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

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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

4 Comments – Post Your Own

#1) On April 14, 2010 at 10:08 PM, ChrisGraley (29.68) wrote:

LOL, he sounds a little like me at parties.

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#2) On April 15, 2010 at 12:14 AM, binve (< 20) wrote:

Chris: LOL!

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#3) On April 15, 2010 at 4:56 PM, outoffocus (23.08) wrote:

I think I'm going to continue to make investments into CEF.

In other news, I wonder if we've hit a top in the market.  I know last year right around this time there were a number of blogs predicting a big plunge.  Could it be all those bloggers were just a year early? I'm seeing a bunch of eery signs that we may see a plunge soon. 

1. First and foremost, Alstry quit.  I mean seriously? He quit? The ultrabear of permabears quit!

2. A couple of key players scores have turned negative. The explanation? They redthumb crappy companies and got burned.  Something wrong with that picture?

3. The DOW hit 11000. Am I the only one catching de ja vu here?

4.  There seems to be this endless bullish euphoria going around. Heck even I'm starting to catch it.  It seems like the market is going up just for the sake of going up. When I see my account hitting higher highs I just like to sit and stare at it in satisfaction.  This feeling is often followed by a nice little reality check.

Now I'm no permabear.  But I am a skeptic. I understand the economy has recovered some, but certainly not enough to justify what is going on in the market. And honestly how long can we expect the market to continue this trajectory? I sure there is a chance the DOW could reach 12000, but some crap is going to hit the fan and send this thing crashing down.

I dont want to sound like a worry wort but its like the signs are so glaringly obvious but everyone's so busy watching out green their accounts are getting to notice.

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#4) On April 15, 2010 at 5:14 PM, binve (< 20) wrote:

Hey outoffocus

>>In other news, I wonder if we've hit a top in the market.  I know last year right around this time there were a number of blogs predicting a big plunge.  Could it be all those bloggers were just a year early? I'm seeing a bunch of eery signs that we may see a plunge soon. 

LOL! I think that might be the case :)

>>4.  There seems to be this endless bullish euphoria going around. Heck even I'm starting to catch it.  It seems like the market is going up just for the sake of going up. When I see my account hitting higher highs I just like to sit and stare at it in satisfaction.  This feeling is often followed by a nice little reality check.

This one is troubling if you subscribe to the theory that markets peak at emotional extremes. Check this out: http://evilspeculator.com/wp-content/uploads/2010/04/2010-04-15_ISEE_10DMA.png. The ISEE (measure of investor sentiment) has now exceeded the 2007 top levels! Really? Have all the structural problems really been solved that we can now be as bullish as we were at all time highs in the market??

>>Now I'm no permabear.  But I am a skeptic. I understand the economy has recovered some, but certainly not enough to justify what is going on in the market. And honestly how long can we expect the market to continue this trajectory? I sure there is a chance the DOW could reach 12000, but some crap is going to hit the fan and send this thing crashing down.

I totally agree. I think the SPX will head to ~1230 in the short term (next couple of weeks). That is a very important retracement level (62% of the move down from Fall 2007 to March 2009). Beyond that, I really don't know. But euphoric run ups at resistance typically have violent corrections. We will see.

Thanks for the comment!!..

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