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Jim Rickards and Alex Stanczyk, The Gold Chronicles July 2017 Topics Include: *US war with North Korea still on the table*Commentary on physical gold*Why gold stores value over long periods of time*Institutional Money Mangers views are shifting towards concerns over insuring portfolio assets will have liquidity under market stress*The critical mistake in due diligence when investing in gold funds*3 Factors which would cause the Fed to pause its rate hiking schedule*Inflation vs Disinflation*Slowing Economy and Fed Policy Listen to the original audio of the podcast here The Gold Chronicles: July 2017 Interview with Jim Rickards and Alex Stanczyk Physical Gold Fund presents The Gold Chronicles with Jim Rickards and Alex Stanczyk offering insights and analysis about economics, geopolitics, global finance, and gold. Alex: Hello, this is Alex Stanczyk. Welcome back to another podcast of The Gold Chronicles. I have with me today Mr. Jim Rickards. Hello, Jim. Jim: Alex, how are you? Alex: Excellent, thank you very much. We covered quite a few topics on our last podcast including the risk in cryptocurrencies. We also talked a little bit about the G20, Syria, and North Korea. On the topic of North Korea, you’ve been saying for several months now that at some point, the U.S. will go to war with North Korea to eliminate the risk that Kim Jong-un might actually nuke a U.S. city. You even mentioned it live on Bloomberg at one point in the last few weeks. The staff there was skeptical of the idea; however, an hour later, North Korea test-fired its first ICBM. Jim: That was one of those amazing coincidences. I wouldn’t have said one thing differently if I had known about the test in advance (which of course I didn’t). Whether it was happening or not, I wouldn’t have said one thing differently. They say it’s good to be smart and better to be lucky, and sometimes things converge in a way that that plays out. Yes, it’s a serious subject. Literally, I was on the air live with Bloomberg Asia, interestingly. Bloomberg has a 24-hour cycle. They don’t have separate networks for their different regions. They just keep going, so it was 7:00 at night where I was in Montreal, 7:00 AM in Hong Kong and Singapore. We were live on the air, and with two billion people in Asia, it was potentially a big audience. That’s exactly what I said. It was with a great interviewer and a cohost. I always say it’s not the anchor’s job to make me look good; that’s my job. They’re there to hold your feet to the fire, and there was a fair amount of skepticism. I was very categorical about the march to war. Then literally minutes later, the news broke that they had just fired an ICBM. People weren’t sure it was an ICBM when it went off although it looked like one. Subsequently, that was verified by a number of sources. It was certainly not a good development. When I do these interviews including our podcasts, I’ll put them out on Twitter to try and expand the audience a little bit. I can see some but not all of the clicks while Bloomberg will obviously see more than I do. That interview got more clicks than anything I’ve ever done outside of a couple things that just went super viral. Normally, if you get 1,000 or so views, that’s pretty good interest. This one went off the charts at over 6,000 views in 24 hours, which is a lot for a TV interview. That definitely got a lot of attention. What was interesting was that my cohost, a very well-established, reputable money manager, was sort of disparaging gold, and I was taking the pro-gold side. Then I went into the thing about North Korea to which he said, “Well, if we’re going to war with North Korea, you would definitely want to own gold,” as if we weren’t going to war. Again, not an amusing exchange, not an amusing topic, unfortunately, but my point was, “We’re going to war.” It was a really good example of the cognitive dissonance or denial and complacency of professional money managers. It’s like, “Oh, yeah, if we’re going to go to war with North Korea, I’d load up on gold.” Well, we are. It’s happening in front of your eyes. You can see it with a six-months to one-year lead time, so why don’t you get some gold now at an attractive entry point? What are you waiting for?” The answer is they always wait until the first shot is fired. Gold will be, who knows what, $500 or $1,000 an ounce higher. Then they’ll run out and buy some at $1,375 – $1,400 an ounce when you can back up the truck right now and buy it for $1,240. I never understand it, but it is what it is. Alex: Yes, that’s pretty typical. For our listeners, if you haven’t heard our previous two podcasts when we talked about the North Korea situation in depth, I recommend you go check them out as well as the last one we just did when we talked quite a bit about the risks in cryptocurrencies, which I think people are starting to explore further. (PhysicalGoldFund.com/podcasts) For today’s topics, we’re going to begin with a few thoughts on physical gold. We’re also going to discuss the U.S. economy, what the Fed is watching in terms of its metrics, Fed policies in terms of easing or tightening, and we’re going to wrap up with some discussion on a little-known problem in the Chinese financial markets. Beginning with physical gold, I recently returned from a family vacation where we spent some time panning for gold in the Black Hills of South Dakota. Jim, as you well know, panning for gold is a labor-intensive process. Our little group of seven people spent about four hours moving earth. We would dig buckets of earth out of these massive tailings piles left over from the gold excavation operations in the Gold Rush back in the 1870s. A tailings pile is leftover dirt that they sifted through looking for gold. The thing was, the screens they used to find the gold had huge holes in them. Back then, they expected to find gold nuggets of much larger size than we find today. Our tailings pile made up the entire side of the riverbed we were on. Even with all of the time and energy we expended – again, there were seven of us working for four hours doing this – we ended up with less than a gram of gold. Some of this reflects the concept of what’s called high grading, which means that all of the super-high ore deposits in history have mostly already been discovered. In everything we’re doing in mining operations today – I’m talking large-scale mining – it’s not uncommon for a large-scale operation to move a ton of earth to find just 1 – 1.5 grams of gold. The point I’m trying to make is that gold is actually stored energy. The energy cost of extracting gold from the earth is now, and has always been, considerable. I contend that, along with physics, these are the two primary reasons gold retains its purchasing power over thousands of years. Jim, you do a bit of panning yourself in your top-secret personal location. I’m not going to ask you to divulge where that’s at, but tell me a little bit about your experiences there and why gold’s physical properties make it ideal for storing value over millennia. Jim: I should make it clear that I do it for fun and to teach my grandchildren a little bit about where gold actually comes from and how scarce it is. We do it as a recreational thing. I’m not trying to pay my property taxes with my gold output. You, at least, had the benefit of tailings where there was some reason to believe there was gold around. I pan in an area where there is gold, but certainly not in commercially viable qualities. It’s also a very environmentally sensitive place, a very green place, which is a good thing. It’s unimaginable to me that anyone could ever get a permit to open a mine. There are old mines from the 1850s in my vicinity. There is gold in them thar hills, as they like to say. In fact, this area was affected by Hurricane Irene in 2011, and there was a bit of a gold rush. People were buying gold pans from the local stores and, believe it or not, running down to parking lots of shopping centers where the earth had literally been stripped off the face of the surrounding area, and it drained into these lower-lying areas. There were mud piles and water caches and so forth. People were panning for gold in these parking lots and finding some. There is gold there, and I find it. A gram would be a lot to me, but if we found a couple flakes, that would be good. We do it for fun. It does underscore the point you were making, which is that this is a known goldmining area, at least back in the 19th century, and it is extremely scarce. I recently visited commercial goldmining operations up in Northern Quebec where they have real goldmines with real development. There’s a lot of drilling going on and equipment moving in, but even there, you’re exactly right. It takes a ton of ore – rock and earth and so forth – to get maybe a gram if you’re lucky. That would actually be quite high, because it’s usually measured in fractions of a gram. That’s how scarce it is. It would be one thing if you could just say, “I’ll get a gram of gold per ton of ore,” in any place you dug up, but you can’t. What I’m talking about, as you said, is a high-grade location. Those locations are few and far between and seem to be getting scarcer. The other point I would make about goldmining output is that we’re talking about very long lead times. Gold had a magnificent run in one of the great bull markets in history from 1999-2011. I’ll use round numbers and say it went up from about $200 an ounce, maybe $199 an ounce at the low, to almost $1,900 an ounce. That was 1,000% gains, ten times your money, in a relatively short period of time. Then it had a measured correct. It came down about 50%, which is interesting. I think I’ve mentioned my conversations with Jim Rogers in past podcasts. He’s one of the great traders, period, but particularly one of the great commodity traders of all time. He was cofounder of the Quantum Fund along with his partner at the time, George Soros. Jim told me he’s bullish on gold. He owns gold, he holds gold, but he’s never seen a long-term bull market that didn’t have a 50% correction along the way. He said that’s just the way it is. You get to $1,900, and gold’s back down. The interim low or cycle low was $1,050. That was just over a 50% correction if you use $200 as your baseline or starting point. It’s been going up over 20% since then. It looks like that is behind us and we’re on to bigger and better things. Here’s my point. You can only imagine the gold rush fever that was going on in 2010/2011 not just in Canada but around the world. People were investing, capital was easy to raise, a lot of mines were opening up, etc., but a lot of that was priced at $1,300-1,400 an ounce, or not really feasible when gold went down below $1,100. You can well imagine the gold fever that was going on when gold was soaring up to $1,900 an ounce. If your production costs were $1,100, $1,200, $1,300 an ounce, you could get financing, you could bring marginal properties back into production, etc. When gold went down to $1,300 by April 2013, then even lower by 2015, those mines were suddenly not economic. There were a lot of bankruptcies, a lot of projects were called off or halted in midstream, other projects went bankrupt, and so forth. There was no – or at least very little – exploration mining going on in 2013, 2014, and 2015 as the price was treading water. What’s happened now, with the price back up at $1,250 and a good upward trend, is that mining fever is picking up again. But you can’t just pick up where you left off. If you’re talking about a greenfield, which is you have an attractive opportunity (you get the mining rights or you lease it, you start exploring, you start drilling, you do your feasibility studies, you get your financing and stuff), that takes 5 – 7 years before you can bring ounces onto the market. With some opportunities, the time horizon is shorter than that, because you’re maybe stepping into the shoes of somebody who went bankrupt at a much lower price point and you pick up where they left off or there are some mines that were never shut down. As far as new production, we’re in a trough right now. It’s going to take years to get production up close to where it was in terms of capacity if you even could. We all know that demand is sky high as we see in Russia, China, India, and elsewhere, and supply is tight. Alex, you and I have been around the world. Whether it’s meeting refiners, miners, vault operators or dealers, we hear the same story everywhere. It’s amazing. It’s really, really hard to fulfill orders or get your hands on gold. The technical setup on the physical side could not be better. Of course, we have our old friend, the COMEX. Anyone can sell 60 tons of paper gold with a phone call to a broker with no actual gold involved. That’s happened occasionally, but that will fade in time. Alex: Yes, I totally agree. To wrap up our gold commentary, I’d like to make a quick observation. I’ve noted a continual shift in the views of institutional money managers when it comes to what they’re allocating to. When they’re evaluating the risk in the ability to get liquidity on their assets, it’s starting to become a big concern. This makes sense, considering the fact that very little has been learned from the past couple of crises. I was recently looking at your latest book, Jim, where you were talking about this concept that Wall Street is basically still clinging to the notion that net exposure is what matters, when gross exposure is where the risk really lies. Wall Street hasn’t come around to this view yet. For any financial professionals and money managers listening to this podcast, if you’re conducting due diligence on gold funds, one area I would encourage you to look into specifically is how those funds are buying and selling their gold. That’s the Achilles heel. I think you’re going to find that they all do it through banks, which is, in our opinion, a big mistake. Jim: They are either doing it through banks, which leaves you very vulnerable, or they’re buying paper gold and expecting to be able to convert it to physical gold. The big gold banks are the members of the London Bullion Market Association (LBMA). There aren’t that many. I don’t know the exact number, seven or eight, but they’re familiar names such as Goldman Sachs, HSBC, and a few others. When they sell gold – and again, you must read the contracts carefully – they do it on what’s called an unallocated basis, which means all you really have is paper price exposure. They don’t have the actual gold. They might have 1 ton of gold and sell it 20 times over. They’re short 20 tons of paper gold backed up by 1 ton of physical gold. What happens if the longs – the holders of the 20 tons of physical gold – all show up on the same day and say, “I’d like to convert my unallocated to allocated, and I’d like to take physical delivery. I’m sending my Brinks truck, and they’ll be there in 15 minutes”? There’s no way they can satisfy those deliveries, no way. What they would do is essentially terminate those contracts and send you a check for the price differential. You would get your paper profit up to that point. This is the conditional correlation Wall Street does not seem to understand or at least does not want to understand. The world in which the holders of the 20 tons of paper gold all call up on the same day to take physical delivery is a world where gold’s going up $200 – $500 an ounce per day, stocks and other paper assets are crashing, and there’s blood in the streets as they say. There’s a panic. When you most want your gold is when you will least be able to get it if you don’t already have it. That’s why I’ve always encouraged those who want exposure to gold to have physical gold in safe, non-bank storage. You won’t have to worry about delivery or fine print and contracts. You’ve got your gold. Obviously, make sure you’re dealing with a reputable fund or provide…
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