Gold Videocast: Jim Rickards & Peter Schiff on Gold & Currency Wars (Video)

In his latest Gold Videocast, Peter Schiff meets with Jim Rickards, author of The Death of Money, for an exclusive interview about gold’s role in the international currency wars.

Jim Rickards is Chief Global Strategist at the West Shore Funds, and Director of The James Rickards Project, an inquiry into the complex dynamics of geopolitics + global capital. In The Death of Money, Rickards shows why another monetary system collapse is rapidly approaching – and why this time, nothing less than the institution of money itself is at risk. Fortunately, it’s not too late to prepare for the coming death of money. Rickards explains the power of converting unreliable money into real wealth, such as gold and other long-term stores of value.

Follow Along with the Full Transcript:

Peter: This is Peter Schiff. I’m sitting here with Jim Rickards, best-selling author of Currency Wars and now the New York Times bestseller, The Death of Money. Welcome, Jim.

Jim: Thank you, Peter. Nice to be here.

Peter: Sure. Well, let’s talk about some of the recent developments in the currency war, which by the way, I think the United States is going to win. Of course, when it comes to a currency war, the last thing you want to do is win because the winner is in fact the biggest loser.

Jim: You make a very important point. A lot of people say the US dollar is not backed by anything. It actually is backed by one thing, which is confidence. If people have confidence in it, they think it’s money, then it’s money. The problem is, if they lose confidence, then it can cease to be money very quickly, it can collapse very quickly. The problem with confidence is it’s fragile, it’s very easily lost, once it’s lost it’s very difficult to regain. That’s something the Fed doesn’t understand. The Fed, the Treasury, other branches of government that are using the dollar as a weapon exactly as you described. They take confidence for granted. They assume because the dollar is king it will always be king, nothing can stop it so they, as you say, throw their weight around, but they’re actually in the process of undermining the dollar. They’re giving the rest of the world reasons to head for the exits.

China wants to get out from under the dollar. They’re buying gold, that’s very clear. Russia wants to get out from the dollar, so they’re not victimized in the financial war. Saudi Arabia wants to get out from under the dollar because we don’t guarantee their security anymore. There’s a lot else going on, the Swiss are joining in. It doesn’t happen overnight, it happens in small stages, but in the end game, it could happen very quickly. Any investor that doesn’t have some gold as insurance policy is taking enormous risk.

Peter: Yeah. I want to of course talk a little bit about gold, and first of all, what about internationally? If the world really wants to get out from under the dollar, which of course is the single largest reserve currency, you would think that they would want to be building up their gold reserves – that the countries that have the biggest dollar reserves would have the biggest vested interest in accumulating as much gold as they can to replace the dollar as a reserve backing up their own currencies.

Jim: Well, they actually are. That’s going on. I talk about this in my book, The Death of Money, and China is a very good example now. China officially says they have about 1,000 tons of gold, but we all know that’s not true. They have some number, no one knows exactly what it is, but you can make a reasonable estimate that they actually have 3,000 or 4,000 or perhaps even 5,000 tons of gold. Now, that’s not just guess work. How do we know that? Well, we know what their mining output is. It’s over 400 tons a year. We know what their imports through Hong Kong are, they’re about 700 tons a year, so you add that up, that’s 1,100 tons. I have information that I talk about in my book, that they’re bringing gold in actually, through military convoys coming in through central Asia that could be coming from Russia or Kazakhstan or elsewhere, so add that to the mix. They’re getting probably 1,500 tons a year. This has been going on for five years, so that’s 7,500 tons. What we don’t know is how much of that is going to private investment in China, how much of that is going to the government? We don’t know that number, but just use half and half as a first approximation, so right there that would add over 3,000 tons to China’s reserves, so they’re probably close to 4,000 tons.

There’s been a lot of speculation, but the reason they’re doing this is they want to launch a gold-backed yuan currency to defeat the dollar. That’s not going to happen, that’s not even close, but what you do is you build up a pile of gold. Now, the Chinese actually want a stable dollar. Remember, every 10% of dollar inflation is a $300 billion wealth transfer from China to the United States.They would love a stable dollar, but if we cheapen the dollar with inflation, they’ll lose money on the paper but they’ll make money on the gold, so they’re building a hedge position. They’re not done yet.

Peter: And of course, for the hedge to work, gold has to move up spectacularly.

Jim: Correct.

Peter: [China’s] gold position is going to be very small relative to their dollar position. I think it’s interesting because I think that’s why China is trying to really lie about how much gold it has and how much it’s been buying because if the truth were out there on how much gold they have, I think the price would already go up. If you really want to buy something, you don’t want people to know how badly you want it or how much you want because they’re going to raise the price. I think China is trying to quietly buy as much gold as they can because they need a lot of gold because they’ve got a lot of dollars so they’re trying to buy as much as they can as cheaply as they can.

Jim: Correct.

Peter: They lie about how much they have. I think we also lie, but maybe we pretend we have more than we do. That could be, so we say we have all this gold and maybe we don’t. China claims they barely have any but they probably have a lot more.

Jim: Well, I think reasonably we have the physical gold. Now, is it leased out? Yes, that’s the thing. It’s hypothecated. We have the physical gold at Fort Knox and West Point, where we say we do, but it is leased out. The gold manipulation, by the way, is so blatant at this point, if I were the manipulator I’d be embarrassed because to me that’s non-debatable. Rosa Abrantes-Metz, professor at NYU Stern School has done some excellent research on this. She’s an expert on this [and] there are other published studies, so this isn’t something we have to speculate about any more.

Peter: Why isn’t there a bigger uproar? What do you think is going on when Germany basically says, “Look, you guys are storing our gold. We’d like half of it back.”

Jim: Right.

Peter: And then we come back and say, “Okay, we’ll give you half back but it’s going to take like 10 years, and here’s our timetable,” and at the end of the first year, we give them one-tenth of what we promised we’re going to give them, and now all of a sudden they’ve changed their mind and say, ‘Okay, we don’t need it. You can keep it.”

Jim: Well, that’s another thing that’s not well understood. The dirty little secret there is Germany doesn’t want the gold back. They asked for it but that was only because it was a political issue. In September of 2013, Angela Merkel was up for election. There was a minority party that was making noise about this, saying, “Why is our gold in New York? Why are we risking the US could confiscate it?” Which I think we might at the end of the day, in desperation. That was only announced to appease that party to help Merkel’s coalition. Once she won the election, they didn’t need those guys anymore.

Peter: The question is, could we have delivered it? Or did Germany know that we weren’t going to deliver it?

Jim: Well, again, there’s a lot of confusion about this because people don’t understand gold leasing. They think if JP Morgan leases from the Fed, which they do, that somehow they back up a truck and take the gold away. They don’t. The gold is there but they get paper title to it, and that’s all you need. Then you go out and sell 10 times, 10 times the paper title in the so-called unallocated gold through the London Bullion Market Association. Now you’re flooding the world with gold contracts. All these people out there say, “Well, I own gold.” They don’t own gold, they have a paper bilateral contract with JP Morgan. If they all showed up for the gold, JP Morgan would terminate the agreements under force majeure clause, and give everyone a check at yesterday’s price. You would not get today’s spike, and there’s nowhere near enough gold to go around, so there’s manipulation galore. It’s a little more sophisticated.

Peter: Well, basically, they’ve sold the same gold over and over again.

Jim: Correct.

Peter: And you have all these people, who think they own it. It’s kind of like the movie The Producers, where the guy assumes the movie’s going to flop, so he sells interest to so many people, and then when it’s a hit, they all come back and they want their share, but of course, they’ve oversold the deal and it’s the same thing.

Jim: Correct.

Peter: Or maybe it’s like a bit of a Bernie Madoff, or some kind of a scam.

Jim: In 2013 – you’re right – it was the first year in 11 years when gold was down, but that’s because the big banks looted the GLD warehouse. The GLD – that’s the ETF – warehouse disgorged 500 tons of gold onto the market. That’s over and above mining output and other sources. Well you can’t do that twice, you take another 500 tons out of GLD, there’s not enough left to pay the bills. That was a one-time event, we’re not going to see that again, you’re right.

Peter: Well, the other problem for the speculators, you know, because the people who bought GLD, you know, they’re going to be back. Once the trends change, the hot money is going to want back into gold.

Jim: Correct.

Peter: The problem is the gold’s not going to be there for the GLD to buy.

Jim: Right.

Peter: So, [just wait until] the speculators want in, and a lot of these guys are actually now short, so wait until they have to cover. Not only do you have the buying for the short covering, but you’ve got buying from the new investor with hot money. You know, typically, when things go wrong, people seek out a safe haven, and the US Treasury market has been the safe haven, but at some point it can’t be the safe haven. You can’t bid Treasury prices to the moon, the yields are too low. Pretty soon, the safer asset becomes so risky that nobody can touch it.

Jim: Right.

Peter: So at some point, the flight to Treasuries can’t go on so what are you going to buy when it’s too dangerous to buy Treasuries? Especially if the next crisis is a dollar crisis? You can’t hedge dollars in Treasuries.

Jim: I think you’re exactly right. The London Gold Fix is less and less significant. Look, the whole gold market, not just the gold, but the gold market is moving to Shanghai. The vaults are there, the refineries are starting to crop up. They’ve redefined good delivery. You know good delivery is the old 400-ounce bar. The 400-ounce bar was specified almost a century ago, because it was so inconvenient. They didn’t want people with gold in their pockets, so they came up with a good delivery that nobody could carry around. The Chinese are going to the 1-kilo bar. 400-ounce bars can be what they call “three 9’s,” you know, 99.9% pure. The 1-kilo bar that the Chinese like is “four 9’s,” so that’s 99.99% pure. That’s the new standard. So the vaults, the refineries, the gold standard, the trading, are all moving to Shanghai. They’re rewriting the rules again.

Peter: It makes sense. The savings are there, the productive capacity is there, the economic freedom is there. Just like America, you know, when we became the most powerful nation because we embraced freedom in a way that had never been embraced before, and we became wealthy because of our free markets, we had all the gold. That’s why the dollar became the reserve currency, because we had so much of the world’s gold. We’ve lost all of that, and it makes sense that the nations that have gained what we’ve lost are now going to take the gold, right? The gold is going to flow from the debtor nations of the West, the welfare states, to the new, freer markets, the dynamic, saving, producing nations of the East.

Jim: Right. In 1950, the United States had 20,000 tons of gold. Today we have about 8,000 tons. So that tells you the story right there.

[Looking at the next liquidity crisis, I like to] go all the way back to 1998, when Long Term Capital and Management collapsed. That was a hedge fund collapsing, jeopardizing the world, and Wall Street bailed it out. Now, come forward to 2008, now Wall Street’s collapsing, jeopardizing the world, and the central banks bailed them out. In the next crisis, soon to come, it’ll be the central banks and the sovereigns themselves who are collapsing.

Peter: The ultimate crisis isn’t going to be a liquidity crisis, but an excess of liquidity because all that money that’s being created, that’s the crisis.

Jim: Correct.

Peter: Because now the money collapses. See, everybody is worried about the asset prices going down. “Oh the stock market comes down, the real estate market comes down, the bond market comes down.” But they forget what if the dollar crashes? What if all the money they print to prop up all these asset prices collapses the currency that everybody actually wants. You don’t really want the assets, you want what you can buy when you sell them. You want what you can buy with the income that they produce. If you can’t buy anything, because they had to create so much money to prop up the values that it’s practically worthless, that is the real crisis, and that is why people need to have gold. When that crisis hits, that is the one place really, really for sure, that they’ll be able to hide but I still think that if you have real tangible productive assets in other countries, things are still going to have value. When you have a currency crisis like that, it’s the paper wealth that evaporates.

Jim: Sure.

Peter: I mean, the factories are still there. The resources, the plant and the equipment, that productive capacity is still there. The question is, who’s going to own it and who’s going to have claim to the production, the output of those assets?

Jim: Well, the guy who’s getting ready for that is Warren Buffett. Warren Buffett’s last two big acquisitions were a railroad, oil and natural gas. Warren Buffett’s a guy who’s dumping paper money, getting hard assets, the dollar can go to zero, and he still owns a railroad, exactly as you described.

Peter: Well, you know, I wouldn’t be surprised because, you know, if you look at what he says, he talks up the paper economy, talks up the US economy, he talks up Obama.

Jim: Buffett’s dumping paper money and getting into hard assets, investors should do the same.

Peter: All right, well on that note, Jim, thanks a lot for coming by.

Jim: Thanks a lot. Nice talking to you. Thank you.

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