(Recorded on 09/21/21) Topics covered on this video coaching call In this special video update, trading coach Jerry Robinson discusses the unfolding Evergrande debt situation, the U.S. debt ceiling debate, this week’s Fed meeting, and more. Included in this video:...
Read the full interview transcript below.
Jerry Robinson, Host: Joining me on the line today is Jim Rickards. He is the New York Times bestselling author of a few books, “The Death of Money”, “Currency Wars”, and his latest, “The New Case For Gold”. We’re going to be talking about this brand new book with the author himself. Jim, it’s great to have you on the program. Welcome back to Follow The Money Weekly.
Jim Rickards: Jerry, great to be with you. Thanks for inviting me.
JR: Absolutely. I had a chance to thumb through the book over the last week. It’s a very compact, slim book. It’s the third book that you’ve released as far as major books. Is that true, Jim?
Rickards: That’s correct, and this is a little different than the first two you mentioned. I had gold chapters in “Currency Wars”, one gold chapter in currency wars, and two gold chapters in “The Death of Money”, and I said, “You know what? I have to stop just touching on this subject and just write a book on gold that gives the reader and listener everything they need to know.” So, it’s a little bit of a specialty item, a little shorter than the other books, but very much to the point and I hope that people enjoy it.
JR: Yes, gold has been, of course, maligned, as you well point out in this book. You talk about how gold is insurance, not an investment, which is so key. You also talk about the fact that gold doesn’t really have risk in the classic sense. Talk about how gold doesn’t really have risk as you talk about it in the book.
Rickards: Well, this is very confusing to a lot of people because they think of gold as an investment. They say the price of gold went up or the price of gold went down, and the point I make is that the dollar price of gold moves around, but gold itself stays constant. So, it all depends on how you count things. The technical name for this is numeraire. It’s a French mathematical term. But, if I sent two people out to measure a football field, and I give one of them a 12 inch ruler and I give the other one a yard stick and say go measure the field, one’s going to come back and say it’s a hundred yards and the other one’s going to come back and say it’s 300 feet. Was it 100 or 300? Well, it depends on what you’re using as the measuring stick. The same is true when it comes to money. If the dollar is your measuring stick, then you can say that gold went up or down. But, if gold is your measuring stick, an ounce of gold today is an ounce of gold a year from now and will be an ounce of gold five years from now. If it’s worth a different amount in dollars, is that a gold problem or a dollar problem? I think it’s a dollar problem. The dollar is the thing that’s volatile. The dollar is the thing that fluctuates and that you really can’t have confidence in whereas gold has a constant store value. People say that gold has no yield. Well, it’s not supposed to have a yield. Take a dollar bill out of your pocket and hold it up in front of you and say, “Does it have a yield?” No, it doesn’t and it’s not supposed to because it is money. It’s money, and, therefore, it doesn’t have a yield. Now, if you want yield, you have to take risks. People say, “Well, I put my money in a bank account, and that’s money.” Well, it’s not money. That’s a bank account. A bank account is an unsecured liability. A bank can fail. Yes, there is deposit insurance, but maybe the deposit insurance fund will fail. Maybe the amount of money in the bank is more than the insured amount. Maybe you live in Greece or Cyprus or someplace where they shut down the banks. I do think that kind of extreme activity is coming to the United States sooner rather than later. All those things, stocks, bonds, bank accounts, money market funds. That’s another one. People say, “I have my money in a money market fund.” That’s a misnomer. That’s not money. People say, “Well, I can call my broker and cash out my money market shares, and the money will be in my bank account tomorrow.” Well, the SEC actually just issued a rule fairly recently that says that the money market funds can suspend redemptions. That means when you call up to sell your shares, they can say,”Sorry, you’re locked in. We’re not stealing your shares, but you’re not going to be able to get money in your bank account tomorrow.” Or, what if the stock exchanges closed down? What if the banks are closed? There are many, many things that can go wrong. When I talk about these things, people say, “Oh, that would never happen.” I guarantee that every single one of these things has happened, either recently outside the United States, or in the United States itself in the not too distant past. These are things that people are not ready for. The only forms of money, real money, actually have no risk meaning they are what they are. The unit of account is the same. They don’t have a yield because you don’t have any risk associated with it. Whether it’s a dollar bill in your pocket, an ounce of gold in a safe place, or some bitcoin in a digital wallet, they are just different competing forms of money. If you want yield, you have to take risks. If you want money, then have gold or one of the other forms.
JR: So, gold is insurance. Gold is not an investment. You also mentioned, very importantly, that gold is not paper and it’s not digital. Of course, we know that gold that’s held in your hand has no derivatives on it. No one has a liability against it. We don’t know what the price will be tomorrow, but we do know that no one else has a derivative on our physical gold. Talk about why that’s important and how unique that is today.
Rickards: Well, a couple of things, Jerry. One is that there are a lot of other things that people call paper gold. The fact that they call it paper gold is a giveaway. It’s an oxymoron. It’s more paper than gold. For example, you can buy gold futures on the Comex, the commodities exchange, but the amount of gold that they have in the Comex warehouses is a tiny fraction of all the paper contracts that are out there. If all of the holders, the longs in other words, who owned gold futures said, “You know what, I’m going to put in a notice to the exchange that I’d like to take physical delivery of my gold,” there’s not even close to enough gold to satisfy that. The exchange knows this, and they would just say, “Sorry, you can’t have your gold. We’re not a source of supply.” People say, oh, the exchange is changing the rules. Well, sorry, I’ve read the rule book. There’s a rule that says they can change the rules, so, technically, they’re playing by their own rule book. The rule book says they can issue an order called Trade For Liquidation Only meaning you can roll over your contract or you can get a cash value, but you can’t get the physical gold. They’re not a source of supply. There’s another kind of paper gold called an ETF. That’s an exchange traded fund. It trades, but it’s not gold. It’s a share of stock that trades on the NYSE. Yes, there’s some gold underneath it, and there’s some price exposure, but, again, if there’s a panic. Those ETFs, when you give them your money, they have up to a month or so to actually get the physical gold. What if in that month is when the panic hits, and the price of gold skyrockets, and all of a sudden, they can’t get the gold anywhere near the price that they sold you the ETF? Well, they would just suspend redemption and send you a check. They won’t steal your money. They’ll give you your money back, but it’ll be yesterday’s price. It’ll be terminate the contract early and give you at the close of business yesterday. Meanwhile, you’re sitting there saying, “Wait a second, the price just went up $200 an ounce today. I think it’s going to go up $200 an ounce tomorrow. It’s gone up $1000 an ounce in the past week. I think it’s going crazy. I want my gold.” They’ll say, “Sorry, we’ll give you a check for the old price, but you won’t get the new price because we’ve terminated your contract.” You have to read all the fine print in these agreements, and, obviously, with physical gold, you don’t have that problem. If you call J.P. Morgan in London and say, “I’d like to buy a ton of gold.” That’s a lot of gold, by the way. Or, a million dollars worth of gold, which is about 35 pounds or maybe 40 pounds, they’ll say, “OK, sign the contracts, send us your million dollars, and we’ll give you the gold. What you will find is that they will have one bar of gold in the vault, and they’ll sell 100 contracts. They’ll sell 100 bars of gold for the one bar on gold that they have. It’s called unallocated. That’s the euphemism for the fact that they don’t actually have the gold. Well, if nobody shows up for the gold, it all works fine on paper, but if 100 people show up at the bank and say, “Give me my gold,” there’s only one bar to satisfy the 100 so called owners. So, again, maybe the first guy that shows up is going to get his bar of gold, but everyone else is going to get their contracts terminated. They’re going to get a cash payment of yesterday’s price. They’re not going to get the price protection they want. When the price of gold begins to skyrocket in the next financial panic, which is coming sooner rather than later, you know, I talk to a lot of people, Jerry, and they say, “Well, I’m just going to wait and see. I understand. I hear what you’re saying, but I’m going to wait and see. When things really start to take off and get shaky, I’m going to go out and buy my gold.” Guess what? You’re not going to be able to get it. I just got back from Switzerland where I met with the head of the world’s largest gold refinery. This guy knows more about physical gold than anybody in the world. He buys it from the London banks. He sells it to China. When you’re a refiner, you take gold in the front door, you process it, and you ship it out the back door. So, he knows who all the sellers are, the big ones, and he knows who all the big buyers are. He said, “I’ve got a waiting list of customers. China wants twice as much gold as I’m sending them, but I won’t give it to them because I need to supply my existing customers.” But, meanwhile, he’s having difficulties sourcing it. So, the gold shortages are already showing up in the physical world. There’s plenty of paper gold around, but when the paper holders want their gold, they’re going to find they can’t get it. So, that’s one reason to have physical gold today. Don’t wait until the panic hits. Get your gold today. The other reason is that all these other assets that we’ve talked about, whether it’s stocks, bonds, bank accounts, money market funds, or paper gold, they’re all digital. They can all be hacked and erased. You can’t hack physical gold. I call my book, “The New Case For Gold”. It’s available from Amazon right now, because they are plenty of old arguments, and they’re good ones, pro and con. I talk about those in the book, but there are new 21st century reasons for owning physical gold that were not part of the discussion in the 70s, 80s, and 90s, or even ten years ago. This has to do with cyber hacking. Vladimir Putin has a ten thousand member cyber brigade operating outside of Moscow working day and night to hack digital systems, erase bank accounts, erase brokerage accounts, shut down exchanges. If your wealth is trapped in that digital world, you can be wiped out in a heartbeat whereas they can’t hack physical gold. They can’t erase it. So, another reason to have it is that it’s robust and stands up against these 21st century digital threats.
JR: You’re listening to the voice of Jim Rickards. He is a bestselling author and economist, and his newest book, “The New Case For Gold” is available now on Amazon. It’ll be released April 5. Let’s talk about this financial panic that you’re talking about because we see this same thing. We saw the 2008 crisis. I love how they talk about how no one saw this stuff coming. We saw 2008, we saw the writing on the wall. And, now, we have gone 7 or 8 years in this tremendous amount of poor monetary policy. Now, here we are again, staring into the abyss, and you’re saying in your book that the next financial collapse will be exponentially bigger than the panic of 2008. Jim, what is the root of that? As 2008 was more of a mortgage backed security, real estate credit issue, what’s the crux? Is it the same thing?
Rickards: Well, I focus a lot more on the outcome than the cause, Jerry. Not to be glib, but the cause actually doesn’t matter. What matters is the degree of the collapse. One metaphor that I use, though it’s more than a metaphor because the math is the same, is the snowflake and the anvil. It’s snowing, snowing for weeks and months. The snow is building up on the mountain side and it’s getting bigger and bigger. Any expert can look at it and say that there’s avalanche danger here. This whole thing is going to collapse. One day, a certain snowflake hits it in a certain way. It disturbs a few other snowflakes. They start to to go down the mountain. They gather momentum. It becomes a shoot. It becomes a slide. Momentum builds. The whole pile of snow rips loose from the mountain and comes down and creates an avalanche that kills skiers and destroys the village below. Who do you blame? Do you blame the snowflake? Or do you blame the instability of the system? My point is that you have to look at the instability of the system as a whole because if it wasn’t one snowflake, it would have been another. So, what did we hear about in 2008? It was too big to fail, too big to fail, too big to fail. Well, guess what? The five biggest banks in the US today are bigger than they were in 2008. They have much larger derivatives books. The own a larger percentage of all the banking assets in the United States. Everything that was too big to fail in 2008 is bigger and more dangerous and more interconnected today, which means the next crisis is going to be bigger than the last one. That’s what I mean by the instability of the system. Everyone says, “Jim, what’s going to cause it?”, and my answer is that something is going to cause it, but it doesn’t matter what it is. What matters is the result, which is this complete avalanche, this complete collapse of the financial system. So, it could be a geopolitical event. There could be a war in the South China Sea. It could be the assassination of a prominent political leader. It could be a natural disaster like what happened in Japan in March 2011. You had an undersea earthquake which caused a tsunami which crashed into a nuclear power plant which caused a meltdown which caused the Tokyo stock exchange to collapse. Those are four separate collapses, an earthquake, a tsunami, a meltdown, and a stock market crash. Two of them were natural, the earthquake and the tsunami, and two of them were manmade, the nuclear power plant and the Tokyo stock exchange. But, they were all connected. They were all complex systems just like billiard balls on a table. You know, you hit a three cushion back shot, and who knows where the ball is going to end up. That’s the way the world is poised today, so it could be an earthquake, it could be a war, it could be the failure of some unknown that leads to larger financial panic. I don’t know what it will be. I know it will be something. I know it will be sooner rather than later, but what I focus on is the degree of the damage that comes afterwards. People say, “Oh, that’ll never happen.” I’m sorry, but the global financial system has collapsed three times in the past 100 years. We had a stock market crash in 1987. The stock market fell 22% in one day. Not a week or a month, but in one day. In today’s Dow Jones Index, that would be the equivalent of 4000 points in one day. You know, if the stock market fell 400 dow points, it would be front page news. You would see it on every website and every blog and people wouldn’t be talking about anything else. Imagine if it fell 4000 points. The equivalent of that happened in 1987. In 1994, the Mexican crisis, in 1998, we were hours away from closing every stock market in the world. People did not know this. It was long term capital management. I negotiated that bailout. I was general counsel long term capital management. I was in the room on the phone with the Fed, and I know how close it came. In 2000, dotcom, in 2007, mortgage collapse, in 2008, financial panic. These things do happen every five, six, or seven years. It’s been eight years since the last one. What are people waiting for in terms of protecting themselves and getting some gold?
JR: Got it. The portion that you put into gold, I see in the book you provide some guidance on that. Let’s just talk real briefly about what to do with the rest of the money. Obviously, you don’t put all of your money into gold because the rules of the game can change. The rulebook is basically the IRS code, and they can change anytime which is why we always say, “Don’t put all of your money in real estate. Don’t put all of your money in paper assets and stocks. Don’t put all of your money in gold.” Give us some other ideas. What’s happening in the Rickards home? How are you diversifying and preparing for what you expect?
Rickards: Sure, that’s a very important and powerful point, Jerry. People love to put words in your mouth, and I always say I’m an advocate for physical gold. People say, “Oh, Jim Rickards says put everything in gold.” I’ve never said that, and I don’t recommend it, and I don’t think it’s a good idea. First of all, define your investable assets. I would put home equity and family and personal business to one side. I would not count that in the investment pool. Your home is where you live, your business is how you make your living, whether you’re a doctor, dentist, lawyer or car dealer, pizza parlor operator, dry cleaner operator, or whatever it is, put that to one side. So, whatever’s left after your home equity and your business equity, those are your investable assets. Put ten percent of that in gold, no more. That’s plenty. That’s your insurance. You don’t want things to fall apart, but when they do, and I expect that they will, you may be losing on other assets, but the gold will hold up very well. Now, what to do with the other 90%? I actually recommend a large slug of cash, meaning 20 to 30 percent. People are surprised to hear me say that. They say, “Wait a second, Jim. You’re the guy talking about the collapse of money. Why would you have cash?” The answer is that I might not have it forever or even a long period of time, but in the short run, it has great optionality. When things start to fall apart, if you’re the person with cash, you’re the person who can pivot into one of these other asset classes. If you put all of your money into something, it can be harder and costly to get out of it if you change your mind, whereas if you have cash, everyday that you wake up you can be very nimble. So, that’s attractive. Also, cash does very well in deflation. The value of cash actually goes up in deflation, and we’re kind of getting close to a deflationary stage. The cash also reduces the volatility of the rest of your stuff, and this is a little bit technical, but the gold is volatile, some of the other asset classes we talk about are volatile. When you leverage, you borrow money, volatility goes up, but when you hold cash, volatility goes down. So, it’s a nice way to kind of take a little volatility out of your portfolio. So, I do recommend cash. Beyond that, I think, land and real estate has a roll if it’s income producing like rental property, farmland, or even just raw land or something, in a good location,obviously. That goes without saying. That will serve you very well. One of my best performing asset classes in the last six years has been fine art. Now, I’m not talking about going out and spending $100 million on a Picasso, but for $100,000 to $200,000, you can buy into a very high quality art fund, and then they will pool the money like any fund and manage it well. Some of these art fund dealers are highly reputable. Some, less so, so you have to be careful which fund you pick, but that has a place. I also have investments in private equity and venture capital in technology. Some of them can be more speculative, but they can pay off very well. I don’t own any publicly traded stocks or bonds. That’s where I think you can lose 30% of your wealth in the blink of an eye. My model portfolio would have, for example, gold, silver, land, fine art, private equity, venture capital, and cash.
JR: We’re in our final moments here with Jim Rickards. The new book is entitled “The New Case For Gold” available for preorder on Amazon. Jim, in our final moments here, a quick two-pronged question, one having to do with Europe. The last time we had you on our program, I was surprised because I don’t find too many people who agree with me that Europe and the Euro, although terribly fundamentally flawed, is something that is so hoped for and so longed for that there’s a tremendous desire for the European experiment to continue and to deepen and to not end. And, there’s been a tremendous number of people who have said, “Well, the Euro’s going to collapse and Europe is a disaster”, but you, on the other hand, when we spoke last time, had the same kind of view we have held to. So, real quickly, your thought on Europe, and then one final question, as well, when you respond is just the old common idea that you address in the book about the gold standard being completely impossible because there’s not enough gold to handle all the commerce and transactions. If you would just talk real briefly about Europe, your thoughts, and why gold could actually be revived to form a new gold standard.
Rickards: Sure. I mean, Jerry, go back to 2011 and 2012, high profile conferences like Davos, all the Nobel Prize winners, Joe Stiglitz and Paul Crugman and other well known figures running around with their hair on fire saying, “Europe’s collapsing! Greece has to be kicked out of the Euro. Spain should quit the Euro and go back to their old currency and lower the unit labor cost. There should be a northern tier and a southern tier and all this.” And, I said that’s nonsense. Nobody’s getting kicked out. Nobody’s quitting. The Euro will actually add members. Every one of those things has turned out to be true. Greece is still in the Euro. Spain is still in the Euro. When I said this, they had 16 members. Today, they have 19 members. They’ve actually expanded the Eurozone. There are other applications pending. They’ll be adding new countries in the months and years to come. So, the Euro is getting stronger. I’d like to point out in the book of Revelation Chapter 12. It talks about the woman clothed in the sun wearing a crown of 12 stars. There are 12 golden stars on the Euro flag. Actually, the designer of the flag made a very explicitly religious reference there. That’s not something that is there by coincidence. So, I look at the victory of the woman in the book of Revelation, and I look at the European flag, and I see the same crown of 12 stars. Europe is strong and getting stronger. Yes, they’ve got problems. They’ve got political issues. They’ve got a refugee crisis. I’m not saying it’s all rosy. I’m just saying don’t listen to American experts when it comes to Europe. You actually have to go to Germany, France, and Italy, Spain, Greece, and elsewhere, and I’ve been to all of those countries and spoken to people and they’re very committed to Europe and the Euro. It’s not an economic project. It’s a political project. It’s the alternative to war. They had centuries of war. They don’t want to repeat that. Unfortunately, they’re in a war with the Islamic State, but that’s a separate issue. Among themselves, they want that unity. As I said, Europe is strong and getting stronger. On your second point, Jerry, in my book, I have a lot of favorable things to say about gold. But, before I get to those, I say I want to demolish once and for all, the arguments against gold because you hear them over and over. They’re thrown in my face. They’re repeated in TV interviews and elsewhere. You know, I just need to knock them down, clear out the dead wood, and let’s proceed with the case for gold. One of the main arguments you hear from the academics and journalists and others as well is, “No matter what you say, Jim, we can’t have a gold standard because there’s not enough gold to support trade and commerce. Look at the banking system, liabilities and notes, and the size of all the commercial transactions in the world. There’s not enough gold.” That’s nonsense. There’s always enough gold. It’s just a question of price. If you had a money supply based on gold at $1200 an ounce which is about the current price, that is highly deflationary. You would have to shrink the money supply to maintain that $1200 parody. But, if you price gold at $10,000 an ounce, which I do expect, then there’s plenty of gold. In other words, it’s the same amount of gold but with a different dollar price. So, the higher dollar price gives plenty of gold for world commerce. But, you have to get the price right, and Paul Walker has said that if you ever went back to a gold standard, the price would have to be much, much higher. Not because he wants to reward gold holders, but because that’s the economics of it. So, one of the reasons the monetary authorities disparage gold and ignore gold and downplay gold and miseducate people about gold is because they don’t want to own up to the fact that if you had a gold standard, it would have to be $10,000 an ounce to work. There’s plenty of gold to support the world monetary system, but you’ve got to get the price right. The implied price is $10,000 an ounce.
JR: Very, very good. I do appreciate that answer because that is a recurring question that people raise that even if we do have a gold standard, we wouldn’t have enough to handle all of the explosive commerce transactions around the world today. Well, very good. The author of the book, Jim Rickards. The book title, “The New Case For Gold”. I do encourage you to go check it out. You can order it on Amazon now. Jim, thank you so much for taking the time to join us. We look forward to having you back soon.
Rickards: Thank you, Jerry.