Open Letter to the President, Part Five

By John Mauldin |


When the next president of the United States walks into the Oval Office on Saturday, January 22, after the heady experience of Inauguration Day followed by numerous balls, he or she will be confronted with significant economic challenges. This is the fifth and I hope final installment in a series of letters I’ve written to the next president on those challenges. The first three letters in the series dealt mostly with the realities of the economic landscape beyond the the United States. The situations that most of our significant trade partners face dictate that the next US president will have much less room to operate than the candidates have suggested that they’d like to have.

Europe will be struggling not to fall apart. The budgets of most European countries are going to be even more constrained than the US budget will be. China will be lucky to escape a hard landing within the next four years. The same can be said for many other countries that are dependent on global trade in an era when trade is actually slowing.

My basic thesis is this: Without significant changes in tax and incentive structures, the US will almost assuredly enter a recession within the next few years. Then, if we lose tax revenues only to the extent we did in the last couple of recessions, we’ll be saddled with a deficit of over $1.3 trillion, and the deficit won’t fall below $1 trillion as far out as the eye can see, according to the nonpartisan Congressional Budget Office (CBO).


 
It appears to me that the CBO projection understates the real issue; in fact, the CBO may be viewing things through rose-colored glasses. They don’t project a recession for the next 10 years. The above chart depicts my estimate of what would happen if we were to encounter recession two years from now. But it doesn’t include the constant revisions upward to the cost of Medicare and Medicaid and other entitlements. Just this week we learned that one portion of Medicaid is going to cost well over $1 trillion more over the next 10 years than was projected in the current budget. So add another $100 billion dollars of deficit a year. Such revelations are constantly coming at us. My estimate also doesn’t take into account how fragile the lower-income echelons of the US economy are today. They will probably require even more income and healthcare support, meaning larger deficits for the US and extremely constrained state and local budgets.

Unless something is done to counter these trends – and I do not mean tinkering around the margins – this is going to be the reality that you as president will face in the next four years. There are those who have warned for many years of a debt crisis.
 
They have looked like stopped clocks. But like any stopped clock, they are getting ready to be right this once. Paul Krugman and others who pooh-pooh the concept that debt is a problem may soon get to see what it’s like to deal with a true economic crisis. Of course, they will want more quantitative easing by the Fed and federal debt issuance to relieve the suffering; but we know now that QE does little for Main Street.
 
Instead, it simply helps the rich maintain their asset prices, and deficit spending digs us deeper into a fiscal abyss. We could of course monetize the US debt, but that course would bring its own major negative repercussions.

My aim with this series is to present you, as the potential new president, with a series of options that I think will not only help us avoid the next crisis but set us up for a decade or more of true prosperity and put us back on the path of 3% to 4% annual growth for the next 10 years. And one of the few things that Krugman and I can agree on is that the only way to get out of this crisis is to grow our way out.

While this series has been more popular than I expected it to be – and even US senators are tweeting about it – there have been those who question how realistic it is to think that my proposal might win acceptance. And sadly, I think they have a point. Enacting radical proposals along the lines I am suggesting will not be politically easy. So next week – in case we don’t pull our act together in time to avert a crisis – I’m going to outline what we can do if we fall into recession again. I’ll also propose how we can end the dysfunctionality in Washington DC. While I’m not advocating an actual revolution, my proposal is quite revolutionary, and it already has a significant movement supporting it. And, who knows, maybe in the midst of a crisis we’ll make good on what Winston Churchill used to say about us: “You can always count on the Americans to do the right thing – after they have tried everything else.”

But before we get into the heart of the letter, let me give you an update on my Strategic Investment Conference, which will be held in Dallas this coming May 24–27.
 
We have been able to work out some additional space and accommodations with the Hyatt hotel here in Dallas where the event is being held, so we have told all those who were on the waiting list that they can now enroll. We also have a small number of additional spaces available. Since we don’t want to find ourselves with more attendees than we can handle, we are going to continue to employ a waiting list.
 
First-come, first-served.

If you want to attend, I suggest you go to the Strategic Investment Conference website (click on the link) and register to have your name put on the waiting list. I can almost guarantee that the new seats now available will disappear, as there aren’t not that many; so don’t procrastinate. Those who wait until the last month to register are going to be disappointed.

I won’t even tease you with the fabulous new speakers that we are adding every week. The lineup just keeps getting better and better.

By the way, I was looking through the list of attendees. There are almost 100 people from outside the US already registered. I see a lot of familiar names, and we could easily put together a fascinating conference just from the attendees. We are evaluating two different computer apps that will, among other things, significantly enhance attendee networking.

One of the comments I have heard over the years is that people would like to be able to network more effectively with other attendees, but they do not always know whom they want to meet. Whichever app we choose, it is going to allow you to find and grow a network of people who share your interests. This is one time you really want to be in the room if at all possible. Now to our letter.

An Open Letter to the President, Part Five

 
Let’s summarize where we are. Last week I showed you where to find $2 trillion for infrastructure development by repurposing the Federal Reserve’s balance sheet.
 
What I didn’t mention was that, while the whole trillion obviously cannot be put to work the first year (given the nature of infrastructure timelines), it is not unreasonable to expect that $400 billion in annual expenditures could be reached within three years. There are 122 million people working in the US today, in an economy of roughly $20 trillion. We could easily expect that our $400 billion a year to translate into more than two million jobs and perhaps even more, as infrastructure development is generally more labor-intensive than many other activities are. And these jobs would generally be higher paying than most service jobs, so this initiative could deliver a serious stim ulus for the economy, helping us steer clear of recession.

And if you do the authorizing legislation correctly, it could be the gift that keeps on giving. As these bonds are paid back to the Federal Reserve, the Fed could use the money coming in to fund even more infrastructure construction. Your presidential legacy might well include leaving the country’s infrastructure in its best shape in 100 years and continuing to improve. Not a bad day at the Oval Office.

Then I showed you how restructuring the corporate income tax – about which there is already quite a lot of bipartisan agreement – would offer a radical boost to US business, especially export businesses, and generate modestly more revenue by eliminating all deductions. Of course, a lot of K Street lobbyists would have to look for new jobs; but they are reasonably well educated, and I’m sure they could find something to do that would actually be more constructive .

The Need for More Revenue

But we come to a real sticking point as we begin to figure out how to navigate the budget.
 
Taxing foreign-earned revenue and growing the economy will only modestly increase the revenue stream from taxes in the short term. To offset the trillion-dollar deficits that the economy will be racking up in just a few years, you’ll need more than modest revenue growth.

There are really only three ways to deal with the deficit. You can increase taxes, cut spending, or borrow money. You will notice that there is at least one party in Congress generally opposed to two out of those three. It’s an existential dilemma for Republicans to allow taxes to increase or for Democrats to cut spending, especially on entitlement programs. Yes, Republicans would be willing to cut some entitlements, and Democrats would be willing to cut some defense spending, but both parties are just tinkering around the edges and won’t get you to where you need to be.

One stubborn problem is that US voters want a lot of healthcare but don’t want to pay for it. Yet maintaining the healthcare services and entitlement programs that we have today will require more money. There’s just no way around it.

In order to get the revenue you need, you are going to have to convince both parties to compromise on issues that both have sworn never to compromise on. And proposing traditional compromises in the current political environment is simply not going to work. You can try until you’re blue in the face, but nothing will happen, and we’ll lurch toward a truly fundamental economic crisis that all the infrastructure spending in the world won’t fix.

So let’s step entirely outside the box and figure out how to give both parties something  they want so badly that to get it they’ll be willing to compromise on what the other party wants. And we have to do this in such a way that the bulk of the American people see a significant improvement in their lives and in their paychecks.

To craft a solution, let’s look first at what has happened to the average American worker. There is a reason that large numbers of voters in both parties are frustrated. The charts that follow tell better than 1000 words could why that frustration is warranted. For all the crowing about how quantitative easing has helped, it has mostly helped Wall Street and the top 20% of earners. Median income in the United States is down 8.5% since 2000.


 
The median net worth of US families has fallen sharply since 2007 and is roughly back to where it was 24 years ago:
 


And that economic malaise is affecting all education groups. Even those with advanced degrees have seen their incomes stagnate since 2007:


And while incomes have stagnated, the real cost of goods and services has increased much more than the purported inflation rate suggests. The cost of housing, utilities, and local taxes has certainly increased beyond inflation levels. And don’t even get me started on how much has gone up, crushing families who can least afford it.

This next chart paints our economic situation in even starker terms. The bottom 90% of Americans have seen their overall income drop. Low interest rates and quantitative easing have dramatically helped the top 10%, and we could break out the numbers to show that it’s actually the top 25% that have benefited, though the further down the income chain you go, the less the Fed’s tinkering has helped. The financialization of America is directly responsible for this turn of events, and rather than helping GDP growth as it was intended to do, it has thwarted growth.


You need to do something, something radical, to shake up the system, to make sure those at the bottom get an increase in income all the while making sure that you don’t push the economy, which is already stalling, into a dive. Economics and politics as usual simply will not cut it.
 
 
Giving Everybody Some of What They Want…
 
But Not Everything They Want

Here is the basic political reality you’re dealing with. Republicans want supply-side tax cuts and flat taxes, spending cuts, and a balanced budget, or some combination of all of them. Democrats want more spending for healthcare and other consumer-related items, an agenda that means higher taxes; and many, if not most, would at least give a nod to balancing the budget. Everyone is for “the little guy.”

So let’s start with the easy part. You’re going to want the Republicans to go along with an increase in the total tax revenue. If you forget for a moment where you want to extract that revenue from (by taxing the rich, for instance) and just say that your goal is to get more tax revenue, then you will have a lot more flexibility. And the reality is that you could significantly raise taxes on the rich (and by “the rich” I mean the top 20% in income) and still get nothing close to the amount you need. The sad reality is that you would have to raise taxes not only on the rich but on the middle class in order to make a difference. And I’m going to assume that raising taxes on the beleaguered and shrinking middle class is a nonstarter for pretty much everyone.

So to get what you want, give the Republicans a tax cut that will get every one of their little supply-side hearts absolutely quivering in anticipation. Give them so much of what they want that it becomes almost impossible for them to say no. That means you can’t be halfhearted; you’re going to have to go the whole hog.

Offer a 20% flat tax on income over $100,000. Period. No deductions for anything.
 
Dividends, interest income, municipal income tax revenues, all are taxed at 20% above the total $100,000 income level. Every sacred cow goes. No mortgage deductions, no charitable contribution deductions, no child tax credit, no nothing.
 
Every penny over $100,000 is taxed at 20%. Now, you can make an argument that income from say $50,000–$100,000 should be taxed at 10%, but that’s not going to give you enough money to do what you need to do in order to be able to get the support of the Democrats. There is, on the other hand, a case to be made that people making over $50,000 should contribute something to the overall general welfare of the economy.

That still gives everyone up and down the ladder a major tax cut. There is not a supply sider in America who is not going to like that tax structure. Your income tax filing is done on a 3”x5” card. If you made between $50,000 and $100,000, you pay 10%. If you made more than that, you pay $10,000 plus 20% of everything you made above $100,000. This is going to be surprisingly popular with millennials: survey after survey shows that one of their big fears is dealing with the IRS. In a world where 40% of America is now getting some form of non-salaried income, dealing with the IRS is becoming more complicated. Millennials are increasingly part of the gig economy, and a flat tax will make their lives easier. You are going to be surprised at the level of support this tax proposal will get from young people.

Now, this tax structure is, of course, going to make people who want to soak the rich unhappy, as they don’t see how the little guy benefits. So here is where we have to get really creative. And this is why you are giving the Republicans something that’s going to be very difficult for them to walk away from: you’re going to combine their tax cut with two additional items.

To the Democrats, offer to abolish the Social Security tax on both sides of the equation, both business and personal. That means an individual making $30,000 a year gets an approximately $2000 pay raise immediately. Every working man and woman gets a pay increase in the form of no deductions for Social Security taxes from their wages.

So where do you get the money? You’re certainly not going to get the support of senior citizens or anyone else for that matter if you start messing around with the ability to pay Social Security benefits. So that means we have to find another revenue source.

And for that revenue source you need to turn to the tax that is the most efficient in economic terms: a consumption tax. But not one that looks like a sales tax. Rather, it should be a version of what almost every other country in the world uses, and that is a value-added tax, or VAT. I would modify it to look more like a business transfer tax (BTT).

Basically, with a BTT, a company pays tax on the revenue it receives net of what it pays for the services and products it is selling. Netflix pays on the revenue it receives after deducting the money it sends to television and movie producers for the rights to show their products. This is all transparent to the end user.

You can tinker around the margins to make this tax more politically acceptable. You can exempt groceries, but then you’re going to have to charge a higher rate on everything else. You can exempt nonprofits, but I wouldn’t: they pay Social Security tax on their employees now. But that may be the price of getting the deal done.

A BTT in the low teens (12-14%) will get you all the revenue that you need. You look the Republicans square in the eye and say I want to get 2% of GDP more tax revenue in the form of the BTT in return for the income flat tax on individuals. By the way, the BTT is legally deductible by US corporations under WTO rules when they ship products overseas – which is what every other country does to us, and why they have a tax advantage over us when shipping products to us. The BTT is going to be a huge boon to US producers. Talk about a cheap way to boost the economy – this is it.

Now, Republicans are going to push back and say, yeah, sure, you want to start this BTT at a low rate today, but the day will come when you want to raise that rate, just as every European and other country around the world has done. And you’re going to want to raise those income tax rates again. Why should we give an inch when you may take a mile in 10 years?

And your counter to that is to offer to sign a constitutional amendment that will require a balanced budget and a supermajority of 60% to raise taxes. In theory, everyone is for a balanced budget (well, almost everyone), and the political reality is that it takes 60% of the Senate to approve any major new tax revenue source anyway.
 
You’re not giving up a lot. Enough Democrats will be willing to go along, because they’re going to get the extra revenue they need for the programs they desperately want, and they get a major boost to lower-income America in the form of no Social Security taxes.

Now, the hard part for Republicans is that they have to get 38 states to approve that constitutional amendment. But they’ll just need to fight it out in about five states (getting 33 more or less red states to approve it shouldn’t be too hard) in order to get what they really want: certainty about the future of taxes and the budget deficit in America. You also need to get everybody to hold hands and sign a pledge to not raise taxes under any circumstances for 10 years. Now, we all know that inside the room a pledge like that is only worth so much, but it’s at least a start.

Oh, and for a sweetener, offer to sign a bill to sunset every government regulation over the next 10 years. Do it in an orderly fashion. Maybe even something like eliminating 20% of government regulations across the board during your first term and not letting the absolute number of new regulations increase after that? If you want a new regulation, get rid of an old one. Force the various bureaucracies to clean out their attics and stop hoarding regulations that are way out of date.

And since I’m from the financial services industry, maybe include one little item to help the gig economy and the upcoming generation. Make retirement plans portable from one job to the next so that a young person has an actual opportunity to build a tax-deferred nest egg.

Be Radical, but Phase It in Slowly

Taken together, my proposals amount to a major shift in the tax and incentive structure of the United States. You won’t be able to implement them all overnight. I would start with the infrastructure project and the reduction of corporate taxes, because the former starts to stimulate the economy, the latter is more or less revenue-neutral, and both boost employment. If part of the compromise on the reduction of corporate taxes is some kind of lower-tax-rate amnesty on the $2 trillion sitting outside the United States, that provision could result in a nice one- or two-year revenue boost. If that tax rate was the 10% I proposed above, there would be $200 billion coming in, which would sure put a dent in the deficit during the following 12 months.

But lowering income taxes, introducing a VAT, and reducing the Social Security burden on businesses and individuals are measures that should probably be phased in over four years. It would take at least a year just for the various agencies involved to change their revenue models and infrastructure.

Set a time limit for balancing the budget. The Clinton/Gingrich budgets did not balance the budget the first year. It took time. Figure out how much actual infrastructure can be worked on to boost the economy in the first year, and then begin to project how those projects will affect growth and how long it will actually take to balance the budget. My back-of-the-napkin guess is that 4–5 years is reasonable. There is nothing like 5% nominal growth to speed the process, and holding spending to the level of inflation will bring the budget under control over time. It will work almost like magic. All you have to do is make sure that the total budget doesn’t rise faster than inflation. The economy can then take care of the rest.

The general objection to the introduction of a VAT in the US is the political impossibility of getting it done. It is only politically impossible if everyone doesn’t get something they want. What I have proposed is so politically delicious to all sides that it becomes possible.

Further, the lead article in this weekend’s Wall Street Journal opinion section is a full-throated endorsement of a VAT, quoting various conservative sources. There are numerous conservative economists who think a consumption-oriented tax is the smartest and most economically efficient way to produce government revenue.

Everyone agrees there are flaws in Obamacare. Depending on who the next president is, those flaws can be fixed and their budget implications can change. But the structure I propose above gives both sides more flexibility in getting the changes they want. Streamlining the healthcare system and giving states more flexibility will certainly help control costs. There have to be caps on how much those costs can rise. The American taxpayer is not a bottomless well.

For those under a certain age, the Social Security rules have to be changed. There needs to be a change in the law so that the age of retirement is automatically adjusted upward if the mortality tables show that lifespans are continuing to increase. (You would be exempt if you were within 15 years of retirement.) This would eliminate a political hot potato. When Roosevelt first proposed Social Security, the average person lived only to age 58, and benefits didn’t start until retirees were 65. Now the average person is living into his or her 80s, and the average lifespan of those with above-average income is in the high 80s. (Yes, there are differences in life expectancy depending on income.) Social Security needs to be means tested.

There are scores of other ways that savings can be found. There are over 100 agencies with their own very expensive bureaucracies that do some type of job training. If this were the private sector, the markets would be screaming for consolidation.

You have an enormously difficult task in front of you. If you do nothing but tinker, you will have a recession on your hands in the early years of your administration. Just yesterday, real interest rates went negative on the US 10-year bond for the first time. The yield curve is in serious danger of becoming inverted in real terms. Your economist advisors will confirm that the research shows the only true predictor of a US recession is a negative yield curve.

The research shows that if the yield curve stays inverted for 90 days, a recession is likely to show up in 12 to 15 months. That means you are not going to have much time after you’re inaugurated to enact a major stimulus program and restructure the incentive structure of the US economy. If you wait until we are already in recession to win cooperation from Congress and get legislation passed , the negotiations will be more difficult by an order of magnitude. You need to hit the ground running. 

Therefore, in addition to campaigning after you’re nominated at the convention, you had better be planning to govern. The economy is not going to wait around for you to get adjusted to your new position. But what better way to campaign than to show the voters you are already thinking about how best to serve them?

There are scores of other major and minor economic topics we could discuss, but these won’t matter much if we fall back into recession. Unemployment will climb back to double-digit levels; incomes will suffer; tax revenues will plummet; tempers will flare and finger-pointing will increase; and you will cornered into being merely reactive instead of proactive. Foreign policy will take a backseat if we hit a recession, and your foreign policy choices will be far more constrained. The first three things you need to be thinking about when you walk into the Oval Office are the economy, the economy, and the economy. In that order. If we go into recession on your watch, nothing else you do is going to matter all that much in terms of the success of your presidency. You can solve the Middle East crisis, bring peace in our time, and curb global warming. But you will still be judged by what the economy does.

I’ve laid out a rough plan that can certainly be adapted and changed. But if you go with the gist of what I’ve suggested, here are the positives:

  1. You’re going to add two to three million jobs during your first term as president. Most of those jobs will be higher-paying ones, so median income is going to rise. And because the economy will be booming, employers are going to have to increase wages in order to attract new workers and keep current workers. There is nothing like fatter paychecks to improve the mood of the middle class.
  2. If you add jobs and get the economy growing back at 2% to 3%, the Federal Reserve can begin to normalize interest rates, and savers will stop being punished. Retirees will be able to make more on their investments and be more capable of affording a reasonable lifestyle in their retirement years. Pension plans and insurance companies will have a better chance of meeting their performance requirements and actually fulfilling their obligations. I know the issue of retirement plans is not high on your list, but there is going to be a crisis that you will have to deal with if we go into recession. So many government pensions are drastically underwater.
  3. You will fix healthcare and entitlement programs in a bipartisan manner that actually solves their problems rather than kicking these cans – real toe-breakers now – down the road. You will put the country on a path to a balanced budget.
  4. You will end your first term in office as the most influential president in terms of economic impact since Franklin Roosevelt.
  5. The economy will be booming, and your reelection in 2020 will see you win nearly as many votes as Ronald Reagan did in 1984.

These are pretty much your choices: Herbert Hoover or Ronald Reagan?

I wish you the best of luck, I truly do. We really are all in this together.

With warm regards,

John Mauldin

A Few Final Thoughts

I know a lot of my readers and friends think I must have gone stark raving mad. I detoured off the deep end and kept going. I missed that turn in Albuquerque. Whatever.

I personally find some of the things that I have suggested to be philosophically offensive. I can’t imagine there is anyone reading this who thinks every one of these ideas is actually a good idea. Seriously, if I haven’t offended your political sensibilities, you are either very flexible or I’m not trying hard enough.

But that is the point. We have a deeply divided country. Nearly fifty percent of Democrats seem to be voting for a full-throated socialist. Sanders is not socialism lite. He would take us to European socialism and keep right on going, and there’s a significant contingent of Americans who seem to be with him. Meanwhile, over 50% of Republicans are saying that what we need is somebody who is way outside the “establishment,” who will shake things up and do things differently. Forget on-the-job experience; people no longer trust the current leadership to get the job done.

Unless something really odd happens at the conventions, we are going to end up with a race where the only thing the majority of Americans agree upon is that they don’t like their choices. The unfavorable ratings of all the candidates in the final running are extraordinarily high.

I am seriously, deeply worried that we are going to have a recession in the next few years. The negative impacts this time around will be every bit as drastic as they were in 2007–08. Pensions and retirement funds will be devastated. Unemployment will go through the roof. Monetary policy will be impotent. The government will be all but nonfunctional, given the current players and system. A recession this time around is actually going to feel far worse than the last one did.

Now, the republic will survive. We’ve actually faced far worse times and come through them. You can go back and read about those periods – they weren’t fun. So it’s not the end of the world, but for much of America it could end up feeling every bit as bad as the Great Depression.

To stave off such a serious outcome will require radical solutions; and given that I don’t think any one party is going to have control of the process (which is not exactly what we’d want anyway), we are going to have to choose between real compromise and real trouble. What I have tried to do is to propose a program that actually amounts to a workable compromise.

I fully recognize that proposing to take another 1–2% of GDP out of the economy and turn it into tax revenue is heresy among my more conservative friends. I fully recognize that cutting income taxes to a 20% top rate feels like giving the rich another get-out-of-jail-free card if you’re a liberal Democrat.

My goal with this proposal is to create an environment in which the economy can grow in the 3–4% range, and that rising tide really will raise all boats with the structure I suggest. Do I think there is much chance of that growth being achieved? That is the question we will deal with next week, when I will talk about what we’ll need to do in case my admittedly rose-colored, optimistic proposals never even make the desk of serious politicians, let alone the next president.

Abu Dhabi, Raleigh, and Home

I’m looking at my calendar, and although I see a few one-day trips with little or no time for anything other than meetings, my next real trip has me leaving in the middle of the month for a short week in Abu Dhabi, then coming back for a quick speaking gig in Raleigh, North Carolina, before I fly back to get ready for my own investment conference here in Dallas. Which is good because the book-writing deadline is looming in the background, along with so many distractions and things that simply “must” be done. And it seems that most of that stuff requires me to spend time in front of my computer. Then there are the never-ending meetings and phone calls. I’m in the process of making significant changes in my core investment business, and that project really requires a great deal of personal involvement. Some things you just can’t delegate.

If you are still with me, you are overly patient; and so rather than conclude with a few personal remarks, which is how I normally close the letter, I am simply going to tell you to have a great week.

Your concerned about his country analyst,

John Mauldin


Jim Rickards: The U.S. Dollar Is A Shadow Gold Currency - The New Case For Gold

by: Palisade Radio
.


Summary
 
- Jim Rickards’ book: The New Case for Gold.

- How the dollar is indeed a shadow gold currency?

- Breakdown of the world’s 35,000 tonnes of official above ground gold.

- Why Fort Knox should be audited and why the gold will all be there!

- All gold price suppression schemes have failed throughout history.

 
Get ready to dispose of your preconceived notions regarding the Federal Reserve and its take on gold! Is it possible that the Fed wants a higher gold price after all? That is what Jim Rickards reveals in this riveting interview with Palisade Radio.

Upon quick review, the Federal Reserve today looks like a really bad hedge fund with leverage of roughly 100:1. However, Jim made a discovery in the Fed's balance sheet, revealing a treasure trove of gold at Fort Knox and West Point worth a staggering $300,000,000,000!

Adding $300 Billion to the Fed's capital account reduces Fed leverage from 100-to-1 to a much more respectable 12-to-1, the capital ratio for most well-capitalized banks. This hidden asset is more than enough to absorb the mark-to-market losses on the bond portfolio when they arise.
"Countries around the world are acquiring gold at an accelerated rate in order to diversify their reserve positions. This trend, combined with the huge reserves held by the United States, the Eurozone, and the IMF, amounts to a shadow gold standard!" - The New Case for Gold
The historical changes of the way gold was used in banking led to the formation of the gold deposits at Fort Knox. Unlike many today, Jim Rickards believes the gold is indeed in Fort Knox but has not been audited to avoid drawing attention to it and to downplay its role. There is no proof of its absence.

China is probably suppressing the gold price through the COMEX market in order to build up more physical supplies itself. Once they have a sufficient supply, equal to the United States, they will no longer care what the price is and the price is likely to skyrocket after the expected reset of the international monetary system.

There are extreme physical shortages of gold. All the elements to cause a bull run are in place.

Jim even talks about gold stocks, an area he believes is set to outperform and in a big way!
"The confidence of the entire global system of finance rests on the U.S. dollar. Confidence in the dollar rests on the solvency of the Fed's balance sheet. And that solvency rests on a thin sliver of… gold. This is not a fact anyone at the Fed wants to acknowledge or discuss." - The New Case for Gold



Palisade Radio Host, Collin Kettell: Welcome to another episode of Palisade Radio. This is your host Collin Kettell. On the line with us today is Jim Rickards, bestselling author of Currency Wars and the Death of Money. He really needs no further introduction so Jim, welcome to the show.

Editor of Strategic Intelligence, Lawyer, Economist, and Investment Banker, James Rickards: Thank you, Collin, great to be with you.

CK: Jim, your latest book, The New Case for Gold, I believe is slated for release on April 5th, just about a week away. Pre-orders via Amazon are already being accepted. I was fortunate enough to get my hands on a copy. I believe the book to be as captivating as your first two. Its release also comes at a very prescient time with gold and other commodities starting to get a lift. One way that I would summarize The New Case for Gold is a defense of gold in the modern world. A lot of people - and Warren Buffet included - brushed it off as an ancient relic and you begged to disagree. Jim, can you start off by spending maybe just a couple minutes expanding on the role of gold in today's monetary system?

JR: Sure. Collin, you are right. First of all, thank you for the introduction. The book is called The New Case for Gold. Obviously, I have a copy with me. But it is available for pre-order on Amazon right now. The title itself has a little bit of history. It is called The New Case for Gold.

But you go back to the late 1970s, around 1980, of course, Pres. Nixon suspended the redemption of dollars for gold with US by US trading partners in 1971. It took a couple of years for gold to be completely pushed out of the international monetary system.

It was in 1974 when the IMF officially demonetized gold and we went into this brave new world of falling exchange rates. But in the 1980 Presidential campaign that was Ronald Reagan versus Jimmy Carter, not that long after the events I just described, they really are just about eight years or so.

There was a lot of pressure, strong movement to go back to a gold standard. Of course, Ronald Reagan was conservative and has been pushed in that direction. What Pres. Reagan did after he won the election he did not say we would go on a gold standard, but he said he would appoint a commission to study, which he did; a high level blue ribbon bipartisan commission - Republicans and Democrats - and they studied the situation, report it back, and the commission as a whole came to the conclusion that the US should not be on a gold standard. But there was a very strong minority on that commission consisting of some prominent Americans including Ron Paul, Lou Lehrman and others who, of course, felt that we should be on a gold standard.

It so often happens they were allowed to write a minority report. The majority report recommended no gold standard, but this minority report recommended the opposite. Well, that was a public record because it was a commission. The minority report, some enterprising publisher, took the minority report and published it as a book called The Case for Gold. That was a minor classic, sort of cult classic among gold bugs also refer to the book The Case for Gold. So my book, The New Case for Gold, obviously plays on that title and is a tribute to the original work on that, The Case for Gold, which was, as I said this minority report.

Now what is new in The New Case for Gold? There are sort of the old arguments that have been around for decades and I talked about those. But there are also some new arguments for owning gold that were not around at the time of the minority report in 1981. They were not even around ten years ago, not even 5 years ago. These involve things like cyber financial warfare. As you may know I do quite a bit of work for the US Intelligence community and national security community and the defense department in the area of financial war and financial threats and cyber-financial threats, all very important subjects.

You bump in to a certain number of billionaires and I will ask them. I say, "Tell me about your portfolio," and they say, "Well, I own these stocks and these bonds and I have got this and I have got that." I say to them, "Well, no, what you have are electrons. You may get a paper statement in the mail from your broker or your bank once a month, but all your assets are digital and all of them are completely vulnerable to hacking by enemy cyber brigades that Vladimir Putin has a six thousand-member cyber brigade operating on the outskirts of Moscow, working day and night to be able to hack, disrupt, destroy, delete and otherwise shutdown US exchanges, US financial assets, etc."

If your wealth is digital, be it stocks or bonds, it can be completely wiped out overnight and good luck restoring it. Whereas if you have some physical assets, and it can be gold but also silver, fine art, land or private contracts, you know private equity is a contract, you do not need a digital certificate to prove it or digital exchange, that is just a contract. These are all kinds of assets that are not vulnerable to hacking, not vulnerable to being wiped out. I say things like this and people would go, "Oh, well, that would never happen." Well, it happens all the time. I mean there is financial warfare going on right now between Russia and China involving Ukraine. The United States Justice Department just indicted five Iranian hackers last week for attacks on US banks.

Talk to the country of Bangladesh. I mean Bangladesh is one of the poorest countries in the world.

They just lost one hundred million dollars to a cyber theft. By the way, that money was on deposit with the Federal Reserve Bank of New York. It was not on deposit with some local bank or Bangladesh bank or Indian bank or even a prominent US commercial bank; it was on deposit at the Fed and one hundred million dollars disappeared that they could ill afford. Of course, if they have had those assets in gold they would still have the gold today.

That is an example of an argument that was not around in the '70s, '80s and '90s or even ten years ago, but is very prominent today. There are other arguments also involving the war on cash which I spend a lot a conversation about. We can talk about that if you like. But there are classic arguments in favor of gold, but there are new 21st century arguments in favor of gold.

That is why I called my book The New Case for Gold.

CK: Thanks for that, Jim. I think that you have a fascinating writing style whereby you start out with a unique story or discovery in each of your books. As an example, in Currency Wars that was, of course, as many of our listeners will remember the war game at the Pentagon where you talked about how a currency war might play out between the major powers of the world. In The New Case for Gold you discuss your findings about the Fed balance sheet. This is going to lead into some other questions I have, but reportedly the Fed has a high rate of leverage, 75 to 1. But you found a very interesting call it area of the balance sheet most people do not look at which has to do with the gold at Fort Knox. Can you talk about that a bit?

JR: Sure. I always say that the Federal Reserve today looks like a really bad hedge fund. It is highly leveraged with a duration asset/liability mismatch in duration and maturity and technically insolvent if you just look at the bond portfolio on a market to market basis from time to time. The Fed has got a pretty crummy balance sheet. By the way, the 75 to 1 leverage, which is extraordinary, I mean banks are leveraged depending on the metrics about 8 to 1 or 12 to 1. Wall Street firms are not allowed to leverage more than 15 to 1. The Fed was leveraged for 75 to 1, but about a month ago they gave back about $40 billion to the treasury and they cut their capital from roughly $60 million down to a number somewhere around $35, $40 million.

Actually they have a little bit more than $60 million and gave a big slice back to the treasury about $40 billion and they are down to around $40 billion or so today.

When you take that into account their leverage is actually over 100 to 1 today, so a pretty lousy balance sheet. But one of the items on the balance sheet is a gold certificate and you say, "Well, how did that get there and what is the history of that?" Well, the history is interesting. Going back to 1913 when the Fed was created, there were actually gold coins in circulation at that time. It was not that unusual for someone to reach in her pocket or his pocket and pull out a one ounce gold coin to pay for something. But most of the gold was held at commercial banks and there was paper money in circulation, but that paper money was backed by gold and convertible into gold.

Beginning right around World War I little by little banks started melting down the gold and turned it into 400 ounce bars. You could still have private gold but they made it more and more inconvenient.

They will say, "We do not have coins anymore." You can own gold but nobody is going to obviously walk around with a 400 ounce bar in their pocket. That was step one getting the gold out of private circulation into the banks. Step two was the Federal Reserve banks which- by the way it is, of course, a private system. I think most listeners know this. The Federal Reserve banks require all the commercial banks to hand over their gold to the Fed. Now, suddenly, the gold went out of the commercial banks into the Federal Reserve Bank. Well, the Treasury had the last laugh because in the 1930s the Treasury ordered the Fed to hand over the gold to the treasury. This was at the time when the Treasury was confiscating all of the private gold in the country. In fact Fort Knox was built in 1937 partly to house all this gold that the Treasury was scooping up. They used to keep it in vaults in the basement of the Treasury on having them placed right next to the White House. But they ran out of space so they built Fort Knox to do this.

By the way, people think all the treasury gold is in Fort Knox. That is not correct either. About half, a little more than half, is at Fort Knox, but the rest of the US gold is at West Point at the Hudson River in New York. Occasionally, people say to me, "Well, Jim, who controls the US gold? Is it the Fed or the Treasury?" I say, "Well, neither one; it is the US army because both Fort Knox and West Point are army bases. The army has got the gold under lock and key." But technically, legally, it belonged to the treasury.

You can see the sequence. Step one: take the gold out of private hands, put it in private banks; step two: take the gold from private banks, give it to the Fed; step three: take it from the Fed and give it to the Treasury. But remember the Fed is private and the Treasury is the US Government and the Fifth Amendment of the Constitution prevents the government from taking private property without just compensation. To get around that the just compensation was this gold certificate that the Treasury gave to the Fed. To this day the Fed carries that on its balance sheet.

Now the Fed values that at $42 an ounce which, of course, is that is the historic cost. That is historic cost convention, but that was last revalued in the 1970s. Of course gold today is around $1200 an ounce so a little bit higher. But if you take the face value, the historic cost of the gold on the Fed balance sheet and divide it by $42 an ounce and come up with a number of ounces and convert that into tons it comes out to almost exactly eight thousand tons, which is interesting because that is how much the treasury owns. The Treasury says they have eight thousand tons. It is as if the Treasury cannot sell anymore gold because they need to hold that much gold at least in order to back up this paper certificate that they gave to the Fed way back when to get around the Fifth Amendment of the Constitution. That is how it is significant because what it means is that the treasury cannot dump anymore gold. If they want to suppress the price they have to twist arms to get other people to do it.

By the way, you look at the history of the Treasury ownership of gold; in 1950, the United States had 20,000 tons of gold. By 1970 we were down to 9,000 tons. Where did those 11,000 tons go? Well, it went to our trading partners under Brighton Woods: 3,000 tons to Germany; 2,000 tons to France; 2,000 tons to Italy, and so forth; smaller amounts to The Netherlands and Japan. That was where the gold went. It was around then, just a year later in 1971, when Pres. Nixon- there was a run on Fort Knox. Clearly, the United States was going to be out of gold in a matter of years or less. Pres. Nixon shut the window and ended the conversion of dollars for gold by our trading partners. But the US still dumped another thousand tons of gold under Pres. Ford and Pres. Carter in the mid to late 1970s and we prevailed upon the IMF to dump 700 tons of their own. So 1700 tons, it was just a lot gold, from the US and the IMF was dumped on the market in the late '70s to suppress the price. It did not work.

The price skyrocketed anyway. We all know it went from $35 an ounce in 1971 to $800 an ounce in 1980.

But in 1980, suddenly, the United States stopped cold. The United States stopped selling gold. We stopped at 8,000 tons. What I talked about in the book is that that very likely happened because the Treasury could not go below 8,000 tons because that amount corresponds to the amount on the Fed balance sheet. By the way, if you take that gold, the 8,000 tons on the Fed balance sheet in the form of this gold certificate, market to market at $1200 and add that to the Fed's capital, guess what? The leverage drops from 110 to 1 to about 12 to 1, 13 to 1 which looks just like a good commercial bank.

The secret to the Fed balance sheet is the hidden gold asset which from mark to market reduces their leverage, makes them highly solvent.

I had started out by exploring the fact that they were temporarily insolvent if you just mark the bonds to market. But when you count the gold they become very solvent and actually decently leveraged.

The secret hidden asset on the Fed balance sheet is actually what keeps them from being insolvent and keeps them moderately leveraged. Of course, nobody talks about this. The numbers are all there.

I did not break into a safe and steal the information. You can look at the Fed balance sheet. You can look at a gold ticker. You can look at the treasury deep storage gold. You can look at the history of the Fed and the Treasury, and Brighton Woods and Glass-Steagall and a lot of other things. It is all there. But you have to connect the dots to see this hidden relationship between treasury gold, the Fed gold certificate, insolvency of the Federal Reserve. That is one of the many mysteries that I unlock and explain. Not deep, dark conspiracy stuff, but just I think good solid forensic analysis and forensic accounting. As I say it is all in the book, The New Case for Gold, and I hope the readers enjoy it.

CK: Well, that brings me to my favorite quote of the book and you write, "The confidence of the entire global system of finance rests on the US dollar. Confidence in the dollar rests on the solvency of the Fed's balance sheet and that solvency rests on a thin sliver of … gold. It is not a fact any one at the Fed wants to acknowledge or discuss publicly." You are almost suggesting, Jim, and correct me if I am wrong that the US dollar is on some form of a gold standard at this point in time.

JR: Well, I am suggesting that. You are right. The point I make is that we have different measures of money supply. There is M2, M1, M0 which is base money. That is the money that the Fed prints. But I have something I call M-subzero. M-subzero is gold; the gold is still the linchpin, the underlying hard asset in the global monetary system. Not just for the Fed, but why does the IMF have 2,000 tons of gold? The IMF has almost 2,000 tons of gold. Madam Lagarde, Head of the IMF, has nothing good to say about gold. She disparages it at every opportunity. Well, fine. Why is the IMF holding on to 2,000 tons of gold? Why does Germany have 3,000 tons of gold? Why is Russia acquiring thousands of tons of gold? Why has China tripled or quadrupled its gold supplies, gold hoard, in the last seven years? When I say tripled or quadrupled you have to speculate a little bit because China lies about their gold. They are not transparent about how much they actually have. But we do have information from Hong Kong imports to China, mining output in China. There is some reliable information that you can use to form reasonable estimates and it is clear that China has taken its gold reserves from reported 600 tons in 2008 to probably 4,000 to 5,000 tons today.

By the way, when I say 4,000 tons here, 2,000 tons here, this is a lot of gold. There are only there are only 35,000 tons of official gold in the world. All the central banks, all the sovereign wealth funds, all the finance ministries, treasury, Fort Knox, all the official gold in the world about 35,000 tons.

When you talk about buying 3,000 or 4,000 tons which is what China has done or over a thousand tons which is what Russia has done, combine that. This is more than 10% of all the official gold in the world just in the past several years. There is just a lot going on behind the scenes. But these countries would not be acquiring gold; they would not be holding on to their gold; they would not be manipulating the gold price; they would not be doing any of this if gold was not critically important in international monetary system which it is. It is just that the central bank or some IMF, they do not want to talk about it. The egg-heads, the professors, the global monetary league, the Martin Feldsteins, the Paul Krugmans, the Janet Yellens, Mario Draghi, none of these people who understand what I am saying. This is all, as I say, very clear.

They get it. But they do not want to talk about it because they do not want people to think about gold. Americans have been really conditioned over decades to stop thinking about gold.

Do not take gold seriously. There are all these arguments against gold that I actually talked about in the book. I shoot them down one by one.

You know, Collin, most of the book is in support of gold and other gold standard, an official gold standard. But I also say, "Look, do not wait for governments to create a gold standard."

You can go on a personal gold standard. Just take 10% of your investable assets, buy physical gold, put it in safe, non-bank storage and protect yourself, and have a personal gold standard.

The Russians are doing it.

The Chinese are doing it. Are they stupid or do they see something coming that most people do not see? Well, I have been to Russia and China, have a lot of friends in both places. They are not stupid.

They see something coming. If it is good enough for them, it is good enough for you. What are you waiting for?

CK: Jim, I have so many other questions I have to ask you so I will try to get through just a few of them here. But you are adamant that the gold is indeed at Fort Knox. I do not want to focus too much time on this point. But I know a lot of listeners have heard questions even from people like Ron Paul, who you mentioned earlier in the interview. He is famous for his Audit the Fed Movement.

Billionaire, Eric Sprott, who we have had on before on the show, has also stated his belief with quite a bit of math behind it that somehow the gold has been leased out or sold. Any quick comment on why you think it is indeed there?

JR: Sure. There is a lot of confusion on this subject so let me just make a few kind of plain statements and then I will talk more about it. I am in favor of auditing the gold in Fort Knox. I have never been against an audit. But the gold bugs and the conspiracy theorists say there is no gold. They say the reason the government will not audit the gold is because the gold is not there.

That is actually a non- sequitur It is quite the opposite. If you are the Fed and the Treasury and you want people to think that gold is unimportant, which they do, why would you audit it? And as you only audit important things you audit financial statements because that is the law, but it is also important to stockholders. You audit things that are important. You do not audit things that are unimportant. If the Fed wants you to think that gold is unimportant, it follows that they would not audit it because auditing it pays too much respect to gold. I am in favor of an audit just to be clear. But the fact that the government does not audit tells me that the gold is there they just do not want you to pay any attention to it. That is the first part of the argument.

Now as far as Sprott saying the gold is leased, it could be leased. That does not mean it is not there. Leasing is a paper transaction. If JP Morgan leases gold from the US treasury, which they do through the BIS and as disclosed in their footnotes to financial statements, the BIS. BIS is the bank for international settlements which is the central banker's central bank and the main intermediary for Central Bank gold transactions. It is like an anonymity broker in stocks or bonds or a dark pool in stock trading. That is what the BIS is. It allows central banks to transact in gold with each other without anybody knowing what is going on. That is kind what the BIS do. But believe it or not the BIS has an audit. They have footnotes in their financial statements and you have to be a little bit of a geek like me to read them. But if you do you will find that they say we intermediate gold transactions between central banks and commercial banks and we know it is going on.

But if JP Morgan leases gold from the US Treasury it does not mean that they back up a truck in Fort Knox and drive the gold away. There is no need for that. It is just a paper transaction.

The gold can sit in Fort Knox. JP Morgan can take a hypothecatable title. Now once JP Morgan has the gold what they do is they sell it at times 100 to gold investors who think they have gold but what they really have is what is called unallocated gold. Unallocated gold is a euphemism for no gold. If I call up JP Morgan and I say, "You know I wanna buy a million dollars worth of gold," they will say, "Fine.

Here is our contract. Send us the million dollars." I sign the contract. I send the million dollars.

They send me a confirmation and it says I own a million dollars worth of gold subject to the contract. Well, read the fine print in the contract. What it says is your gold is unallocated which means that they do not claim to have any specific bar with a serial number or your name on it. In reality they have taken the same bar of gold and sold it to a hundred different investors.

Now that is fine if we are happy with the paper contract, but if all 100 of us show up at JP Morgan and they have only got one bar of gold, the first person may get the gold. The other 99 people, they are going get their contracts terminated. They are going to get a check for the value of gold at the close of business yesterday, but they are not going to get today's price movement or tomorrow's price movement when super spiking going up to $2,000, $3,000, $4,000 an ounce. That is when you want your gold for the price protection when everything else is falling apart. That is when you are going to discover that you do not have gold, you have just been closed out at yesterday's price by JP Morgan.

They will send you a check but not what you participated in the price of gold from there. And they only will have first bar because that is sitting at Fort Knox.

Do I agree with Ron Paul that we should audit the Fed? Yes, I do. Do I agree with Eric Sprott that a lot of gold is leased? Yes, it is. I agree with that. But neither one of those things is proof that the gold is not there. The gold is certainly there. Actually I have some evidence that the gold is there from other sources, from military sources. My point is this is why it is so confusing because yes, we should audit; yes, the gold is leased; yes, there is price suppression. I agree with all of that and there is very good evidence for all that. It does not mean the gold is not there.

The gold could be sitting there on a shelf in Fort Knox and still be leased out and unaudited.

None of those things prove the gold is not there. Apart from those arguments which are really non-sequiturs, as I have just explained I have seen no proof that the gold is not there and I have seen some proof that the gold is there. But this is where the legitimate criticisms and conspiracy theories and sloppy analysis all get mashed-up into this no gold thesis when in fact if you were the United States of America why would you let the gold out of your sight?

CK: Well, you just mentioned price suppression and I want to bring to the interview kind of to an end here by talking about the manipulation that you do believe is in place and this back and forth between China and the US. You talk about this a lot in your book. But you say once China has enough gold so that its gold to GDP ratio equals or exceeds that of the USA, it is not there yet, but once it is there will be no political reason to buy more, and I guess that is kind of an endgame. How far away is that and then will the gold prices go up because the suppression by the US and China ends? What is going on there?

JR: Well, the gold price will go up one way or the other so, sure, if the price suppression ends that would create a factor for the gold price to go up. But all the price suppression and manipulation schemes in the past every one of them has failed. The London Gold Pool of the 1960s failed. The US dumping of 1700 tons in the late 1970s failed. The UK selling almost all of its gold failed.

Switzerland selling thousands of tons of gold in the early 2000s failed. All these price suppression schemes have failed; gold has gone persistently higher. Manipulation can work in the short run, but it never works in the long run. I am confident that the price will skyrocket, will go where it is going to go manipulation or no manipulation. But you are certainly right, Collin, if the manipulation ends for other reasons, for political reasons, then that is just one less thing standing in the way of gold going a lot higher.

As far as the manipulation is concerned, again, I do not like speculation. I like analysis. I like empirical data. I like hard facts. I like science. That is how I do things. But the evidence for manipulation is overwhelming. I have actually met with Professional Rosa Abrantes-Metz at New York University Stern School. She is the leading expert on using price signals and market data to determine if this manipulation is going. She has advised some of the lawsuits still pending involving manipulation. Her evidence is conclusive. She has written a report, not public yet because this is being used as evidence in these cases. But as I say I have spoken to her firsthand and the conclusion is inescapable. There is no other explanation for the price behavior other than manipulation of gold.

I also spoke to a PhD statistician at a major hedge fund. He said the best way to make money the last ten years is short Comex gold just before the close and buy it just before they open the next day. He says like clockwork, it gets squashed at the close and spikes at the open, squash at the close, spike at the open with some volatility around that, but that is clear evidence of manipulation. The odds that that would happen based on normal market forces are infinitesimal. He was actually surprised that more people were not doing the arbitrage because the manipulation was so blatant.

One PhD professor and another PhD statistician who have studied the data, again, they are not conspiracy theorists; they are scientists who have come to the same conclusion. There are others as well. But also just kind of anecdotally or just inferentially, if you are China and you have to buy another 3,000 tons, which they do; they are trying to catch up with the United States. I estimate they have between 4,000 and 5,000 tons of official gold. But the US has 8,000 tons. They need another 3,000. If you were out to buy 3,000 tons of gold you would not want the price to go up, you would want the price to stay down because you are a buyer. Now once they get the gold and they are on a par with the United States and it comes time to reset the international monetary system, then no one will care what the price is because everyone will have the same amount of gold both in absolute terms and relative to GDP. But we are not there yet. If China is manipulating the market through Comex futures, then they are beyond the enforcement powers of the United States. You cannot subpoena China. The CFTC is going to get nowhere trying to investigate behind the scenes China's behavior in the market.

I have spoken to top level officials at the IMF and in the US intelligence community. They are pretty relaxed about it. They think that it is a good thing that China is rebalancing their reserves away from what they called credit assets meaning treasury securities into gold assets.

People know this is going on. The data is available if you want to look at it. The US and the international monetary elites are very relaxed about it. They think it is a good thing. If you are China, you want a low price and so you get the gold. These are the forces operating. These are the headwinds, if you will, operating against the gold price, but in favor of the gold price are extreme physical shortages. I have seen this firsthand.

I just got back from Switzerland with the head of the world's largest gold refinery. I met with head of secure logistics also in Switzerland for some of the largest gold vault operators. People ran armored cars and move gold around, spoken to miners. I crawled down into gold mines. I mean I have been very involved in the physical side of the business as much as the paper side of the business.

These stories will make your hair stand. I mean there are shortages. They cannot meet the demand. There is a waiting list of buyers, shortages of sellers. One of things a gentleman told me what that if you have seen a 400 ounce gold bar, I mean I have kind of physically handled them and been in these vaults. They have got stamps all over them. It is almost like a dollar bill.

It has got a serial number. It has got a date. It has got a stamp for the purity; is it two nines? is it three nines? meaning 99.9% pure.

The refinery stamp is there. There is an assayer who certifies it is not counterfeit. In other words there has got a lot of stamps on it. But one of them is the date. Well, gold warehouses are managed on a last in, first out basis, so I fill it up with gold and then when the gold goes out I am going to take the bars closest to the door. In other words the ones that I put in last they are the ones I am going to ship out.

What my friend at the refinery told me was he is starting to see bars that are stamped from the 1980s, bars that had been in storage for 30 years or more. That tells him that they scraping the bottom of the barrel. If you have a 2006 or 2007 bar and you send it out that means you have a pretty full vault. But if you are sending out bars from the 1980s that means you are back at the far end of the warehouse, scraping the bottom of the barrel. That is what is going on in the physical market.

We have our friends at JP Morgan selling paper gold 100 to 1, but we got people on the physical side of the business who say the shortages are scary. How is that going to end? It was very apparent that at some point something is going to break, someone is going to fail to deliver. There is going to be an exogenous shock. China is going to get their full fill of gold. The manipulation is going to end. Something is going to happen. It almost does not matter what it is.

The set up for a buying panic and skyrocketing prices in gold is there. The setup is there. The catalyst is irrelevant. It could be a war, a national disaster, an assassination, a financial failure.

It could be a lot of things. But it does not matter because the result is going to be the same.

CK: Well, Jim, I have one final question for you and if you do have to go please let me know as I know we are at the end of our 30-minute block in your busy schedule. Gold stocks, that is something we focus on a lot at Palisade and Palisade Radio; it is not something that you specifically go into in your book. But my assumption would be that if you see a catalyst coming or a reason for gold to come up that, gold stocks being cyclical, would be somewhere where you might want to put your money in or at least given some thought to. Last question for you: what are your thoughts on gold equities over the next few years?

JR: Well, economically, a share of stock in a gold mine is a leverage bet on gold. Generally speaking, the gold miner will outperform gold in a rising market and it will underperform gold in a falling market. It is basically a leverage bet on gold which you can do yourself just by buying gold with leverage which I do not recommend. But that is one way you do it.

Now the problem I have with miners is that they are not generic. In other words gold is generic.

Gold is gold. It is an element, anatomic number 79. We do not have to quibble about grades of gold. It is all the same. Gold miners can be anywhere from excellent to fraudulent. You cannot speak about gold miners generically; you have to take them one name at a time. These gold mining stocks got beaten down 90% or more between 2011 and 2015. The sentiment was lousy.

You just say, "How low can they go?"

The thing about going down 90%, one of two things is going to happen. You are either going to bounce back skyrocket or you are going to go all the way. You are going to go into bankruptcy.

I do not want to recommend gold stocks generically because some of them are crooks and some of them are going to go bankrupt. Other stocks are excellent. If they are down 90% and they are not bankruptcy candidates, then they could double or triple in the years ahead. They are highly recommended. But you have to take it one name at a time. I know how they do the analysis, but it is not really what I do. I am more of a global macro analyst.

For gold stocks, people such as yourself, John Hathaway, Gold Funds , Sprott, Casey Research, there are others out there who are doing this sort of work. I do like gold streamers, names like Franco Nevada, Royal Gold, Silver Wheaton, and others because a gold streamer, they actually do the hard work that I am talking about. They go out and visit the mines. They are good at financials, meet with management, assess the projects, etc. I would say they are only going to buy the good ones. They are not miners. They just buy royalties and then stream them through to investors. A good gold streamer is probably a good way to get leveraged exposure to the price of gold without having to figure out the good, the bad, and the ugly.

CK: Alright, well, Jim, thank you so much for taking the time out of your day to come on the show. I can promise to all of our listeners that it is well worth the read. It is a relatively quick read, but it is filled with a lot more detail than Jim is going into here, as you can tell from listening to Jim just a wealth of knowledge on everything gold and a lot of more things. Jim, anything else to add at this point for our listeners?

JR: Yeah, the one thing I say is some of your listeners are like, "Okay, I hear you. I understand. I even agree. But I am going to wait until the price of gold really starts to skyrocket then I will jump on board." What I say to these people is do not be so sure. You are not going to be able to get the gold. The physical shortages is going to be so severe that if you are waiting for the price of gold to go up to jump on the bandwagon; you may be watching it go up on television but you are actually not going to be able to get it, so the time to get gold is right now. I mean I just say to people watching Russia, watching China, knowing what is coming, all of which is easy to foresee, what are you waiting for?

CK: Alright, well, Jim, if you want to hold it up one more time, The New Case for Gold, everybody. You can go pick it up pre-order on Amazon right now. Thanks so much, Jim, for coming on the show.

JR: By the way, it has got a nice gold cover so I would say you buy the book is like getting a bar of gold. I hope the readers enjoy it. The New Case for Gold available now on Amazon. Collin, thank you for having me on your show.

CK: Okay. Thanks so much, Jim.


James G. Rickards is the editor of Strategic Intelligence, the newest newsletter from Agora Financial. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.