Jim Rickards on Fed Policy and Why Gold Is Winning the Money Competition

Also in here: A preview of his latest book: "The New Case for Gold"
March 16, 2016 Updated: March 18, 2016

An introduction to lawyer, portfolio manager, government adviser, lecturer, and author James Rickards could easily be five pages long. Sifting through his CV, it’s easier to pick the things he doesn’t do rather than listing all the different jobs and responsibilities he holds and has held over the past decades. This is what is keeping him busy at this moment:

He is the chief global strategist at West Shore Funds, a registered investment advisor, and he edits the financial newsletter Strategic intelligence. He advises the department of defense and also lectures at Johns Hopkins University and other prestigious institutions. What he is best known for, however, are his two best-selling books about the global financial system, “Currency Wars” (2011, Portfolio Penguin) and “The Death of Money” (2014, Portfolio Penguin).

Both books have defined and predicted important trends in financial markets that major media organizations and well-known commentators frequently overlook, or only pick up on years later.

Epoch Times spoke to Mr. Rickards about his forthcoming book “The New Case for Gold” (Portfolio Penguin, 2016), Federal Reserve policy,  and gold

The Fed decided not to raise rates; they chickened out of their own policy which they laid down in December.

Epoch Times: Let’s start with the Fed.

James Rickards: They have a meeting this week, the Federal Open Market Committee, which is the policy-setting committee of the Federal Reserve. They meet eight times a year, this is one of the meetings, but four times a year they have a press conference after the meeting and that gets a lot more attention because Chairman Yellen will come out and answer reporters’ questions for about an hour or so. You get a lot more information.

Of course, my expectation and the market expectation is that they will not raise interest rates at this meeting.

December 2015 was the famous liftoff when the Fed actually raised rates. They did a lot more than that at the time, though. They laid out a path for the next three years. They said it was their goal to raise interest rates 300 basis points, or 3 percent in three years, but to do it in slow steps so as to not shock the market.

That would come to 100 basis points, or 1 percent, a year. They have eight meetings per year, so the minimum practical increment is 25 basis points. So assume a minimum of 25 basis points, which would be consistent with the idea that they want to do things slowly and very incrementally.

They did say that it was data-dependent and things could change, they put in all the usual caveats, but subject to that, you could assume that every other meeting for the next three years they’re going to raise the rates 25 basis points.

I personally think of gold as money.

Having said that, in December, their expectation and my expectation was that they would raise rates in March subject to economic indicators. And the economic indicators were slightly better than they were in December. Growth is coming along a bit better for the first quarter of 2016 than in the fourth quarter of 2015. Employment gains have continued to be strong. Inflation is ticking up a little bit—not to an extreme level but to a level that would make the Fed more, rather than less, likely to raise rates.

So all the economic data indicates that based on what they said, they will raise rates in March. But they’re very clearly not going to.

James Rickards with his new book "The New Case for Gold"
James Rickards with his new book “The New Case for Gold”

Epoch Times: Why not?

Mr. Rickards: Because of market volatility in January and February. The market went down, stock markets went down 10 percent, they were very volatile, and we were almost staring into the abyss in early February.

At that point it became clear—at least the Fed started to leak hints—they weren’t going to raise rates and the market bounced back. So you have this, call it a recursive function or feedback loop, almost like a staring contest or game of chicken between the markets and the Fed.

The markets went down so much this time that the Fed blinked. The Fed decided not to raise rates; they chickened out of their own policy laid down in December. It’ll be interesting to see what they actually say on Wednesday because they’re not going to raise rates, but what are they going to say about it?

If people lose confidence in the other forms of money they’ll go to gold.

What reason are they going to give? There is some weakness in some of the data, but based on the Fed’s metrics of employment, job creation, inflation, GDP growth, etc. it looks like they should raise rates but they’re not going to.

So all they can say is “market volatility.” That’s an invitation to the market: Every time the Fed is going to raise rates, just go down and the Fed will chicken out. I don’t think that’s going to happen next time. I think in June, particularly after having skipped March, they’re going to want to get back on track. They’re going to raise rates, but the market expectation is still not better than 50 percent that they will.

What that tells me is to look for stocks to go down, with some volatility, but to go down between now and June. Because they’re not fully priced for a rate hike, but I think one is coming up anyway.