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Jim Rickards: Possible Run on the Gold Bank, Fed Insolvent, Currency Endgames in the US Dollar Debt Crisis

April 14, 2010 – Comments (4)

Jesse put together a great post highlighting the points from Jim Rickards interview on King World News. Some similar points were made by Eric Sprott in his interview on King World News http://caps.fool.com/Blogs/ViewPost.aspx?bpid=360939. Mr. Rickards also made some very similar points in his article at the Daily Caller: http://caps.fool.com/Blogs/ViewPost.aspx?bpid=374158.

Regarding the China angle, I linked to a presentation that layed out a similar case a few months ago: Gold: China's End Game - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=338913. It brings up a very interesting theory at the very least.

My own view is a little bit different. I make the case for a stagflationary outcome vs. a hyperinflationary outcome: More Thoughts on Gold's Massive Bull Market - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=372061. However I think gold will preserve wealth in either scenario.

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Jim Rickards: Possible Run on the Gold Bank, Fed Insolvent, Currency Endgames in the US Dollar Debt Crisis
14 April 2010
Jesse at Jesse's Café Américain
http://jessescrossroadscafe.blogspot.com/2010/04/jim-rickards-possible-run-on-gold-bank.html

[excerpt]

The interview is refreshing because Mr. Rickards lays his thoughts out clearly and without excessive jargon. I found his rationale for China's desire to increase its gold holdings to be intriguing. The price objective of $5,000 - 10,000 is somewhat arbitrary, but directionally correct if it is not accompanied by a reissuance of the currency, which I think is much more probable. Essentially it works out to be the same, since the new currency is likely to be a factor of 1 for 100 exchange for current dollars. If this seems outlandish, it should be kept in mind that this is not all that far removed from the fairly recent post-empire experience of the Soviet Union.

Jim Rickards audio interview on King World News

Highlights (aka Cliff's Notes):

    * There is obviously not enough gold and silver to cover the physical demand if holders of paper certificates in unallocated accounts demand delivery, and most likely only a small fraction could be covered with the practical supply available. Cash settlement will be enforced in the majority of cases.
    * Cash settlements would be for a price as of a 'record date' which is likely to be much less than the current physical price which would continue to run higher
    * There is more here than meets the eye - if you holding metal in an unallocated account you are likely to be considered an unsecured creditor
    * 100:1 leverage is reckless no matter commodity or asset it involves - little room for error
    * There is no way to pay off the existing real US debt without inflating the currency in which the debt is held, to the point of hyperinflation
    * If the Fed's mortgage assets were marked to market the Fed itself would be insolvent
    * Anything involving paper claims payable in dollars (stocks, bonds) are a 'rope of sand,' a complete illusion that is fraught with risk
    * $5,500 per ounce of gold would be sufficient to back up the money supply (M1) as an alternative to hyperinflation and a reissuance of the currency. Target price is 5,000 - 10,000 per troy ounce in current issue US dollars
    * The break point will be when the US debt can no longer be rolled over. US will not be able to finance its debt without taking drastic action on the backing or nature of the currency
    * China needs to have about 4,000 tonnes of gold, and only has 1,000 tonnes today
    * China cannot fulfill this goal by taking even all of its domestic production for the next 10 years. The Chinese people are showing a strong preference to hold gold themselves.
    * From 1950 to 1980 the US gold supply declined from 20,000 to 8,000 tonnes, basically moving from the US mostly to Europe.
    * The Chinese are frustrated that they cannot obtain sufficient gold at reasonable prices as Europe did, to withstand the currency wars and the reworking of international finance
    * Holding your gold in a bank correlates you to the banking system, the very risks which you are trying to avoid