Jim Rickards 'New Case For Gold' At the Foreign Correspondents Club of Japan

"Gold is not an investment, because it has no risk and no return. Warren Buffett's well-known criticism of gold is that it has no return and therefore no chance of compounding his wealth.

He is right. Gold has no yield; it is not supposed to, because it has no risk. If you buy an ounce of gold and keep it for ten years, you end up with an ounce of gold— no more, no less. Of course, the 'dollar price' of an ounce of gold may have changed radically in ten years. That‟s not a gold problem; it is a dollar problem.

To get a return on an investment, you have to take risk. With gold, where is the risk? There is no maturity risk, because it is just gold. It will not mature into gold five years from now; it is gold today, and always will be. Gold has no issuer risk, because nobody issues it. If you own it, you own it. It is not anyone else's liability.

There is no commodity risk. With commodities there are other risks to consider. When you buy corn, you have to worry: does it have bugs in it? Is it good corn or bad corn? It‟s the same thing with oil; there are 75 grades of oil around the world. But pure gold is an element, atomic number 79. It is always just gold...

Wall Street sponsors, U.S. banks, and other members of the London Bullion Market Association (LBMA), have created enormous volumes of 'gold products' that are not gold. These are paper contracts. These products include exchange-traded funds, ETFs, the most prominent of which trades under the ticker symbol GLD. The phrase 'ticker symbol' is a giveaway that the product is not gold. An ETF is a share of stock. There is some gold out there somewhere in the structure, but you do not own it— you own a share. Even the share is not physical; it is digital and easily hacked or erased."

Jim Rickards, The New Case For Gold

It is true that money provides no interest payments if it is truly money. If you hold US dollars as cash, for example, you obtain no interest or dividends on them. If you did, it would interfere with their neutrality as a medium of exchange, as people would tend to save, hold, hoard them.

You get the interest from money by 'loaning' it to someone else, and accepting a form of obligation with risk, thereby obtaining interest payments as compensation for that risk. This is what a bank deposit has been traditionally, at least before the days of confiscatory negative interest and the gross and purposeful mispricing of risk.

The same is true of government bonds, which are not money but loans with risk compensation as interest payments.

However gold is natural money, and not 'official money' because it is recognized as such by few governments, and must be exchanged for the official currency in payment of taxes for example.

I would quibble a bit with Jim about gold not being an 'investment' if I was inclined to split hairs, because it can be and is often used as a long term hedge for example, against loss in dollar assets based on dollar devaluation as inflation.

His colleague sitting next to him on the dais in Tokyo describes gold in a hedging trade which he is now holding. Why would the other components of the trade be considered investments if held long enough, but not the gold? Perhaps one might calls this a 'speculation' rather than an 'investment' but I fail to see the difference.

Land is thought of as an investment in the common language, even though it pays no interest and generates no income in and of itself except as it is hired our for use, or used directly as a component of some overall productive endeavor, with risk.

And if I hold a tech stock for ten years that pays no dividends, is this not still a type of 'investment?'

Typically the difference between 'trade/speculation' and 'investment' have been related to duration and the volatility of the difference between the expected and unexpected outcomes. It is a small distinction, but I am not willing to conceed this to Buffett, who seems to betay a narrowing of outlook that often comes to those too heavily specialized for too long in one thing or another.

Depending on the assumptions which one has made, the manner in which the holding of the asset is structured, and especially in regard to intended duration, I can see any number of instances in which gold and silver can be considered 'investments' without paying dividends and interest, but having some probablility of gains against some other thing.

As for stocks and other assets, I don't even wish to think about the times that some short term 'trade' has turned into a longer term 'investment' because of some poorly estimated probability of risk and duration.

Jim Rickards on King World News

Jim Rickards Interview on King World News - click here to listen.

1. Financial Warfare - protectionism, excess savings, managing exchange rates.
2. Beijing consensus: neo-mercantilism can lead to outright financial warfare
3. Bernanke worried about deflation more than anything else
4. Money printing in US and Euro is inflationary and balances China deflationary forces
5. Gold does well in both inflation and deflation - well suited to times of uncertainty
6. Pullback in gold due to liquidation to raise cash in current crunch
7. Gold sellers are daytraders, speculators, but buyers look like strong hands
8. His Price target on gold to $2,000 short term and $5,000 intermediate term
9. Merkel ban on naked short selling was absolutely right - stand up to Wall Street
10. The way CDS are being used they are not part of a free market, but a rigged game
11. Greece, Spain, and Italy are important NATO allies - we are allowing our own US investment banks to assault them financially (economic hitmen)
12. Speculation is fine, but it must be transparent, well funded, and regulated
13. No money down, shadow CDS market is completely destructive
14. Who are the Bullion Banks serving? Who are the longs and the shorts?
15. JamesGRickards is posting on twitter.com

There is a very important thought buried in the observation that Chinese deflationary forces and slack demand are deflationary, but being countered by money printing which is inflationary. That is a prescription for stagflation.

I thought he was rather easy on the Chinese who are egregiously manipulating their currency exchange rate to their advantage vis-à-vis the developed industrial nations of Europe and North America.

Jim Rickards: Possible Run on the Gold Bank, Fed Insolvent, Currency Endgames in US Debt Crisis

"Somewhere ahead I expect to see a worldwide panic-scramble for gold as it dawns on the world population that they have been hoodwinked by the central banks' creation of so-called paper wealth. No central bank has ever produced a single element of true, sustainable wealth. In their heart of hearts, men know this. Which is why, in experiment after experiment with fiat money, gold has always turned out to be the last man standing." Richard Russell

The interview is refreshing because Mr. Rickards lays his thoughts out clearly and without excessive jargon. I found his rationale for China's desire to increase its gold holdings to be intriguing. The price objective of $5,000 - 10,000 is somewhat arbitrary, but directionally correct if it is not accompanied by a reissuance of the currency, which I think is much more probable. Essentially it works out to be the same, since the new currency is likely to be a factor of 1 for 100 exchange for current dollars. If this seems outlandish, it should be kept in mind that this is not all that far removed from the fairly recent post-empire experience of the Soviet Union.

Jim Rickards audio interview on King World News

Highlights (aka Cliff's Notes):

• There is obviously not enough gold and silver to cover the physical demand if holders of paper certificates in unallocated accounts demand delivery, and most likely only a small fraction could be covered with the practical supply available. Cash settlement will be enforced in the majority of cases.
• Cash settlements would be for a price as of a 'record date' which is likely to be much less than the current physical price which would continue to run higher
• There is more here than meets the eye - if you holding metal in an unallocated account you are likely to be considered an unsecured creditor
• 100:1 leverage is reckless no matter commodity or asset it involves - little room for error
• There is no way to pay off the existing real US debt without inflating the currency in which the debt is held, to the point of hyperinflation
• If the Fed's mortgage assets were marked to market the Fed itself would be insolvent
• Anything involving paper claims payable in dollars (stocks, bonds) are a 'rope of sand,' a complete illusion that is fraught with risk
• $5,500 per ounce of gold would be sufficient to back up the money supply (M1) as an alternative to hyperinflation and a reissuance of the currency. Target price is 5,000 - 10,000 per troy ounce in current issue US dollars
• The break point will be when the US debt can no longer be rolled over. US will not be able to finance its debt without taking drastic action on the backing or nature of the currency
• China needs to have about 4,000 tonnes of gold, and only has 1,000 tonnes today
• China cannot fulfill this goal by taking even all of its domestic production for the next 10 years. The Chinese people are showing a strong preference to hold gold themselves.
• From 1950 to 1980 the US gold supply declined from 20,000 to 8,000 tonnes, basically moving from the US mostly to Europe.
• The Chinese are frustrated that they cannot obtain sufficient gold at reasonable prices as Europe did, to withstand the currency wars and the reworking of international finance
• Holding your gold in a bank correlates you to the banking system, the very risks which you are trying to avoid

I was gratified to see that Mr. Rickards has come to the same conclusion as I had that the limiting factor on the Fed's ability to monetize debt will be the value and acceptance of the bond and the dollar.

I should add that although it is possible that some event might precipitate a series of events that could accelerate this, the scenario will otherwise take some years to play out. These types of changes happen slowly. The rally in precious metals has been going on for almost ten years now, and it might take another five to ten years for the resolution of these imbalances into a new equilibrium barring some precipitant, or 'trigger event.'

Mr. James G. Rickards is Senior Managing Director for Market Intelligence at Omnis, an applied research organization. He is also co-head of the firm's practice in Threat Finance & Market Intelligence and a member of the Board of Directors. Mr. Rickards is a senior counselor, investment banker and risk manager with extensive experience in capital markets including portfolio and risk management, product structure, financing and operations.

Prior to Omnis, Mr. Rickards held senior executive positions at "sell side" firms (Citibank and RBS Greenwich Capital Markets) and "buy side" firms (Long-Term Capital Management and Caxton Associates). Mr. Rickards has been a direct participant in many significant financial events including the 1981 release of U.S. hostages in Iran, the 1987 Stock Market Crash, the 1990 collapse of Drexel and the LTCM financial crisis of 1998 in which he was the principal negotiator of the government-sponsored rescue. He has been involved in the formation and successful launch of several hedge funds and fund-of-funds. His advisory clients have included private investment funds, investment banks and government directorates. Since 2001, Mr. Rickards has applied his financial expertise to a variety of tasks for the benefit of the national security community.

Mr. Rickards holds an LL.M. (Taxation) from the New York University School of Law; a J.D. from the University of Pennsylvania Law School; an M.A. in international economics from the JHU /SAIS, and a B.A. degree with honors from The Johns Hopkins University.