Jim Rickards On The Confused Fed, Gold Manipulation, And Negative Interest Rates

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Mike Gleason: It is my great privilege to be joined now by James Rickards. Mr. Rickards is Chief Global Strategist at the West Shore Funds, editor of Strategic Intelligence, a monthly newsletter, and Director of The James Rickards Project an inquiry into the complex dynamics of geopolitics and global capital.

He’s also the author of several best-selling books including The Death of Money and Currency Wars and just released his latest work, The New Case for Gold. James is a portfolio manager, lawyer and renowned economist having been interviewed by CNBC, the BBC, Bloomberg, Fox News and CNN just to name a few. And it’s a real honor to have him on with us again.

Jim, we really appreciate you taking the time to talk with us today, and welcome back.

Jim Rickards: Thank you Mike. It’s great to be with you.

Mike Gleason: First off, I’d like you to talk about how you view gold because I think it’s important to start with that before we get further into the discussion. I want people to understand where you’re coming from. Now I know in the book, The New Case for Gold you go through some of the definitions and purposes of gold, but how should people view it?

Jim Rickards: I actually few it as money Mike, and I’ll expand on that a little bit. Although, how I view it is one thing, but how the world views it is another. In other words, you want to take into account different ways people look at gold and think about gold.

If you’re going to own it or going to store wealth in it, again I think it’s a pure form of money, but not everyone agrees with that. It’s important to understand how other people think about it.

On that note, I call gold a chameleon. Sometimes gold trades like a commodity. Sometimes it trades like an investment, and sometimes it trades like money. It’s like a chameleon. You put a chameleon on a green leaf, it turns green. You put it on a tree trunk, it turns brown. It adapts to its circumstances. Gold is often thought of as a commodity. It does trade on commodity exchanges, I understand that, and it tends to be included in commodity industries. The common understanding is gold is a commodity in commodity trade.

I really don’t think that’s correct. The reason is that the definition of a commodity, it’s a generic substance, it could be agricultural or a mineral or come from various sources, but it’s sort of a generic undifferentiated substance that’s input into something else. Copper is a commodity, we use it for pipes. Lumber is a commodity, we use it for construction. Iron ore is a commodity, we use it for making steel. Gold actually isn’t good for anything except money.

Gold is probably the best form of money, but it’s not really good for anything else. People don’t run around the world and dig up gold because they want to coat space helmets on astronauts or make ultra-thin wires. Gold is used for that, but that’s a very small portion of the application. People point to jewelry and say, “There’s a different application,” but I think of jewelry as wearable wealth. No better example than an Indian bride for example where they might have four or five pounds of 18 karat gold necklaces around their necks, and it’s very stunning and maybe attractive, but they consider it to be their wealth. So it’s really just a wearable form of wealth.

So I don’t really differentiate between jewelry and bullion in terms of the monetary gold. So I don’t think of gold as a commodity for that reason. It’s not really input into any process or industrial process, but nevertheless we have to understand that it does sometimes trade like a commodity.

As far as being an investment is concerned, that’s the most common usage. People say, “Well, I’m investing in gold,” or, “I’m putting part of my investment toward bullion gold.” Again, I don’t really think of gold as an investment. I understand that it’s priced in dollars, and the dollar value can go up, and that will give you some return, but to me that’s more a function of the dollar than it is a function of gold. In other words, if the dollar gets weaker, sure the dollar price of gold is going to go up or as has happened recently, if the dollar gets stronger, then the dollar price of gold may go down.

So if you’re privileging the dollar as the measure of all things, then it looks like gold is going up and down, but the way I think of it is I think of gold by weight. An ounce of gold is an ounce of gold. If I have an ounce of gold today, and I put it in a drawer, and I come back a year from now and take it out, I still have an ounce of gold. In other words it didn’t go up or down. The dollar price may have changed, but to me that’s the function of the dollar, not a function of gold. I don’t really think of it as an investment.

That goes to one of the point I make in my book. One of the criticisms of gold, and I don’t think it is a criticism, it’s just a fact is that gold has no yield. You hear it from Warren Buffet, you hear it from others, and that’s true, but I kind of shrug and say, “Well yeah, but gold is not supposed to have a yield because it’s money.” Just reach into your wallet or your purse and pull out a dollar bill and hold it up in front of you, and ask yourself what’s the yield? Well there is no yield. The dollar bill doesn’t have any yield. It’s just a dollar bill, the way a gold coin is a gold coin.

If you want yield, you have to take some risks. You can put the money, put that dollar in the bank, and the bank might pay you a quarter of 1% or something, not very much, but now it’s not money anymore. People think of their money in a bank deposit as money, but it really isn’t money. It’s an unsecured liability of an occasionally insolvent financial institution. The risk may be low, I’m not saying the risk is high or you ought to pull all your money out of the bank, but I am saying that there’s some risk, and that’s why you get a return. Of course, you can take more risk in the stock market or the bonds market and get higher returns. The point is, to get a return you have to take risk. Gold doesn’t have any risk. It’s just gold, and it doesn’t have any return. It’s not supposed to. I don’t really think of it as an investment.

So that brings me to the third part of the chameleon characteristic, which is money. And that’s what gold is. Gold is money. It has no risk. It has no yield. It is the store of wealth. Classic definition, medium of exchange, unit of account. And that’s important.

So the way I think of gold right now, I think of it as money. I think it’s in competition with the dollar, the euro, the yen, the Swiss franc, and other forms of money, bitcoin for that matter, they’re all forms of money. And they’re competing for the subjective preference of people who need money and want to store wealth and I think gold’s doing very well in that context.

Mike Gleason: The idea of a gold standard is getting more and more play these days, and has even been talked about some during the election cycle as certain candidates are calling for a return of the gold standard as a way to reign in all of the out of control government spending, but obviously many out there are very against this idea. And the example by the gold standard naysayers is what happened during the Great Depression. Now former Federal Reserve Chairman, Ben Bernanke famously complained that the Fed was hamstrung by the gold standard during the Great Depression. Talk about this because this is a common belief among Keynesian scholars and economists. Is that a correct assumption to say that the Great Depression either happened or continued as long as it did because the Central Bank had their hands tied by the gold standard? Are we dealing with fact or fiction there with this popular notion?