AUG 19, 2014
Money is transitory and wealth is permanent. So, a lot of people confuse money and wealth and say well, I have a lot of money so I’m wealthy. Well, in the short run, that may be true but in the longer run, the money can go away but the wealth is something that prevails.
You look at Warren Buffett. In the last several years, Warren Buffett went out and bought the Burlington Northern and Santa Fe Railroad. He didn’t just buy some stock, he bought the whole thing, took it private.
What is a railroad? A railroad is nothing but hard assets. It’s right of way, mining rights adjacent to the right of way, rail, rolling stock, yards, switches, signals, buildings, it’s all hard assets. How does the railroad make money? It makes money by moving hard assets so coal, wheat, corn, steel, other kinds of freight, etc. So, railroad is the ultimate, its hard assets moving hard assets. It’s the ultimate hard asset play. Warren Buffett’s next deal was to go out and buy massive natural resources in oil and natural gas. And by the way, he can move his oil on his railroad. He doesn’t need the Keystone Pipeline. You line up a hundred tanker cars, that’s a pipeline on wheels.
So, Warren Buffett comes with his own railroad. That means he has his own pipeline. So, Warren Buffett’s a guy who’s dumping paper money, getting into hard assets in the form of transportation and energy in particular. And the dollar could go to zero and it has no effect on him. He still owns a railroad
The other example are the Chinese. The Chinese have spent the last four years acquiring approximately 3,000 to 4,000 tons of gold. Now, how do we know that? We have some hard data. We know China’s mining output is about 450 tons a year. We know China’s imports through Hong Kong are coming in between 800 and 1,000 tons a year. This has been going on for four years so that’s kinda 6,000 tons there and where you have to use a little guesswork is okay, we know how much gold China is getting, how much is going to private consumption, how much is going to the government? We’re not as clear on that, but I use kinda half as the first approximation.
And we also know that China is acquiring gold through stealth using intelligence and military assets to bring gold in completely off the books, doesn’t show up in Hong Kong imports. So, why is China doing this? Well, because they got a mountain of paper assets. They’ve got $4 trillion in reserves, almost all of it denominated in paper bonds. Most of that U.S. dollars, most of that U.S. treasury so, you know, the oldest joke in banking is if I owe you a million dollars I have a problem, but if I owe you a billion dollars, you have a problem because you have to collect it from me and I can walk away.
Well, we owe China $4 trillion so China has a problem. So, they can’t dump those paper assets. They know that. Their treasury markets big, but it’s not that big. It can’t absorb those kinda sales. So, what China’s doing, they’re vulnerable in the paper. If we have inflation, that’s just a wealth transfer from them to us so they’re acquiring gold, thousands of tons of gold. By the way, there are only about 33,000 tons of official gold in the world. All the central banks, sovereign wealth funds and treasuries and finance ministries combined have about 33,000 tons of gold.
China’s acquired 10 percent of all of the official gold in the world in the last four years. So, why are they doing that? Well, they now have a hedge position. So, they actually want a strong dollar because they own so much dollars denominated paper. If the dollar is strong, they might not make very much on the gold, but they’ll collect the value of their bonds, but if we inflate the dollar, which we’re trying to do, and the value of those bonds goes down in real terms, we know what’s gonna happen.
The gold is gonna go up like this so they’ve created a hedge where they win this way and they win this way so I would say look at China buying gold, look at Warren Buffett buying hard assets in energy and that will give some guidance. The two other ones, powerful, biggest, best and foreign investors in the world are getting out of paper money into hard assets.
James G. Rickards is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is a writer and is a regular commentator on finance. Rickards advised clients of an impending financial collapse, of a decline in the dollar and a sharp rise in the price of gold, all years in advance. Rickards is the author of The New York Times bestseller Currency Wars, published in 2011.