August 28, 2019
James Rickards, who has been warning about fault lines in America’s financial system for more than a decade, is one of the country’s most forward economic thinkers.
The prolific writer mixes with big bank board members, CIA spooks, and grubby miners in the Val D’Or Quebec pits.
After four major works—including Currency Wars, The Death of Money, The Road to Ruin, and The New Case for Gold—you’d think he’d run the gamut.
In his latest book, Aftermath, Rickards updates readers on his thinking and doubles down on his forecast that gold prices, up 25% since we published his initial prognosis in 2016, will hit USD $10,000 per ounce.
An innovative investment strategy: 10% invested in physical gold
Rickards believes that the U.S. economy is already in a depression as defined by John Maynard Keyes, which is a sustained period of sub-par economic growth.
This fact is masked by the reality that U.S. statistical agencies have redefined the way they calculate the unemployment rate, which would in fact be above 10% using previous methodologies.
Rickards’ key message—which makes him a perennial favorite at gold conferences (including, full disclosure: numerous Sprott events)—is that investors should hold 10% of their investable assets in gold, to act as a hedge against coming catastrophe.
This, he says, will come from a variety of factors ranging from a 60% stock market crash, to multiple decades of economic stagnation, to the collapse of major U.S. banks.
Rickards says financial institutions are far more vulnerable than they appear, because much of their derivatives trading is now done through clearinghouses whose debts they are collectively liable for.
Longer-term, America will be particularly hard-hit if oil begins to be priced in IMF-issued special drawing rights, as Russia, China, Iran, and Turkey combine to force accelerated de-dollarization.
The ultimate hedge
In Aftermath, Rickards assigns greater probability to deflationary pressures than he did in previous works, and thus recommends a 30% cash allocation to enable investors to profit from any downturns, with the balance of the portfolio going into equities.
Rickards figures that by using this “barbell” investment strategy, investors will be protected against wild portfolio fluctuations during a time when, for most investors, return of investment is a bigger priority than return on investment.
For example, if gold prices were to fall 20%, an investor who held 10% of his portfolio in gold would register a related setback from the category worth only 2% of his overall holdings.
On the other hand, due to gold’s counter-cyclical properties, a fall in prices would suggest that the investor’s other asset classes are doing much better.
Forecasting long-term cycles
Rickards, who also edits the Strategic Intelligence newsletter, thinks in multi-year and often multi-decade cycles. This, however, poses certain challenges.
One of these is dealing with friends, clients, and readers who want to know what day the economic reset—which smart money managers think is coming—will happen.
(Rickards says he has never met a major hedge fund manager who did not personally own gold.)
The lawyer and former accountant won’t bite.
Rickards likens accumulating system debts, central bank stock market manipulations, and financial institution off-book derivative trading to piling snow on a mountain. Just one snowflake will set the avalanche off—you just never know which one that will be.
Rickards’ favorite talking point is that during the 1998 Long-Term Capital Management crisis, the big banks bailed out the hedge fund. During the 2008 crisis, central banks bailed out the financial institutions.
But during the next crisis, the central banks themselves will need to be bailed out, says Rickards, possibly by the IMF and through hyper-printing of a global currency.
All of this, he says, would be highly inflationary and thus boost the value of hard assets relative to paper claims.