Renowned author, lawyer, economist and finance expert James “Jim” Rickards has forecast the US dollar will falter in the wake of a new financial crisis that may be closer to reality than people think.
The expert pointing out central banks still haven’t recovered from the previous crisis, while Russia and China have been buying up gold at unprecedented levels over the past decade.
Speaking with Small Caps, Mr Rickards said the global economy is still wading through the 2008 global financial crisis, with interest rates remaining low and central banks unable to boost their books to previous levels.
He pointed out the world was completely “unprepared for the next crisis”, which will be far worse than the previous two.
According to Mr Rickards, the 1997-1998 Asian financial crisis could’ve brought the world to its knees if Wall Street banks hadn’t pulled together to bail out US hedge fund Long-Term Capital, which was about to collapse.
The crisis spread throughout the world and hit the US causing Dow Jones industrial average to record its biggest point fall in history by October 1997 – triggering a trading suspension.
However, disaster was averted after Long-Term Capital received a US$3.75 billion bail-out.
Had it not been bailed-out, a cascade of secondary bank bankruptcies would’ve ensued with numerous majors around the world including Deutsche Bank, UBS, and HSBC reporting they had either contributed to the bail-out or written off hundreds of millions in losses.
The following 2007-2008 global financial crisis was triggered by the US subprime mortgage market and excessive risk taking by banks with their lending practices.
Falling prey to the crisis was Lehman Brothers which went bankrupt and caused the Dow Jones to topple to its lowest in seven years.
In this bail-out, it was left to central banks to prevent financial Armageddon, with the US Federal Reserve taking its balance sheet from US$800 billion to over US$4.2 trillion.
The US Government took over flailing banks Fannie Mae and Freddie Mac, while others including Merrill Lynch, Wells Fargo, and Bank of America received hundreds of billions in US government bail-outs.
Who’s going to bail out the central banks?
With another financial crisis imminent, Mr Rickards posed the question: who is going to bail out the central banks?
“Your only alternatives are turn to the International Monetary Fund (IMF) to basically bail out the world although that is a slow and difficult process.”
If the IMF did bail out the central banks, the process could take six months to a year.
Additionally, Mr Rickards said there were numerous other challenges to an IMF bail-out.
For an IMF bail-out to occur, it would require 85% approval from all member countries.
“If you have a 15% plus 1% blocking power vote then it doesn’t happen.”
He added that the US was the only country in the world with a 16% voting power.
However, he pointed out a small coalition such as BRICS (Brazil, Russia, India, China and South Africa) nations and Venezuela could collectively block any bail out action or put conditions on it.
And that condition may well be that the US dollar is no longer the global reserve currency.
Mr Rickards said some people expect the US Federal Reserve to jump to the rescue again in the next financial crisis.
“What are they going to do if a crisis hit tomorrow? Go to US$5 trillion, US$6 trillion?”
Mr Rickards said the other alternative was to shut down the banks.
“And that’s what I expect will happen. They’ll close exchanges, close banks, close ATMs, freeze accounts.”
When people say that will “never happen”, Mr Rickards explained it has happened many times before including Cypress, Greece and Argentina.
He added it also happened in the US in 1933, when US President Franklin D Roosevelt ordered every bank to close.
The bank shutdown lasted eight days, but Mr Rickards said no-one knew how long the closure would be and it could easily have been a month-to-two months.
He pointed out another financial shutdown occurred in the US in 1914 when World War One broke out.
“The New York Stock Exchange was closed for five months – from July 1914 to December 1914.”
What does the future look like in the next crisis?
Mr Rickards was quick to point out he doesn’t foresee a dystopian future or an end of the world scenario.
However, he said he did expect the crisis will begin with “enormous social unrest”.
Elaborating on this statement, Mr Rickards noted the veneer of civilisation is “paper thin”.
“We saw this in August 2005 with Hurricane Katrina in the US where the city of New Orleans was cut off and order broke down within days.”
“By the second day, people were becoming desperate for food and water. By the third day, violence had broken out. You have vigilantes, looters, and the national guard moving in.”
“Civilised behaviour only lasts about three days in the absence of reliable water, food, electricity and all the things we take for granted.”
In a situation where banks are closed and people can’t access their money, Mr Rickards said social disorder will break out “quite quickly”.
This will be followed by a breakdown of internal systems.
“This is how complex civilisations collapse.”
“It isn’t a barbarian invasion, but an internal collapse, because of too much bureaucracy, too much taxation, and complexity.”
He said the social disorder will be most acute in major metropolitan areas.
To survive this new system, Mr Rickards anticipates communities will shift to a semi-barter system where skills are traded and silver, or gold if you have it, can be used to buy food and other essentials.
Fall of the US dollar and rise of gold
As the crisis unfolds, the US dollar is expected to become worthless – with gold the primary valuable commodity.
Even then, Mr Rickards said, in his opinion, it was safer to own mostly physical bullion rather than gold futures, options, unallocated gold contracts and ETFs etc.
He pointed out there is not enough physical gold in warehouses to meet these paper claims.
Slightly different was owning shares in gold mining stocks. “There is gold there, but it doesn’t belong to you, it belongs to the miner.”
When looking at investing in gold mining companies and explorers, Mr Rickards said just as important as the geology, location, costs, grade and processing methods is the management team.
“Some gold companies have great management. They know exactly what they are doing and they have a track record of controlling costs etc.
“Other gold companies – some of them are frauds. Some may not be frauds but have poor management. So, obviously you don’t want to be involved in those.”
Gold looks to new future
Speaking with Small Caps on his prediction gold will exceed US$10,000/oz, Mr Rickards said people may look at him like he is crazy, but the forecast is based on “rigorous analysis”.
The number has been arrived at via several scenarios including returning the international monetary system to some form of gold standard.
He said there is definitely enough gold to underpin the global monetary system.
“It’s just a question of price.”
“At US$1,500/oz where it is today – there isn’t enough gold, the gold we have at US$1,500/oz, you would drastically have to reduce the money supply by over 50% to maintain that parity of gold to money.”
“But you could take the same amount of gold and reprice it at US$10,000/oz and now suddenly the same gold supports a much larger money supply.”
He pointed out China, the US, Japan and Europe account for more than 80% of global gross domestic product (GDP).
Combined, these countries’ money supply is about US$24 trillion.
“If you said we want 40% gold backing (and historically that’s a pretty high number), 40% of US$24 trillion is US$9.63 trillion.”
There is about 33,000t of gold in the world – not counting private ownership.
“If you take 33,000t and divide it by US$9.6 trillion, which is how much you have to back, the gold price comes to about US$10,000/oz.”
“So, when I say that number, it is not pulled out of thin air, it is actually the implied non deflationary price of gold to have any kind of gold standard,” he explained.
Another way of reaching the US$10,000/oz price is by looking at gold’s previous performance.
There have been two previous great bull markets for gold.
The first started in 1971 and continued through to 1980 where the gold price ran up more than 2,000% from about US$35/oz to around US$900/oz.
In the second bull market, gold ran up almost 700% between 1999 and 2011 – rising from US$250/oz to US$1,900/oz.
According to Mr Rickards, we are in the third bull market which started on 16 December 2015 when it was at a low of US$1,050/oz.
He said the current price is up about 50% from this low.
When looking at the huge percentage leaps of previous bull runs, Mr Rickards said the current one had a long way to go.
“This will run for years.”
If you apply the previous percentage runs to the current bull market, Mr Rickards said you’d exceed US$14,000/oz.
“These are very simple calculations that are historically rooted.”
“Numbers like US$10,000/oz and US$15,000/oz are not pie in the sky.”
Mr Rickards added if the upcoming financial crisis tips us into a world where there is a complete currency collapse, then gold won’t even have a price.
“It will just be a case of can you get it.”
Axis of gold
In anticipation of such a scenario, many countries have been scooping up gold at rapid rates – with central banks buying record amounts of the precious metal in the first half of 2019 alone.
Since 2009, Russia has tripled its gold reserves from about 600t to almost 2,300t.
“China has more than tripled its gold reserves also from 600t to 2,000t. They probably have more off the books, we don’t know how much, but could just say they’ve tripled it and you are on safe ground.
“Iran has acquired well over 100t. They are not transparent. We don’t know the exact amount but that’s a good estimate.
Collectively, central banks have been hoarding gold since 2010, with buy ups increasing even more in recent years and even months.
Other countries making big gold purchases include Poland, Turkey, Kazakhstan, Vietnam, Mexico and the Philippines.
He has called this movement the new “Axis of Gold”.
Looking at what most of these countries have in common is they are also targets of US sanctions.
“Russia has been sanctioned for its operations in Ukraine and Crimea; China has been sanctioned for theft of intellectual property, limits on foreign investment and unfair trade practices, etcetera; North Korea has been sanctioned for weapons; and Iran has been sanctioned for its nuclear enrichment program etcetera.”
According to Mr Rickards, the US’ financial war on these countries effectively suffocates their economies.
Mr Rickards said this form of warfare works “but the question is how long a country is going to sit there and take it”.
“And the answer is not much longer.”
He said China and Russia could feasibly implement a permissioned digital currency system that is backed by gold and based on blockchain technology.
Being a permissioned system, countries would need approval to join.
“If the permissions committee doesn’t let you in, then you’re on the sidewalk.”
He said digital coin tokens would be used to keep track of transactions and the balance settled with physical gold once or twice a year.
“What’s missing from that? The US dollar. There is no dollar at all.”
And if you think this is a fictitious scenario. Think again.
Mr Rickards pointed out it was already underway.
“The gold is being acquired – this is a foundational step. The technology is out there, it isn’t that difficult to do.”
“This could come quite quickly and unexpectedly.”