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Jim Rickards on Fed Policy and Why Gold Is Winning the Money Competition  ( Original )
MAR 16, 2016

By ,  Epoch Times | March 16, 2016

An introduction to lawyer, portfolio manager, government adviser, lecturer, and author James Rickards could easily be five pages long. Sifting through his CV, it’s easier to pick the things he doesn’t do rather than listing all the different jobs and responsibilities he holds and has held over the past decades. This is what is keeping him busy at this moment:

He is the chief global strategist at West Shore Funds, a registered investment advisor, and he edits the financial newsletter Strategic intelligence. He advises the department of defense and also lectures at Johns Hopkins University and other prestigious institutions. What he is best known for, however, are his two best-selling books about the global financial system, “Currency Wars” (2011, Portfolio Penguin) and “The Death of Money” (2014, Portfolio Penguin).

Both books have defined and predicted important trends in financial markets that major media organizations and well-known commentators frequently overlook, or only pick up on years later.

Epoch Times spoke to Mr. Rickards about his forthcoming book “The New Case for Gold” (Portfolio Penguin, 2016), Federal Reserve policy,  and gold. 

The Fed decided not to raise rates; they chickened out of their own policy which they laid down in December. 

Epoch Times: Let’s start with the Fed.

James Rickards: They have a meeting this week, the Federal Open Market Committee, which is the policy-setting committee of the Federal Reserve. They meet eight times a year, this is one of the meetings, but four times a year they have a press conference after the meeting and that gets a lot more attention because Chairman Yellen will come out and answer reporters’ questions for about an hour or so. You get a lot more information.

Of course, my expectation and the market expectation is that they will not raise interest rates at this meeting.

December 2015 was the famous liftoff when the Fed actually raised rates. They did a lot more than that at the time, though. They laid out a path for the next three years. They said it was their goal to raise interest rates 300 basis points, or 3 percent in three years, but to do it in slow steps so as to not shock the market.

That would come to 100 basis points, or 1 percent, a year. They have eight meetings per year, so the minimum practical increment is 25 basis points. So assume a minimum of 25 basis points, which would be consistent with the idea that they want to do things slowly and very incrementally.

They did say that it was data-dependent and things could change, they put in all the usual caveats, but subject to that, you could assume that every other meeting for the next three years they’re going to raise the rates 25 basis points.

I personally think of gold as money. 

Having said that, in December, their expectation and my expectation was that they would raise rates in March subject to economic indicators. And the economic indicators were slightly better than they were in December. Growth is coming along a bit better for the first quarter of 2016 than in the fourth quarter of 2015. Employment gains have continued to be strong. Inflation is ticking up a little bit—not to an extreme level but to a level that would make the Fed more, rather than less, likely to raise rates.

So all the economic data indicates that based on what they said, they will raise rates in March. But they’re very clearly not going to.

James Rickards with his new book

James Rickards with his new book “The New Case for Gold”

Epoch Times: Why not?

Mr. Rickards: Because of market volatility in January and February. The market went down, stock markets went down 10 percent, they were very volatile, and we were almost staring into the abyss in early February.

At that point it became clear—at least the Fed started to leak hints—they weren’t going to raise rates and the market bounced back. So you have this, call it a recursive function or feedback loop, almost like a staring contest or game of chicken between the markets and the Fed.

The markets went down so much this time that the Fed blinked. The Fed decided not to raise rates; they chickened out of their own policy laid down in December. It’ll be interesting to see what they actually say on Wednesday because they’re not going to raise rates, but what are they going to say about it?

If people lose confidence in the other forms of money they’ll go to gold.

What reason are they going to give? There is some weakness in some of the data, but based on the Fed’s metrics of employment, job creation, inflation, GDP growth, etc. it looks like they should raise rates but they’re not going to.

So all they can say is “market volatility.” That’s an invitation to the market: Every time the Fed is going to raise rates, just go down and the Fed will chicken out. I don’t think that’s going to happen next time. I think in June, particularly after having skipped March, they’re going to want to get back on track. They’re going to raise rates, but the market expectation is still not better than 50 percent that they will.

What that tells me is to look for stocks to go down, with some volatility, but to go down between now and June. Because they’re not fully priced for a rate hike, but I think one is coming up anyway.


Epoch Times: The market thinks the whole rate hike idea is a big mistake.

Mr. Rickards: Based on certain things the Fed looks at, they think the economy is strong enough to have a rate increase. My view is that the Fed uses obsolete models. I’m not on the FMOC so my vote doesn’t count, but my own analysis is that the economy is considerably weaker than the Fed thinks it is. I don’t put as much weight on employment because employment is a lagging indicator.

Yes, we are creating new jobs, but it’s well known that these are not high-paying jobs. If you lose $100,000 job in the oil sector but you get three $25,000 jobs as waitresses or bartenders, they don’t replace one $100,000 job. You don’t get the aggregate income, purchasing power, and aggregate demand that we need to power the economy forward. So that’s one sign of weakness—plus it’s a lagging indicator.

But you look at a lot of other things. Manufacturing is already in a recession. People say it’s a small part of the economy, but it’s actually a larger part if you look at the entire supply chain. At lot of it is netted out, you are only counting final sales or net value added as GDP.

If you count the whole supply chain, the gross value of manufacturing output is much higher and deserves more weight. It seems to be leaking into the service sectors somewhat. Imports and exports are down. There’s a lot of reasons to think the economy is going into recession. I think the Fed is committing a blunder by raising rates in a recession, but they think they’re raising rates into a growing economy. However, this will accelerate the recession.

Gold is money, and money is not supposed to have a yield.

Epoch Times: And this mistake is good for gold?

Mr. Rickards: As far as gold is concerned, I’ve recently written a few columns where I said gold is a chameleon. Sometimes gold trades like a commodity; it is in fact listed on the commodity exchange, and it gets reported in the commodities report along with steel and copper, coffee, cocoa, and all the other commodities.

Sometimes gold trades as an investment—they’ll talk about it in terms of portfolio allocation, how it performs against stocks and bonds. But sometimes gold is money. I personally think of gold as money. I understand the commodities analysis and the investment analysis, but I talk about this in my new book, “The New Case for Gold.”

What’s interesting about gold right now is that given the fact the Fed is raising rates and there’s a strong deflationary vector that’s often bad for gold, gold is the best performing asset class of 2016.

The rest of the commodities complex is still near the bottom, so when I see oil and copper and iron ore and all these commodities down here, I see signs of deflation, I see signs of economic weakness, yet gold is going up. It tells me that gold is starting to trade more like money than an investment or a commodity.

Gold jewelry and other artifacts in a treasure chest. (Forrest Fenn via AP)

Gold jewelry and other artifacts in a treasure chest. (Forrest Fenn via AP)

And this is very significant because it says that it’s in a horse race with other forms of money. What are the other forms of money? Well, Dollars, Euros, Yen, Yuan, but also Bitcoin, gold—all of these are forms of money.

If people lose confidence in the other forms of money, they’ll go to gold. Sometimes gold rallies because it’s an inflation hedge, which it is, but gold can also be a deflation hedge. But most importantly gold is money, and when I see the dollar price of gold going up in this environment, it tells me that people are losing confidence in central banks, thinking of gold as money, thinking they want to allocate part of their portfolio not to dollars or Yen or Euros or Yuan, but to gold.

There’s a lot of things that can go wrong that people don’t really think about. 

Epoch Times: Especially with the talk of negative interest rates on deposits and a possible ban of physical cash?

Mr. Rickards: The vast majority of my new book is about reasons to have gold as part of your asset allocation.

But there are some classic reasons against gold which you hear all the time. I don’t give them much credence, but I took them head-on in the introduction of the book. Because now if you raise your hand and say “I invest in gold” or “I own some gold”, or “I like gold as an asset class” you immediately get ridiculed.

They call you a gold bug or a gold nut, or worse—a Neanderthal—they say gold is a barbarous relic. There’s this whole litany of things that the gold-bashers will say. I took them head on because you hear them over and over, and I analyzed them. It turns out, every single one of them is either wrong, just objectively, empirically wrong, or the one that’s right, which is that gold has no yield, actually makes sense because gold is money, and money is not supposed to have a yield. So I demolished the arguments against gold before I turned to the arguments for gold.

Just to take the one I mentioned, people say gold has no yield. If people buy bonds they get a yield. If people buy stocks they get a dividend, etc. but gold has no yield, so why would they buy gold?

My answer is that gold has no yield because it isn’t supposed to have a yield. Reach into your wallet and pull out a dollar bill and look at it. Does it have a yield? No. It has no yield. Money isn’t supposed to have a yield.

People say that they can put it in the bank and get a little bit of return. But when you put it into the bank it’s not money anymore, it’s a bank account, it’s an unsecured liability of the bank. But people think that it’s money, just a different form of money. Really, well tell that to the people in Greece, and Cyprus, and during other times throughout history when the banks were closed and savers lost their money. So it’s not money, it’s an unsecured liability of the bank subject to bail-ins and rules.

They’ll then say they have deposit insurance. They might have deposit insurance up to some level, but if you’re a small business or a wealthier individual, you might have amounts in excess of the deposit insurance limit. Also, you’re depending on the Federal Deposit Insurance Corporation (FDIC). What if the FDIC fails? So there are lots of ways your so-called money could turn out to not be money. I’m not saying don’t put money in the bank, I’m saying do it with your eyes wide open, know what it is you’re doing.

So there are lots of ways your so-called money could turn out to not be money.

People have money market funds. They say they can call their broker, sell their money market fund units and have their money in the bank the next day. There’s a new FDIC rule that came out recently. It says that money market funds can suspend redemptions. They can break the buck. They don’t have to give you a dollar for every dollar you put in. They trade on stock exchanges. Well, the exchanges can be shut. There’s a lot of things that can go wrong that people don’t really think about.

Those are not really forms of money. They can be more or less liquid but they all have risk. Dollar bills don’t have any risk; it is what it is. A bar of gold doesn’t have any risk; it is what it is. They don’t have yield because they’re not supposed to.

What’s interesting about that is that you’re right; we’re now getting into negative interest rates on bank accounts, on bank deposits. We have them already in Switzerland, the Eurozone, Japan, Sweden. These are breaking out around the world, and Janet Yellen has talked about the possibility of having them in the United States. I don’t see that, at least not in the short run.

If gold has zero yield and bank deposits have a negative yield, gold is the high yield asset, zero is greater than negative 40 basis points. So gold is the high yield asset; zero is more than negative.