The head of Russia’s central bank, Elvira Nabiullina, has reported to Vladimir Putin that “There was the threat of being shut out of SWIFT. We updated our transaction system, and if anything happens, all SWIFT-format operations will continue to work. We created an analogous system.”
Russia is also part of a reported Chinese plan to install a new international monetary order that excludes U.S. dollars. Under that plan, China could buy Russian oil with yuan and Russia could then exchange that yuan for gold on the Shanghai exchange.
Now it appears Russia has another weapon in its anti-dollar arsenal.
Russia’s development bank, VEB, and several Russian state ministries are reportedly teaming up to develop blockchain technology. They want to create a fully encrypted, distributed, inexpensive payments system that does not rely on Western banks, SWIFT or the U.S. to move money around.
This has nothing to do with bitcoin, which is just another digital token. The blockchain technology (now often referred to as distributed ledger technology, or DLT) is a platform that can facilitate a wide variety of transfers — possibly including a new Russian-state cryptocurrency backed by gold.
“Putin coins,” anyone?
The ultimate loser here will be the dollar. That’s one more reason for investors to allocate part of their portfolios to assets such as gold.
Jim discusses how most financial concepts are easy to understand. Dollar and gold are an inverse relationship, and gold has dropped due to recent dollar strength. Throughout 2016 and 2017 the dollar has been weakening. The Euro has risen against the dollar, and this weaker dollar has translated into higher prices for gold.
Jim thinks a shooting war with North Korea could be a wake-up call for the markets. The markets did react somewhat to Kim Jung-un’s initial missile tests however these launches have become normalized. Jim is convinced the U.S. is on a path toward war and will have to attack before they miniaturize their nuclear warheads to missile size. Korea has achieved made advances faster than intelligence agencies suspected.
Jim thinks the markets are overly complacent about it. Yellen’s recent speeches indicate the Fed will not raise rates. The Fed uses a relatively simple model that targets 2% inflation. The Fed wants interest rates to be around 3.5% before the next recession because you can’t get out of a recession with rates this low.
He discusses various pause factors that use in their forecast. Gold stocks are much the same what differs is management. How do you sort the well-run companies from the frauds? Jim says do your homework or find a reliable source.
Russia is poised to break out of its oil-related slump and become one of the best performing emerging markets economies in the years ahead. This sleeping giant is breaking its dependence on oil prices and embraces diversified growth.
When you hear the name “Russia” you probably run for cover. Russia has been the subject of nearly continuous media coverage bordering on frenzy since the election of Donald Trump last November.
Russia allegedly hacked U.S. computer systems and email servers, rigged the election in favor of Trump, and colluded with the Trump campaign to defeat Hillary Clinton. Trump campaign officials met with Russian operatives and spies to coordinate all of this nefarious activity. Or so the story goes.
The truth is more complex. Russia certainly does run an around-the-clock hacking and spying operation aimed at any U.S. system they can penetrate. We do the same to Russia. It’s what national intelligence agencies do. No news there.
There may have been some “weaponization” of the hacked data through selective leaks to publishing outlets like Wikileaks. That allegation is less clear. Wikileaks has always insisted that their leaks did not come from Russia. There is some evidence to support the claim that the Hillary Clinton related leaks came from disaffected Bernie Sanders supporters. That truth may emerge later.
Trump campaign efforts to reach out to Russia between November 2016 and January 2017 did not have to do with “collusion.” They were a smart geopolitical move to align U.S. interests with Russia in advance of a confrontation with China about trade, currency, and North Korea.
Unfortunately, the Trump team consisted of amateurs like Jared Kushner who bungled the job. They played into the hands of Democrats who were waiting to pounce on the smallest sign of so-called collusion. This sequence combined with media bias has now poisoned the U.S.-Russia relationship.
Now, the confrontation with China is arriving right on schedule but the U.S. has no relationship with Russia to help back up our position. It’s two-against-one, and the U.S. is the odd man out — thanks to U.S. political dysfunction and the media.
The point in reciting this history is that it’s difficult for investors to separate the economic fundamentals of Russia from the media circus and political noise. If Russia were named “Volgastan,” and not involved in U.S. politics, its economic position would be one of the most attractive emerging markets stories in the world.
Let’s begin our independent analysis by reviewing the fundamentals.
Russia is the 12th largest economy in the world with about $1.3 trillion in GDP. That is slightly larger than Australia or Spain, and significantly larger than well-liked emerging markets economies such as Mexico, Indonesia, and Taiwan.
Russia’s sovereign debt-to-GDP ratio is a microscopic 17%. Compare that to the U.S. debt-to-GDP ratio of 106%, more than six times larger. Other debt-to-GDP zombies are Japan (240%), France (96%) and the UK (89%).
The fact is, in the next liquidity crisis, you won’t be hearing about Russian default. The U.S. and China are more likely to be in the eye of the storm.
Russia is the world’s second largest oil exporter (after Saudi Arabia) and the world’s largest exporter of natural gas. Russia is also the world’s third largest gold producer after China and Australia, and ahead of the United States.
From a geopolitical perspective, Russia is one of only three genuinely powerful countries in the world (along with the U.S. and China) despite media efforts to portray it as an inefficient economic backwater.
Still, there’s much more to the Russian economic analysis than the familiar story of an export and geopolitical powerhouse. In particular, Russia has engaged in one of the most aggressive gold accumulation operations since the U.S. in the 1920s.
Russian reserves are managed by the Central Bank of Russia, CBR. The CBR Chair since 2013 has been Elvira Nabiullina. Think of her as the “Janet Yellen of Russia,” but with a much different pedigree.
Nabiullina did not graduate from one of the Keynesian-monetarist hotbeds such as MIT or the University of Chicago. She graduated from Moscow State University and worked her way up through the Russian Ministry for Economic Development and Trade.
With that background, she has a much better feel for the dynamics of Russian growth and the Russian people than the so-called Western experts who rushed in to “fix” the Russian economy in the 1990s. Those experts ruined Russia and paved the way for the more authoritarian politics of Vladimir Putin.
To his credit, Putin has given Nabiullina independence and allowed her to manage reserves, interest rates, and capital outflows with a minimum of political interference. In 2017, The Banker, a British publication, named Nabiullina “Central Banker of the Year, Europe.”
Nabiullina’s greatest accomplishment is to increase Russia’s gold reserves by 700 tonnes since taking office. This gold has a market value of $32 billion at today’s prices. This is on top of the approximately 1,000 tonens of gold that Russia already had when Nabiullina became CBR Chair in 2013.
This is an extraordinary accomplishment considering that Russian reserves collapsed from about $525 billion to $350 billion during the oil price crash of 2014-2015. Today, Russia’s reserves are back up to a healthy $425 billion, recovering over 40% of the reserves lost in the oil price collapse.
Despite the roller-coaster ride in the overall reserve position, Russia never stopped buying gold. If it needed hard currency, Russia would sell U.S. Treasury securities and keep buying gold.
Russia now has a gold-to-GDP ratio of almost 6% — more than three times the comparable ratio for the U.S. Russia is preparing for the day when a full-blown crisis of confidence in the U.S. dollar emerges. At that point, a new international monetary conference similar to Bretton Woods will be convened.
In such a scenario, gold will be a major determinant of the power of each participant in reshaping the international monetary system. Russia will have a prime seat at the table, while gold weaklings such as the UK, Canada, and Australia sit along the sidelines.
Oil prices have stabilized above $40 per barrel, which puts a floor under the Russian economy. If oil prices rally, the Russian economy, stocks and currency will rally together.
But, Russia is not solely dependent on oil for economic growth. The Russian economy is poised for strong growth from a diversified combination of exports, agriculture, and direct foreign investment.
The combined prospect of strong growth independent of oil prices, and a possible windfall if oil prices spike on geopolitical fears, makes the Russian economy attractive right now.
What indicators am I using to support this positive fundamental analysis of the Russian economy?
The most important development is the diversification of the Russian economy to avoid exclusive reliance on energy exports.
Russia has revved up its export economy. These exports include arms sales to cash customers such as Iran and Turkey.
Russia is also a major exporter of nuclear power plants. Russia recently signed several major deals with Turkey on the expansion of Turkey’s nuclear power generating capacity, for example.
Russia is also harvesting a bumper crop of wheat both from Russia itself and parts of eastern Ukraine effectively dominated by Russia. These crops will be in high demand due to drought conditions in major Russian competitors such as Australia, Canada and the U.S.
Improvement in Russia’s trade surplus and reserve position will make it a magnet for direct foreign investment and global capital flows.
This combination of diversified export revenues and capable central bank reserve management has left Russia less vulnerable to economic sanctions and oil prices than most Western analysts expected.
Having weathered the storm, Russia will be the main beneficiary as sanctions are gradually eased and as oil prices gradually recover.
Central Banks around the world continue to position themselves for the eventual day when the US Dollar will be replaced as the reserve currency of the world. All fiat money fails throughout history, always. James Rickards discusses what he sees unfolding and how Central Banks are positioning themselves right now, for this new future. The days of "King Dollar" are soon coming to a historic and violent end.
I’ve been arguing for months that we are headed for war with North Korea because of its nuclear program.
This brings us to the topic of nuclear proliferation.
Nuclear proliferation of the kind we are seeing in North Korea is nothing new. The U.S., Soviet Union (now Russia), U.K. and France all had nuclear weapons by 1960. China joined the club in the mid-1960s.
India and Pakistan started becoming nuclear powers in the 1970s. Israel has never officially announced it has nuclear weapons, but it is well-known that Israel possesses them. At various times, South Africa, Brazil, Iran, Syria, Iraq and Libya have pursued nuclear weapons development.
The Iranian program is the only one of those that is still active.
Critics of any effort to attack North Korea to stop its nuclear weapons program point to this extensive proliferation over 60 years as a reason not to risk war. According to these critics, the world has learned to live with eight nuclear powers. One more won’t matter. Deterrence works.
North Korea knows that if it uses nuclear weapons, it will be subject to a nuclear attack by the U.S., and therefore it won’t use them.
But this analysis is wrong on a number of levels.
The U.S. began its nuclear program to end World War II. The U.K., French, Russian and Chinese nuclear programs were part of a Great Power dynamic in the Cold War that does not apply to lesser powers like North Korea.
For the Great Powers, deterrence does work.
Israel’s program is a response to an existential threat from the Arabs (four large wars and many smaller ones in less than 70 years) and Israel’s lack of strategic depth. India and Pakistan are mutually hostile and their weapons are aimed at each other, not at the west.
North Korea is different because it continually threatens to use nuclear weapons on the U.S. and its allies, like Japan.
Deterrence does not work on Kim Jong Un. The North Korean leader will be safe in his nuclear bombproof bunker. He does not care about his people.
Kim’s threats involve actual nuclear missiles striking cities and a potential electromagnetic pulse weapon (EMP) detonated in the high atmosphere that produces a power surge that would destroy the U.S. power grid.
All communications, cellphones, computers, bank ATMs, debit and credit cards, gas station pumps and lights would be disabled. U.S. civilization would last about three days before food and water were depleted and society descended into rival gangs of looters and vigilantes.
That may sound paranoid or alarmist, but it’s not. It’s a legitimate possibility.
This is why North Korea will not be allowed to have nuclear weapons. This is why war is coming. - Source, Jim Rickards via the Daily Reckoning
I believe gold is ultimately heading to $10,000 an ounce, or higher.
Now, people often ask me, “How can you say gold prices will rise to $10,000 without knowing developments in the world economy, or even what actions will be taken by the Federal Reserve?”
It’s not made up. I don’t throw it out there to get headlines, et cetera.
It’s the implied non-deflationary price of gold. Everyone says you can’t have a gold standard, because there’s not enough gold. There’s always enough gold, you just have to get the price right.
I’m not saying that we will have a gold standard. I’m saying if you have anything like a gold standard, it will be critical to get the price right.
The analytical question is, you can have a gold standard if you get the price right; what is the non-deflationary price? What price would gold have to be in order to support global trade and commerce, and bank balance sheets, without reducing the money supply?
The answer is, $10,000 an ounce.
I use a 40% backing of the M1 money supply. Some people argue for 100% backing. Historically, it’s been as low as 20%, so 40% is my number. If you take the global M1 of the major economies, times 40%, and divide that by the amount of official gold in the world, the answer is approximately $10,000 an ounce.
There’s no mystery here. It’s not a made-up number. The math is eighth grade math, it’s not calculus.
That’s where I get the $10,000 figure. It is also worth noting that you don’t have to have a gold standard, but if you do, this will be the price.
The now impending question is, are we going to have a gold standard?
That’s a function of collapse of confidence in central bank money, which is already being seen. It’s happened three times before, in 1914, 1939 and 1971. Let us not forget that in 1977, the United States issued treasury bonds denominated in Swiss francs, because no other country wanted dollars.
The United States treasury then borrowed in Swiss francs, because people didn’t want dollars, at least at an interest rate that the treasury was willing to pay.
That’s how bad things were, and this type of crisis happens every 30 or 40 years. Again, we can look to history and see what happened in 1998. Wall Street bailed out a hedge fund to save the world. What happened in 2008? The central banks bailed out Wall Street to save the world.
What’s going to happen in 2018?
We don’t know for sure.
But eventually a tipping point will be reached where the dollar collapse suddenly accelerates as happened to sterling in 1931. Investors should acquire gold and other hard assets before that happens.
Many Daily Reckoning readers are familiar with the original petrodollar deal the U.S made with Saudi Arabia.
It was set up by Henry Kissinger and Saudi princes in 1974 to prop up the U.S. dollar. At the time, confidence in the dollar was on shaky ground because President Nixon had ended gold convertibility of dollars in 1971.
Saudi Arabia was receiving dollars for their oil shipments, but they could no longer convert the dollars to gold at a guaranteed price directly with the U.S. Treasury. The Saudis were secretly dumping dollars and buying gold on the London market. This was putting pressure on the bullion banks receiving the dollar.
Confidence in the dollar began to crack. Henry Kissinger and Treasury Secretary William Simon worked out a plan. If the Saudis would price oil in dollars, U.S. banks would hold the dollar deposits for the Saudis.
These dollars would be “recycled” to developing economy borrowers, who in turn would buy manufactured goods from the U.S. and Europe. This would help the global economy and help the U.S. maintain price stability. The Saudis would get more customers and a stable dollar, and the U.S. would force the world to accept dollars because everyone would need the dollars to buy oil.
Behind this “deal” was a not so subtle threat to invade Saudi Arabia and take the oil by force. I personally discussed these invasion plans in the White House with Kissinger’s deputy, Helmut Sonnenfeldt, at the time. The petrodollar plan worked brilliantly and the invasion never happened.
Now, 43 years later, the wheels are coming off. The world is losing confidence in the dollar again. China just announced that any oil-exporter that accepts yuan for oil can convert the oil to gold on the Shanghai Gold Exchange and hedge the hard currency value of the gold on the Shanghai Futures Exchange.
The deal has several parts, which together spell dollar doom. The first part is that China will buy oil from Russia and Iran in exchange for yuan.
The yuan is not a major reserve currency, so it’s not an especially attractive asset for Russia or Iran to hold. China solves that problem by offering to convert yuan into gold on a spot basis on the Shanghai Gold Exchange.
This straight-through processing of oil-to-yuan-to-gold eliminates the role of the dollar.
Russia was the first country to agree to accept yuan. The rest of the BRICS nations (Brazil, India and South Africa) endorsed China’s plan at the BRICS summit in China earlier this month.
Now Venezuela has also now signed on to the plan. Russia is #2 and Venezuela is #7 on the list of the ten largest oil exporters in the world. Others will follow quickly. What can we take away from this?
This marks the beginning of the end of the petrodollar system that Henry Kissinger worked out with Saudi Arabia in 1974, after Nixon abandoned gold.
Of course, leading reserve currencies do die — but not necessarily overnight. The process can persist over many years.
For example, the U.S. dollar replaced the UK pound sterling as the leading reserve currency in the 20th century. That process was completed at the Bretton Woods conference in 1944, but it began thirty years earlier in 1914 at the outbreak of World War I.
That’s when gold began to flow from the UK to New York to pay for badly needed war materials and agricultural exports.
The UK also took massive loans from New York bankers organized by Jack Morgan, head of the Morgan bank at the time. The 1920s and 1930s witnessed a long, slow decline in sterling as it devalued against gold in 1931, and devalued again against the dollar in 1936.
The dollar is losing its leading reserve currency status now, but there’s no single announcement or crucial event, just a long, slow process of marginalization. I mentioned that Russia and Venezuela are now pricing oil in yuan instead of dollars. But Russia has taken its “de-dollarization” plans one step further.
Russia has now banned dollar payments at its seaports. Although these seaport facilities are mostly state-owned, many payments, like those for fuel and tariffs, were still conducted in dollars. Not anymore.
This is just one of many stories from around the world showing how the dollar is being pushed out of international trade and payments to be replaced by yuan, rubles, euros or gold in this case.
But today, I want to take a look at the case against gold.
Starting from a low of about $250 per ounce in mid-1999, gold staged a spectacular rally of over 600%, to about $1,900 per ounce, by August 2011.
Unfortunately, that rally looked increasingly unstable towards the end.
Gold was about $1,400 per ounce as late as January 2011.
Almost $500 per ounce of the overall rally occurred in just the last seven months before the peak.
That kind of hyperbolic growth is almost always unsustainable.
Sure enough, gold fell sharply from that peak to below $1,100 per ounce by July 2015. It still shows a gain of about 350% over 15 years.
But gold has lost nearly 40% over the past five years. Those who invested during the 2011 rally are underwater, and many have given up on gold in disgust.
For long-time observers of gold markets, sentiment has been the worst they’ve ever seen.
Yet it’s in times of extreme bearish sentiment that outstanding investments can be found — if you know how and where to look.
So far this year, there’s already been a change in the winds for gold.
A change that, in many ways, I predicted in my most recent book: The New Case for Gold.
But today, I want to show you three main arguments mainstream economists make against gold.
And why they’re dead wrong.
The first one you may have heard many times…
Argument #1: Not enough gold to support the financial system
‘Experts’ say there’s not enough gold to support a global financial system.
Gold can’t support the entire world’s paper money, its assets and liabilities, its expanded balance sheets of all the banks, and the financial institutions of the world.
They say there’s not enough gold to support that money supply; that the money supplies are too large.
That argument is complete nonsense.
It’s true that there’s a limited quantity of gold. But more importantly, there’s always enough gold to support the financial system.
But it’s also important to set its price correctly.
It is true that at today’s price of about $1,300 an ounce, if you had to scale down the money supply to equal the physical gold times 1,300, that would be a great reduction of the money supply.
That would indeed lead to deflation.
But to avoid that, all we have to do is increase the gold price.
In other words, take the amount of existing gold, place it at, say, $10,000 an ounce, and there’s plenty of gold to support the money supply.
In other words, a certain amount of gold can always support any amount of money supply if its price is set properly.
There can be a debate about the proper gold price, but there’s no real debate that we have enough gold to support the monetary system.
I’ve done that calculation, and it’s fairly simple. It’s not complicated mathematics.
Just take the amount of money supply in the world, then take the amount of physical gold in the world, divide one by the other, and there’s the gold price.
$10,000 an ounce
You do have to make some assumptions, however.
For example, do you want the money supply backed 100% by gold, or is 40% sufficient? Or maybe 20%?
Those are legitimate policy issues that can be debated. I’ve done the calculations for all of them. I assumed 40% gold backing. Some economists say it should be higher, but I think 40% is reasonable.
That number is $10,000 an ounce…
In other words, the amount of money supplied, given the amount of gold if you value the gold at $10,000 an ounce, is enough to back up 40% of the money supply. That is a substantial gold backing.
But if you want to back up 100% of the money supply, that number is $50,000 an ounce. I’m not predicting $50,000 gold. But I am forecasting $10,000 gold, a significant increase from where we are today.
But again, it’s important to realise that there’s always enough gold to meet the needs of the financial system. You just need to get the price right.
Regardless, my research has led me to one conclusion — the coming financial crisis will lead to the collapse of the international monetary system.
When I say that, I specifically mean a collapse in confidence in paper currencies around the world. It’s not just the death of the US dollar, or the demise of the euro. It’s a collapse in confidence of all paper currencies.
In that case, central banks around the world could turn to gold to restore confidence in the international monetary system. No central banker would ever willingly choose to go back to a gold standard.
But in a scenario where there’s a total loss in confidence, they’ll likely have to go back to a gold standard.
Argument #2: Gold can’t support world trade and commerce
The second argument raised against gold is that it cannot support the growth of world trade and commerce because it doesn’t grow fast enough.
The world’s mining output is about 1.6% of total gold stocks.
World growth is roughly 3-4% a year. It varies, but let’s assume 3-4%.
Critics say that if world growth is about 3-4% a year and gold is only growing at 1.6%, then gold is not growing fast enough to support world trade.
A gold standard therefore gives the system a deflationary bias.
But again, that’s nonsense, because mining output has nothing to do with the ability of central banks to expand the gold supply.
The reason is that official gold — the gold owned by central banks and finance ministries — is about 35,000 tonnes.
Total gold, including privately held gold, is about 180,000 tonnes.
That’s 145,000 tonnes of private gold outside the official gold supply.
If any central bank wants to expand the money supply, all it has to do is print money and buy some of the private gold.
Central banks are not constrained by mining output. They don’t have to wait for the miners to dig up gold if they want to expand the money supply.
They simply have to buy some private gold through dealers in the marketplace.
To argue that gold supplies don’t grow enough to support trade is an argument that sounds true on a superficial level.
But when you analyse it further, you realise that’s nonsense. That’s because the gold supply added by mining is irrelevant, since central banks can just buy private gold.
Argument #3: Gold has no yield
The third argument you hear is that gold has no yield.
This is true, but gold isn’t supposed to have a yield.
Gold is money.
I was on Fox Business with Maria Bartiromo last year. We had a discussion in the live interview when the issue came up.
I said, ‘Maria, pull out a dollar bill, hold it up in front of you and look at it. Does it have a yield? No, of course it has no yield — money has no yield.’
If you want yield, you have to take risk. You can put your money in the bank and get a little bit of yield — maybe half a percent.
Probably not even that. But it’s not money anymore.
When you put it in the bank, it’s not money. It’s a bank deposit. That’s an unsecured liability in an occasionally insolvent commercial bank.
You can also buy stocks, bonds, real estate, and many other things with your money.
But when you do, it’s not money anymore. It’s some other asset, and they involve varying degrees of risk.
The point is this: If you want yield, you have to take risk.
Physical gold doesn’t offer an official yield, but it doesn’t carry risk. It’s simply a way of preserving wealth.
I believe the primary way every investor should play the rise in gold is to own the physical metal directly.
At least 10% of your investment portfolio should be devoted to physical gold — bars, coins and the like.
But you can also up the risk to potentially profit from gold too.
Max and Stacy discuss the bricks and mortar meltdown and how private equity has once again led the way to a hollowed-out economy. Max interviews Jim Rickards, author of The Road To Ruin, The Death Of Money, Currency Wars and The New Case For Gold. They discuss the new Yuan-priced gold-backed oil contract and what this means for US dollar hegemony.
In this excellent video presentation, Jim Rickards tell's us that It is inevitable the next financial crises is six to eight months away and it will be triggered by a war between the US and North Korea. He still say's one of the best way to protect your wealth preservation is through gold.
As mounting tensions rise from the latest round of nuclear testing out of North Korea, Jim Rickards believes a considerable window is closing by the United States. The threat of a nuclear armed and capable North Korea is a line that the currency wars expert and macro analyst believes the United States will now allow to be crossed. Speaking on CNBC’s Capital Connection Rickards offered his latest critique of the restrictions and response by the international community on North Korea.
The interview began with a question what an oil embargo would mean for North Korea and how it would impact that country. Rickards blasts, “North Korea has already beaten the world to the punch. They’ve been building up their strategic oil reserves. What that means is they have an estimated year’s worth of held in reserve and China has played a role in these things in the past.”