gunDriller
7th July 2010, 04:50 PM
http://us1.institutionalriskanalytics.com/pub/IRAMain.asp
This is about half of it. It's interesting because it implies that China's cost per gold ounce is $400 ... the Chinese government pays the smelter/ mine $800 per ounce. They are happy, China gets gold WAAAY below market cost.
It also suggests the interesting possibility where the Chinese mines could do what China does with so many other commodities - become the low-cost producer. If the Chinese mining companies are happy selling for $800 to the Chinese government, how would they feel about selling for $1100 to the world market ?
"The IRA: Thank you for taking the time to talk with us. We previewed this interview yesterday on CNBC in a discussion with Ian Bremmer of Eurasia Group and Nouriel Roubini. We wanted to talk to you today about the global economy and the dollar. You may have seen our reference last week ("Country Risk: The World According to Robert Rubin (Updated)", June 29, 2010) to the new borrowing rights that the International Monetary Fund has created at the behest of the inflationist tendency in the White House.
Rickards: My day job is working with funds and banks, but by night I focus on the geopolitical implications of the global macroeconomic outlook. The intersection of finance and geopolitics is a place that far too few analysts feel comfortable. The people who can speak to a three-star general about asymmetrical warfare and then turn around and speak to a swap counterparty about collateral issues are few and far between. At Omnis we are finding more and more call for just this type of expertise. When credit default swaps are taking down Greece and you realize that Greece is a NATO ally, the reason for interest in financials by the security community is obvious.
The IRA: As we have said before, we note an increased interest in financial markets by members of the security community. If you go through the contract awards for SEC and the bank regulatory agencies you will see some names that are most often seen in the defense community.
Rickards: There are actually two flows at the moment. The capital markets have a voracious appetite for geopolitical insights involving, for example, Iran and Israel with obvious implications for oil prices. At the same time the national security community needs to understand capital markets because the security of nations is being undermined by fiscal policies and credit default swaps as we've seen in Greece. My firm is comfortable processing information in both directions; helping the national security community understand markets and helping capital markets participants understand geopolitics.
The IRA: Using techniques tuned to predict security events can also help with screening incoming tips for a regulatory hotline, for example. But many of the "issues" facing regulators in better attacking problems in the financial markets involve process issues, not decision about the desired result. When our political class becomes so dissolute that their behavior threatens national security, it raises some issues that Americans are not used to dealing with.
Rickards: Agreed. To give you a sense of how much interest there is in financial matters in the national security community, I recently headed a panel at a program sponsored by the Johns Hopkins Applied Physics Laboratory, one of the premier private research centers in the U.S. for developing everything from new weapons to nuclear strategy. The topic of my paper was a hypothetical press release issued by the Russian central bank announcing the creation of a new, gold-back currency. In the hypothetical, the Russians also announce that exports of energy and other natural resources will have to be made in this new "gold ruble." The Russians would become a market maker in gold and effectively control the marginal price of gold transactions. This is basically a plan for taking down the dollar.
The IRA: It is an entirely plausible scenario. The Russians could establish a "gold" price for oil and then the paper currencies would trade at a discount. Thanks to the lack of leadership in Washington by either party, the U.S. is quite vulnerable to the creation of a gold-backed or commodity-backed currency. This August is the 40th anniversary of the decision in 1971 by President Richard Nixon, aided and abetted by a Treasury official named Paul Volcker and Fed Chairman Arthur Burns, to break the link between the dollar and gold. The excuse then was justified based on the short-term need for growth and inflation. As a senior Fed official told us, look at the period since the 1990s. Count how many quarters we have not had either fiscal stimulus or accommodative interest rates by the Fed to maintain the illusion of growth.
Rickards: Precisely. But what is interesting is that a couple of days ago, we saw the arrest of this seemingly hapless Russian spy gang. These people were a relic of the Cold War, running around Montclair, New Jersey, and meeting in New York coffee shops. But the one little tidbit that came out of the complaint filed by prosecutors is that the one subject that got a lot of reaction from Moscow was gold. Whatever these people were collecting for the Russians, the information about gold was of great interest. Often times in intelligence you care less about what the field agents are collecting than who is asking and why they are asking. The paper I did is getting written up all over the web. But the fact that the information on gold touched a nerve in Moscow confirms my view about their intentions toward the dollar.
The IRA: Well it is so obvious. We interviewed David Kotok of Cumberland Advisers last month, some of which will appear in Chris Whalen's upcoming book. Kotok just published a bullish book on Europe, Invest in Europe Now, and Kotok is even more bullish today. As he puts it, the Greeks gave the Germans a 20% currency devaluation. Kotok thinks that the crisis in Europe will eventually force the EU to fully integrate. But we speak to insiders with precisely the opposite view, who say the Europeans do not have a grip on the financial problems. Does the EU emerge stronger from the crisis?
Rickards: I agree with the view that says the EU gets stronger. I keep reminding people that the European Central Bank and the 16 members of the monetary system have over 10,000 tons of gold. They have more gold that the U.S. Treasury. We have just over 8,100 tons ourselves. If the EU were to go to even a partial reserve coverage with gold, say 20% backing, it would put Europe at an enormous advantage. They have enough gold today to set a target and make a two-way market in gold. I think that the first major currency bloc that goes to gold will dominate the financial world because it will become the only currency anybody will want. The first mover will force the other nations to follow.
The IRA: This is the idiocy of the U.S. position. We have set ourselves up as an easy target for our enemies. It is astounding that the Chinese have not been more aggressive in selling dollars. Maybe they are going to manage our downfall gently.
Rickards: I think the Chinese probably are doing it gently. The Japanese and Chinese are both influenced by Zen which, in Western jargon, is really about optionality. The whole idea of Zen is to avoid black and white decisions and instead create a range of options and possible outcomes. Instead of committing yourself to a binary decision, you create a fan of probabilities and look for your openings. So in that sense, if you think of it in options space, the Chinese are probably content to play the American paper game with the dollar, but all the while preparing for the day when the dollar collapses completely.
The IRA: Americans are convinced that it cannot happen here, the greatest nation on earth. Reminds us of France after WWI. Same degree of self-delusion. And no reaction by U.S. officials to the Chinese and Russia gold purchases?
Rickards: The Russians do not hide their purchases of gold. The incremental growth of Russian gold reserves is visible in their monthly statistics. The Chinese have been more surreptitious in their purchases but even they have announced the reserves doubled in recent years. The way that both of these nations add to gold without impacting the global price is that they are buying from internal, captive producers. And they pay below market prices because even paying $800 per ounce still gives their miners a tremendous profit. Between 2004 and 2008, China almost doubled the gold stocks of Peoples Bank of China, but they bought it through other state agencies to keep it off their books. "
This is about half of it. It's interesting because it implies that China's cost per gold ounce is $400 ... the Chinese government pays the smelter/ mine $800 per ounce. They are happy, China gets gold WAAAY below market cost.
It also suggests the interesting possibility where the Chinese mines could do what China does with so many other commodities - become the low-cost producer. If the Chinese mining companies are happy selling for $800 to the Chinese government, how would they feel about selling for $1100 to the world market ?
"The IRA: Thank you for taking the time to talk with us. We previewed this interview yesterday on CNBC in a discussion with Ian Bremmer of Eurasia Group and Nouriel Roubini. We wanted to talk to you today about the global economy and the dollar. You may have seen our reference last week ("Country Risk: The World According to Robert Rubin (Updated)", June 29, 2010) to the new borrowing rights that the International Monetary Fund has created at the behest of the inflationist tendency in the White House.
Rickards: My day job is working with funds and banks, but by night I focus on the geopolitical implications of the global macroeconomic outlook. The intersection of finance and geopolitics is a place that far too few analysts feel comfortable. The people who can speak to a three-star general about asymmetrical warfare and then turn around and speak to a swap counterparty about collateral issues are few and far between. At Omnis we are finding more and more call for just this type of expertise. When credit default swaps are taking down Greece and you realize that Greece is a NATO ally, the reason for interest in financials by the security community is obvious.
The IRA: As we have said before, we note an increased interest in financial markets by members of the security community. If you go through the contract awards for SEC and the bank regulatory agencies you will see some names that are most often seen in the defense community.
Rickards: There are actually two flows at the moment. The capital markets have a voracious appetite for geopolitical insights involving, for example, Iran and Israel with obvious implications for oil prices. At the same time the national security community needs to understand capital markets because the security of nations is being undermined by fiscal policies and credit default swaps as we've seen in Greece. My firm is comfortable processing information in both directions; helping the national security community understand markets and helping capital markets participants understand geopolitics.
The IRA: Using techniques tuned to predict security events can also help with screening incoming tips for a regulatory hotline, for example. But many of the "issues" facing regulators in better attacking problems in the financial markets involve process issues, not decision about the desired result. When our political class becomes so dissolute that their behavior threatens national security, it raises some issues that Americans are not used to dealing with.
Rickards: Agreed. To give you a sense of how much interest there is in financial matters in the national security community, I recently headed a panel at a program sponsored by the Johns Hopkins Applied Physics Laboratory, one of the premier private research centers in the U.S. for developing everything from new weapons to nuclear strategy. The topic of my paper was a hypothetical press release issued by the Russian central bank announcing the creation of a new, gold-back currency. In the hypothetical, the Russians also announce that exports of energy and other natural resources will have to be made in this new "gold ruble." The Russians would become a market maker in gold and effectively control the marginal price of gold transactions. This is basically a plan for taking down the dollar.
The IRA: It is an entirely plausible scenario. The Russians could establish a "gold" price for oil and then the paper currencies would trade at a discount. Thanks to the lack of leadership in Washington by either party, the U.S. is quite vulnerable to the creation of a gold-backed or commodity-backed currency. This August is the 40th anniversary of the decision in 1971 by President Richard Nixon, aided and abetted by a Treasury official named Paul Volcker and Fed Chairman Arthur Burns, to break the link between the dollar and gold. The excuse then was justified based on the short-term need for growth and inflation. As a senior Fed official told us, look at the period since the 1990s. Count how many quarters we have not had either fiscal stimulus or accommodative interest rates by the Fed to maintain the illusion of growth.
Rickards: Precisely. But what is interesting is that a couple of days ago, we saw the arrest of this seemingly hapless Russian spy gang. These people were a relic of the Cold War, running around Montclair, New Jersey, and meeting in New York coffee shops. But the one little tidbit that came out of the complaint filed by prosecutors is that the one subject that got a lot of reaction from Moscow was gold. Whatever these people were collecting for the Russians, the information about gold was of great interest. Often times in intelligence you care less about what the field agents are collecting than who is asking and why they are asking. The paper I did is getting written up all over the web. But the fact that the information on gold touched a nerve in Moscow confirms my view about their intentions toward the dollar.
The IRA: Well it is so obvious. We interviewed David Kotok of Cumberland Advisers last month, some of which will appear in Chris Whalen's upcoming book. Kotok just published a bullish book on Europe, Invest in Europe Now, and Kotok is even more bullish today. As he puts it, the Greeks gave the Germans a 20% currency devaluation. Kotok thinks that the crisis in Europe will eventually force the EU to fully integrate. But we speak to insiders with precisely the opposite view, who say the Europeans do not have a grip on the financial problems. Does the EU emerge stronger from the crisis?
Rickards: I agree with the view that says the EU gets stronger. I keep reminding people that the European Central Bank and the 16 members of the monetary system have over 10,000 tons of gold. They have more gold that the U.S. Treasury. We have just over 8,100 tons ourselves. If the EU were to go to even a partial reserve coverage with gold, say 20% backing, it would put Europe at an enormous advantage. They have enough gold today to set a target and make a two-way market in gold. I think that the first major currency bloc that goes to gold will dominate the financial world because it will become the only currency anybody will want. The first mover will force the other nations to follow.
The IRA: This is the idiocy of the U.S. position. We have set ourselves up as an easy target for our enemies. It is astounding that the Chinese have not been more aggressive in selling dollars. Maybe they are going to manage our downfall gently.
Rickards: I think the Chinese probably are doing it gently. The Japanese and Chinese are both influenced by Zen which, in Western jargon, is really about optionality. The whole idea of Zen is to avoid black and white decisions and instead create a range of options and possible outcomes. Instead of committing yourself to a binary decision, you create a fan of probabilities and look for your openings. So in that sense, if you think of it in options space, the Chinese are probably content to play the American paper game with the dollar, but all the while preparing for the day when the dollar collapses completely.
The IRA: Americans are convinced that it cannot happen here, the greatest nation on earth. Reminds us of France after WWI. Same degree of self-delusion. And no reaction by U.S. officials to the Chinese and Russia gold purchases?
Rickards: The Russians do not hide their purchases of gold. The incremental growth of Russian gold reserves is visible in their monthly statistics. The Chinese have been more surreptitious in their purchases but even they have announced the reserves doubled in recent years. The way that both of these nations add to gold without impacting the global price is that they are buying from internal, captive producers. And they pay below market prices because even paying $800 per ounce still gives their miners a tremendous profit. Between 2004 and 2008, China almost doubled the gold stocks of Peoples Bank of China, but they bought it through other state agencies to keep it off their books. "