Rickards Busts Two Gold Myths
- “Stand for delivery”? Forget it: What many gold bugs don’t understand
- The truth about “gold confiscation”
- $10,000 gold and how we’ll get there
- Rickards reveals the gold endgame in a special edition of The 5
There’s nothing like buying the right asset for the wrong reasons. Buy gold for the wrong reasons and it could be fatal to your wealth.
Before we proceed, a program note: The Agora Financial editors are still gathered in Baltimore today — the reason we didn’t bring you an episode of The 5 yesterday. We’ll give you a window into this meeting — a sneak preview of their best ideas in their formative stages — starting tomorrow.
In the meantime, we thought today would be a good time to revisit two persistent myths about gold — myths that Jim Rickards has been working hard to bust all year.
Some of what follows might look familiar to you… but a little reinforcement never hurts. “Men more frequently require to be reminded than informed,” Samuel Johnson once said.
We’re back to regular programming tomorrow. Promise.
The first myth is one that we daresay we had a hand in fostering — albeit quite by accident.
Even as gold was nose-diving in early 2013, we identified the ultimate catalyst for the gold price. It’s a scenario our executive publisher Addison Wiggin labeled “Zero Hour” — a moment when demand for physical metal would far outstrip the “paper gold” market of gold futures traded on the Comex in New York.
Since 2014, the momentum toward “Zero Hour” has been building relentlessly. Last spring, Byron King explained in this space that for every ounce of physical metal held by the Comex, there are 500 traders holding gold futures.
For the time being, those traders are content to roll their contracts forward or take a cash payout when those futures expire. But hypothetically, they have the right to demand delivery in physical metal.
The key word there is “hypothetically.” In the years since we identified “Zero Hour,” a lot of Internet screamers have latched onto the theme — while failing to understand the subtleties.
As a result, many of their followers wonder what the hell’s taking so long.
“For years, gold bugs implored futures traders to ‘stand for delivery’ on the Comex,” says Jim Rickards.
“If every long in the futures market put in a notification that they wanted to take physical delivery instead of closing out or rolling over their contracts, the result would be one of the greatest short squeezes and price spikes since ‘Big Jim’ Fisk and Jay Gould tried to corner the private gold market in 1869. (Fisk and Gould’s corner failed when the U.S. Treasury unexpectedly made public gold available to bail out the shorts.)
“But this scenario is unlikely to play out in the way the gold bugs wish, for several reasons,” Jim goes on.
“The first is that the Comex has emergency powers to prevent longs from taking delivery in a way that disrupts the orderly functioning of the market. The Comex rule book makes it clear that a futures exchange is for hedging, price discovery and legal speculation, but is not a source of supply. (Physical delivery is permitted, but only enough to keep the paper price ‘honest.’ The irony, of course, is that the paper price is anything but honest, due to manipulation.)
“Another rule allows Comex officials to change the rules as needed in emergencies (something the Hunt brothers experienced when they tried to corner the silver market in 1980). The fact that longs know they cannot take delivery in the end is a major deterrent to the attempt.”
There’s one more reason the gold longs don’t squeeze the gold shorts. Jim sums it up in two words: “It’s illegal.”
“Most major participants in the gold market (banks, dealers and hedge funds) are regulated by one or more of the Federal Reserve, U.S. Treasury, SEC or CFTC,” he explains. (And he’s been a lawyer for banks, dealers and hedge funds, so he’d know.)
“Applicable laws contain strict anti-fraud and anti-manipulation rules, including jail time in cases of willful and knowing violations.”
So a rogue hedge fund manager out there might want to call BS on the whole Comex scheme… but he thinks better of it, lest the full weight of Uncle Sam’s prosecutorial apparatus comes crashing down on him.
If someone demanding delivery of physical metal from the Comex doesn’t bring on “Zero Hour,” what will?
It comes back to “avalanche theory” — Jim’s popularization of the science called complexity theory.
“A single snowflake,” he reminds us, “can turn a seemingly stable snowpack into a roaring avalanche that destroys everything in its path. Once the snowpack is arranged in an unstable way (like the gold market today), a single snowflake can unleash carnage. Of course, a single snowflake is so small you never see it coming.
“What this means is that the super-spike in gold prices will not come from any of the obvious sources but from an unexpected source.”
It could be the bankruptcy of a medium-size gold dealer. It could be lawmakers in Washington talking about new reporting requirements for gold dealers. Or it could have nothing to do with gold: It could be a war or a pandemic that frightens people into safeguarding wealth.
“It doesn’t matter,” Jim sums up. “Once the avalanche begins, there’s no stopping it.
At that point, the hedge funds can demand physical delivery of gold without fear of prosecution. If a hedge fund tries to start an avalanche, it’s manipulation. But if the avalanche starts from another source, then a hedge fund piling on is ‘normal’ market conduct.
“Since every gold market participant knows there’s not enough physical gold to go around, everyone will demand physical gold at once. No one wants to be left holding the bag.
“What happens when there’s a panic and everyone demands their gold at once?” he goes on. “And how does this end?
“There are a few ways… and none of them good.”
This summer, Jim and his team spent $115,000 of Agora Financial’s money to take a professional film crew overseas to pursue an in-depth investigation. It’s called The Great Gold Hoax.
“The answers we found are absolutely shocking,” says Jim. “And it could put your money at serious risk within the next 12 months.” You can give it a look right now…
Once you have physical gold in your possession, you must confront the other gold myth Jim’s been trying to bust this year — the one about gold confiscation.
Here too, many gold bugs are sadly misinformed. A few are informed but try to mislead you about gold confiscation — luring you to buy pricey collector coins on the theory those won’t be subject to seizure, unlike bullion coins.
“Gold confiscation” as carried out 80-odd years ago did not proceed the way you might think. It’s not as if G-men were going house to house in 1933 carrying out FDR’s orders.
No, people had already voluntarily surrendered their gold during the early decades of the 20th century.
How, you ask? “Banks slowly took the coins out of circulation (the way cash is going out of circulation today), melted them down and recast them into 400-ounce bars,” Jim explains. “Nobody is going to walk around with a 400-ounce bar in her pocket.
“Then they said to people, in effect, ‘OK. You can own gold, but it’s not going to be in the form of coins anymore. It’s going to be in the form of these bars. By the way, these bars are very expensive.’ That means you needed a lot of money to have even one bar, and you weren’t going to take it anywhere. You were going to leave it in a bank vault.”
Americans were lured down the garden path with the promise of convenience. Why lug around those $5, $10 and $20 gold coins when you had those handy paper “gold certificates”? (The same thing is going on now with physical cash; why fool around with coins and notes in an age of electronic ease?)
As for gold confiscation now? Fact is, there’s nowhere near enough gold in the public’s hands to make it worth the feds’ while.
But what about a 90% “windfall profits tax” on gold?
That’s a more realistic threat — as Jim told your editor three years ago. By the time the next financial meltdown hits, only a relative few people will have taken protective measures with gold. “So you’re going to have this resentment, this political resentment, where the vast majority of the people who just sort of took it on the chin are going to be looking at a small number of people who protected themselves, and they’re going to say that’s not fair.”
But as Jim points out in his most recent book, The New Case for Gold, “A windfall profits tax on gold is not something that can easily be accomplished by executive order because of congressional control over taxation. Such a tax requires legislation, and the legislative process is slow. Gold holders would know in advance and have time to prepare.”
So… Follow Jim’s guidance about putting 10% of your investable assets into bullion. Then relax and wait for gold to reach his target of $10,000.
As long as we brought that up, it’s worth revisiting how he arrived at that $10,000 figure — seeing as it’s not something he yanked from his posterior just to get attention.
In his first book five years ago, Currency Wars, Jim invoked Hemingway’s description of bankruptcy: “When the dollar collapse comes, it will happen two ways — gradually, and then suddenly.”
It comes back to that avalanche analogy. Each snowflake piles on, one by one, until the whole thing gives way.
Result: “a chaotic, catastrophic collapse of investor confidence resulting in emergency measures by governments to maintain some semblance of a functioning system of money, trade and investment.”
How can governments restore that confidence? By resorting to some sort of gold standard. Central bankers will take that step not because they want to, but because they have to.
But once that decision is made comes the hard part — how to value gold under this new system.
It’s easy to foul up. “Choosing the wrong price,” Jim wrote, “was the single biggest flaw in the gold exchange standard of the 1920s.” Staying at $20.67 an ounce simply didn’t reflect the vast money printing that took place worldwide to pay for World War I. “A price of perhaps $50 per ounce or even higher in 1925… might have helped to avoid some of the worst effects of the Great Depression.”
When Currency Wars was published in 2011, you could take “M1” — one of the basic measures of U.S. money supply — and back only 40% of it with gold and wind up with a gold price of $2,590.
If you took “M1” of the United States, the eurozone and China and gave it that same 40% gold backing, you’d be talking $6,993 an ounce.
Of course, there’s been a lot of inflation in the five years since Currency Wars was published — propelling that figure from near $7,000 to $10,000.
Next question: At what point will the globe’s monetary mandarins resort to this new system valuing gold at roughly $10,000?
To answer that question, we must look to China. If you’ve been reading us for a while, you know how Jim explains China’s relentless gold accumulation: Chinese leaders want that proverbial “seat at the table” when the global monetary system collapses and the powers that be hash out a new system.
In his 2014 book, The Death of Money, Jim laid out the case that Western powers have gone so far as to make room at the table for China. They’re enabling China’s accumulation with the gold manipulation techniques we’ve been describing regularly since 2013. Western central banks have “leased” their gold to commercial banks, and those commercial banks have sold that gold to Asian buyers — including the Chinese central bank.
“The gold price must be kept low,” Jim wrote, “until gold holdings are rebalanced among the major economic powers, and the rebalancing must be completed before the collapse of the international monetary system.”
But how much gold is enough to earn China that seat at the table?
The metric the power brokers will rely on is gold reserves as a percentage of GDP. When The Death of Money was published two years ago, China’s official gold stash was 1,054 tonnes. But the official figures are notoriously understated. Conservative estimates of the real amount in 2014 was 2,710 tonnes.
And as you see from this before-and-after table, it won’t take much more before China’s gold-GDP ratio equals America’s…
Once this rebalancing process is complete, Jim wrote, “there will be less reason to suppress gold’s price, because China will not be disadvantaged in the event of a price spike.”
The evidence to back up Jim’s assertions is all there. You just have to look hard enough. “Get the annual report from the Bank for International Settlements,” he told me over dinner two years ago. “Read the footnotes. I understand it’s geeky, but it’s there. They actually get audited — unlike the Fed and unlike Fort Knox.”
“Once China has enough gold, the United States and China together could let the price of gold go wherever it wants in an orderly way,” Jim writes in his third book, The New Case for Gold — published only six weeks ago.
At present, Jim estimates China’s gold holdings at about 4,800 metric tons. The 2.7%-of-GDP threshold’s been met. But Jim suggests Chinese leaders are holding out for more. Much more. They might want a gold stash that equals America’s measured by raw tonnage — in which case, they’re not even halfway there.
“When [China’s] done buying, when it has approximately 8,000 tons, the United States and China can shake hands and both say they’re protected.
“At that point, the devaluation of the dollar by a rise in the dollar price of gold can commence.”
In the meantime, you can accumulate gold with the confidence that all the pieces are in place for a march to $10,000 — nearly eight times today’s price.
Get your gold. Then sleep tight.
The 5 Min. Forecast
P.S. “Zero Hour” for gold, described at the beginning of today’s episode, has morphed into what Jim Rickards calls “The Great Gold Hoax.”
This hoax is an earthquake that could rock the precious metals space any day now. When it does, gold prices to $2,000 in the blink of an eye… then to $3,000… past $5,000 in a flash…
And all the way up to a final price of $10,000 per ounce — a 700%-plus gain from today’s levels.
But here’s the truly shocking thing… Most gold owners will NOT profit from this massive gold super spike.
In fact, this gold mania will actually kill many gold owners’ retirement, making them much, much poorer.
All of the answers are in the simple wooden box pictured here: