Friday, January 23, 2015

Jim Rickards: The Fix is In

This is a new article from Jim Rickards appearing on the Daily Reckoning web site. Jim is launching a newsletter service associated with this site. This article touches on some sensitive new ground so we will take a look at it in depth. Below are some key quotes and then some comments. To read the full article, click the link above.

One of the biggest issues discussed on alternative media sites by those who are advocates for precious metals is whether or not the gold market is a manipulated market. There is a lot of data on this topic available at the web site of the Gold Anti Trust Action Committee (GATA). Here is a link to that site for those interested.

We don't take a position on that issue here on the blog. But Jim Rickards has made it a key feature of this article so we will take a look at what he is proposing for readers to consider. Here are a few quotes from his new article:


"A lot of people think about gold as a percentage of total reserves. So countries have reserves. What percentage of your reserves consist of gold? For example, a lot of people are surprised to learn that the United States has 70 percent of its reserves in gold. China has about 1 percent of its reserves in gold. So people look at that and think that’s the imbalance. But that’s not a very meaningful figure in my view."

. . . . .

". . .  to me, a better metric, a better way of thinking about how much gold a country has is to look at gold as a percentage of GDP. Your GDP’s your economy — How big is your economy? That’s just the gross value of all the goods and services."

. . . . .

"The US has about 8,000 tons. We haven’t sold a significant amount of gold since 1980. We dumped a lot of gold in the late ’70s to suppress the price, but none after that. We’ve held onto the gold. So one of my questions for central bankers is, if it’s such a ridiculous thing to have, why are we hanging onto it? But that’s a separate question."

"So the point is, China does not have enough gold to have a seat at the table right now. Think of it as a game of Texas Hold’em. What do want in a poker game? You want a big pile of chips. Gold are gonna be your chips. It doesn’t mean that you automatically have a gold standard, but the gold that you have will kind of give you your voice at the table."

"For example, Russia has one-eighth the gold of the United States. It sounds like they’re a small gold power, but their economy’s only one-eighth as big. So they have about the right amount of gold. The U.S. gold reserve at the market is about 2.7 percent of GDP. That number varies because the price of gold varies, but it’s about 2.7 percent. For Russia, it’s about 2.7 percent. But Europe, it’s even higher. It’s over 4 percent. That’s one of the reasons I’ve been very bullish on the euro and continue to be."

. . . . . . 

"So here’s the problem: If you took the lid off and ended the gold price manipulation and let gold find its level, China would be left in the dust. It wouldn’t have enough gold relative to the other countries, and because their economy’s growing faster and because the price of gold would be skyrocketing, they could never acquire it fast enough. They could never catch up. All the other countries would be on the bus. The Chinese would be off the bus."

"So, when you have this reset, and when everyone sits down around the table, China’s the second largest economy in the world. They have to be on the bus. So the global effort is to keep the lid on the price through manipulation, which is very obvious. I tell people, if I were running the manipulation, I’d be embarrassed because it’s so obvious at this point."

"So the price is being suppressed until China gets the gold that they need. Once China gets the right amount of gold, then you can take the cap off."               . . . . 
My added comments:

This article contains a number of hotly debated issues. First, some will question Jim Rickards statement that the US has 8,000 tons of gold. Critics believe that the US has sold or leased much of its gold to hold the price down. They claim this is why the US will not allow an audit of gold reserves to be conducted. 

Next, we have Jim's statement that the manipulation of the gold price is so obvious that he would be embarrassed if he were in charge of running it. So he clearly states he believes official manipulation is happening. 

We are not going to delve into either of these controversial areas because we cannot prove whether the US really has 8,000 tons of gold or not. We could look at the evidence cited to support price suppression/manipulation, but it would be way too much information for a simple blog post. You can use the link to GATA above if you have interest in that or read Jim's book (he mentions 300 footnotes of documentation in his book).

What we will focus on here is Jim Rickard's statement that the reason gold is being held down is so that the global gold reserves can be re-balanced and get China caught up with the rest of the world. He says that once that is accomplished, we can expect a "reset" of the global monetary system. He says that gold can be allowed to seek a true market price at that time once China has enough gold reserves (what they have now is unknown).

I don't know if Jim Rickards is speculating or speaking from inside knowledge when he makes these comments. But the possibility of a reset of the global monetary system is what started this blog in the first place. Clearly, if this happens it will be a historic change that will impact everyone. Of course we are going to cover Jim Rickards talking about that here.

This idea of a global monetary system reset is why we continue to follow the status of the 2010 IMF reform package. If there is to be a global gathering around the table some day like Jim Rickards talks about in this article, it will have to happen at the IMF where all the nations are members. But as things stand today, the IMF is not in a position to step into a global crisis and be the leader to work out whatever solution might be put forward. 

So, connecting all the dots, here is what readers here need to watch for. First, a new global crisis much bigger than the 2008 GFC. This is followed by immediate pressure on the Republican controlled US Congress to approve the 2010 IMF reforms. The Republican led Congress is setup right now to take the blame for a crisis if they don't respond as the public would most likely tie lack of action to them since they have not approved the IMF reforms and recently rolled back some of the Dodd Frank legislation. The media can also easily associate the Republican Congress as favoring the 1% if the 99% are suffering. President Obama added to this public perception with with his State of the Union address.

The crisis will also have to be too big for national central banks to handle. Interestingly, with the move by the Swiss National Banks, criticism of central banks is now showing up everywhere in the media. Here is a blog article that talks about that .

Once the IMF reforms are approved, then you could look for the IMF to convene a new global "Bretton Woods" type conference. This is where the "reset" might come into play that he mentions in this article. With the reforms passed, look for the BRICS nations to be quite willing to participate. The Yuan may also be in the SDR basket later this year as well.

This scenario is by no means a prediction. It is just an attempt to connect a number of dots that seem to be isolated, but could possibly connect to form a clearer picture over time

Conversely, if the 2010 IMF reforms don't pass and/or we do not have another big global financial crisis, an IMF led conference to preside over a "reset" of the monetary system will not be a very credible scenario. This is why I think the most likely time frame for this scenario is before the next US elections in November 2016 so that the Republican controlled Congress can be blamed for the problem. After 2016, the Democrats will probably have more power in the Senate or retake it. The political timing favors sometime before the 2016 elections. This is my reasoning for that time frame.

So, these are the big keys we will watch for the next two years to see if this scenario is plausible or not. As always, time will tell us the answer.

added note: Jim Rickards follows up this article with another one at Daily Reckoning you can read by clicking here. In this one he warns we are at real risk of a new financial crisis as much as six times the size of the 2008 crisis. I had already written this blog post when I saw this new article. Interestingly, he talks about a time frame of the next two years for this crisis to unfold. I can't help but notice how this time frame ties to what I wrote above. Another coincidence? We'll see.

Quotes from this second article:

"The good news for investors is that this fiasco will not happen overnight. It will take a year or two to play out. "

"This new junk debt fiasco started in the summer of 2014 but will not reach its peak until 2016 or later. Even companies and countries with dim prospects often have enough cash on hand to make payments for a while before they actually default."

additional added note: Dutch researcher Koos Jansen writes this new article supportive of Jim Rickards comments on gold above. The article is lengthy, but does provide a lot of docmentation to support the idea which some readers may want to explore. Koos Jansen is viewed as an expert on tracking movement of gold reserves from the west to the east and China. Here is the concluding paragraph of his article:

"Not so long ago I published a Wikileaks cable from 1976 wherein China expresses its particular interest in gold and SDR’s. Of course this is all just a theory, but it seems as if the redistribution of the chips, physical gold flowing form West to East, is all part of orchestrated preparations for the next international monetary system, anchored by gold. This system would require gold to be spread among the major economic power-blocks proportionally."

additional added note: Silver Doctors runs this article on their site. We always appreciate it when one of our articles here is run on another site. Thanks! 

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