window and ended the conversion of dollars for gold by our trading partners. But the US still dumped another thousand tons of gold under Pres. Ford and Pres. Carter in the mid to late 1970s and we prevailed upon the IMF to dump 700 tons of their own. So 1700 tons, it was just a lot gold, from the US and the IMF was dumped on the market in the late '70s to suppress the price. It did not work. The price skyrocketed anyway. We all know it went from $35 an ounce in 1971 to $800 an ounce in 1980.
But in 1980, suddenly, the United States stopped cold. The United States stopped selling gold. We stopped at 8,000 tons. What I talked about in the book is that that very likely happened because the Treasury could not go below 8,000 tons because that amount corresponds to the amount on the Fed balance sheet. By the way, if you take that gold, the 8,000 tons on the Fed balance sheet in the form of this gold certificate, market to market at $1200 and add that to the Fed's capital, guess what? The leverage drops from 110 to 1 to about 12 to 1, 13 to 1 which looks just like a good commercial bank. The secret to the Fed balance sheet is the hidden gold asset which from mark to market reduces their leverage, makes them highly solvent.
I had started out by exploring the fact that they were temporarily insolvent if you just mark the bonds to market. But when you count the gold they become very solvent and actually decently leveraged. The secret hidden asset on the Fed balance sheet is actually what keeps them from being insolvent and keeps them moderately leveraged. Of course, nobody talks about this. The numbers are all there. I did not break into a safe and steal the information. You can look at the Fed balance sheet. You can look at a gold ticker. You can look at the treasury deep storage gold. You can look at the history of the Fed and the Treasury, and Brighton Woods and Glass-Steagall and a lot of other things. It is all there. But you have to connect the dots to see this hidden relationship between treasury gold, the Fed gold certificate, insolvency of the Federal Reserve. That is one of the many mysteries that I unlock and explain. Not deep, dark conspiracy stuff, but just I think good solid forensic analysis and forensic accounting. As I say it is all in the book, The New Case for Gold, and I hope the readers enjoy it.
CK: Well, that brings me to my favorite quote of the book and you write, "The confidence of the entire global system of finance rests on the US dollar. Confidence in the dollar rests on the solvency of the Fed's balance sheet and that solvency rests on a thin sliver of … gold. It is not a fact any one at the Fed wants to acknowledge or discuss publicly." You are almost suggesting, Jim, and correct me if I am wrong that the US dollar is on some form of a gold standard at this point in time.
JR: Well, I am suggesting that. You are right. The point I make is that we have different measures of money supply. There is M2, M1, M0 which is base money. That is the money that the Fed prints. But I have something I call M-subzero. M-subzero is gold; the gold is still the linchpin, the underlying hard asset in the global monetary system. Not just for the Fed, but why does the IMF have 2,000 tons of gold? The IMF has almost 2,000 tons of gold. Madam Lagarde, Head of the IMF, has nothing good to say about gold. She disparages it at every opportunity. Well, fine. Why is the IMF holding on to 2,000 tons of gold? Why does Germany have 3,000 tons of gold? Why is Russia acquiring thousands of tons of gold? Why has China tripled or quadrupled its gold supplies, gold hoard, in the last seven years? When I say tripled or quadrupled you have to speculate a little bit because China lies about their gold. They are not transparent about how much they actually have. But we do have information from Hong Kong imports to China, mining output in China. There is some reliable information that you can use to form reasonable estimates and it is clear that China has taken its gold reserves from reported 600 tons in 2008 to probably 4,000 to 5,000 tons today.
By the way, when I say 4,000 tons here, 2,000 tons here, this is a lot of gold. There are only there are only 35,000 tons of official gold in the world. All the central banks, all the sovereign wealth funds, all the finance ministries, treasury, Fort Knox, all the official gold in the world about 35,000 tons. When you talk about buying 3,000 or 4,000 tons which is what China has done or over a thousand tons which is what Russia has done, combine that. This is more than 10% of all the official gold in the world just in the past several years. There is just a lot going on behind the scenes. But these countries would not be acquiring gold; they would not be holding on to their gold; they would not be manipulating the gold price; they would not be doing any of this if gold was not critically important in international monetary system which it is. It is just that the central bank or some IMF, they do not want to talk about it. The egg-heads, the professors, the global monetary league, the Martin Feldsteins, the Paul Krugmans, the Janet Yellens, Mario Draghi, none of these people who understand what I am saying. This is all, as I say, very clear. They get it. But they do not want to talk about it because they do not want people to think about gold. Americans have been really conditioned over decades to stop thinking about gold. Do not take gold seriously. There are all these arguments against gold that I actually talked about in the book. I shoot them down one by one.
You know, Collin, most of the book is in support of gold and other gold standard, an official gold standard. But I also say, "Look, do not wait for governments to create a gold standard." You can go on a personal gold standard. Just take 10% of your investable assets, buy physical gold, put it in safe, non-bank storage and protect yourself, and have a personal gold standard. The Russians are doing it. The Chinese are doing it. Are they stupid or do they see something coming that most people do not see? Well, I have been to Russia and China, have a lot of friends in both places. They are not stupid. They see something coming. If it is good enough for them, it is good enough for you. What are you waiting for?
CK: Jim, I have so many other questions I have to ask you so I will try to get through just a few of them here. But you are adamant that the gold is indeed at Fort Knox. I do not want to focus too much time on this point. But I know a lot of listeners have heard questions even from people like Ron Paul, who you mentioned earlier in the interview. He is famous for his Audit the Fed Movement. Billionaire, Eric Sprott, who we have had on before on the show, has also stated his belief with quite a bit of math behind it that somehow the gold has been leased out or sold. Any quick comment on why you think it is indeed there?
JR: Sure. There is a lot of confusion on this subject so let me just make a few kind of plain statements and then I will talk more about it. I am in favor of auditing the gold in Fort Knox. I have never been against an audit. But the gold bugs and the conspiracy theorists say there is no gold. They say the reason the government will not audit the gold is because the gold is not there. That is actually a non- sequitur It is quite the opposite. If you are the Fed and the Treasury and you want people to think that gold is unimportant, which they do, why would you audit it? And as you only audit important things you audit financial statements because that is the law, but it is also important to stockholders. You audit things that are important. You do not audit things that are unimportant. If the Fed wants you to think that gold is unimportant, it follows that they would not audit it because auditing it pays too much respect to gold. I am in favor of an audit just to be clear. But the fact that the government does not audit tells me that the gold is there they just do not want you to pay any attention to it. That is the first part of the argument.
Now as far as Sprott saying the gold is leased, it could be leased. That does not mean it is not there. Leasing is a paper transaction. If JP Morgan leases gold from the US treasury, which they do through the BIS and as disclosed in their footnotes to financial statements, the BIS. BIS is the bank for international settlements which is the central banker's central bank and the main intermediary for Central Bank gold transactions. It is like an anonymity broker in stocks or bonds or a dark pool in stock trading. That is what the BIS is. It allows central banks to transact in gold with each other without anybody knowing what is going on. That is kind what the BIS do. But believe it or not the BIS has an audit. They have footnotes in their financial statements and you have to be a little bit of a geek like me to read them. But if you do you will find that they say we intermediate gold transactions between central banks and commercial banks and we know it is going on.
But if JP Morgan leases gold from the US Treasury it does not mean that they back up a truck in Fort Knox and drive the gold away. There is no need for that. It is just a paper transaction. The gold can sit in Fort Knox. JP Morgan can take a hypothecatable title. Now once JP Morgan has the gold what they do is they sell it at times 100 to gold investors who think they have gold but what they really have is what is called unallocated gold. Unallocated gold is a euphemism for no gold. If I call up JP Morgan and I say, "You know I wanna buy a million dollars worth of gold," they will say, "Fine. Here is our contract. Send us the million dollars." I sign the contract. I send the million dollars. They send me a confirmation and it says I own a million dollars worth of gold subject to the contract. Well, read the fine print in the contract. What it says is your gold is unallocated which means that they do not claim to have any specific bar with a serial number or your name on it. In reality they have taken the same bar of gold and sold it to a hundred different investors.
Now that is fine if we are happy with the paper contract, but if all 100 of us show up at JP Morgan and they have only got one bar of gold, the first person may get the gold. The other 99 people, they are going get their contracts terminated. They are going to get a check for the value of gold at the close of business yesterday, but they are not going to get today's price movement or tomorrow's price movement when super spiking going up to $2,000, $3,000, $4,000 an ounce. That is when you want your gold for the price protection when everything else is falling apart. That is when you are going to discover that you do not have gold, you have just been closed out at yesterday's price by JP Morgan. They will send you a check but not what you participated in the price of gold from there. And they only will have first bar because that is sitting at Fort Knox.
Do I agree with Ron Paul that we should audit the Fed? Yes, I do. Do I agree with Eric Sprott that a lot of gold is leased? Yes, it is. I agree with that. But neither one of those things is proof that the gold is not there. The gold is certainly there. Actually I have some evidence that the gold is there from other sources, from military sources. My point is this is why it is so confusing because yes, we should audit; yes, the gold is leased; yes, there is price suppression. I agree with all of that and there is very good evidence for all that. It does not mean the gold is not there. The gold could be sitting there on a shelf in Fort Knox and still be leased out and unaudited. None of those things prove the gold is not there. Apart from those arguments which are really non-sequiturs, as I have just explained I have seen no proof that the gold is not there and I have seen some proof that the gold is there. But this is where the legitimate criticisms and conspiracy theories and sloppy analysis all get mashed-up into this no gold thesis when in fact if you were the United States of America why would you let the gold out of your sight?
CK: Well, you just mentioned price suppression and I want to bring to the interview kind of to an end here by talking about the manipulation that you do believe is in place and this back and forth between China and the US. You talk about this a lot in your book. But you say once China has enough gold so that its gold to GDP ratio equals or exceeds that of the USA, it is not there yet, but once it is there will be no political reason to buy more, and I guess that is kind of an endgame. How far away is that and then will the gold prices go up because the suppression by the US and China ends? What is going on there?
JR: Well, the gold price will go up one way or the other so, sure, if the price suppression ends that would create a factor for the gold price to go up. But all the price suppression and manipulation schemes in the past every one of them has failed. The London Gold Pool of the 1960s failed. The US dumping of 1700 tons in the late 1970s failed. The UK selling almost all of its gold failed. Switzerland selling thousands of tons of gold in the early 2000s failed. All these price suppression schemes have failed; gold has gone persistently higher. Manipulation can work in the short run, but it never works in the long run. I am confident that the price will skyrocket, will go where it is going to go manipulation or no manipulation. But you are certainly right, Collin, if the manipulation ends for other reasons, for political reasons, then that is just one less thing standing in the way of gold going a lot higher.
As far as the manipulation is concerned, again, I do not like speculation. I like analysis. I like empirical data. I like hard facts. I like science. That is how I do things. But the evidence for manipulation is overwhelming. I have actually met with Professional Rosa Abrantes-Metz at New York University Stern School. She is the leading expert on using price signals and market data to determine if this manipulation is going. She has advised some of the lawsuits still pending involving manipulation. Her evidence is conclusive. She has written a report, not public yet because this is being used as evidence in these cases. But as I say I have spoken to her firsthand and the conclusion is inescapable. There is no other explanation for the price behavior other than manipulation of gold.
I also spoke to a PhD statistician at a major hedge fund. He said the best way to make money the last ten years is short Comex gold just before the close and buy it just before they open the next day. He says like clockwork, it gets squashed at the close and spikes at the open, squash at the close, spike at the open with some volatility around that, but that is clear evidence of manipulation. The odds that that would happen based on normal market forces are infinitesimal. He was actually surprised that more people were not doing the arbitrage because the manipulation was so blatant.
One PhD professor and another PhD statistician who have studied the data, again, they are not conspiracy theorists; they are scientists who have come to the same conclusion. There are others as well. But also just kind of anecdotally or just inferentially, if you are China and you have to buy another 3,000 tons, which they do; they are trying to catch up with the United States. I estimate they have between 4,000 and 5,000 tons of official gold. But the US has 8,000 tons. They need another 3,000. If you were out to buy 3,000 tons of gold you would not want the price to go up, you would want the price to stay down because you are a buyer. Now once they get the gold and they are on a par with the United States and it comes time to reset the international monetary system, then no one will care what the price is because everyone will have the same amount of gold both in absolute terms and relative to GDP. But we are not there yet. If China is manipulating the market through Comex futures, then they are beyond the enforcement powers of the United States. You cannot subpoena China. The CFTC is going to get nowhere trying to investigate behind the scenes China's behavior in the market.
I have spoken to top level officials at the IMF and in the US intelligence community. They are pretty relaxed about it. They think that it is a good thing that China is rebalancing their reserves away from what they called credit assets meaning treasury securities into gold assets. People know this is going on. The data is available if you want to look at it. The US and the international monetary elites are very relaxed about it. They think it is a good thing. If you are China, you want a low price and so you get the gold. These are the forces operating. These are the headwinds, if you will, operating against the gold price, but in favor of the gold price are extreme physical shortages. I have seen this firsthand. I just got back from Switzerland with the head of the world's largest gold refinery. I met with head of secure logistics also in Switzerland for some of the largest gold vault operators. People ran armored cars and move gold around, spoken to miners. I crawled down into gold mines. I mean I have been very involved in the physical side of the business as much as the paper side of the business.
These stories will make your hair stand. I mean there are shortages. They cannot meet the demand. There is a waiting list of buyers, shortages of sellers. One of things a gentleman told me what that if you have seen a 400 ounce gold bar, I mean I have kind of physically handled them and been in these vaults. They have got stamps all over them. It is almost like a dollar bill. It has got a serial number. It has got a date. It has got a stamp for the purity; is it two nines? is it three nines? meaning 99.9% pure. The refinery stamp is there. There is an assayer who certifies it is not counterfeit. In other words there has got a lot of stamps on it. But one of them is the date. Well, gold warehouses are managed on a last in, first out basis, so I fill it up with gold and then when the gold goes out I am going to take the bars closest to the door. In other words the ones that I put in last they are the ones I am going to ship out.
What my friend at the refinery told me was he is starting to see bars that are stamped from the 1980s, bars that had been in storage for 30 years or more. That tells him that they scraping the bottom of the barrel. If you have a 2006 or 2007 bar and you send it out that means you have a pretty full vault. But if you are sending out bars from the 1980s that means you are back at the far end of the warehouse, scraping the bottom of the barrel. That is what is going on in the physical market.
We have our friends at JP Morgan selling paper gold 100 to 1, but we got people on the physical side of the business who say the shortages are scary. How is that going to end? It was very apparent that at some point something is going to break, someone is going to fail to deliver. There is going to be an exogenous shock. China is going to get their full fill of gold. The manipulation is going to end. Something is going to happen. It almost does not matter what it is. The set up for a buying panic and skyrocketing prices in gold is there. The setup is there. The catalyst is irrelevant. It could be a war, a national disaster, an assassination, a financial failure. It could be a lot of things. But it does not matter because the result is going to be the same.
CK: Well, Jim, I have one final question for you and if you do have to go please let me know as I know we are at the end of our 30-minute block in your busy schedule. Gold stocks, that is something we focus on a lot at Palisade and Palisade Radio; it is not something that you specifically go into in your book. But my assumption would be that if you see a catalyst coming or a reason for gold to come up that, gold stocks being cyclical, would be somewhere where you might want to put your money in or at least given some thought to. Last question for you: what are your thoughts on gold equities over the next few years?
JR: Well, economically, a share of stock in a gold mine is a leverage bet on gold. Generally speaking, the gold miner will outperform gold in a rising market and it will underperform gold in a falling market. It is basically a leverage bet on gold which you can do yourself just by buying gold with leverage which I do not recommend. But that is one way you do it.
Now the problem I have with miners is that they are not generic. In other words gold is generic. Gold is gold. It is an element, anatomic number 79. We do not have to quibble about grades of gold. It is all the same. Gold miners can be anywhere from excellent to fraudulent. You cannot speak about gold miners generically; you have to take them one name at a time. These gold mining stocks got beaten down 90% or more between 2011 and 2015. The sentiment was lousy. You just say, "How low can they go?"
The thing about going down 90%, one of two things is going to happen. You are either going to bounce back skyrocket or you are going to go all the way. You are going to go into bankruptcy. I do not want to recommend gold stocks generically because some of them are crooks and some of them are going to go bankrupt. Other stocks are excellent. If they are down 90% and they are not bankruptcy candidates, then they could double or triple in the years ahead. They are highly recommended. But you have to take it one name at a time. I know how they do the analysis, but it is not really what I do. I am more of a global macro analyst.
For gold stocks, people such as yourself, John Hathaway, Gold Funds , Sprott, Casey Research, there are others out there who are doing this sort of work. I do like gold streamers, names like Franco Nevada, Royal Gold, Silver Wheaton, and others because a gold streamer, they actually do the hard work that I am talking about. They go out and visit the mines. They are good at financials, meet with management, assess the projects, etc. I would say they are only going to buy the good ones. They are not miners. They just buy royalties and then stream them through to investors. A good gold streamer is probably a good way to get leveraged exposure to the price of gold without having to figure out the good, the bad, and the ugly.
CK: Alright, well, Jim, thank you so much for taking the time out of your day to come on the show. I can promise to all of our listeners that it is well worth the read. It is a relatively quick read, but it is filled with a lot more detail than Jim is going into here, as you can tell from listening to Jim just a wealth of knowledge on everything gold and a lot of more things. Jim, anything else to add at this point for our listeners?
JR: Yeah, the one thing I say is some of your listeners are like, "Okay, I hear you. I understand. I even agree. But I am going to wait until the price of gold really starts to skyrocket then I will jump on board." What I say to these people is do not be so sure. You are not going to be able to get the gold. The physical shortages is going to be so severe that if you are waiting for the price of gold to go up to jump on the bandwagon; you may be watching it go up on television but you are actually not going to be able to get it, so the time to get gold is right now. I mean I just say to people watching Russia, watching China, knowing what is coming, all of which is easy to foresee, what are you waiting for?
CK: Alright, well, Jim, if you want to hold it up one more time, The New Case for Gold, everybody. You can go pick it up pre-order on Amazon right now. Thanks so much, Jim, for coming on the show.
JR: By the way, it has got a nice gold cover so I would say you buy the book is like getting a bar of gold. I hope the readers enjoy it. The New Case for Gold available now on Amazon. Collin, thank you for having me on your show.
CK: Okay. Thanks so much, Jim.
James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Agora Financial. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.