TIP 082 : Jim Rickards - The New Case for Gold (Investing Podcast)

Episode Summary

Executive Summary: Jim Rickards argues that gold should be understood through monetary math, not mystique: a future gold peg at today's money supply implies roughly $10,000/oz, gold is strongest when real rates are negative, and most “paper gold” instruments do not guarantee physical delivery. He also ties weak growth, debt expansion, and low velocity to persistent monetary fragility and a larger future crisis.

Main Topics: Why Rickards thinks $10,000 gold is the non-deflationary peg (Priority: 5/5): He argues that if the world returned to a gold-linked monetary system, the gold price would need to be much higher than today to avoid forcing a deflationary contraction in money supply. Churchill, Keynes, and the 1933/1925 gold standard lesson (Priority: 5/5): Rickards uses the UK’s post-WWI return to gold at the old price as the historical example of a policy mistake that worsened deflation and depression. Gold performance, numeraire, and real versus nominal rates (Priority: 5/5): He explains that gold’s price depends on the measuring unit used, and that negative real interest rates make gold attractive because zero yield beats negative yield. Physical gold versus paper gold (Priority: 5/5): He distinguishes bullion held outside banks from futures, ETFs, and unallocated gold claims, warning that paper claims can fail precisely during panic conditions when delivery is most needed. Debt, nominal growth, and the velocity problem (Priority: 4/5): Rickards aligns with Ray Dalio: if nominal growth does not exceed nominal debt growth, economies remain fragile; low velocity and weak inflation make that harder to fix. Why conventional monetary models fail (Priority: 4/5): He criticizes value-at-risk and normal-distribution thinking, favoring complexity theory, behavioral economics, and Bayes’ theorem as better tools for systemic risk. Policy choices and the risk of a larger crisis (Priority: 4/5): He says central banks can either keep printing, or explicitly reprice gold upward to create inflation, but both reflect severe monetary stress and could trigger a bigger crisis than 2008.

Key Arguments: A gold standard is not inherently deflationary; the problem is adopting the wrong gold price relative to the money supply. The 1925 UK return to gold at the prewar price forced monetary contraction and contributed to depression, proving that policy choice—not gold itself—was the error. Using a global M1 and 40% backing, Rickards estimates a non-deflationary gold price of $10,000/oz; with global M2 and 100% backing, the figure could be far higher. Gold tends to do well when real interest rates are negative because its zero yield becomes relatively attractive versus negative-yielding cash or bonds. Paper gold instruments can promise exposure to price moves but not guaranteed access to physical metal during stress; delivery rules and market halts can override investor expectations. Low nominal growth plus weak inflation leaves debt growing faster than the economy, matching Ray Dalio’s warning that such systems are unstable. Negative interest rates may backfire by encouraging saving, signaling deflation, and reducing spending velocity rather than increasing it. Modern risk models understate systemic risk because they assume normal distributions and linear scaling, while real-world risk rises exponentially with system size.

Data Points: Post-WWI gold standard breakup: 1914 - Major combatant nations suspended or left gold shipments during World War I. UK gold standard return year: 1925 - Churchill restored gold at the pre-WWI price. Pre-WWI gold price: About $20/oz - Churchill chose the old parity instead of a higher re-pegged price. Gold price at today’s non-deflationary peg: $10,000/oz - Rickards’ estimate using global M1 with 40% backing. Alternative gold peg estimate: $50,000/oz - If using global M2 with 100% backing. US gold-standard legal backing: 250% of gold supply - Rickards cites Bernanke’s research on the allowed money supply relative to gold. Actual US money supply versus gold backing: Never more than 100% - He says the Fed could have more than doubled money supply and still remained within the law. 1990s/2000s crisis sequence: 1998, 2000, 2007, 2008 - He references LTCM, dot-com, mortgage crisis, and AIG/Lehman as a chain of shocks. US budget deficit: About $1.2 trillion in 2011 to about $400 billion - Used to illustrate improvement, though still too large relative to growth. Budget deficit as share of GDP: About 3% - Rickards says it still exceeds economic growth conditions. US GDP growth: About 2% - Nominal and real growth remain too weak versus debt expansion. Example mortgage rate: 13% in 1980 - Rickards cites his own first mortgage during high inflation. Inflation example: 15% - Used to show negative real borrowing costs despite high nominal rates. Weimar note printing constraint: One side printed to save ink - Illustrates extreme monetary expansion and physical limits on printing. Comex warehouse coverage: About 1% of futures contracts outstanding - Used to argue futures holders may not receive physical delivery in stress. Public pension / market example: None specified - Not a quantified point; omitted. Real-rate example: -1% nominal with -2% inflation = +1% real - Shows that nominally low rates can still be expensive in real terms.

Pivotal Quotes: "Gold did not cause the Great Depression. But a politically motivated price of gold did." — Jim Rickards: Explaining why the 1925 UK gold parity choice worsened deflation and depression. "Gold loves a negative real rate because the world of negative real rates is the world of higher dollar prices for gold because ... zero is greater than any negative number." — Jim Rickards: Describing why gold becomes more attractive when adjusted for inflation. "Paper gold comes in three flavors... But what you want is today's price. Because when is this going to happen? This is not going to happen in calm times." — Jim Rickards: Warning that futures, ETFs, and unallocated claims may fail when investors most want delivery.

Implications: Listeners should treat gold as a monetary insurance asset, not a mystical one. The episode warns that policy errors, low real rates, and fragile paper claims can make future crises harsher—and that physical ownership matters most in panic.