Enjoy this special delayed broadcast…

  • Feel that grip
  • The case against gold

Today’s Port Phillip Insider comes to you on a delayed broadcast from Melbourne Airport.

Hold the excitement if you can. Your editor’s normal contribution will be brief [Readers’ voice: praise the Lord!]. But it will be followed by an essay from Jim Rickards…which may not be brief [Readers’ voice: Lord help us!].

We’re about to begin our long journey to Baltimore, Maryland. We’re paying a visit to the head honchos at the ‘ranch’.

So, by the time you receive this delayed message, we hope to be somewhere over the Pacific. Hopefully, high over the Pacific.

We’ll report in as normal tomorrow. For now…


Overnight, the US Dow Jones Industrial Average closed up 78 points, or 0.44%.

The S&P 500 index closed higher by 11.18 points, or 0.54%.

In Europe, the Euro Stoxx 50 index ended the day down 51.51 points, or 1.83%. Meanwhile, the FTSE 100 index closed down 1.25%, and Germany’s DAX ended the day down by 1.67%.

In Asian markets, as we write, yes, it’s still too early. The markets haven’t opened. By the time you receive this, they will have closed. You can check the latest details in the Market Data section at the end of this letter.

On the commodities markets, early this morning, West Texas Intermediate crude oil was trading for US$47.82 per barrel. Brent crude was US$48.80 per barrel.

Gold is trading at US$1,369 (AU$1,820) per ounce. Silver is US$20.16 (AU$26.84) per ounce.

The Aussie dollar is worth 75.1 US cents.

Feel that grip

But a day in the markets these days isn’t a day in the markets if you’re not paying attention to interest rates.

A glance at today’s Australian Financial Review tells us:

A second wave of Brexit-led volatility has caused a sell-off in global equity markets and pushed bond yields in Australia and the United States to record lows.

A decision by large British commercial property funds to freeze £9 billion worth of assets because too many people were rushing to withdraw their money spooked global markets, just as further faults are emerging within Italy’s banks. Bank of England governor Mark Carney added to the sense of unease gripping the world with fresh warnings about a “material slowing” of the UK economy.

Gosh! Can you feel the ‘unease’ gripping you? We hope not. It sounds terribly painful.

It’s why we say, we’ve long said, and we’ll always say (that’s present, past, and future tense there, folks) that you should own gold.

To us, gold is like a Nurofen, or in your editor’s case, as we recover from some severe back pain, a milligram or five of diazepam. It certainly makes driving interesting!

Gold helps relieve the effects of global political and central bank-induced pain.

But back to interest rates. By jingo! The motley bunch at the AFR is right. Aussie yields are at a record low. The chart of the 10-year Australian government bond yield below proves it:

chart image

Source: Bloomberg
Click to enlarge

There’s your 1.845% folks. The lowest it has been…ever. Lower than in 2008, when the lowest this lazy old bond could muster was a touch below 4%.

It’s lower than in 2012, when the 10-year yield ‘only’ sunk to a pathetic sub-3%. Today, it’s 1.845%.

Hats off Australian government bonds. You’re doing the country proud. Of more interest are the shorter bonds, the two-years. They currently yield 1.544%.

That’s also a record low. How long until we get to zero? It can’t be long. In fact, we won’t even tell you not to hold your breath. It may happen sooner than most folks expect.

On that note, the gate is about to close and our flight is about to leave. See you tomorrow. Over to Jim Rickards with his take on the state of the world’s affairs…




Right Now: The Case Against Gold

Editor’s Note: This article was originally published in the US edition of the Daily Reckoning (30 June, 2016).

Recent history has been a long and volatile ride for gold investors.

The recent Fed decision…

The ‘Brexit’ leave vote…

Today I want to take a look at gold — and, in particular, the case AGAINST the Midas metal…

Starting from a low of about US$250 per ounce in mid-1999, gold staged a spectacular rally of over 600%, to about US$1,900 per ounce, by August 2011. Unfortunately, that rally looked increasingly unstable toward the end.

Gold was about US$1,400 per ounce as late as January 2011. Almost US$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 US$1,100 per ounce by July 2015. It still shows a gain of about 350% over 15 years. But gold’s lost nearly 40% over the past four 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. There’s already been a change in the winds for gold so far this year.

And using complex dynamic systems analysis, a trusted colleague of mine and I have developed a new thesis and strategy for profiting in the gold market.

The takeaway? Do not buy another ounce of gold until you read what I have to say.

Today I 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. ‘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 US$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, US$10,000 dollars 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.

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 US$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 dollars 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 US$50,000 an ounce. I’m not predicting US$50,000 gold. But I am forecasting US$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.

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 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 tons. Total gold, including privately held gold, is about 180,000 tons. That’s 145,000 tons 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.

The third argument you hear is that gold has no yield. It’s true, but gold isn’t supposed to have a yield. Gold is money. I was on Fox Business with Maria Bartiromo recently. 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.

All the best,

Jim Rickards