Epoch Times: Mr. Rickards, in our last interview (Part 1, Part 2), we talked about gold and why it should rally. You also said the Chinese are behind buying a lot of physical ...
James Rickards: I met with the largest gold refinery in the world, the head of precious metals operations. He’s recently expanded his own capacity; they put a whole new area in their factory and it’s highly automated. And he’s working triple shifts, he is working 24 hours a day to produce gold.
He is producing 20 tons a week and half of that is going to China. So that’s 10 tons a week, which is about 500 tons a year. And that’s just one refinery, not counting all the others, that’s a lot of gold.
He said the Chinese want more, but he won’t supply it because he has regular customers. He supplies Rolex watches and other high net-worth individuals and institutions; these are all long standing customers. He can’t refuse to fill their orders.
He said: “I’m making all the gold I can, working 24 hours a day, sending as much gold as I possibly can to China, 500 tons a year and the Chinese still want more.”
Epoch Times: How can supply keep up?
Mr. Rickards: So where is the gold coming from? It’s coming from mining output, scrap, and 400 ounce bars. The Chinese are basically turning their back on the London gold market and creating a new standard. So the old standard was the 99 percent pure gold 400 ounce bar, the new standard is a 99.99 percent pure gold one kilogram bar.
So what the refineries are doing is they are taking 99 percent 400 ounce bars, and they are refining them to 99.99 percent kilo bars because that’s the only thing China wants.
You are taking 400 ounce bars, which weigh about 25 pounds or 10 kilos, and turning them into one kilo. Chinese like one kilo because there is a lot of consumer demand for that, and it’s a lot better for smuggling. There is a lot of capital flight coming out of China.
The Shanghai Gold Exchange is in the process of replacing London as the center of gold trading in the world, and I have already mentioned a couple of aspects of that [in my earlier interviews].
One is a lot of floating supply is moving there; two the Chinese have changed the standard from 400 ounce bars to one kilo bars, and they are facilitating the trading and building of very large vaults in Shanghai and they’ve got their own refineries. So taking all these trends together, it’s very clear that the center of gold trading is moving from London to Shanghai.
Epoch Times: What about the Chinese purchase of the JPMorgan gold vault in New York?
Mr. Rickards: I don’t put much stock in buying the JPMorgan vault, that was a real estate transaction. They’ve bought the whole Chase Manhattan skyscraper. There happens to be a vault in the basement. I can’t imagine they spend upward of a billion dollars on a building so they can get a vault. I am sure it was a real estate deal, and they wanted the building, but yeah, there is a vault.
Also, if you are Chinese, why would you want your gold in New York, you would want your gold in Shanghai. But what is going on in Shanghai is very significant. Suffice to say that China is the coming world gold power. In terms of the world monetary system, Shanghai is becoming the center of world gold trading as opposed to London and putting these two things together, you have to ask yourself why?
Epoch Times: Why?
Mr. Rickards: I think they see something most people don’t. The international monetary system based on paper currencies is fragile and likely to collapse, and when the system needs to be reformed, the people with the largest voice at the table will be the people with the most gold.
Epoch Times: Right, but even including this frantic buying, the Chinese have a lower percentage of their money supply reserved in gold than the United States.
Mr. Rickards: I agree with that, which tells me they will keep buying. I think they have acquired three or four thousand tons secretly, but I don’t think they are done.
Epoch Times: Can China supply the world with a reserve currency?
Mr. Rickards: Not with the yuan. A: They don’t want to open their capital account. B: The yuan can’t possibly be a global reserve currency. It is expanding in use as a trade currency, but most people don’t understand the difference between a trade currency and a reserve currency. The trade currency is just a way of keeping score in the balance of payments mechanism.
If you are Brazil and China, and Brazil agrees to take yuan for Brazilian goods, and China agrees to take reals in exchange for Chinese goods, that’s fine. Then you just keep score and settle up every now and then. That’s a trade currency.
But to be a reserve currency means that countries that have reserves have to invest it in something, so you need a deep liquid pool of investable assets. China does not have that. There is no Chinese bond market. There are a few Dim-Sum bonds and a few other things, but there is no Chinese government bond market to speak of, and it would take 10 to 15 years to develop one.
But it’s not just about issuing debt. China doesn’t have to borrow because they have too many reserves. If they don’t borrow then there are no bonds, and if there are no bonds there can’t be a reserve currency because there is nothing to invest in.
Even if they did, there is no rule of law in China, so why would you trust the Chinese not to steal your money? So putting all that together, they are not even close to being a reserve currency.
Epoch Times: So what are the Chinese up to?
Mr. Rickards: What China wants is the SDR [Special Drawing Right, a type of money for governments], because it’s not the dollar. It’s issued by the IMF [International Monetary Fund], and China is simultaneously lobbying for more votes in the IMF.
China is trying to use its willingness to lend money to the IMF to purchase SDR notes from the IMF to give the IMF money to bail out Europe. It’s trying to use that as a lever to get more votes. If it has more votes, it would be comfortable using the SDR as a reserve currency, because its use would be regulated by the membership and that would make China the second largest member after the United States.
The United States is opposing it, but Christine Lagarde [Head of the IMF], is pushing very hard to increase the Chinese role. It’s a complicated global game.
If you said to me, does China want to get rid of the dollar as the global reserve currency, the answer is yes. But most people think it’s that they want the yuan. They don’t. It’s the SDR.
Epoch Times: What can the United States do about the money owed to China?
Mr. Rickards: All we have to do is inflate our currency and pay them back in cheaper dollars and that reflects a wealth transfer from China to the United States. So China is completely vulnerable to that, which is why they are buying gold to create a hedge.
If we inflate, then gold will go up. So what they lose on the paper, they make on the gold.
James Rickards is the author of the national bestseller “Currency Wars” and the forthcoming “The Death of Money.” He is a portfolio manager at West Shore Group and an adviser on international economics and financial threats to the Department of Defense and the U.S. intelligence community. Follow on twitter @JamesGRickards.
The interview has been edited for brevity and clarity.
