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.

SP 500 Daily Chart Looking Toppy, Regulators Looking Sloppy

The SP 500 Chart is looking rather 'toppy' here as the rally extends higher, running on monetary inflation and technical trading, squeezing the shorts.

Make no mistake, if enough specs try to front run this to the short side the hedge funds and Wall Street Banks like JPM can run it higher, since selling volume has not yet picked up. And the government and the Fed are only too happy to facilitate a reflating of a stock bubble as a means of 'soft' market intervention.

This is a factor in how the Banks are making their substantial trading revenues these days, in a return to leverage and subsidized regulatory and monetary easing. Although the example presented here is with regard to commodities and ETFs, the principle applies very well to stock index ETFs.

"Much of this happens because the government is too stupid to see the inherent conflict of interest in what a broker-dealer does. Regulation will not stop gaming the law. Ethics do, and not everybody has ethics. So best you can do is prevent situations of conflict of interest, like the existence of Broker-dealer type entities. Either you trade for yourself, or you trade for others. Period...

You can never know intentions, and no one is bigger than the market, but the consequences of a lack of transparency and the free reign in which banks can tell half-truths to investors is a big factor in enabling strong hands to fleece weak hands with little market risk. It’s all a con game."

In defense of the stupidity of government, quite a few economists, analysts, and even bloggers do not 'get' the inherent conflict of interests involved in the current structure of the broker dealers, or do not care to see it for a variety of personal reasons. Stupidity can often be willfully obtained, bu always for a price. Some of the arguments against financial reform that I have seen appear to be similar to arguments that would be in favor of armed robbery because it stimulates the velocity of money.

The inherent problem with the dealer playing his own hand at the same table with the players, using the house bankroll, and looking at the cards as he deals them, would seem to be pretty much common sense, unless the casino is staffed with very restrained and scrupulous individuals, and some uncommonly good regulators equipped with the right equipment and a willingness to use effective deterrents.

But Wall Street banking is about as bad as it gets when it comes to ethical considerations and self-restraint. The regulators are too busy surfing porn, and the top politicians like Rahm Emmanual are compromised by free wheeling financiers and outrageously weak campaign contributions laws. That is why these lunatics need a strait-jacket like Glass-Steagall. The culture of greed is epidemic and overcomes all other considerations.

So for an opportunity to short this market, wait for it.

And as for serious financial reform, the Republicans are as bad or even worse than the Democrats. Mitch McConnell makes Chris Dodd look like Mahatma Ghandi, so don't hold your breath.

Several ProSharest ETFs Are Going to Have Reverse Splits This Week

The 'deflation trade' has been a tough row to hoe for the past year or so, compliments of the Fed's Balance Sheet.

It has been SO bad, that nine Proshares funds including several of the 'short ETFs' are going to have substantial reverse splits this week.

ProShares announced that it will execute reverse share splits on nine ProShares ETFs.



The splits take effect after the close on April 14. Here's the reason for doing the reverse splits according to ProShares:

For funds with lower nominal prices, bid-ask spreads represent a higher percentage of the transaction price than for higher-priced funds, increasing both costs and volatility — even when the spread is tight.

ProShares believes the reverse splits will adjust the share prices to a more cost-efficient level for the Funds' shareholders and that commissions charged by brokers who assess their clients on a per-share basis may be smaller, as investors will need to buy or sell fewer shares.

Read the rest of this article here.

Danger On the Horizon: The Systemic Pollution of The Big Banks

There are times for genuine concern in life, but the antics of Wall Street may be of less necessity than they would like us to imagine.

Goldman Sachs has not nearly enough societal value to balance its social pollution. They need to be cut off immediately from all government subsidy and restrained in their ability to game the system.

Excessive size and leverage breeds interdependent fraud, political corruption and inefficiency, and pseudo-scientific rationales for the ridiculous from domesticated economists.

Take the big Wall Street Banks apart into self-sufficient components, save the depositors, and start worrying about the things that really matter.



(h/t qqqbear and paine)