Transcript of Anglo Far East's interview with Jim Rickards on January 14, 2014.
Jon Ward

Transcript of AFE's interview with Jim Rickards on Jan. 14, 2013.

Interview with Jim Rickards on Gold during massive deflation, gold is positioned for a huge technical rally, tapering into weakness, the new FED Chairwomans twin pillars of Optimal Control Theory and Communications Policy, the FED's intended role versus what it does now, the incredible leverage employed on the FED's balance sheet, and how most financial models today are completely wrong.

Jim Rickards Interview: 14-1-2014

Jon Ward: Hello, I’m Jon Ward on behalf of Anglo Far-East and Physical Gold Fund. We’re delighted to have with us here Jim Rickards. Mr. Rickards is the author of the New York Times bestseller Currency Wars: The Making of the Next Global Crisis. He’s an investment banker, an investment advisor based in New York, and he also serves on the Investment Advisory Committee for Physical Gold Fund. Welcome, Jim, and thank you for joining us.

Jim Rickards: Thank you, Jon. Glad to be with you.

JW: Jim, we’ve invited people who follow us on Twitter to submit questions for these podcasts, and we’re excited to have our audience involved in the conversation. I’d like to begin with our first Twitter question, which comes from [@went_galt] who asks, "What effect will deflation have on the price of gold? Might it sink to under $800 an ounce?"

JR: I’m glad we’ve opened this podcast up to the Twitter audience. It’s always something I enjoy doing as well. That’s actually two questions. Of course, they’re related but could point in different directions. Let me explain by beginning with take the second question first. “Could gold go to $800 an ounce?” I’ll be the first one to say that anything’s possible. As you know, I’m a long-term bull and I have been and I continue to be. I think the fundamental case is intact, but I would never say that gold couldn’t do it nowgo down or it couldn’t even go down that low. The way I look at it, I don’t think that’s likely, but I would not rule it out. If it happens, it’s telling us something, because nothing happens in isolation. Gold going to $800 an ounce is a very powerful deflationary signal. It means a lot of other things are going on in the U.S. economy and in the global economy. I know this sounds funny, but it’s possible to you'd even like your gold more at those levels, because that is such a sign of distress i. In the global economy, . tThere might be an even stronger case for gold.

Let me unpack that just a little bit. When you have that kind of deflation, it is really the worst nightmare from the point of view of central banks and government and government bond issuers, because as you know, deflation means prices go down but it also means the real value of debt goes up. So if I owe you a billion dollars and we have deflation, in real terms, the billion dollars actually becomes a larger debt. It’s more like 1.2 billion or whatever, depending on the amount of deflation. This makes it harder for governments to pay their debts and for them to collect taxes. Everything about government finance falls apart in a world of deflation; therefore, governments will do everything possible to prevent it. I’ve said for years that the best way to understand a global economy is to think of it like a tug of war between deflation and inflation. We don’t have one or the other. We have both at the same time pulling against each other. When you see time series of prices showing inflation at about 1 percent, which it has been lately, I don’t think of it as 1 percent. I think of it as 5 percent pulling against 4 percent and netting out to 1, if you will.

To see $800 gold means deflation won in the tug of war, because I would expect the world of $800 gold to also be the world of, say, $50 oil and maybe 10,000 on the Dow and 1,000 or perhaps lower on the SMPS&P. It means that everything else has come down with it. At that point, government is going to have to fight deflation by using more powerful medicine. Historically, what they do is devalue the currency against gold, because right now countries are trying to devalue their currencies against each other. That’s what the currency wars are all about. The problem with currency wars is that countries just end up fighting each other – maybe I devalue against you but next week you devalue against me, and it just goes on and on and on.

Gold is the one currency that can’t fight back. You can just suddenly dictate by executive order that gold shall be $5,000 an ounce. If you do that, the price of everything else goes up. So when countries become desperate to fight deflation, one of the tools in the toolkit, to use the Fed’s expression, is to devalue the dollar against gold. That is guaranteed to cause inflation and is almost the definition of inflation. Other prices will go up, and that’s how you break the back of deflation. It’s exactly what happened in 1933.

The short answer is I expect gold to go much higher. I don’t expect it to go down to $800, but I would never rule that out. If that does happen, it’s telling me that we’re in a period of extreme deflation and maybe getting closer to the point when governments actually force the price of gold to go higher in order to fight deflation and cause inflation.

JW: Let’s turn to the larger economic picture here. There seems to be a tremendous level of consensus in the media right now that the U.S. economy, at least, is on the mend. The narrative that I’m seeing almost daily is that the Fed’s easy-money policies have worked. The real economy is recovering, and it’s now safe to gradually tighten the monetary built. Everyone seems to be singing from this hymn sheet. Why not you?

JR:It’s interesting that you should call it a narrative. I think that’s a very good word for it, Jon. I am kind offind it curious when every analyst, every self-styled analyst, every talking head on TV, everyone you can turn to, is seems to be saying the same thing. I’m not suggesting a conspiracy, but there is a degree of like-mindedness or orchestration behind that. I’m not “singing from this hymn sheet” because I think nothing could be further from the truth.

I said before the Fed tapered in December that it was not clear what they were going to do; maybe they would taper, maybe they wouldn’t. It turned out that they did. At the time, I said if they taper, they will be tapering into weakness. It may actually cause a recession in 2014, which I think at this point is much more likely. We’ve seen the first evidence of that with the December employment report, which was miserable. Some of the analysts have said to ignore it. Well, that’s nice. It’s like ignoring a dead body lying in your living room. It’s kind of hard to ignore. Others just have said, well, it’s the weather, and my answer there is, well, why was your consensus forecast at 200,000 jobs? It sounded sounds like you didn’t know it was cold in December. So it’s there's quite a bit of rationalization and kind of dancing around that., but But other data came in. : December, month- after over-month, retail sales were quite weak, indicating maybe a weak Christmas season. There are just a lot of things.

This is all in addition to fundamental things that have been true all along even in the months when job creation was stronger, meaning 200,000 jobs or more. A disproportionate amount of those jobs were in the lowest-paying part-time sector. They I would always point out that there’s dignity in work. : I’m certainly not denigrating low-paying jobs. But except that if you’re working 30 hours a week for $10 an hour, good luck trying to raise a family or pay some bills with that. Those are the kind of jobs the economy has is generated generating disproportionately. There are always some of those jobs around, but t. They typically run at less than a third of the total jobs. For the past year, , but they’ve been running at half to two-thirds of total jobs. for the past year.

So we’re not generating very many jobs. The jobs we are generating are the lowest paying. Maybe people felt a little better in November and ran up their credit cards a bit, but that’s not sustainable. Then you look at the things that don’t go away such as 50 million people on food stamps and 26 million unemployed or underemployed. I saw an analysis the other day by Dan Albert, a great analyst on labor-force participation. He said that over two-thirds of the improvement in the unemployment rate is due to decline in labor-force participation, not job creation. If you held labor-force participation (the number of people in the workforce who are actually working and have not dropped out) held constant at the October 2009 level so that the denominator of your fraction was actually larger, you’d find that unemployment today is 9 percent, not 6.7 percent. In other words, most of the improvement from 10 on down is due to this decline in labor-force participation. The fundamentals and recent data are weak.

When the Fed said we’d have a strong forecast and that was the basis for tapering, my first thought was that the Fed has the worst forecasting record out there, . and And they really do. —That’s that’s not just rhetoric. Look at their annual forecast for the last four years:, and they’ve been wrong four years in a row by worse orders of magnitude. They are just dismal at forecasting. So when they say things are getting better, I assume the opposite. I think what’s happened here is that the economy is fundamentally weak, and the data is starting to bear that out. The Fed, at least by their lights, has blundered by tapering. They’ve tapered into weakness and will probably cause a recession this year.

JW: Speaking of the Federal Reserve, as we expected, Janet Yellen has been confirmed as the new Chair beginning February 1st. I’d like to explore with you briefly what this appointment means for monetary policy in the coming months. Yellen has been quoted as advocating what she calls 'optimal control' in conjunction with something else dubbed 'communications policy.' Could you help us understand these two pillars of the Yellen philosophy – that's optimal control and communications policy – and what are their implications?

JR:‘Optimal control’ is the buzzword going around, but when you go to the academic literature, it’s actually called ‘optimal control theory.’ That phrase alone sends chills down my spine. Certainly, if we heard the phrase ‘optimal control theory’ coming from North Korea, we would say that’s about what we expect from North Korea, but here we are getting it from the central planners in the United States. My nickname for Janet Yellen is Janet Yeltsin, because she reminds me of leaders going back to the communist days. The theory is that it’s almost as if you have a thermostat in every room and are trying to get the temperature just right. Some people like it a little cold over here and some people like it a little warmer in front of the TV set. You run around spinning all these dials that are linear and reversible. You tweak it and then if there is a gradient of heat in one room leaking into the other room and making it too warm, you turn that down. It’s just running around.

I know that’s an extended metaphor, but it kind of captures the sense of what the Fed is trying to do with a combination of actual monetary policy, zero-interest-rate policy, and other tools in their toolkit including system repo (. That is a technical way to print money even when you’re not doing QE). aAnd then communications policy, which you mentioned specifically. I call it propaganda policy or basically lying. It’s how the Fed creatively lies to the population to mislead them as to their intentions to get them to behave in a certain way so that they get certain outcomes. This is all an extreme form of central planning. Why that’s not more widely recognized in the government – — I think it is recognized out in the country among a lot of analysts – — but I don’t know why people in Congress don’t recognize it. Some do such as Rand Paul who stood up and talked about this. But by and large, most people really don’t see it for what it is, and they think the Fed knows what they’re doing.

The biggest misunderstanding or mistake people can make is to think that the Fed knows what they’re doing. The Fed has on many occasions admitted that they don’t. They’ve said that QE is an experiment and has never been tried before. There’s nothing standard, there’s nothing textbook, there’s nothing in history that tells us what happens here except for historical episodes of debasement and catastrophes. I think we know that much. So what they’re doing is completely experimental, and they really don’t know what they’re doing. Beyond that, they have a lot of models and theories to back them up, but all those models are seriously flawed. They’re equilibrium models, and the economy does not work on an equilibrium basis. It works as a complex system, which is occasionally prone to throwing out completely unexpected outcomes or so-called emergent properties. So it’s delusional and is certainly going to end badly although we don’t know exactly how or when because it is an experiment. Just like mixing chemicals, it’s just a matter of time before you blow up the lab. You don’t quite know which catalyst is going to cause that to happen, but you can be pretty sure it will happen if you play with the chemicals long enough.

As far as ‘communications policy’ is concerned, this is what the Fed would call forward guidance. They can’t lower interest rates, because interest rates are already zero. They tell us they’re not going to raise interest rates this year, next year or maybe the year following. They may extend this out to 2017, and I actually expect that they will by the time we’re done. The reason for that is they can always control short-term interest rates, no doubt about that. They’ve got short-term interest rates close to zero, but they want to control intermediate and long-term interest rates and get those lowered. One way to do that is to just go out and buy the bonds. Bid up the bonds, which; that’s leads to a lower yield to maturity. That’s what QE is and that’s one way they’ve been doing that.

Here’s another way to do it. How do primary dealers and institutional investors price a ten-year note? They think of it as a strip of one-year notes. To them, a ten-year note is a one-year note, and then a one-year note a year forward, a one-year note two years forward, a one-year note three years forward, etc. They think of a 10-year note as the present value of a strip of one-year notes, two, three, four, five, six, etc. years forward. By the Fed saying they’re not going to raise short-term rates this year or next, they’re helping dealers actually lower the rate in the intermediate sector because of the way the math works in terms of coming up with the present value of that strip. That’s the idea.

Now, what if they’re right? I don’t think they are right, and I explained why, but if they’re actually right and the economy gets better, interest rates are going to take off, inflation’s going to take off, and they’re going to have to raise rates sooner than the market expects. It’s a little bit like a game. They’re going to lie to you about their intentions to try to get you to behave in a certain way. If you do that, the economy will get better and they’re going to have to raise rates, which is a lie relative to what they originally said, but just pretend that’s not true. That’s literally the recursive propaganda game that’s going on here. Of course, it will fail, because people will see right through it. Why Janet Yellen doesn’t understand that, I have no idea, but these are disastrous policies almost certain to fail. They involve central planning and propaganda, so it’s exactly like the way you run countries in a communist society.

JW: This ‘communications policy’ phrasediscussion raises a the larger question of the Federal Reserve’s proper function. Would you talk briefly about the role you think the Fed should play in managing the economy in contrast with the role it’s actually playing or trying to play?

JR:This goes back to what I call the original sin of the Fed’s 'dual mandate' and is not something that was run up in the beginning. By the way, the phrases 'single mandate' and 'dual mandate' is are a little bit misleading, because they’ve always had multiple jobs. Obviously, the Fed doesn’t have a dual mandate today; they have five or six mandates including price stability, lender of last resort, improve the unemployment picture, regulate the banks, regulate the consumers and, international transactions – — they have a bunch of things that they do. But fundamentally, beginning in 1913, the Fed was supposed to be a lender of last resort in the event of a panic. That was their original raison d’être for their creation, and they were also there to maintain price stability or and maintain the value of the dollar. In 1977, they were given another mandate under the Humphrey-Hawkins Act, which was to reduce unemployment or actually kind of create jobs. To this day, I don’t know how you create jobs by printing money, but that’s what they were told to do.

This has been difficult all along. During the period from roughly 1981 to 2010, they did a pretty good job on price stability and unemployment. In fact, I would say that it's not so much that they did a good jobwell on unemployment; it's rather as it was that if you have price stability and normal interest rates, you’re probably going to get a pretty good economy out of that which will create jobs. I think a better way to put it is that Iit’s not so much that you created the jobs as it is that you created conditions allowing entrepreneurs to create jobs. Today, the Fed has eliminated the entrepreneur and is just trying to create jobs directly by manipulating interest rates. But here’s the catch: Show me a politician or a policymaker anywhere in history that, when given power, doesn’t want more of it and is not willing to give it back.

The problem with the dual mandate is, once the Federal Reserve is told they are in charge of creating jobs, that makes them a central planner no longer limited to interest-rate policy and lender of last resort. They can do anything vis-à-vis the macro economy to create jobs. It’s a license to be a central planner, and that’s exactly what the Fed is. This is going on globally, not just in the United States. The dollar is the leading reserve currency by far, and other markets price off dollars, so when you manipulate the dollar, you’re manipulating every market in the world directly or indirectly. When you create the dual mandate, including with the mandate for unemployment as to create jobs, you’re not just a central banker anymore, you’re a central planner. The Fed has fallen for this lock, stock, and barrel and has said, in effect, thank you very much, we’re happy to be the most powerful institution in the world, which they are.

Now, of course, they’re not capable of understanding how economies work and they’re certainly not capable of micromanaging them, but that doesn’t mean they’re not going to try. So I think the problem with the Fed is the dual mandate, the legislative charter to go ahead and control the unemployment or employment situation. It’s one thing if it’s a byproduct, but it’s become the Fed’s main task. Janet Yellen has said in her speeches and in her writings that they’re going to run monetary policy to create jobs. As a result, that just makes them the economic czar of the country, and they will ruin the country, but that doesn’t mean they’re not going to try.

JW: The policies the Fed has pursued, and is likely to continue pursuing under Yellen, have led to a spectacular increase in its balance sheet. Does this actually matter? And if so, why does it matter?

JR:I think it matters a lot, but there are people in the Fed who don’t think it does — although, to be candid, I think they’re having second thoughts right around now. Let me just make a couple of points. First of all, the Fed does have a balance sheet. They’re not a government agency like the Department of Transportation. They’re a bank, and they have a balance sheet. They have about $60 billion of capital, give or take, but the balance sheet, as you know, is now up to $4 trillion. So put $4 trillion against $60 billion, and they’re leveraged about 70 to 1. I’ve been in the hedge fund business a long time, and when you’re leveraged over about two or three to one, it gets pretty scary. Some hedge funds have been leveraged more than that. I’m thinking of Long-Term Capital Management, which is was leveraged about 20 to 1 and crashed and burned in a spectacular fashion in 1998. So 70 to 1 is unimaginable, but that is the leverage they have.

Not only that, the Fed has’s have a mismatch between their assets and liabilities. They’ve gone into much longer term assets – — five-year notes, ten-year notes, and mortgages , (which have a weighted average maturity of about seven years, depending on a number of variables). If you know anything about the bond market, [unintelligible]you know that long-term maturities, a technical name for it is longer duration, has have greater volatility relative to any change in interest rates. That means for a given rise in interest rates such as 50 basis points or certainly 100 basis points, the price change or price decline in those intermediate-term bonds is much greater than it is for short-term securities which the Fed has traditionally held.

If you put all this together, you have witches’ brew where – and I would say this has happened already – even a modest increase in interest rates causes your bonds on a mark-to-market basis to decline in value in such a way that it wipes out your capital. In my estimate – and it can only be an estimate, because we don’t have all the information we need to do this exactly – the Fed is already insolvent if you apply that mark-to-market test. Now, of course, the Fed does not mark to market. They carry these bonds on their balance sheet as historic cost, so you will never see what the exact market impact is. If this were a hedge fund, they would’ve been out of business already. So we have an insolvent central bank and we have a bank that’s poised for more losses as interest rates go up. Remember what the Fed is trying to do; : they’re trying to get inflation. If you get inflation, what does it do to interest rates? They go up. If interest rates go up, what does it do to your assets? They go down. What does it that do to your capital? It wipes it out.

The Fed is actually trying to do something that will have the effect of wiping out this its capital. There must be people in the Fed who think this doesn’t matter. If they can sweep it under the rug by not using mark-to-market, maybe it’s all good, they just wait it out, the things bonds mature, they pay off, you get your dollars back, and somehow the balance sheet magically unwinds, and it’s all good. They’re not going to get that far, because this is going to be seen for what it is. Certainly if you’re a technician or a bond market participant, you know exactly what I’m talking about right now, but the general public, I would say, probably doesn’t understand. Why should they? They’ve got jobs and lives; they’re not bond-market traders., but But this is going to get into the political discourse, and people are going to hear more about it. Someone’s going to do this map in a more transparent way. You’re going to see exactly where things stand, and then the issue of bailing out the Fed is going to be on the table. You think bailing out banks was unpopular, — wait until we have to bail out the Fed.

What it all gets down to is, again, the view that none of this matters, because they just sit, wait it out, the bonds mature, and it’s all good. But where it matters is in the context of the dollar. What is a dollar? At the end of the day, a dollar is a perpetual non-interest-bearing liability of the Fed. Basically, it’s a promise by the Fed. Where does it get its value? It gets its value from confidence. Somehow you have to trust the Fed and the Treasury to maintain the value of the dollar. If you lose confidence, the dollar can suddenly become worthless, and of course gold prices are nothing more than the inverse of the dollar. When people say gold is going up or down, I say what’s really happening is the dollar is going up and down and gold is just sitting there. So when people say gold goes down, to me, the dollar goes up. And when they say gold goes up, to me, that’s just the dollar going down.

Now you have a scenario where confidence in the dollar is lost because of the Fed’s balance sheet. The value of the dollar approaches zero, which means the value of gold goes infinite. Again, I think it won’t get there. What will happen is it will get to some number, maybe $7,000, $8,000, or $9,000 an ounce, and then someone will blow a whistle and call a timeout. You’ll either have confiscation or a return to a gold standard or some extreme measure. What the Fed balance sheet acrobatics risk is a loss of confidence in the dollar. Confidence is the most important thing when it comes to a currency. You can do all the economic theories you want, but at the end of the day, it all boils down to confidence. People have taken this confidence for granted and have assumed it could never be damaged. Once what the Fed is doing to its balance sheet becomes more well-known, confidence will be lost, and that’s when we’ll have a catastrophe.

JW: This picture you’ve drawn of the Federal Reserve is certainly cause for concern. Obviously, it’s very different from the picture the Fed would draw of itself. If they were on this interview with us, they would give us a very different picture of their policies and the consequences. Why do you think they fail to see what you’re seeing? These are pretty intelligent people at the Fed who have access to the same information as you, perhaps access to even more information. Why do you think they arrive at such radically different conclusions?

JR:It is a very interesting question, Jon. We actually don’t have to speculate on the answer, because I’ve spoken to a number of people at the Fed including senior staff. I’ve been partners in a couple of businesses with former vice chairmen of the Fed, and I have good friends in very senior positions there, not just the Fed staff and members, but their ilk, let's say. I've shared offices with Nobel Prize-winning economists. I was at Long-Term Capital Management. We had 16 PhDs in financial economics who were the crème de la crème of the entire field. We actually had deans at major universities call us and complain that we were depriving them of future generations of scholars because we were hiring so many PhDs away to come work for us.

My point is that I’m very immersed in this milieu, and when I discuss it with all the folks I just mentioned, they actually don’t understand it. What I would say is it’s not so much that there’s a debate – — I have a view, they have a view, and we debate it the way you would have a normal debate – — they can’t even process what I’m saying. They just kind of look at me like, what are you talking about? But there’s a reason for that, and the reason has to do with the paradigm, the thingwithin which you operate. Your paradigm is your mental frame, if you will, for understanding very large phenomena. A good example here is cosmology. From about the 1st Century until around the 16th Century, cosmology was based on something called the Ptolemaic method. The idea was very simple, which was that the earth was the center of the universe, and the stars, planets, and sun all revolved around the earth. This seemed very obvious, because if you woke up in the morning, you’d see the sun over there in the east and then it would circle around and come down in the west, so it was very clear that the sun circled around the earth.

Very smart people, very smart mathematicians, — not dopes, geniuses, in fact —, started writing these equations. Over a long period of time, centuries, in fact, they began to notice that the planets weren’t quite where they were supposed to be. The whole idea of having a model is to make good predictions, but if you take observations and Jupiter is not quite where it’s supposed to be according to the theory, there’s a problem with your model. Instead of throwing the whole model out, they started tweaking it. In addition to the big cycles such as the rotation of Jupiter around the earth, they created what they called epicycles where they would start the revolution of Jupiter around the earth. An epicycle is a little counter-clockwise circle on top of the big clockwise circle.

Over centuries, they kept tweaking the models, but they never said to themselves, you know, maybe the model’s wrong, maybe the whole paradigm is wrong, maybe there’s a different way to think about it. Along came Copernicus who said, you know, maybe the sun doesn’t revolve around the earth, maybe the earth revolves around the sun. Of course, sure enough, it does. Once they started doing realizing that and others started contributing to these models, they saw that orbits were elliptical, that the sun was the center of the solar system and not the earth, etc. The reason I tell this story of an important landmark in the history of science is to make the point that the paradigm matters. You can have a paradigm that’s wrong but never know it’s wrong, because you keep tweaking the models and tweaking the equations, and it’s very rare that the paradigm actually gets thrown out. That’s what’s happening in financial economics today.

These equilibrium models that have been in use for over 50 years are wrong. They fail over and over again just like a wrong model will fail over and over again. Why did the global economy almost collapse in 1998? Why did the stock market, why did the NASDAQ go down 80 percent in 2000? Why did the mortgage market collapse in 2007? Why was there financial panic in 2008? Why will there be another financial panic sooner or later? Why are they wrong every single time? The answer is, they’ve got the wrong models, but to get someone to throw it out and start over with a new paradigm, which is what I’m talking about, is very, very difficult. It’s almost like we’re talking two different languages. You made a very important point, Jon, which is that we all have the same facts. It's not as if I have one set of facts and they have a different set, so the facts will tell the tale. History of science says these things can take 25, 50 or 100 years to actually change people’s way of thinking, because it’s almost like they have to get hit on the head with a 2×4 two-by-four more than once before it sinks in.

JW: For investors, what are the implications of the scenarios you’ve been describing? What should investors be looking out for in the coming months, and how should they best protect themselves?

JR:I think one thing we will see in the months ahead is increased volatility. I say that because we’ve had very low volatility the last six months. The best indicator of high volatility is low volatility that goes on [goes on] too long, too low. It’s almost like interest rates; it gets ready to pop, . so So that’s not necessarily directional. There This is something we saw a lot of in 2011 and 2012, which is non-directional volatility. Remember, those were the days of European sovereign debt crisis. One day Greece would was going to get kicked out of the euro and stock markets would go down. The next day Angela Merkel and the Greek finance minister would kiss and make up, and stocks would go up. There were these big swings without a lot of direction, but there was a lot of volatility. We might start to see something like that.

Gold is set up for a huge technical rally even apart from the fundamentals. I really make my bull case for gold based on fundamentals, but even aside from the fundamentals, the technicals right now really favor gold. China has bought so much gold. When China buys gold, it’s not like you and I are gold dealers and I sell some to you and then tomorrow you sell it back to me. That’s normal day-to-day dealing among banks and investors and so forth. What China is doing is a one-way trip. That That gold goes into from Switzerland or the Perth Mint or elsewhere into China. It’s been put in vaults and is never going to see the light of day. China buying gold from sources in Europe and Australia does not change the total supply, but it does change the floating supply. The floating supply is that portion available for transactions. Once China gets it the gold and buries it in their vaults, it’s no longer part of the floating supply because they’re not sellers, . They’re they’re just buyers. whoThey might be playing the futures market to manipulate the price down so they get a better price for the physical, but they’re not sellers of physical.

And so you’ve got this huge paper short or paper floating interest on a progressively smaller and smaller amount of physical gold, the physical floating supply. The floating supply is disappearing, so it’s just a matter of time before the that inverted pyramid tips over. I think we are already seeing signs of that, so I expect a good year for gold, increased volatility. Stocks could go higher for what I would call the wrong reason, i.e., the Fed has begun to taper, but as we’ve discussed earlier in the interview, they probably tapered into weakness and we are probably looking at a recession. I would expect, perhaps by the middle of the year, that they’re certainly going to have to stop the taper, meaning level off asset purchases and maybe even increase asset purchases later in the year. Let’s see how the data comes in, but I wouldn’t rule that out at all. Of course, that, in a perverse way, could actually be good for stocks, because the stock market loves free money.

So batten down the hatches and look out for volatility. For technical reasons, as well as fundamental, I think things are in line for a good rally in gold. And I think stocks could go up based on [continued easing] continuing easy money, but I don’t like stocks because they’ll go up until they suddenly collapse 20 or 30 percent. I don’t want to be around when that happens.

JW: Thank you, Jim Rickards.

JR:Thank you, Jon.

JW: And thank you to our listeners. Let me encourage you to follow Jim Rickards on Twitter. His user name is @jamesgrickards. Speaking of Twitter, please share with us your questions for our next podcast. It’s easy to do; just use the hash tag #askjimrickards followed by your question. Wherever you post that on Twitter, we’ll find your question. So goodbye for now, and we look forward to joining you again soon.

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