- From $1,250 now to $10,000 later…
- When central bankers choose gold because they have to
- The global monetary reset catalyst: Watch China
- Pot investing possibilities, pro and con
- Housing chugs along… the Fed and “bullets in the chamber”… America too broke to save the world… and more!
Assuming nothing changes by day’s end, gold will hold the line this week on $1,250. The bad news is that’s a three-week low. The good news is that gold hasn’t looked back since breaking through the $1,200 level more than three months ago…
At $1,250, gold is set to grow eightfold by the time it reaches Jim Rickards’ target of $10,000 an ounce.
But how, you might wonder, did he arrive at that number?
He didn’t pull it out of his posterior. He didn’t look for a nice round number with five figures just to grab attention. There’s math behind it… and not very complicated math, either. In the next three minutes, you’ll understand how we get to $10,000 gold.
First, we should tie up a loose end from Wednesday’s mailbag… when a reader wrote in suggesting gold will have nowhere to go but down once China stops its aggressive gold accumulation.
Another reader came up with a snappier riposte than we could muster: “For the guy asking if gold will drop when China quits buying, I would submit it will rise exponentially because China will stop shorting to suppress the price.”
Bingo. This fellow knows his Jim Rickards well.
“When the dollar collapse comes, it will happen two ways — gradually, and then suddenly.”
Jim invoked Hemingway’s description of bankruptcy five years ago in his first book, Currency Wars. It comes back to his familiar avalanche analogy. Each snowflake piles on, one by one, until the whole thing gives way.
Result: “a chaotic, catastrophic collapse of investor confidence resulting in emergency measures by governments to maintain some semblance of a functioning system of money, trade and investment.”
How can governments restore that confidence? By resorting to some sort of gold standard. Central bankers will take that step not because they want to, but because they have to.
But once that decision is made comes the hard part — how to value gold under this new system.
It’s easy to foul up. “Choosing the wrong price,” Jim wrote, “was the single biggest flaw in the gold exchange standard of the 1920s.” Staying at $20.67 an ounce simply didn’t reflect the vast money printing that took place worldwide to pay for World War I. “A price of perhaps $50 per ounce or even higher in 1925… might have helped to avoid some of the worst effects of the Great Depression.”
When Currency Wars was published in 2011, you could take “M1” — one of the basic measures of U.S. money supply — and back only 40% of it with gold and wind up with a gold price of $2,590.
If you took “M1” of the United States, the eurozone and China and gave it that same 40% gold backing, you’d be talking $6,993 an ounce.
Of course, there’s been a lot of inflation in the five years since Currency Wars was published — propelling that figure from $7,000 to $10,000.
Next question: At what point will the globe’s monetary mandarins resort to this new system valuing gold at roughly $10,000?
Here’s where China comes back into play. If you’ve been reading us for a while, you know how Jim explains China’s relentless gold accumulation: Chinese leaders want that proverbial “seat at the table” when the global monetary system collapses and the powers that be hash out a new system.
In his 2014 book, The Death of Money, Jim laid out the case that Western powers have gone so far as to make room at the table for China. They’re enabling China’s accumulation with the gold manipulation techniques we’ve been describing regularly since 2013. Western central banks have “leased” their gold to commercial banks, and those commercial banks have sold that gold to Asian buyers — including the Chinese central bank.
“The gold price must be kept low,” Jim wrote, “until gold holdings are rebalanced among the major economic powers, and the rebalancing must be completed before the collapse of the international monetary system.”
But how much gold is enough to earn China that seat at the table?
The metric the power brokers will rely on is gold reserves as a percentage of GDP. When The Death of Money was published two years ago, China’s official gold stash was 1,054 tonnes. But the official figures are notoriously understated. Conservative estimates of the real amount in 2014 was 2,710 tonnes.
And as you see from this before-and-after table, it won’t take much more before China’s gold-GDP ratio equals America’s…
Once this rebalancing process is complete, Jim wrote, “there will be less reason to suppress gold’s price, because China will not be disadvantaged in the event of a price spike.”
The evidence to back up Jim’s assertions is all there. You just have to look hard enough. “Get the annual report from the Bank for International Settlements,” he told me over dinner two years ago. “Read the footnotes. I understand it’s geeky, but it’s there. They actually get audited — unlike the Fed and unlike Fort Knox.”
“Once China has enough gold, the United States and China together could let the price of gold go wherever it wants in an orderly way,” Jim writes in his third book, The New Case for Gold — published only six weeks ago.
At present, Jim estimates China’s gold holdings at about 4,800 metric tons. The 2.7%-of-GDP threshold’s been met. But Jim suggests Chinese leaders are holding out for more. Much more. They might want a gold stash that equals America’s measured by raw tonnage — in which case, they’re not even halfway there.
“When [China’s] done buying, when it has approximately 8,000 tons, the United States and China can shake hands and both say they’re protected.
“At that point, the devaluation of the dollar by a rise in the dollar price of gold can commence.”
In the meantime, you can accumulate gold with the confidence that all the pieces are in place for a march to $10,000 — exactly eight times today’s price.
[If eightfold gains aren’t good enough for you: Jim says a once-in-a-decade opportunity has opened up in the gold market. When this window of opportunity has opened in decades past, the profit potential has been as high as $192 for every $1 invested.
Even if Jim’s wrong and gold tops out at $1,500, you’re looking at nearly quadrupling your money.
Jim’s prepared a 48-second video answering the questions “Why now?” and “How much money can you make?” Click here to watch.]
To the markets — where the major U.S. stock indexes have a fighting chance of ending the week in the green. As we write, they’re up close to 1% on the day, the S&P 500 at 2,057.
As noted above, gold is at $1,250 — little changed from 24 hours ago.
The only economic number of note today is existing home sales — up 1.7% last month, up 6.0% year over year. The strongest activity is in the Midwest.
Do we detect the tide turning for legal marijuana… and its investment potential?
The nonpartisan Tax Foundation says the federal government and most states are passing up $28 billion in tax revenue every year as long as weed stays illegal.
The researchers made a few assumptions to come up with the figure — including $45 billion in annual sales and a taxing scheme similar to that for tobacco.
Under a legal marijuana regime, state governments would collect about three-quarters of that $28 billion total…
In Colorado and Washington — where recreational weed has been legal the longest — revenues are exceeding projections. Colorado will likely take in $140 million this year, double the original estimate. Gov. John Hickenlooper, who opposed the 2012 referendum in that state, now says, “It’s beginning to look like it might work.”
If you’re a longtime reader, you know we’re skeptical about “pot investing” possibilities as long as Cannabis sativa remains illegal on the federal level. But studies like this, and Colorado’s experience, might start changing minds…
On the other hand, don’t count out the power of the law enforcement lobby: Legal recreational pot is on the ballot in California this fall, and about half the money raised to oppose the measure is coming from groups representing cops and prison guards.
“Drug war money has become a notable source of funding for law enforcement interests,” writes Lee Fang at The Intercept. “Huge government grants and asset-seizure windfalls benefit police departments, while the constant supply of prisoners keeps the prison business booming.” Here at The 5, we’ve previously spotlighted the perverse incentives of private prison operators.
That said, supporters of the measure have raised $2.25 million thus far — 40 times the amount of opponents. We’ll keep a pulse on the investable marijuana situation as 2016 continues to unfold…
“Gentlemen, great insights as always!” writes a reader weighing in after yesterday’s episode.
“I wonder if the Fed’s hawkish language on Wednesday wasn’t intended to inoculate the markets a bit, so there won’t be a big shock if they impose another small rate hike at some point. The 0.25% increase in December may have been just a partial step toward creating the wiggle room they’ll need to ease again when the time comes.
“The Fed is probably in a pickle: On one hand, they need to be hypersensitive to political ramifications because of the upcoming election. But they still want to impose another paltry rate increase or two — so they’ll have some ammo when they deem that it’s time to tighten again.
“Considering their ability to massage data to fit their objectives, ya gotta wonder.”
The 5: That’s the familiar “bullets in the chamber” argument.
Jim Rickards is more inclined to think if the Fed needs to ease policy, it’ll resort to “helicopter money.” The government will ramp up spending, and the Fed will print money to pay for it. We saw early signs of this late last year with the “zombie budget” deal struck between President Obama and House Speaker Paul Ryan.
“Love The 5!” a reader prefaces his email — which always gets our attention.
“I agree with the comments that the U.S. should mind its own damn business! Contrary to idiot presidents and presidential candidates who have the need to be saviors of the world, we can’t afford to be the world’s police force, if for no other reason than our country’s credit cards are maxed out and way behind on monthly payments.
“Sorry to our friends and innocents abroad, but it’s time you paid the bill and sacrificed your own citizens to protect yourself.
“Did I mention, love The 5?”
“I would like to ask the reader in Latvia why he believes it is the responsibility of Americans to defend Latvia, Lithuania or Estonia from anyone.
“Americans, or more so the USA, have bankrupted themselves in its effort to ‘defend’ people around the world, when in reality we had no business or responsibility to do so.
“If Woodrow Wilson and the USA had stayed home and minded its own business in 1917, think how much better off the world might be today. What responsibility did we have then to assist any country who entered that war simply because they had entered into an alliance to assist another country, even if that country made a foolish decision to commit their nation to war in the first place?
“We are doing the same thing again; the USA as part of NATO has pledged to support any country attacked who is part of NATO, and if that attacking party would happen to be Russia, then we would more than likely face the combined forces of Russia and China if war were declared. If this should come to pass, I am sure future historians will surely report, if anyone is left alive, we really put a lot of thought into that plan.
“It is also worth noting that in 1989, then-president GHB promised NATO would never move to include any of the states of the former Soviet Union, a contract that has been broken many times.”
The 5: NATO expansion and the repeal of Glass-Steagall: We can only hope future historians look with scorn upon these two signal “accomplishments” of Bill Clinton.
Have a good weekend,
The 5 Min. Forecast
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