Never-ending financial warfare
‘A sideshow to where we are going.’
‘Dump Treasuries and they will drive the price down.’
‘Trump doesn’t back down; he doubles down.’
‘The Reserve Bank of Australia is the most confused central bank in the world.’
‘How many times does the RBA need to get hit in the head with a two by four to understand that you can’t raise rates?’
‘…global coordinated slowdown.’
‘…these crises that seem to come out of nowhere actually have fairly long gestation periods…’
These quotes aren’t snippets from the news around this world this week.
Nor are they quotes from Jim’s article below.
It’s better than that.
Instead, they’re actual quotes from my 45-minute phone call with Jim two weeks ago.
Even though I’ve been working with Jim for three years, I still get excited about an hour-long interview with him. Because every single time I think I’m throwing him a difficult question, he answers with something I hadn’t thought about.
This privilege isn’t lost on me, either.
In our most recent interview, we covered US politics and government funding, the players to watch in the gold market right now, plus the next moves from the Fed.
And then we got down to the nitty-gritty. We looked at what’s going on in the Aussie economy, and exactly what our own central bank may do next.
The interview was exclusively for Strategic Intelligence Australia subscribers. If you aren’t one yet, you can click here to gain immediate access to the interview. Remember you won’t see this interview with Jim anywhere else in Australia.
In the meantime, read on for Jim’s analysis.
You don’t want to miss it.
Until next time,
Never-ending financial warfare
Jim Rickards, Strategist
Conventional wisdom says that ease by the Federal Reserve is good for business and tightening by the Fed is a headwind for business.
But there’s nothing conventional about the financial environment we’re living in today.
The fact is that raising rates may be a positive if business is thriving, growth is strong and companies are competing for funds.
Higher rates keep a lid on inflation and let only the most creditworthy projects move forward. Rising rates can also be a problem if growth is weak, inflation is nowhere in sight and the Fed is just storing up dry powder for a recession it may end up causing.
Likewise, rate cuts may be fine if growth is weak and the economy needs a boost, but may be dangerous if growth is strong and inflation is on the rise.
It all depends on conditions.
In October last year, the Fed FOMC (Federal Open Market Committee) took a hawkish stance and made it clear that it intended to keep raising rates. The next rate hike came right on schedule in December.
Then the Fed did an about-face and turned dovish in a late-December speech by Fed Chair Jay Powell.
This signalled that there would be no rate hikes until further notice.
The reason the Fed eased was because growth was weakening in the US and around the world.
The Fed did not want to cause a recession, but it may be too late to avoid one because of the Fed tightening from 2015-18.
The Fed deserves credit for doing the right thing now. But if a recession comes soon, the Fed will also get the blame for waiting too long.
Keep an eye out for recession indicators. One may be on the way.
Bank of England robs countries of their gold
What’s the safest way to store physical gold bullion?
Most investors would say that the safest place is in a bank vault.
Most would agree that the one place safer than a bank vault would be a central bank vault.
What could be safer?
Both answers are incorrect.
Banks are controlled by the government. Central banks are the government thinly disguised as banks.
Both are subject to government declarations, including account freezes and confiscation.
Venezuela stored 14 tonnes of gold in the Bank of England, one of the two largest official depositaries in the world (the other is the Federal Reserve Bank of New York; both the BoE and the NY Fed have more gold than Fort Knox).
Venezuela requested that the gold be returned.
No doubt, Venezuela intended to pledge it to Russia or China in exchange for cash.
But the Bank of England reneged on its custody agreement, froze the gold in place, and said it would hold it in trust until the appointment of a new Venezuelan president in place of Nicolas Maduro.
This just shows that when you put your gold in a bank vault, it’s not your gold anymore.
The lesson is to store your gold in a secure non-bank vault operated by Brink’s, Loomis or another high-quality provider.
If you store gold in a bank, you may never see it again.
Financial warfare is the new battlefield for great rival powers
If confiscating gold wasn’t enough, there is a new financial deprivation tactic to cripple countries.
Wars are raging all over the world, yet relatively few are traditional shooting wars.
Most are financial wars involving banks, payment systems, capital markets and gold.
The US is in a complicated financial war with Venezuela.
The US has placed an embargo on Venezuelan oil exports and has threatened to seize any money received by Venezuela for its oil.
The only exception is for oil shipped directly to US refineries, where the sale proceeds would be placed in escrow accounts for the benefit of the Venezuelan people once a replacement president to Nicolas Maduro is installed.
Maduro is fighting this by turning to the Russians. Venezuela has informed buyers of its oil to deposit proceeds to an account at Gazprombank AO, an entity controlled by Russia’s largest energy company and indirectly by Russia itself.
That account is presumably beyond the direct jurisdiction of the US authorities. But this war could easily escalate to the point where the US imposes secondary sanctions on parties that do business with Gazprom.
It’s not clear how much this financial war will escalate and how it will end.
What is clear is that financial warfare may be more destructive to a target economy than bombs and is definitely here to stay.
All the best,