Jim Rickards and The New Case for Gold

Jim Rickards, who we’ve written about previously has this week launched his latest book entitled “The new case for gold”. In the last week or so he has been participating in numerous interviews promoting the content and has provided some succinct and factual rebuttals to many of the anti-gold ideas and comments that are commonly heard.

According to Jim, it is little wonder that those who value the role that precious metals play in a sound and balanced investment strategy are largely misunderstood. This stems from the fact that there are now “upwards of three generations who have been miseducated, uneducated or led in a false direction with regards to gold”. Since the mid-1970s gold has essentially not be taught in universities and financial courses. Jim’s economics class of 1974 was one the last classes to be taught gold as a monetary asset. Beyond that, Jim claims that anyone younger than him with any real knowledge of gold “is either self-taught or has attended mining college”.

One of the first main-stream inaccuracies that Jim dispels is the claim that gold is a rock; usually accompanied by some form of dissuading adjective. It is a metal. Quite interestingly too, it is a metal that the US has 70% of its reserves stored in. This is impressive for something that Ben Bernake claims is held for reasons of “tradition”.

Secondly, Jim addresses the argument that gold cannot be used as a financial base because the gold supply does not expand quickly enough to support the growth of the world economy. It is commonly claimed that with mining output relative to global gold stock at about 1.6% a year – and given world growth varies say between 3% and 4% a year, then the adoption of gold as a monetary base would be deflationary “given that gold can’t keep up”.

Jim argues simply that the numbers are accurate but irrelevant “because mining output has nothing to do with the ability of central banks to expand their gold supply and participate in discretionary monetary policy”. The argument compares apples and oranges by confusing mining output with total gold. “With approximately 180,000 tons above ground but only 35,000 tons held by central banks, there is ample scope for banks to simply buy privately held gold” and effectively acquire more in an open market operation.

Thirdly, Jim addresses the claim that there is not enough gold to support world trade and commerce by stating “that’s another nonsensical comment”. His assertion is that “there is always enough gold, it is just a question of price”. At $1250 per ounce, a gold standard is not a good idea as it would lead to a deflationary environment. At something more like $10,000 per ounce for example, conditions would actually be mildly inflationary (depending on the definition of the currency base being utilised). Jim emphasises that the consideration is never about the gold supply as such but rather about the price of that supply.

Lastly, Jim discusses the argument that gold has no yield; one of the most frequent anti-gold comments in current circulation. In rebuttal, two answers are made. Firstly, in a negative yield environment, zero-yield is the high yield asset. The other answer applies in a positive yield environment too; that is that gold is money and as such it is not intended to have yield. As an example, Jim invites readers to consider taking a $20 bill from their wallet or purse and holding it up in front of them. Propose the question “what is the yield on that bill”? The answer is zero. It is only when that bill is deposited into a bank that it might offer yield but by doing so it is not money anymore; it is an unsecured bank deposit (liability). Jim emphasises that this is another “apples and oranges” comparison.

In a closing thought, Jim highlights the fact that owning stocks, bonds and other classical electronic forms of investment is nothing more than “owning electrons”, warning that “digital wealth can be erased”. As an example, Jim highlights the recent case where Bangladesh had $100M on deposit with the Federal Reserve NY which “disappeared” and “if that wealth was in physical gold, they’d still have their $100M”.