MORE ON DEBT SOLVENCY

“Somewhere ahead I expect to see a worldwide panic-scramble for gold as it dawns on the world population that they have been hoodwinked by the central banks’ creation of so-called paper wealth. No central bank has ever produced a single element of true, sustainable wealth. In their heart of hearts, men know this. Which is why, in experiment after experiment with fiat money, gold has always turned out to be the last man standing.” Richard Russell

The interview is refreshing because Mr. Rickards lays his thoughts out clearly and without excessive jargon. I found his rationale for China’s desire to increase its gold holdings to be intriguing. The price objective of $5,000 – 10,000 is somewhat arbitrary, but directionally correct if it is not accompanied by a reissuance of the currency, which I think is much more probable. Essentially it works out to be the same, since the new currency is likely to be a factor of 1 for 100 exchange for current dollars. If this seems outlandish, it should be kept in mind that this is not all that far removed from the fairly recent post-empire experience of the Soviet Union.

Jim Rickards audio interview on King World News

Highlights (aka Cliff’s Notes):

  • There is obviously not enough gold and silver to cover the physical demand if holders of paper certificates in unallocated accounts demand delivery, and most likely only a small fraction could be covered with the practical supply available. Cash settlement will be enforced in the majority of cases.
  • Cash settlements would be for a price as of a ‘record date’ which is likely to be much less than the current physical price which would continue to run higher
  • There is more here than meets the eye – if you holding metal in an unallocated account you are likely to be considered an unsecured creditor
  • 100:1 leverage is reckless no matter commodity or asset it involves – little room for error
  • There is no way to pay off the existing real US debt without inflating the currency in which the debt is held, to the point of hyperinflation
  • If the Fed’s mortgage assets were marked to market the Fed itself would be insolvent
  • Anything involving paper claims payable in dollars (stocks, bonds) are a ‘rope of sand,’ a complete illusion that is fraught with risk
  • $5,500 per ounce of gold would be sufficient to back up the money supply (M1) as an alternative to hyperinflation and a reissuance of the currency. Target price is 5,000 – 10,000 per troy ounce in current issue US dollars
  • The break point will be when the US debt can no longer be rolled over. US will not be able to finance its debt without taking drastic action on the backing or nature of the currency
  • China needs to have about 4,000 tonnes of gold, and only has 1,000 tonnes today
  • China cannot fulfill this goal by taking even all of its domestic production for the next 10 years. The Chinese people are showing a strong preference to hold gold themselves.
  • From 1950 to 1980 the US gold supply declined from 20,000 to 8,000 tonnes, basically moving from the US mostly to Europe.
  • The Chinese are frustrated that they cannot obtain sufficient gold at reasonable prices as Europe did, to withstand the currency wars and the reworking of international finance
  • Holding your gold in a bank correlates you to the banking system, the very risks which you are trying to avoid
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