"I expect a gold price of 7.000 dollars by the next several years"
- US-Investor and gold expert Jim Rickards believes that the gold price won´t fall below 1.500 dollar per ounce.The loss of confidence in currencies will lead to a new gold standard.
FORMAT: You are criticizing that President Nixon took the United States off the gold standard. Can you explain why you think that this step was a mistake?
Jim Rickards: It was wrong because the inflation destroyed the dollar. The United States went through three recessions in 1974, 1979 and 1980. Between 1977 and 1981 the compound inflation was 50 percent. That destroyed the savings of the American people. The economy growth was slow, the unemployment rose, industrial production declined. At the beginning of the 1970´s, the price of a barrel of oil was about two dollars. By the end of 1970´s it cost twelve dollars. The monetary policy aimed to cheapen the dollar to promote exports and create jobs. It actually had the opposite effect and was extremely disruptive to the US-economy. It took the federal reserve from 1982 until about 2002 to repair the damage. The destroyed currency made it impossible to create an efficient asset allocation..
FORMAT Is there a way to go back to the gold standard?
Rickards: Yes, that´s possible. But it is very important to fix the right price. Just for example: The important industrial nations followed the gold standard from 1870 to the beginning of World War One. Since the nations had to finance the war, they left the gold standard and started to print money. After the war they wanted to return to the gold standard. They had to work out the exchange rates of their currencies to gold. The United States and Great Britain returned to a rate corresponding to the pre-war-level. Particularly the UK printed an enormous amount of money to finance the war. It was necessary to cut the money supply drastically to correct the ratio between the value of the currency and gold to the prior level.
FORMAT: What is the right price for gold if we go back to the gold standard?
Rickards: The value of gold would be in the range between 5.000 to 7.000 dollars per ounce. That would be the right ratio between paper money and gold. That sounds much higher as it is today. But as confidence declines in paper money it becomes more apparant that we have to go back to some kind of standard in order to restore confidence.
FORMAT: How long could it take, until the gold price will rise up to this level?
Rickards: A period of several years. We are in a new depression that started in 2007. The depression will go on, the central banks will continue printing more and more money to try to stimulate the global growth. As I said, this will lead in loss of confidence in printed money.
FORMAT: Why do you think that all the actions of the central banks do not have the requested impact to create economic growth?
Rickards: The biggest concern to central banks today is not inflation but deflation. Deflation leads to defaults in the banking system. Everyone wants a cheap currency. The US wants a cheap dollar, the EMU wants a cheap Euro and China wants a cheap Yuan. But that´s not possible. If one currency is cheap another one has to be strong. Not all the currencies can devalue at once.
FORMAT: Which monetary policy can central banks follow to create inflation?
Rickards: The only thing you can do is to devalue a currency against gold. Gold cant fight back because it is not a country. So if you cant create inflation after you have printed money, if you did quantitative easing and everything you can think of to try to cheapen a currency, the last step and a thing you can always do is reprice gold. If the gold price would reach 5.000 dollars per ounce, a barrel of oil could cost 400 dollars. This would cause a generalised inflation. thats exactly what central banks want. It will take a couple of years but at some point it will happen because of loss of confidence in the currencies or because it helps central banks to create inflation.
FORMAT: Why do you think that the demand for gold will be rising?
Rickards: Central banks are fuelling the demand. Russia is a buyer, the Chinese are collecting as much gold as they can. Many other countries like Mexico or the Philippines do the same. This will lead in the end into a high gold price that can be used as a measure for a new gold standard.
FORMAT: What is more likely inflation or deflation?
Rickards: At the moment we have inflation and deflation at the same time. Both the forces are fighting each other right now. The question is, if the relation remains stable or if will tip in one or the other direction. It is a much more dynamic process than people realise.
FORMAT: The gold price weakened since September last year. Is this decline a forerunner for new lows?
Rickards: No, because there is sort of a floor at the mark of 1.500 dollars per ounce. It is established by the Chinese demand. The Chinese need to buy plenty of gold. But they are very smart. They keep on waiting with their purchases until the price is near to 1.500 Dollar. This stabilizes the market.
FORMAT: Is the current gold price a good opportunity to invest now?
FORMAT: Do you prefer physical gold or an investment through funds?
Rickards: Physical. In the short run and for a short period of time stock traded funds are ok. But in the longer run it is not a good idea to buy ETF. If financial panic should occur, the authorities will close the stock exchanges. In this case investors won´t get their money out of the funds.
FORMAT: There is a big gap between the development of he gold price and mining stocks. What is the reason?
Rickards: The famous hedgefund-manager John Paulsen made a fortune by betting on the collapse of the American housing market in 2007. After that he took big positions in mining stocks. But he underestimated their volatility, the shares he bought are down 20 percent or more. He will be facing redemptions. Because of that he will be forced to cut his positions which will create pressure on some mining stocks.
FORMAT: How many percent of your portfolio would you put into gold investments?
Rickards: Up to 20 Percent. You shouldn´t put 50 percent or more into gold.
About James Rickards
He is the author of the national bestseller, Currency Wars: The Making of the Next Global Crisis and a Partner in JAC Capital Advisors, a hedge fund based in New York. He is a counselor and investment advisor and has held senior positions at Citibank, Long-Term Capital Management and Caxton Associates. In 1998, he was the principal negotiator of the rescue of LTCM sponsored by the Federal Reserve. He has been interviewed in The Wall Street Journal and has appeared on CNBC, Bloomberg, Fox, CNN and BBC.