Book Review: ‘The New Case for Gold’

March 25, 2016 Updated: December 30, 2016

Whether it’s up or down today, gold is always a hot topic. If you say it has value or that it is money, you may even get ridiculed.

This is a completely unedited excerpt of an email I received this morning from an undisclosed commentator on my recent interview with James Grant. Grant is in favor of a gold standard.

“Mr. Grant would prefer a monetary system tied to the amount of gold dug out of the ground to one based on the untrammeled discretion of Ph.Ds. Thus comes his ascertain ‘failure of Central Bankers on the PHD Standard’. Grant wants Gold rather than Dollars to take-to-bed at nights…something that the whole world’s financial experts agree will never come to pass.”

Will it really never come to pass, though? In order to find out, we need some more solid logic and deliberation than baseless ad hominem attacks, which also featured in this email but have no place in this article.

The good news is that the author of international best-sellers “Currency Wars” and “The Death of Money” James Rickards recently wrote a book which uses sound logic and historic precedent to refute the arguments against gold as money and present “The New Case for Gold” (Portfolio Penguin, 2016).

The other good news is that the book is easy to understand for the layman and relatively short.

Rickards - B&W & gold - cropped
(James Rickards)

Like Grant, Rickards is well aware that anti-gold crowd sometimes get emotional. “They call you a gold bug or a gold nut, or worse—a Neanderthal—they say gold is a barbarous relic,” he recently told me in an interview.

If you want to know all the reasons people think gold is not money or a bad investment, or a bubble, you’ll have to buy the book, but let’s look at one particular one which also featured in my email from this morning, again unedited.

“Smart Bankers with PHD’s in reasonable thinking sold tons of high-priced Gold unloading a dead product (paying no interest=yield) getting cheap dollars to reinvest into the market. So who’s laffing all the way to the bank…the little piggie said to his mom?”

One wonders whether former Chancellor of the Exchequer Gordon Brown is included in the “smart banker” group, as he sold most of the United Kingdom’s gold at the recent secular bottom around the turn of the millennium for $300 to $400 per ounce, but that’s beside the point. The fact gold doesn’t have yield, that we cannot argue with.

True or Not?

“Gold has no yield or return because it is not supposed to,” writes Rickards. “Gold is money, and money has no yield because it has no risk.” According to its definition, money needs to be

  1. A medium of exchange
  2. A store of value
  3. A unit of account

Nowhere does it say money needs to have a yield. As a reminder, fiat money in the form of dollar bills and coins also doesn’t have a yield.

Interestingly, credit money in bank accounts may soon have a negative yield, so in any case the yield argument seems to be in favor of gold as money rather than against it.

“If gold has zero yield and bank deposits have a negative yield, gold is the high yield asset, zero is greater than negative 40 basis points. So gold is the high yield asset; zero is more than negative,” said Rickards.

In the introduction Rickards also dispels such myths that John Maynard Keynes called gold a “barbarous relic” (he didn’t), that there is not enough gold to support finance and commerce (there is, it depends on the price), that the gold supply does not grow fast enough to support world growth (it does if we are looking at real growth), that gold caused the Great Depression (it didn’t, it was the Fed in charge of managing the money supply) and that gold has no intrinsic value (it doesn’t but neither has the theory of intrinsic value).

Epoch Times Photo
Total institutional assets under management in 2014. Hewitt ennisknupp completely left out gold altogether. (Hewitt ennisknupp)

Pro Gold

Rickards argues that according to the classic definition of money, gold is money. I can exchange it for goods and services, I can use it as a store of value, and I can use it as a unit of account.

Contrary to popular opinion, gold is also at the very center of international finance as the International Monetary Fund (IMF) with its Special Drawing Rights (SDR) reserve currency is regaining prominence. This point is important as the current financial system is inherently unstable and may soon have to be reformed. Gold will play a prominent role, according to Rickards.

The IMF is the third largest holder of official gold reserves after the United States. In addition, the current valuation of the SDR could not be calculated without using gold, even though one has to go back to the 1970s to understand why.

China is not only acquiring vast quantities of physical gold, it is also going through the hassle of infiltrating the London gold market and simultaneously setting up its own clearing mechanism in Shanghai. Russia has boosted its gold to GDP ratio to 2.7 percent, higher than the United States percentage of 1.7 percent.

According to Rickards all powers are acquiring gold to have some bargaining power when the international financial system will be reformed.

“The gold to GDP ratio will be critical when the monetary system collapses because it will form the basis for any monetary reset and the new ‘rules of the game.'”

Why? After redistributing the official gold holdings and having monetized everything from bonds to stocks, the world’s governments and central banks won’t have a choice left other than to devalue paper money compared to gold, the same trick President Roosevelt used during the great depression and with the same objective of getting rid of an unsustainable debt burden. 

As a twenty-first-century investor, I don’t want all my wealth in digital form.
— James Rickards

Rickards then explains why the financial system is inherently unstable (complexity theory and financialization of the economy) and why gold acts as an insurance policy no matter what happens: Inflation, deflation, bank failures, and bail-ins. Gold is always gold. It’s outside the banking system, can’t be reproduced by fiat, and it also cannot be hacked.

“It is one of the few asset classes that perform well in both inflation and deflation. That is the best kind of insurance,” writes Rickards.

Despite all the love for gold, Rickards recommends only a 10 percent allocation of physical gold for individual investors. But it has to be physical, as the paper gold market (futures, unallocated certificates, exchange traded funds) is manipulated by banks and sovereigns and will default in case of a buying panic.

For the rest of the book, Rickards goes through the nitty-gritty of different scenarios leading to the destruction of digital and fiat money, including the government’s war on cash and tops it off with different ways how one can acquire gold.

Only Upside

His conclusion: “As a twenty-first-century investor, I don’t want all my wealth in digital form. I want part of my wealth in tangible form, such as gold,” he writes. He also says you should act now to be safe and not wait for the buying panic, as there won’t be any physical to go around.

Rickards is a good investor and portfolio manager because he also takes into account what would happen if he was wrong.

If gold drops 20 percent on a 10 percent allocation, you lose 2 percent of your investable assets and most likely the world will be fine: Stocks and bonds will do well, you will have your job and your business will do well.

However, if the complex system that is the world financial system indeed fails and needs to be reformed, Rickards thinks gold will go to $10,000, maybe even $50,000. And the gold allocation should make up for potential losses of other assets in your portfolio.

My recommendation: Read “The New Case for Gold,” to understand the most important aspects about gold and the financial system. Then buy some physical and in Rickards’ own words: “You’re ready to weather the storm.”