Monetary expert Jim Rickards returns this week to share the insights from his latest work The New Case For Gold, a detailed and highly-researched study of the fundamentals likely to drive the price of gold bullion in the years to come.
Rickards is quite confident that the price is going higher — much higher in fact — as the current world fiat currency regimes falter, to be replaced by ones backed (at least in part) by bullion.
On the way to that outcome, expect the price to be subjugated to the interests and aims of the largest players on the geopolitical chessboard:
Is there gold price manipulation going on? Absolutely; there’s no question about it. That’s not just an opinion.
I spoke to a PhD statistician who works for one of the biggest hedge funds in the world. I can’t mention the name but it’s a household name, you would know the fund. This guy is a PhD statistician. He looked at COMEX opening prices and COMEX closing prices for a 10-year period and he was dumbfounded. He said…This is the most blatant case of manipulation I’ve ever seen. He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits. He said statistically that’s impossible unless there’s manipulation going on.
I spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She is the leading expert on globe price manipulation. She actually testifies in some of these gold manipulation cases that are going on. She wrote a report reaching the same conclusions. It’s not just an opinion, it’s not just a deep, dark conspiracy theory. Here’s a PhD statistician and a prominent market expert lawyer, expert witness in litigation qualified by the courts, who independently reached the same conclusion.
Now, where is the manipulation coming from? Well, there are a number of suspects but my number one suspect is China. To that you might say: Wait a second, China has 5,000 tons. They lie about it. They say officially they have 1,700 tons but it’s very easy to establish that China probably has 5,000 tons or more. Again, that’s not a made up number. How do we know? Well, we look at Hong Kong imports. China lies, Hong Kong doesn’t — they actually have fairly reliable trade statistics. They’re showing about 700 or 800 tons a year of exports from Hong Kong to China. Let’s just say 800 tons a year there and we have geological surveys that show China produces about 450 tons a year from the mining output and we know they have zero exports. Combine Hong Kong exports to China with Chinese indigenous mining output and you get a figure of about 1,200 or 1,300 tons a year times six years. That’s 9,000 tons right there. The only thing that’s not clear is how much of that is public and how much of it is private.
I was in Switzerland a couple of weeks ago and met with the head of the world’s largest gold refinery. His estimate is about 70% goes to private usage and about 30% to the government. Take the 9,000 tons, apply 30% and you get 3,000 tons, plus the 1,000 they admit, so you easily get to a figure of 4,000 or 5,000 tons. But here’s the problem: China has to get to 8,000 tons. If they want to look the US in the eye and have a big enough pile of poker chips the next time the major trading financial powers sit down to play poker and recut the deal and reform the international monetary system, they have to have as much gold as the US. So they’re still out to buy another 3,000 or 4,000 tons. Ultimately, the price will go much higher, but if you were a buyer of 3,000 tons wouldn’t you want a low price? Of course you would. By the way, they are untouchable by the CFTC or the Justice Department. We can’t prosecute China. We can’t get access to them. They would laugh at is.
So you’ve got a big whale out there buying thousands of tons through stealth interception motivated to have a low price, which is untouchable by US regulatory authorities. There’s your culprit right there(…)
(…) The senior officials know about it. They’re very relaxed about it. They think we need to do this. The question is: Why? Why does China need gold reserves? Obviously, you’re going to reset the monetary system on a gold basis. If you do that, back to Churchill 1925, you’ve got to get the price right. What is the implied, non-deflationary price of gold in the reset monetary system? The answer is at the low end $10,000 an ounce, at the high end $50,000 an ounce. It’s coming.
People say “I hear you Jim and I agree with your argument, but I’ll wait until it starts to take off.” Sorry, you’re not going to be able to get the gold. It will take off, but you’ll be standing there watching it on television going to $2,000, $3,000, $4,000 an ounce while frantically calling your dealer saying: Get me some gold! You know what the dealer is going to say? Sorry, sold out: back ordered. You call the Mint: back ordered. You’re not going to be able to get it. That’s my point. Get it now, while you can, at a good entry point. Not 100%. Just get 10% of your assets in gold, sit tight, and you’ll be fine.
Click the play button below to listen to Chris’ interview with Rickards (39m:36s)
Chris Martenson: Welcome to this Peak Prosperity podcast. I am your host, Chris Martenson. You know, with every passing day there is another example of central banks doing something, anything, to rescue or stabilize financial markets, especially the equity and currency markets. To help us understand this better we have back with us today, a man who really needs no introduction, Jim Rickards—seasoned financier, risk manager, and author. We’re going to discuss his latest book, The New Case For Gold, hot off the presses as its release date is April 5, 2016. Now, Jim is perhaps best known for his expertise in describing how currency wars are one of the most destructive and feared outcomes in international economics and that history shows they always end badly. In fact, that is one of the core reasons we’ve been suggesting gold to our listeners for a long time is because of central bank monetary action more than anything else.
Now, in 2014, Jim warned us that the world was going to engage in a new currency war and it was going to pose risks that every prudent individual should be aware of and of course, we do consider gold to be a form of money at Peak Prosperity, which is a different thing from being a form of currency, a distinction that matters a lot and maybe we’ll get to here today. Jim, welcome back. It’s always a pleasure to have you on.
Jim Rickards: Thank you, Chris, great to be with you. Thanks for having me on your program.
Chris Martenson: Let’s set the stage for why you wrote this book. Gold, I hate to say it Jim, it’s a long-suffering relic, at least if we go by its price over the last five years; and Grant Williams, who I admire a lot, makes the case that in the west nobody cares about gold. It’s beaten down, it’s forgotten about by most financial managers in the west. Your new book is making the case that every portfolio should have some gold in it, so let’s talk about that. First, why is gold suffering and forgotten by western financiers, and are they making a mistake here?
Jim Rickards: Well, that’s a great question. First of all, you’re exactly right Chris. You can’t get into normal conversation with most people, or certain monetary elites—university professors, academics, central bankers, etc. journalists for that matter—with few exceptions. You can’t get into a normal conversation about gold without being either ridiculed, or you’ll be treated like a gold bug, or gold nut, or a Neanderthal. I’m kind of used to it all. I’ve heard it all. You need a pretty thick skin to be in the space.
But that’s the reason I wrote the book; you’re exactly right that we now have upwards of three generations of Americans who have either been miseducated, uneducated or led in a false direction with regard to gold. So 90% of my book, The New Case For Gold, are positive, affirmative reasons to have gold in your portfolio. But the first 10% of the book, and part of the motivation for writing it, I had to knock down these anti-gold arguments once and for all. I know that they don’t hold water, they’re empirically, factually, historically, analytically incorrect or obsolete but you hear them all the time. I was on Bloomberg with my friend Joe Weisenthal and he starts calling gold “a shiny pile of rocks.” I said, “Joe, it’s not a rock, it’s a metal; so why don’t we start there and get some facts straight?”
There are half a dozen obsolete canards you hear all the time and I shoot them down one by one. Let me just give you a simple example. People say that the gold supply does not expand fast enough to support the growth of the world economy; you hear that one all the time. The fact of the matter is mining output relative to total stock is about 1.6% a year and world growth, it varies but between 3% and 4% a year, so people say "Hey, if gold output grows 1.6% a year and world growth is growing 3% or 4% a year, obviously it’s going to be deflationary because the gold can’t keep up with the growth." Well first of all, that’s complete nonsense. Those facts are correct but they’re irrelevant because mining output has nothing to do with the ability of central banks to expand their gold supply and to have discretionary monetary policy. It confuses mining output official gold and total gold. As you know, total gold above ground is about 180,000 tons, give or take, but official gold, that is gold held by central banks and finance ministries, is only about 35,000 tons. That leaves 145,000 tons out there that central banks can acquire that has nothing to do with mining output.
If you’re a central bank and you want to expand the money supply and you want to have some monetary ease, but you’re on a gold standard or some kind of modified gold standard, you don’t have to wait for the miners to dig it up. All you have to do is go out and buy some gold from the private sector. By the way, that’s called an open market operation. It’s exactly what the Fed does today in bonds. When the Fed wants to expand the money supply, what do they do? They call the primary dealers, which are the big banks, they buy some bonds, the dealers deliver the bonds, and the Fed pays for them with money that comes out of thin air. You can call private gold dealers—have a list of primary dealers in gold—call private gold dealers, buy some gold, pay for it with money that comes out of thin air. If you want to expand your gold base, and you want to expand your money supply, and you want to conduct discretionary monetary policy, it has nothing to do with mining output. You can just go buy some private gold. When you say that, people go "Oh yeah, I get that. I understand that." That’s one falsehood you can knock down.
The other one of course: There’s not enough gold to support world trade and commerce. That’s another nonsensical statement. There’s always enough gold. It’s just a question of price. At $1,250 an ounce if you want to have a gold standard, not a good idea; that’s highly deflationary. But, at $10,000 an ounce it's not deflationary; it’s mildly inflationary. It’s never about the gold supply. It’s about the price. I think going to a gold standard at $1,250 would be a disaster. Same mistake Winston Churchill made in 1925 when he went to gold at about $20 an ounce; that was disastrous. By the way, the person who told Churchill not to do it…Churchill was Chancellor of the Exchequer at the time, which is kind of like Treasury Secretary. The person who told Churchill not to do it said go to gold at a much higher price, meaning at the time about $40 an ounce, was John Maynard Keynes. Keynes has this reputation as a gold basher but in my book, The New Case For Gold, I talk about how Keynes actually understood gold very well. By the way, he never called gold a barbarous relic; that’s another thing you hear. When he used the phrase "barbarous relic," he was referring to a flawed gold exchange standard of the 1920’s. And he was right about that; it was flawed because the price was wrong.
So again, I take these anti-gold arguments, you hear them…they’re all friends of mine by the way, whether it's Barry Ritholtz, or Joe Weisenthal…they’re good people but they just don’t get it. I’m not a gold dealer, I don’t get paid a commission if somebody buys gold. I am an author, I am an analyst, so what I do is provide an educational function. First I knock down the anti-gold arguments (and none of them hold water) and then I spend the rest of the book giving you very good reasons why you should have good.
Chris Martenson: Well Jim, let me get to one of my favorite gold bashing pieces, which we have to discuss now, which was this—people used to throw this out like it was a very, very astute, very savvy thing to say—"Gold has no yield." Well, now I can at least rejoin that and come back and say "at least it doesn’t have a negative yield." Certainly, this negative yield environment has to be gold positive I would think, but from your view, how is this negative yield environment actually working and should we expect that it's going to influence this new case for gold?
Jim Rickards: Gold has no yield, you’re absolutely right Chris, is one of the most frequent anti-gold comments you hear. You hear it prominently from people like Warren Buffet. Of course, Warren Buffet is the king of tax deferred compounding so he likes his yield. You’ll hear it from talking heads and TV anchors, and you hear it all the time. There are two answers to it. One is the one you just mentioned which is that in a world of negative interest rates, zero yield is the high yield asset because zero is greater than negative one, so that makes gold very attractive. There’s another answer that applies even in a positive rate environment that I think is a little more to the point, which is that right, gold has no yield, that’s true. It’s not supposed to. It’s money. Take a dollar bill out of your wallet. Reach in your wallet or your purse, pull out a dollar bill, hold it up in front of you. What’s the yield? Zero. You don’t get any yield on your money. Now, people say "Oh, I can put it in the bank and get a yield, you know, 25 basis points or whatever—" maybe, until you get to negative rates, but when you put it in the bank it’s not money anymore. It’s a bank deposit.
What is a bank deposit legally? A bank deposit is an unsecured liability of an occasionally insolvent financial institution. What is a money market fund? A money market fund is a share of an SEC registered fund—and by the way, last year (and very few people noticed this) the SEC changed the rules so that money market funds can suspend redemptions for the first time. They were never allowed to do that before last year. Hedge funds of course, can suspend redemptions whenever they want, but it didn’t used to be the case with money market funds. These are all misnomers…money market fund. Forget the word money, think about the word market. People say "I have my money in a money market fund." They think they can call their broker, give a sell order, and the money will be in their bank account the next day.
Guess what; let me tell you all the things that can go wrong. First of all, now, in a panic, the money market fund can suspend redemptions so you can’t get your money. Number two, even if it goes to the bank, who is to say the bank is open? Who is to say the bank is not insolvent? What if the power grid goes down? What if Vladimir Putin hacked it? What if the bank closes, which…by the way, I say these things and people roll their eyes and go "That will never happen." Every one of them has happened. 1933, by executive order all the banks were closed. In 1914, the New York Stock Exchange was closed for five months…months, not days. How many people know that? From July to December 1914, the New York Stock Exchange was closed. Vladimir Putin has a 6,000-member cyber brigade. These are not criminal hackers trying to get your credit card number. These are Russian military intelligence assets working day and night to destroy, hack, disrupt, delete and erase every digital asset in the world.
I say to people when I talk to people and meet people in Greenwich, Connecticut, they’re billionaires, I say "What have you got?" They say "I’ve got stocks, bonds, all this other stuff." I say "No you don’t. You’re a billionaire? What you have are electrons. You have digital wealth. You may get a paper statement from your broker or bank once a month but it's all in digital form. It can be wiped out and erased." People say "That will never happen." Guess what? It happened last week. The country of Bangladesh, one of the poorest countries in the world, had one hundred million dollars on deposit with the Federal Reserve Bank of New York that disappeared. It wasn’t on deposit with some rinky-dink bank in Bangladesh. In theory, the Federal Reserve Bank of New York is the safest bank in the world. Here’s a poor country and a hundred million dollars disappeared. By the way, if they had that money in physical gold they would still have their hundred million dollars.
So, every one of these things has happened, every one of these things is coming. I don’t say "sell everything and buy gold." I don’t say "pull all your money out of the bank and buy gold." I do say take 10% of your investable assets, put it in physical gold, put it in safe, non-bank storage and you will weather the storm.
Chris Martenson: I couldn’t agree more and what’s intriguing to me, Jim, is that what you’re talking about is just buying insurance, and unlike an insurance policy where you dump the premium and if nothing bad happens all you’re left with is nothing, gold is a form of insurance where it's always going to have some value. It may be in dollar terms, higher or lower than when you bought the insurance policy, but you’re talking about prudent insurance given real risks that we can see.
You mentioned Putin hacking. It was two years ago I think Symantec released this (I thought) alarming report saying somebody out of Eastern Europe, we think, got root level admin access to our nation’s power infrastructure grid. It made little waves like in wired.com. I saw a little mention of it in some newspapers, but I don’t think it got widely circulated because it's actually a very scary thought. That was the one we found out about; there was a Trojan horse that inserted some malware that gave them root level access…somebody. We don’t know who but let’s imagine for the moment, Eastern Europe is close to Russia, or somebody…could be China, doesn’t matter…what you’re saying is look, these are known things. We’ve already seen that there’s a big global game of chicken and hacking going on and something could come from that. To me, that’s just a prudent A goes to B, goes to C. Somewhere along the line, it makes sense to have your wealth out of the system in physical assets and yet people still resist it. First, why? And second, how do you approach that in your book?
Jim Rickards: Well, the reason why is as we discussed earlier Chris. Call it conditioning, miseducation, brainwashing, take your pick but since the mid-1970’s, gold has not been taught in universities, in economics departments, in education. I was sort of fortunate. I got a graduate degree in international economics but my class, the class of ’74, was the last class that was taught gold as a monetary asset. Everyone says the gold standard ended in 1971 with Richard Nixon. That’s not quite correct. Richard Nixon in August 15, 1971 suspended redemption of dollars for gold, that’s true, but that was not the end of the gold standard. It kind of struggled along for a couple of years. It wasn’t until 1974, that the International Monetary Fund officially demonetized gold and then we went to the world of floating exchange rates where we’ve been ever since.
My years, ’73-’74…I studied gold. Actually my professors, I’m a 25-year-old grad student but my professors were in their 50’s, they were the young guns when the IMF was created in 1944 and the early 1950’s so I was taught by the professors who had created and administered the IMF in its early years and I studied gold in a monetary context. If you’re younger than I am and you know anything about gold, you’re either self-taught or you went to a mining college, because they don’t teach it in academic economics departments, with very few exceptions. So we just don’t know about gold.
By the way, it’s the number one trick of a propagandist. Either don’t talk about something, as George Orwell said "Send it down the memory hole," or if you do talk about it, lie about it. Remember the famous interview with Ben Bernanke talking to George Washington University students a couple years ago. I love lecturing and meeting with students because they always ask the smartest questions because they haven’t been totally brainwashed yet. One of the students raised his hand and said to Chairman Bernanke, “Mr. Chairman, if gold is so irrelevant why does the United States have 8,000 tons?” Chairman Bernanke said, “Well, you know, it’s a tradition.” He used the word "tradition" and just threw it out there and moved on. Well you know what; it was a good question. Why does the US have 8,000 tons? Why does China have more than 5,000 tons? Why has Russia acquired 1,000 tons in the past six years? Why do the 19 members of the Eurozone have 10,000 tons? Why does the IMF have 2,000 tons? What is up with all this gold if it has no role? Of course it has a role. It’s propping up the Fed.
By the way, I talk about that in chapter one of my book. I explain how the Fed is periodically insolvent and has leveraged over 100:1 if you don’t count the gold on their balance sheet, but if you do take the gold on the balance sheet mark-to-market, they look pretty healthy. They’re leveraged 13:1, which is a normal commercial bank leverage and they have a very solid equity base. So gold is propping up the Fed. Now, nobody will talk about that but I do explain it in the book. I take you through. I take the Fed balance sheet, I pull the line items out, I do the math and I explain it analytically so it's all there in chapter one of my book, The New Case For Gold.
I don’t know what to say Chris; it's a great question. I guess it's miseducation but we’re trying to remedy that. I think with your program and your output and some interviews I do and my book, hopefully we can little by little have an impact.
Chris Martenson: Absolutely. I think it is spreading, of course thanks to your great work as well and others. This might be a little geek moment here but you’re the only person I know who might be able to answer this. You just mentioned that the Fed carries a lot of gold on its balance sheet, they carry it at the rate of 11 billion dollars, which is $42 an ounce and change I think if I have that right.
Jim Rickards: That’s right.
Chris Martenson: It should really be 300 billionish under today’s terms. When I wander over to the Treasury Department, I find that they also are recording 11 billion of the same gold on their balance sheet as an asset. How do two entities both record the same asset as an asset?
Jim Rickards: There’s a little bit of history there. First of all, let’s go quickly through the history of how all the gold got confiscated and why we don’t have it anymore. Private citizens can buy gold. I tell people "Don’t want for central banks to go on a gold standard. You can go on a personal gold standard. Just get some gold today." Fortunately, we have the freedom to do that. As you know, from 1933 to 1975, it was illegal for Americans to have gold. It was a crime. It was like having drugs or contraband. Fortunately, that changed in ’75 and we can own gold today.
Anyway, go back to 1912. People actually walked around with gold coins in their pockets. Not all the time; there were silver coins, there was paper money, they were all kind of side-by-side in the marketplace but people could pull out a $20 one-ounce gold coin and go shopping with it. In World War I, the banks hoovered up all the gold (I’m talking about commercial banks) and they melted it down and turned it into 400 ounce bars. So they said to people "Okay, you can have gold but by the way, we’re holding it in these 400 ounce bars." It’s 35 pounds. Nobody is going to walk around with a 35 pound gold bar in their pocket so people were like "Okay, I’ve got gold, I’ve got money that can be turned into gold, but the gold is in the bank vaults." That was step one.
Step two, the Federal Reserve, after it was created in 1913, required all the commercial banks who own the Federal Reserve to give them the gold, meaning give it to the Federal Reserve. That was part of their investment in the Federal Reserve to get their stock. That’s how they got to own the Federal Reserve. So now the gold is at the Federal Reserve. In the 1930’s, during the Roosevelt administration, President Roosevelt ordered the Federal Reserve to hand it over to the Treasury. That’s why they built Fort Knox in 1937, because they were actually holding it at the Treasury Building on Hamilton Place next to the White House before that and they said there wasn’t enough room in the vaults so they built a new vault out at Fort Knox.
Look at the sequence. First, the citizens have gold, then the commercial banks have it, then the Federal Reserve has it, then the Treasury has it and that’s where the gold still sits. Now, here’s the point. The Federal Reserve is privately owned. The Treasury is the United States government. It is unconstitutional under the Fifth Amendment, for the government to take private property without just compensation. So when the Treasury took the Fed’s gold, they had to give the Fed just compensation so they gave them a gold certificate. That’s what the Fed has on its balance sheet. It’s not physical gold, it's the gold certificate, equivalent to a certain amount. It’s not double counting. The Treasury counts physical gold and the Fed counts a gold certificate backed up by the physical gold. It appears twice but it's not quite the same thing.
Here’s where it gets really interesting and I talk about this in chapter one of my book, The New Case for Gold. You’re exactly right, Chris, both institutions value it at $42 an ounce approximately and we all know it's $1,250 an ounce and it fluctuates. Take the line item, take the historic cost value on the Fed’s balance sheet, divide by 42; that gives you the number of ounces of gold. Convert that into tons and guess what you get? 8,000 tons. How much does the Treasury have? 8,000 tons. It’s no coincidence that the Treasury has the same amount of gold that that Fed says it has. In other words, the Treasury gold backs up the Fed.
This unlocks one of the great mysteries, something I’ve thought about for a long time and I only recently solved it and I talk about this in the book. Go back to 1950. The Treasury had 20,000 tons of gold. By 1970, we were down to 9,000 tons. Where did the 11,000 tons go? Well, it went to our trading partners under Bretton Woods. Germany, we were buying Volkswagens; Japan, we were buying transistor radios…they had trade surpluses, they could cash in their dollars and get the gold under Bretton Woods and they did. 3,000 tons went to Germany, 2,000 to France, 2,000 to Italy, 600 to Netherlands etc. Add it up and that’s where the 11,000 tons went. Then we suspended redemptions in 1971.
Between 1971 and 1980, the United States dumped another 1,000 tons in a futile effort to suppress the price of gold and they twisted the IMF’s arm. The IMF dumped 700 tons. So there was 1,700 tons of US and IMF gold dumped between 1971 and 1980, to suppress the price. It failed the same way the London Gold Pool failed in the 1960’s and the price skyrocketed to $800 an ounce in January 1980. Then the Treasury stopped.
The Treasury has not sold a significant amount of gold since 1980. In 36 years, they haven’t sold any gold. So how is it the case that they go down 12,000 tons in 30 years, between 1950 and 1980, and they go down zero tons in the 36 years between 1980 and 2016? The answer is the Treasury can’t sell gold because they can’t go below the 8,000 ton threshold, because then they’re violating their pledge to the Fed, which has that 8,000 tons on its balance sheet. What that means is highly significant. It means the Treasury can’t dump gold. The Treasury is out of the game in terms of gold suppression.
That’s why they’re going around getting everyone else to sell their gold. We got the UK to sell their gold in 1999. We got the Swiss to dump thousands of tons in the early 2,000’s. Poor Canada, they dumped the last of their gold the other day. We got the IMF to sell 400 tons in 2010. We’re getting everyone else to sell their gold. I saw a report just yesterday that poor El Salvador sold five tons. El Salvador is one of the poorest countries in the world but they had to dump five thousand tons. So we’re running out of gold. The US is getting everyone else to dump gold because the US cannot dump gold, because it can’t go through that 8,000 ton threshold. The minute I did the conversation and saw that the Fed was counting on 8 tons, and I knew that was the Treasury number, it was like a light bulb went on. The US is out of the game.
Chris Martenson: Somebody is in the game though and I think the game has changed slightly because paper currency on COMEX is certainly now driving this. On the date of this taping…we’re taping this on April 1, 2016…I’m looking at my screen and gold is taking another patented Friday swan dive. It is down $20-ish here at this moment. But of course, every student of gold knows that this would be the case today because the commercial short position…that’s the bullion banks…had built up again to a near-record short position which means that those big bullion banks, they need the price to go down to make a few bucks, make some money. They never seem to lose. The surprise weakness in the price of gold is nothing personal. It’s just how these banks make money. We’ve all in the gold community been waiting forever for maybe this dynamic to change, but so far it hasn’t so it never seems to; wash, rinse, repeat right? The bullion banks win, they win again. What in your mind could change this and is this a necessary condition to change for the price of gold to be unleashed so that people might take it more seriously?
Jim Rickards: It will change. Here’s the thing…Is there gold price manipulation going on? Absolutely; there’s no question about it and I talk about this in my book, The New Case For Gold. That’s not just an opinion. I spoke to a PhD statistician who works for one of the biggest hedge funds in the world…I can’t mention the name but it’s a household name, you would know the fund…this guy is a PhD statistician. He looked at COMEX opening prices and COMEX closing prices for a 10-year period and he was dumbfounded. He said "This is the most blatant case of manipulation I’ve ever seen." He said if you went into the aftermarket, bought after the close and sold before the opening every day, you would make risk-free profits. He said statistically that’s impossible unless there’s manipulation going on.
I spoke to Professor Rosa Abrantes-Metz at the New York University Stern School of Business. She is the leading expert on gold price manipulation. She actually testifies in some of these gold manipulation cases that are going on. She wrote a report reaching the same conclusions. It’s not just an opinion, it’s not just a deep, dark conspiracy theory. Here’s a PhD statistician and a prominent market expert lawyer, expert witness in litigation qualified by the courts, who independently reached the same conclusion.
Now, where is the manipulation coming from? Well, there are a number of suspects but my number one suspect is China. You say "Wait a second. China has 5,000 tons." Chris, they lie about it. They say officially they have 1,700 tons but it's very easy to establish that China probably has 5,000 tons or more. Again, that’s not a made up number. How do we know? Well, we look at Hong Kong imports. China lied, Hong Kong doesn’t. They actually have fairly reliable trade statistics. They’re showing about 700 or 800 tons a year of exports from Hong Kong to China. Let’s just say 800 tons a year there, and we have geological surveys that show China produces about 450 tons a year from the mining output and we know they have zero exports. Combine Hong Kong exports to China with Chinese indigenous mining output. You get a figure of about 1,200 or 1,300 tons a year times six years. That’s 9,000 tons right there. The only thing that’s not clear is how much of that is public, how much of that is private.
I just met recently…I was in Switzerland a couple of weeks ago and met with the head of the world’s largest gold refinery. His estimate is about 70% goes to private usage and about 30% to the government. Take the 9,000 tons, apply 30% and you get 3,000 tons plus the 1,000 they admit so you easily get to a figure of 4,000 or 5,000 tons. But here’s the problem; China has to get to 8,000 tons. If they want to look the US in the eye and have a big enough pile of poker chips the next time the major trading financial powers sit down to play poker and recut the deal and reform the international monetary system, they have to have as much gold as the US. They’re still out to buy another 3,000 or 4,000 tons. Ultimately, the price would go much higher, but if you were a buyer of 3,000 tons wouldn’t you want a low price? Of course you would. By the way, they are untouchable by the CFTC or the Justice Department. We can’t prosecute China. We can’t get access to them. They would laugh at us. So you’ve got a big whale out there buying thousands of tons through stealth interception, motivated to have a low price, which is untouchable by US regulatory authorities. There’s your culprit right there.
Chris Martenson: It’s been an absolute vast hoovering sound coming from the east, not just China in particular but India too. Thank you for that wonderful description by the way. I was talking with a gentleman who operates a refinery in Switzerland and he says "yeah, they’re still going three shifts, they’re taking physical gold out of London off the OTC market almost as fast as they can and converting it into kilo bars and sending it to China and there it goes." That’s been going on for a while. I’m on record as saying that can’t go on forever but I’m surprised at the durability of that particular process because it seems like it has to be sanctioned at some fairly high levels. I don’t think the west just doesn’t pay attention, and doesn’t care, and thousands of tons are leaving from the west heading east.
Jim Rickards: Oh no, you’re absolutely right. It is sanctioned. I spoke to—again…I want to be careful. Actually, this one is on the record. I spoke to Dr. Zhu Min. He is the number two guy at the IMF. He is Deputy Managing Director and reports to Madame Lagarde; an interesting figure. He was a PhD economist…actually, we went to the same school. Dr. Zhu was Deputy Governor of the People’s Bank of China, so basically a central banker for the communist party of China, and today he is number two guy at the International Monetary Fund. He’s got a foot in both camps; a foot in the Chinese camp and a foot in the western camp because the US more or less controls the IMF. There is nobody who knows more about the inner workings of the international monetary system than Zhu Min.
I spoke to him personally and I said "Zhu, I have a question for you. In 2010, China bought 1,000 tons of gold and the IMF sold 400 tons of gold. Who is right? You can’t both be right. You’ve got sellers and buyers. Somebody is on the wrong side of the trade." He kind of shrugged and said, “You know, China needs to do this.” He used a fascinating phrase. He said, “China needs to rebalance their reserves from credit reserves to real reserves.” I almost fell out of my chair because by "credit reserves" he meant treasury notes. That’s debt. Treasury note is debt. If you buy debt, you’re giving credit so those are credit reserves. This is the number two guy at the IMF referring to gold as a real reserve. This isn’t some fringe website. This isn’t Zero Hedge. This is the IMF. He says they need to rebalance their reserves from credit reserves to real reserves. So it is sanctioned at the highest levels of the IMF.
I had a similar discussion—this one I can’t mention the name, but I’ll just say one of the highest ranking officials in the US intelligence community, actually higher than the CIA because we’re talking about the Director of National Intelligence, which oversees the CIA. I can’t mention the name but I said, “You know what’s going on with China; they’re buying all this gold.” He had the facts; the facts aren’t secret. He kind of looked at me and he shrugged and he said, “Well, somebody has to own it.” As if it were a yard sale and I’m getting rid of my junk and you’re going to come buy some stuff at my yard sale.
So the senior officials know about it. They’re very relaxed about it. They think we need to do this. The question is why. Why does China need gold reserves? Obviously, you’re going to reset the monetary system on a gold basis. If you do that, back to Churchill 1925, you’ve got to get the price right. What is the implied, non-deflationary price of gold in the reset monetary system? The answer is, at the low end, $10,000 an ounce; at the high end, $50,000 an ounce. It’s coming. People say "I hear you Jim and I agree with your argument but I’ll wait until it starts to take off." Sorry, you’re not going to be able to get the gold. It will take off but you’ll be sitting there watching it on television going to $2,000, $3,000, $4,000 an ounce frantically calling your dealer saying "Get me some gold." You know what the dealer is going to say? "Sorry, sold out, back ordered. We called the mint; back ordered." You’re not going to be able to get it. That’s my point. Get it now, while you can, at a good entry point. Not 100%, get 10% of your assets, sit tight and you’ll be fine.
Chris Martenson: You keep saying get 10% of your assets in there. I feel like you’re kind of talking to an individual. Are you talking as well…would you recommend that every portfolio...are you including pensions, endowments, big money as well in that statement?
Jim Rickards: Here’s the thing Chris...by the way, do you know what percentage of US reserves—we talk about Chinese reserves and Russian reserves. Do you know what percentage of US reserves are in gold?
Chris Martenson: No, I don’t.
Jim Rickards: 70%. The US has 70% of its reserves in gold, and again, that’s publically available. Just go to the Treasury Department and look at the reserve report.
Chris Martenson: You’re saying the US should have more reserves then? [Laughs]
Jim Rickards: I’m just telling you the US is way over my 10% allocation. Look, I was…as I mentioned, I was in Switzerland and I did meet with the head of the world’s largest gold refinery but I was also there at a high-end investor conference. These were the largest institutional investors from around the world and when I arrived in Zurich, it was about a two-hour ride out into the Alps where the conference was. It was at a great spa in the middle of nowhere in the Alps, kind of an interesting Goldfinger type location. I shared a car from the airport to the spa with the head of the Government of Columbia—basically their Social Security fund. But unlike our Social Security fund, theirs is actually funded. They’ve got really assets in it as opposed to phony promises. This guy runs a 50 billion dollar portfolio for the benefit of the people of Columbia and I said to him, “How much gold do you have?” He said, “Zero.”
By the way, the institution allocations worldwide are about 1.5%. I think thanks to Kyle Bass, the University of Texas is bringing up the average a little bit but allocations are pitifully small. We can debate 10%, 30%, 50%, but the fact is the actual allocations are 1.5%. We’re talking tens of trillions of dollars. If they only move the needle from 1.5 to 3, forget 10, forget 5…3%, they would double the gold allocation. There’s not enough gold in the world at anywhere near these prices to fill that order. You don’t have to go to 10%. Just move the needle a little bit and you’re talking about a buying panic and skyrocketing prices. Again, my point to investors is... commodities traders and hedge funds have what they call the trend following technique. They say "I’m going to wait until it takes off and then I’m going to jump on. I’ll miss some of the early move but I’ll be along for the ride." That’s trend following, and fine, it works fine in liquid markets but this won’t be a liquid market. This will be panic buying. You won’t be able to get the gold.
Chris Martenson: I guess people can always say "I can own proxy gold then so I’ll buy gold futures, I’ll step in on one of the funds that are always liquid or something like that." They wouldn’t actually have access to gold. Why wouldn’t that work? Why couldn’t somebody say "I can always buy a gold future; trust me."
Jim Rickards: Okay, you admit to being a big of a geek, I’m definitely a geek. I was General Counsel to one of the world’s largest futures traders for a number of years and also worked in hedge funds and traded futures. I’ve actually read all the rulebooks of all the exchanges and guess what; there’s a rule that says they can change the rules. Everyone goes back to the Hunt Brothers 1980 and whines and says "The metals exchange changed the rules on the Hunt Brothers." There’s a rule that says they can change the rules.
Here’s what will happen. You hear some of the gold bugs say "Come on all you long futures traders. Stand up, take delivery. You’ll break the bank." No you won’t because what will happen is if a disproportionate number of long futures positions in gold put in notice to take physical delivery—and of course, there’s nowhere near enough gold in the COMEX warehouse to satisfy that. Everyone understands that. There’s not supposed to be.
First of all, they have a rule that says "we are not a source of supply." The only reason they allow physical delivery at all is to kind of keep people a little bit honest about the paper price and maintain an arbitrage. If you have a disproportionate number of requests for physical delivery, they will issue an order that says "No, you can’t take physical delivery. We’re going to—" what they call trade for liquidation only. That means you can take your long future, you can close it out against the short, you can roll it over to a future month in the calendar spread, but you can’t actually get the physical delivery.
They have a separate rule for what they call disorderly markets. When they have disorderly markets, they can do whatever they want. They can issue emergency orders. They’ll just say "Sorry, no delivery. Out of luck. Trade for liquidation. See you later."
Gold ETF is even worse. When you buy…I don’t want to pick on GLD; it’s the best known but there are other ETFs out there. You buy GLD, you don’t own gold. You own a share of stock that’s traded on the New York Stock Exchange. That stock is in a trust with authorized dealers and they go out…if you want to liquidate, all you can do is sell your share to somebody else. You can’t get the gold. The authorized dealers can but they run a nice arbitrage game kind of front running their own customers. Even there, when they get your money…and again, this is all in the fine print of the ETF offering document…they’ve got 28 days to go buy the physical gold. Well, when do you think they are going to get caught short? It’s not going to be when times are normal. It’s going to be when there’s a buying panic. They’re going to have your money and they’re going to say "Gold sky…better go buy some gold." Again, they’re not going to be able to get it and so they’re going to have to suspend redemptions and they are allowed to do that. They won’t steal your money. What they’ll do is send you a check for your profits as of the close of business yesterday and you’ll be sitting there watching TV saying "It’s up $200 an ounce today, what about that?" They’ll say "Sorry, you’re closed out as of COB yesterday. Here is your check. Nice knowing you."
Exactly when you want the price exposure is when you’re not going to be able to get it. This is something we learned the hard way—Long Term Capital Management. It’s called…my friend Myron Scholes won the Nobel Prize for the invention of the Black-Scholes Pricing Model…he called this "conditional correlation." It’s something that’s not normally or usually correlated but it becomes correlated upon the happening of a certain condition. In other words, the time you want your price exposure to gold is the time you’re not going to be able to get it unless you own physical.
Chris Martenson: That sounds like sort of a parallel inverse to derivatives. They work great as insurance until you actually need them as insurance.
Jim Rickards: Correct. It’s like you have fire insurance on your house and the day before the fire breaks out they cancel your policy. That’s actually not a joke. That’s exactly the way these paper gold contracts work. I’ve read them. Believe me; I’ve sat down and read the London Bullion Market Association standard gold purchase contracts for unallocated gold. It will hurt your head but I’ve read it and I’ve seen the force majeure clauses and the early termination clauses and what you have to go through if you want the physical gold. By the way, they can also close you out before you ever get the physical. I’ve read the offering documents on GLD, I’ve read the rule book of the COMEX. I’ve read all this stuff and again the devil is in the details but read the fine print. You’ll find out that you’ll never get your…not only will you never get your gold, you won’t even get the price exposure when you most want it.
Chris Martenson: That’s going to be a tragedy for a lot of folks and that’s one of the reasons that I’ve been actively encouraging people to get gold. Get physical gold in your hot little hands and if you have to have it in an account, it’s got to be a fully allocated account with your name on it. Again, read the rulebooks. Read very carefully what the conditions are because I think you’re supporting a statement that from your own direction, from a much deeper base of experience. One of my operating principles that I share with my listeners is when the going gets tough they’re going to change the rules.
Jim Rickards: That’s right and by the way Chris, all of this…everything we’re talking about…I love this conversation and I’m glad we are able to put this out there on your program but all of this is in my book, The New Case For Gold. The great thing for readers who buy the book, you don’t have to read the rulebook of the COMEX, you don’t have to read an LBMA contract. It’s all summarized in the book in plain English and I hope people enjoy it.
Chris Martenson: Me too. I’m really going to plug for it. I haven’t had a chance to read it yet; I’ve just downloaded it. I’m going to read it and I will be letting people know about it. I’m sure it's packed with great information. I got a lot out of Currency War. I know it’s going to be a fantastic read.
We’ve been talking with Jim Rickards, author of the newly released book, The New Case For Gold and Jim, thank you for a fantastic interview and great information.
Jim Rickards: Thank you, Chris.