The New Case for Gold: James Rickards 2016

The New Case for Gold

“The New Case for Gold” by James Rickards, was just published in April 2016 and is a Wall Street Journal Business Best Seller.

James Rickards is one of today’s thought leaders on Global Currencies and the Global Financial System, and he is a strong advocate for a return to the Gold Standard. “The New Case for Gold” builds on foundation established by Rickards previous books “Currency Wars” (published 2011, see my blog post dated March 2015) and “The Death of Money” (published 2014, see my blog post dated June 2016).

Rickards has done a masterful job of packing a great deal of historical and technical information into a relatively short book of only 192 pages. Rickards writing is clear, concise, well researched, and well reasoned. He makes a very strong case for returning to a Gold Standard, which has been the prevailing global currency standard for most of the past 5,000 years.

“The New Case for Gold” debunks many commonly held misconceptions about Gold, especially why Gold is no longer suitable for use as a Global Currency. One of the most common criticisms of gold is that “there’s not enough gold”. Rickards explains that what this really means is that there isn’t enough gold at its current valuation. Rickards analyses the valuation of Gold based on several potential valuation scenarios, and theorizes a current valuation, consistent with historical models, of $10,000 per ounce. This valuation model gives strong insight into how badly debased the US dollar has become since it became a fiat currency.

Much of the current monetary economic theory is based on the work of John Maynard Keynes. Central bankers have been using and abusing Keynes’ economic theories for decades. However, Rickards notes that “Keynes was an advocate for gold early in his career, an astute adviser on gold in mid-career, and an advocate for gold again late in his career.” Rickards notes the famous Keynes quote “In truth, the gold standard is already a barbarous relic” which many observers use as evidence against a return to the Gold Standard. However, Rickards explains that Keynes was not advocating against Gold backed currencies, but rather complaining about the “Gold Exchange Standard” that was in place between 1922 and 1939. The Gold Exchange Standard was notoriously flawed and Rickards agrees that “it should have been abandoned long before it died with the outbreak of the Second World War.”

Some of the most tantalizing sections of “The New Case for Gold” involve Rickards research into current gold reserves held by various nations, and the ongoing stealth purchase of gold by China and Russia. Today there are approximately 35,000 tons of gold owned by central banks, finance ministries, and sovereign wealth funds. Rickards observes that “China, like Russia, is acquiring gold so that it will have a comparable ratio to the United States and Europe. The gold-to-GDP ratio will be critical when the monetary system collapses because it will form the basis for any monetary reset and the new ‘rules of the game.'”

Rickards also explains that China is buying gold to hedge its position in US Treasuries. If Inflation gets out of control and China doesn’t have its portfolio of US Treasuries hedged, “China will be left in the dust.” However, if China can reach its target of eight thousand tons of gold, China will have its US Treasuries holdings adequately hedged.

Rickards advocates for prudent investors to hold 10% of their portfolio in physical gold, and gives prudent justification for his recommendations. He discusses best practices for acquiring and holding gold, and also discusses serious pitfalls especially concerning various forms of “paper gold.”

I enthusiastically recommend “The New Case for Gold” to anyone keenly interested in the Global Financial System, is skeptical about the safety and security of Fiat Currencies, or has an interest in prudently diversified investments.

Frank T.

Currency Wars: James Rickards 2011

Currency Wars

Back in March 2015 I posted a review of James Rickards’ book “The Death of Money”, which was published in 2014. In that book, Rickards presented a fascinating and frightening review of the current Global Financial System and outlined the inherent dangers of Fiat Currencies.

Recently I have started following James Rickards on Twitter, and have therefore been inspired to read more of his published works. I have just finished reading both “Currency Wars” which Rickards published in 2011, and “The New Case for Gold” which was just published in April 2016. I will post my review of “The New Case for Gold” in the coming days.

James Rickards has degrees in both Law and International Economics, and has more than 35 years of experience on Wall Street. He was the General Council for the infamous hedge fund Long-Term Capital Management (LTCM) and had a front row seat to witness the collapse and bailout of LTCM. He was the principal negotiator for LTCM with the Federal Reserve Bank of New York.

In “Currency Wars” Rickards does an excellent job of presenting the history of gold backed currencies, fiat currencies, and the objective historical evidence for the safety and stability of prudently managed gold backed currencies. He provides a very solid historical perspective to understand and interpret the relative advantages and disadvantages of gold backed and fiat currencies, and relates this historical evidence to current day events.

Rickards explains that “Currency wars have been fought before – twice in the twentieth century alone – and they always end badly.” He also states that “by engaging in quantitative easing, the Fed has effectively declared currency war on the world.”

In a particularly enlightening, sobering, and frightening section of the book, Rickards introduces and explains Behavioral Economics and Complexity Theory. He defines a complex system as a system that includes “spontaneous organization, unpredictability, the need for exponentially greater energy inputs and the potential for catastrophic collapse.” He describes a Swiss watch as being complicated, having many gears, springs, jewels, stems, and casings, but a Swiss watch is not Complex. As a comparison, he describes human consciousness, which is an emergent property that arises out of a complex combination of organic elements.

Central Bankers and economists have not yet embraced Complexity Theory, and instead continue to rely on equilibrium models, confident in their ability to calculate and manage predictable outcomes. However, since markets are not merely complicated, but are truly complex, they are fully capable of, and have frequently demonstrated, spontaneous organization and unpredictability, and periodically end in catastrophic collapse.

Rickards explains that one solution to dealing with a complex system is to make the system smaller, known as “descaling”. Ski patrols use dynamite to cause small avalanches, to descale or simplify the masses of snow accumulated on unstable slopes. He observes that our Central Banks have allowed our financial system and the “too big to fail” banks to grow much larger and more concentrated than immediately prior to the 2007 market collapse. He states that “the financial ski patrol of central bankers is shoveling more snow on to the mountain.”

Rickards discusses the future and potential solutions to our currently unstable global financial system in his final chapter “Endgame – Paper, Gold or Chaos?” He strongly supports and defends a return to the Gold Standard, noting that it “offers the best chance of stability but commands so little academic respect as to be a nonstarter in current debates. This leaves chaos as a strong possibility.” He strongly advocates to “break up big banks and limit their activities to deposit taking, consumer and commercial loans, trade finance, payments, letters of credit and a few other useful services.” He proposes banning derivatives except for standardized exchange-traded futures with daily margin and well-capitalized clearinghouses. He observes that “Derivatives do not spread risk; they multiply it and concentrate it in a few too-big-to-fail hands. Derivatives do not serve customers; they serve banks and dealiers through high fees and poorly understood terms.”

“Currency Wars” is a fascinating book. I highly recommend it to anyone seeking a better understanding of our Global Financial System.

Frank T.