Jim Rickards Warns: Global Shutdown Is Near

The straits closed. The global economy is about to suffer major shutdowns because we've used up all of our reserves.

And people say, "Well, Jim, okay, we've been hearing about this for months. You know, oil, natural gas, sulfur, helium, none of this stuff can get out of the straits. Um, we haven't seen the, you know, the collapse yet. What's going on?"

Gold has been going up on some fundamental vectors which we described. It hasn't yet hitched on to the inflation bandwagon because that tipping point over to changed expectations has not happened yet, but it's we're right on the edge. It's very close to happening. And I expect if you see the war continue and you see higher prices get even higher and that flows through to a large list of goods and services and expectations change, you're going to start to see that demand-pull inflation and that's going to drive the price of gold a lot higher. And I lived through that in the 70s. cuz I saw it uh firsthand that people go, "Well, Jim, you know, gold is like struggle to get back to $5,000 an ounce. How's it ever going to get to 10,000, you know?" Well, the answer is that.

Welcome to the Microscopic Podcast. My name is Alex Adrenov and I'm your host. And today I have the pleasure to welcome back Jim Records.

"It's great to be with you, Alex."

Quite some time we haven't spoken. Uh the last time was when you actually came to Amsterdam in December to celebrate our anniversary. Uh which was amazing to meet you in person to be able to also sit with you and uh to spend those few days to getting al to also to to get to know you to yeah better and also share this uh uh almost three-hour long conversation that we had with Peter Schiff which I think was uh was a really great conversation. I had a lots of good good uh feedback comments, people who really said this should be taught in school. Uh so again, I want to thank you for for this uh time that you spent with us and the knowledge that you shared.

"You're welcome. I I thoroughly enjoyed the visit to your offices. Uh it's my first time in Amsterdam, so I loved getting to uh know the city. It's a great walking city. Kind of walked all over the place. You had to watch out for bicycles, but other than that, it was it was really uh really enjoyable. And uh I've I've known Peter for a long time and it was great to meet your team uh um you know the uh the owners and the principles and the staff. So it was really uh very very enjoyable."

So obviously since then a lot of uh things happened. I mean it was 8 months and 8 months in in macroeconomics and geopolitics is uh is plenty. It's it's almost like a decade's worth of events that unfold in the last couple of months. And I would like to get back onto a few things that you said back then and that was mainly uh in relation to some of the forecast of some of the developments you saw actually accelerating um which was the the call for um a severe recession, uh the the the falling US stocks especially more related to AI, uh and gold potentially reaching $10,000 an ounce by 2026. Um so I would like to first start um which of those uh let's say calls uh would you say materialized? Which ones are not let's say per se going into the right direction or how do you basically analyze uh those projections that you made back then?

"Sure. Well, it's uh like it's not just a matter of projections that's important and I'll I'll turn to that. But it's also the uh the analysis behind them and those just don't throw numbers out there and you know we hope for the best. Uh you have to um understand the dynamics and give reasons why and then that's the basis for uh uh telling you whether you stick with the forecast or not. If the fundamentals haven't changed, if the inputs haven't changed, then the forecast should be the same. Even though of course there's volatility along the way, which is easy to explain because we have a war on that we didn't have uh then. But yeah, gold is still going to make its way to $10,000. It's going to get there a lot sooner than people expect. Um the US is um in for a severe recession, but let me spend let me spend a little time on that and then I'll I'll pivot to gold. Um the uh people focus very much on the word recession, at least in the US, it's the rule of thumb is two consecutive quarters of declining GDP. That's a recession. Um, some are longer than others, some are shallow, some are deep, but that that's the basic rule. We have not had two consecutive quarters of declining GDP. It goes goes up and down. It's not particularly high at the moment. Um, and so people go, "Well, there's no recession. What are you talking about?" Um, I would say two things. Number one, uh, where if there's a recession, I expect there will be. It will be a technical recession within a depression. And a depression is a different thing. Uh the definition of a depression is a uh is growth below trend or below potential with neither a tendency to collapse nor to return to potential. In other words, if your potential growth is say 3 and 1/2% and I think that is reasonable for a developed economy like the US and for that matter um developed economies in Europe. So if your potential's 3 3 and 1/2% you're growing between two and 2 1/2% which we have been s on average since 2007 you're in a depression. You don't have negative growth. Your GDP is not going down but you're nowhere near your potential and that gap between the potential growth and the actual growth is lost wealth. So I would say the US has been in a a long depression since 2007. Japan has been in a long depression since 1990. Uh we've seen these kinds of 20 30 year depressions in Japan's case maybe 40 years. They've happened before um in the late 19th century for example. So um you know from 2009 to 2019 for example uh from the end of the COVID uh uh sorry from the end of the uh great global financial crisis to the beginning of the COVID pandemic 10-year period uh average annual GDP growth in the United States was 2.2%. Well that kind of proves my point. If your potential is 3.5 and you're growing at 3. oh sorry you're growing at 2.2 too. That's a depression. That's trillions of dollars of lost wealth. We're still in that mode. So, that hasn't changed.

Now, a technical recession, um it's easily foreseeable, and this is the result would be the result of the um uh the war in Iran and high energy prices, oil and natural gas, but not just energy prices. Uh the the fact that the straits of Hormuz is closed. Uh which we all know um affects uh sulfur, nitrates, helium. These are not just kind of generic commodities. Helium is uh necessary for semiconductor production. You need a very uh you know, kind of sterile type environment to do the etching and um the microscopic etching and helium is a critical input of that. Without helium, you you basically shut down parts of the semiconductor industry. Sulfur sounds like a mundane chemical but it's a precursor, the chemical in uh thousands of chemical processes and in particular with nitrates, urea and sulfur necessary for the uh creation of fertilizer, basically um nitrogen-based fertilizer. Um we're getting closer to the um planting season in the southern hemisphere that begins in September. And people say, "Well, Jim, okay, we've been hearing about this for months. You know, oil, natural gas, sulfur, helium, none of this stuff can get out of the straits of Hormuz. Um, we haven't seen, you know, the collapse yet. What's going on?" Um, the answer is uh has several dimensions. Number one, um people have been able to use substitutes. So China's burning more coal. Um Japan is getting some oil from the United States that it did not get before, but the US is a net exporter. Russia has increased its exports. Not enough to make up what's missing, but enough to kind of keep things going, if you will. Um and more importantly, everyone has drawn down reserves. So, China had a strategic petroleum reserve. The United States has a strategic petroleum reserve. Some other countries did as well. They've had uh nitrogen fertilizer reserves. Um they've had reserves of all these things we're talking about. They've all been drawn down. Well, now we're at the point where the closures continuing. The reserves have drawn down. There's not have been drawn down. There's nothing on the way. So we are now um uh after uh really seven months of the war getting to the point where that kind of global economic shutdown is about to begin. Um the ceasefire failed and it it won't be revived. Uh there's there's still some peace talks going on in uh um and Qatar and uh and Turkey I believe but um they're not going anywhere. The, you know, Iran, Iran would sign a deal that gives them $80 billion of, uh, you know, released assets, freedom from economic sanctions, uh control of the straits of Hormuz, and the US withdrawing military from the militarily from the Middle East. Trump won't do that deal. Trump would sign a deal that says the straits of Hormuz is open with no tolls. China or sorry, Iran gives up its highly enriched uranium, discontinues its nuclear um uh you know, weapons making projects subject to international inspections. Um and then maybe at that point the US would release sanctions, relax sanctions. Iran won't do that deal. So yeah, they're floating proposals, but I'm not surprised. In fact, I said that the ceasefire wouldn't last and we'd be back to military action. Here we are. Uh the number of vessels going through the straits of Hormuz, I mean we have actual pretty good numbers. They're hard to get but um five a day, nine a day. The normal traffic was 160 vessels per day. So yeah, a couple of them are get get through and people you know blast over social media. It's minuscule compared to um what's there and what's still bottled up in the Persian Gulf. So um the the short answer is now the and the US has resumed bombing now. So the peace deal is off the table. Um the bombing continues. The attacks by the United States continue and Iran shooting back. America's suffering casualties are hitting US bases in Jordan, hitting other critical infrastructure, Saudi Arabia and elsewhere. So the war is back on pretty much full tilt. Except it's worse because now the Houthis are uh going to close the Red Sea. There's actually more vessel traffic of the con we're discussing through the Red Sea than there is through the straits of Hormuz. Um and in effect it's tantamount to closing the Suez Canal. These choke points are shutting down. Uh and Trump says, you know, I'm going to bomb the Houthis back into the Stone Age. Well, I have news for President Trump. The Houthis live in the Stone Age. I mean, they they live in caves. They they're nomadic. You can't bomb them into the Stone Age. They're already there. And the past bombing, Saudi Arabia's been fighting them for 10 years and with no apparent effect. So, uh the likelihood and and you know, it's not as if the Houthis have a navy and they're going to go out and interdict every vessel. You don't have to. All you have to do is blow up one or two a week. That's enough to shut down traffic because do you want to be the captain who goes in risks a vessel and the cargo and the crew and your lives and everything else on, you know, might not be your day. You know, you might be the one they decide to blow up. And Iran. Same thing with Iran in the straits of Hormuz, which they only have to blow up the occasional vessel to shut down the traffic because of insurance legalities, risk to crews, etc. So that's where we are.

So um the straits closed, the global economy is about to suffer major shutdowns because we've used up all of our reserves. Uh Trump's uh the the the peace deal is off the table. The two sides are just not going to agree. um at least well they're not going to agree uh period and then uh so what's Trump doing with the bombing now? Here it's really important to understand that this um it's not going to lead what we're doing now by itself will not achieve anything. It will not get regime change. It will not get the highly enriched uranium, etc. Uh but it is uh in military parlance this is called conditioning the battlespace or shaping the battlespace. Basically, we're getting ready for something much bigger. It's not here yet, but you know, blowing up bridges, blowing up control towers, blowing up railroads, blowing up port facilities, it's damaging in and of itself. Not enough to get regime change or achieve anything, but it will soften the target, if you will, for a major operation. What would that be? Um, the US might go in and try to actually get the highly enriched uranium. I call this uh operation Aztec. Uh, you know, the Aztecs used to, you know, rip the beating hearts out of their victims and the heart they hold it up and the heart would still be beating and chop the guy's head off and roll him down the temple. Um, if you rip the highly enriched uranium out of Iran, then who cares what happens to Iran? You've basically gotten rid of the threat. Uh, the other one that would but that would require division uh strength invasion. um meaning 10,000 troops um army corps of engineers, CB, special operations command, surveillance, air support, a lot else and you would have casualties but basically you have to establish a security perimeter so that the mining and disarming the booby traps etc could go on to actually get the uranium out of there but you'd be fighting a large battle around it at the same time. That's 10,000 boots on the ground plus uh a lot more that the US could muster. Um, another possibility, and the US has not demonstrated this capability, but um, it may exist, are hypersonic missiles. The uh, basically modeled on the Russian Avangard missile. You don't actually need tactical nuclear weapons anymore because these hypersonic missiles, they don't have explosives. They just have a really dense metal core and they hit at 10,000 mph and create the land equivalent of a tsunami. It's basically the whole earth shakes. And that would probably be enough to bury this um highland Iran in a way that the Iranians couldn't even get to it. So, uh not sure which, but something major of that sort is coming.

Now, let's get back to your your question, Alexi, which is basically the impact on the economy. This is going to take time and prices are going to go up in the meantime. They went down a little bit. Okay, so they went up in um uh March and April. They leveled off. They came down a lot in May. Over the course of June with the MOU and the peace talks. You know, Brent went from $110 a barrel to $85 a barrel, a little bit less actually, closer to 80. It's back up now into the '90s, probably heading to 100, but it's going to go up. Uh and that's those are futures contracts. People have to understand Brent futures and uh West Texas Intermediate futures settle two months forward. So those are bets about where traders think on average oil prices are going to be two months from now. That's not for wet cargos. If you want to you want to call a cargo broker and say, "Hey, I want a tanker full of oil delivered to my refinery next week. I want to actually buy the cargo." That's not a futures market. That's a that's a, as I say, it's a cargo transaction. Those prices are much higher, $120 a barrel or more. That's going to uh so between the agricultural inputs, the chemical inputs, oil and liquid natural gas, that's going to start to feed through the supply chain. We're going to see much higher prices. So, you're going to get inflation. Uh some people are going to suffer shortages. At the extreme, you could be looking at mass starvation. Um so, that's what happens with mere escalation and what we call forever war. Trump's not going to do that. So if you can't get a peace deal and a forever war is not sustainable, what's left? What's left is a major escalation of the military operation, some kind of invasion. So uh look for that. That's going to be a shock that will send gold much higher by itself. Um so the recession's coming. Uh as far as gold price is concerned, it's very easy to explain. So when we when we last met when we met in Amsterdam, gold was in the 4,000s. But by the end of January, it was uh it was at an all-time high. You know, it depends on the ticker, but $5,300 per ounce. Some quotes are a little higher. It depends on what ticker you were looking at, but I'll say 5,300. It dropped uh it has since then it has dropped all the way to about $4,000 an ounce. Up a little bit uh as we speak, but um uh it found it seemed to find a floor. It had $3,900 an ounce right around there. That's a uh 25% drop. Um but if you uh pick a base um say $1,800 an ounce, which was not too long ago, less than less than two years ago. So if you take $1,800 as a base and then go up to 5,300. Okay? I said take that as your gain and then take half of that. That's about where we are in terms of uh basically 40% decline of of the giving up 40% of the gains since that baseline of about $1,800. I talked to Jim Rogers about this years ago and uh you know, probably the greatest commodities trader of all time. And he said to me, this is when uh gold gold had peaked. The earlier peak was about $1,900 an ounce in August 2011. We were we were talking it was around 2013. Gold had come down a lot and Jim said to me uh he said, you know, nothing goes to the moon without a 50% drawdown along the way. That's just how commodities trade and if you're not if you don't know that or you're not prepared for that, you should not be in that commodity. Um but then we can take a look at fractal mathematics, uh basically Mandelbrot and he introduced a concept called scale invariance and what it says in volatile systems if I gave you a one-week chart and I gave you a 10-year chart and I just took out the timeline so you're looking at two charts with diff with with whatever scale, whatever timeline, but you don't know which is which, the charts are the same. In other words, that kind of the volatility you see in a 10-year chart repeats on a daily basis. That's what we mean by scale invariance. So, taking Jim Rogers' point, which I think is he's exactly right, and applying it to the current context on a smaller scale because we're starting not from $250 an ounce, but you know, like $1,800 an ounce. That's what we're seeing. We're seeing one of those drawdowns. Now, based on that, how low could it go? My estimate. I'm not this is not a forecast, but it wouldn't surprise me to see gold go to $3,600 an ounce. That's a that's a that would be a base, a full 50% drop from the prior base of $1,800 as I described. That's what the math would say. That's what history would say. Won't necessarily get there, but that's that's a pretty hard floor. But from there, it takes off. So, you know, just if you don't have your gold, get some now. It's a good entry point. If you do, hang on because the fun's just about to begin. Uh we've seen our 50% drawdown off a base of 1,800 relative to 5,300. It's how these things go and it's going to go up.

Now, what were the catalysts for this? I described the math and and the volatility and the history of commodities price movements and I think Jim Rogers got it right and I know Mandelbrot got it right. Uh so I'm just applying those u uh those insights. Uh what were the catalysts for this? Like why did this happen? Very, very easy. People, the price of oil doubled. It went to $60 an ounce to $120 now. I know it came down and it's back up again. But basically, oil is priced in dollars. Everybody needs oil. That means everybody needs dollars. When you double the price, you need twice as many dollars. And where do you get them? There's a global dollar shortage. The banks aren't lending. So, one of the things you can do is sell gold and get dollars, and that's what's been going on. So, central banks are still net buyers. Um, uh, I think the buying interest is still pretty high. But it is the case that central bankers have had and sovereign wealth funds and others, traders have had to sell gold to get dollars to pay for oil because they need the dollars. And Russia has uh had taken its reserves from 600 metric tons to about 2600 metric tons about six months ago. But in the past six months, they've been selling uh they've sold um several hundred metric tons. But the reason is simple. As I said, they need they they're subject to sanctions. They're, you know, Europe won't buy their energy, etc. They need the dollars to run basically war machine for the war in Ukraine. You see how this is all connected, you know, oil, dollars, gold, wars, they're all connected and you really have to look at the global macro and the geopolitical to to understand it. Um, but having said that, the fundamentals on gold haven't changed. Net global mining output is flat. Um demand is growing. Uh the uh the safe haven aspect of it uh is is still there. There is a temporary blip because um people are selling some people are selling gold to get dollars to pay for oil. That will change and then uh I think we'll be and we've had our drawdown so we got that behind us and I think we'll be off to the races. So, uh, I do look for a global recession. Uh, gold taking off from here, maybe a little bit lower in the short run, but taking off a lot from here, getting to $10,000 an ounce faster than people expect. Uh, and the war getting um a lot worse before it reaches a final stage with the final stage will be pretty dramatic.

"So, if I understood correctly, um, you you foresee then this this huge move then in gold to still persist by the end of the year. Um oil in in the contrary is also then set to then increase dramatically then if this Hormuz crisis still deepens uh with all tankers not being able to go through. So which um at which oil price would that shock become than the global recession?"

"Well, I think I think we're there. Uh we're um because it's not just about price. I mean price is a reflection of something else which is supply and a very good question I've been asked is, well Jim, you've been predicting these shortages and price spikes and inflation all that and I have and I I stick to that but why hasn't it happened already? And the the answer is that we've been drawing down reserves but that's been that got us through and there's been some substitution as I mentioned from oil to coal and there is some there are some net exports from the US and Russia but subject to all that uh we're at the end of that um ability to substitute or draw down reserves and so the impact is going to be felt um very quickly. But one thing that gold has not been driven by um is inflation. It uh it has been driven by um safe haven demand, the desire to get out of US Treasuries to some extent because the EU has been stealing trying to steal Russian assets. Um the Iranian assets are frozen. People, more countries I should say, are more concerned that the US will use its u control of the dollar and the US not so much the dollar but US Treasury securities ledger controlled by the Treasury, US Treasury and the Federal Reserve to freeze assets and people say, well, what happens if the US wakes up and decides they don't like what I'm doing, you know? So maybe I already got some gold to offset that. So those are that's what and and mining output is flat. I'm not saying peak gold, but maybe it is peak gold. I mean I I've invested in a few mining companies. I know just how difficult it is to uh to find high-grade deposits. It's getting more and more difficult. So, putting all that together, the price of gold has been moving on fundamentals, but we haven't had that much inflation. Well, here it comes. Now, the inflation is here. And inflation has two, well really three um main causes if you will. One is a supply-side breakdown. So, supply chains break down. You have scarcity of goods, the shelves are empty. That's by itself is enough to bid up the price. Uh the other one is with higher energy prices. It's not just gas at the pump. That's what Americans and others see. You pull in, you fill up your car, you see the price of gas at the pump. So it's very tangible to most people. It's in your face. But everything moves by fuel. It's if not gasoline, diesel, uh and uh you know, moves by truck. Everything you see in the store or everything that gets delivered to your house got there by a truck and trucks run on diesel. And diesel's prices are going up faster than the gasoline prices. But it's not just the shipper has to pay more for gasoline. They they raise they raise the price of everything being transported to make up for the fact that the diesel prices are higher. So that feeds inflation through basically all goods and services. Um and uh but at at that point that tends to be self-correcting, which is prices get high. People they pay more for gas at the pump. So you you cut back somewhere else. You don't go out to dinner. You don't take a vacation. You don't buy new clothes. Whatever it is, you you skimp because you can't afford because you're you're you have to pay for the gasoline. It's inelastic inelastic demand. Um but that because of that you tend to get layoffs, uh higher unemployment and recession as we described. But there's a tipping point. There's a tipping point where it moves from the supply side to the demand side, what's called demand-pull inflation, where people's expectations go up like, hey, you know, this inflation isn't going away. It's getting worse and I was thinking of buying a refrigerator. I was thinking of buying a you know, some new furniture. I better I better do it now before the price goes up. So you're pulling demand forward and that kind of psychological behavioral process drives prices. Shutting down inflation coming from the supply side is relatively easy. It tends to shut itself down because you know unemployment goes up and substitutions and things I mentioned. But shutting down uh inflation from the demand side is much more difficult because it's behavioral, psychological. It's not like a knob than the monetary policy that you can just fix and from that you'll get much higher interest rates and that will drive the price of gold a lot higher. So gold has been going up on some fundamental vectors which we described. It hasn't yet hitched on to the inflation bandwagon because that tipping point over to changed expectations has not happened yet. But it's we're right on the edge is very close to happening. And I expect if if you see the war continue and you see higher prices get even higher and that flows through to a large list of goods and services and expectations change, you're going to start to see that demand-pull inflation and that's going to drive the price of gold a lot higher. And I lived through that in the 70s. I saw it uh firsthand that, you know, the 70s were the same thing. The 73, 74, well 73 inflation was a supply-side shock. 74 was a really bad recession, stock market crash, but then after that, you know, in 76, 77, 78, that was all demand-driven. And then, of course, inflation got to in the US got to um uh 15% in uh in 1980 in 1980, 1981, and that was when Volcker took interest rates to 20%. So, we'll see how it plays out, but that that's a driver of higher gold prices. It hasn't really kicked in yet, and I expect it will. And then the last thing I'll add, Alexi, I said, um, you know, later this year maybe, but it could be 2027. I'm not pushing it off five years. Might push it off, you know, six months or one year. But as we mentioned before, people go, "Well, Jim, you know, gold is like struggle to get back to $5,000 an ounce. How's it ever going to get to 10,000?" You know? Well, the answer is that uh if you think of thousand benchmarks, um each one is easier than the one before because you're working off a higher base. So, when you go from $4,000 to $5,000 an ounce, that's a 25% increase. That's a pretty steep climb. But when you go from $9,000 to $10,000 an ounce, that's only an 11% increase. That's like a a month's volatility these days. So, you'll you'll struggle. you get to five and you get to six, but when you get that far, it's going to go 8, 9, 10 really quickly."

"So, regarding the inflation, we've also talked of Peter about uh the Supreme Court uh that could strike down the EAPA tariffs. Uh you also defended that this couldn't be like this was not probable that you thought that this would actually uh not be the case and in the end uh the court held that the E uh the EPA uh did not authorize those those tariffs. Um does that ruling change your inflation forecast as well on on that on that front or industrial policy assumptions or the expected tariff revenue?"

"Well, I I did I did say that the uh s thought the Supreme Court would uphold it. Uh and they didn't, but I also said that if they didn't, the Trump administration would just turn to another statute. I mean, you've got the uh uh Trade Reform Act of 1962. You had the Trading with the Enemy Act. You've got uh statutes other than uh AIPA, International Emergency Economic Powers Act of 1977. So, they're and that's what they've done that. And you know, Trump put 50% tariffs on Canada two days ago. So the uh AIPA uh the statutory basis was shot down by the Supreme Court at least in this context but there are many other statutes uh trade acts and provisions that the administration can use to impose tariffs and they are so uh the tariffs are still there and they're going up. Um, however, I don't see that as being inflationary. Um, because there's a lot of substitution going on, a lot of investment coming into the United States where the goods will be made. Uh, cuz you can sell anything you want to Americans with no tariffs. You just have to build it here. Uh, and we're seeing that with data centers, semiconductor production, automobile production, and a lot else. So, um, so the tariffs are here to stay. The fact that the Supreme Court shot down one statute doesn't matter that much because there are a number of other statutes that can be used and are being used. Uh so the tariffs are here. Um I pay them. I buy things from Europe and they get shipped and like you know 20% tariff or whatever. Uh uh it's real but um it's it's not inflationary um because u you know because of substitution, demand shifts in US production. What is inflationary is fiscal policy uh and behavioral expectations and those two things are are in play."

"How do you expect then Kevin Walsh from now onwards to be able to change monetary guidance in terms of forward guidance, I mean, and and impact it will have then on on the US economy?"

"Well, I have news with the audience. Kevin Walsh doesn't care about forward guidance. He doesn't. He thinks, well, first of all, the Fed has always been wrong. He knows it. So, he's going to, you know, I'll talk about actual monetary policy in a second, but I don't think very many people, I'll say outside the United States, but even inside the United States appreciate how much Kevin Walsh is going to change the Fed and it's already showing up. You know, when the Fed is technically the Federal Open Market Committee sets interest rates or interest rate targets and that is the seven members of the Board of Governors and five uh uh regional reserve bank presidents including the Federal Reserve Bank of New York um in rotation except New York always has a seat. Um so it's a 12-person Federal Open Market Committee that sets rates. Um they come out with a statement when they have these meetings every six or seven weeks. Uh they come out with a statement. Uh Walsh has already shortened the statement. These things kind of used to be like a thousand words. Now they're like 300 words. You might get it down to like a couple sentences. Uh they're going to get rid of the dots. The dots are uh you know, the n there 19 member, there 12 sorry 12 members of the FOMC, but there are 19 people in the room, 12 regional reserve bank presidents and seven members of the Board of Governors. And they all give these forecasts, unemployment, inflation, interest rates, you know, GDP growth, etc. And they put them on a dot chart and they combine them. They don't tell you who's who, although you can guess. And they call them the dots. They're always wrong. I tell I told my my readers, you I just, you know, they're there. You can look at them. They'll talk about them on CNBC, but they don't don't use them as a forecast because they're always wrong. Again, Walsh understands that he's going to get rid of the dots. Uh I mean, I was I used to talk to the Fed every day. Um in the late 80s and early uh 90s I was u on the executive committee of one of the largest primary dealers. The primary dealers, it's a group of about 20 banks that trade with the Fed. I should put it differently. The Fed trades with them. You're on the approved list. So when the when the uh open market operations desk at the Federal Reserve Bank in New York wants to pick up the phone, buy and sell securities with banks, they only trade with certain banks. You have to be on that list and my firm was one of them. So we talked to the Fed all the time and I used to go down there New York and Washington but primarily New York and and meet with their officials. In those days they didn't tell you anything. There was no press conference. There was no statement. The minutes were released, you know, years after the fact. The only way you knew what the Fed was doing is if you traded with them. The the traders could look at the bids and offers and say, "Okay, it looks like they're tightening interest rates," you know, and then eventually it would leak out. But for three or four days, you had this uh enormous trading advantage cuz if you were if you were trading with the Fed, you knew what the Fed was doing. But that was the only way you knew. The other way was uh there's a place called Harry's of Hanover Square. It's a bar uh very close to the Fed headquarters. You could go down there and have a few drinks and pick up information. But that's how you that's how you learned about Fed policy. Now, you know, under Bernanke, it was like have a press conference, have a statement, have the dots, you know, be out there, give speeches, etc., etc. We're not going to get all the way back to the radio silent days that I remember. But um we are going to move in that direction. So there's going to be a lot less information coming out of the Fed and and Walsh hates forward projections because he knows they're wrong. He doesn't like the dots because he knows they're wrong. Why keep talking if you're making it up? So um um so but then okay fine. It's a new Fed. What is policy going to be? My expectation for the meeting coming up in a couple weeks or actually next week um is they're going to leave rates unchanged. The case for raising rates is all the inflation that we just we talked about we know we talked about in this uh interview that is coming. Uh the case for cutting rates has to do with unemployment going up and the economy may be going into a recession. So there's no reciprocity or inverse correlation between rates and unemployment or inflation and unemployment, I should say. They can both go up uh and and they are and when that happens you got to pick one because you can't fight them both at the same time. But for right now the there's a there's a large group on the Federal Open Market Committee that absolutely wants to raise rates. Probably four or five members. Uh there's a smaller group who thinks you should who think you should cut rates because we're heading for a recession. Probably two or three members and there's a group in the middle. So I think they're going to compromise and just do nothing. And remember Jay Powell is still on the board. You know, Kevin, he's out as chair and Kevin Walsh is the new chair, but typically when because your term as chair is four years, um, but your term as a governor is 14 years and Powell is out as the chairman, but he's still on the Board of Governors, and he will be till 2028. So, when was the last time uh a chair stepped down and did not resign from the Board of Governors, stayed on the Board of Governors? It's 1949, Mariner Eccles. So, it's been almost 80 years since this happened. But Powell's doing it just to poke a stick in Trump's eye because um if Powell uh leaves as a governor, which everyone has done, like I say, for 80 years, um that would create a vacancy and Trump could appoint somebody and Powell doesn't want to give Trump that uh degree of freedom. So, so Powell said it. Imagine you're Kevin Walsh and you're coming in, you're chair of the meeting. You're in the boardroom. I've been in the Fed boardroom. Um, and Jay Powell is sitting right next to you like, okay, he's not the chair, but he's got friends and he's kind of looking over your shoulder. So, it's a tough spot. I I expect them to do nothing for now, but I do expect inflation to go up uh as we described."

"And now I want to shift maybe another topic which we also mentioned last time, which is the AI topic. Uh you've also written about this. Industry publishers highlighting a roughly $236 billion of AI-linked debt in 5 months. Um where exactly is the dangerous mismatch? Is it in the debt maturity, the utilization, the the customer credit power, the lag before the revenue covers the capex? Where do you see it go wrong?"

"All of the above. Um okay, so uh no, it it it does it hasn't shown any revenue uh potential and then what they're what the hyperscalers um and the AI frontier model creators such as OpenAI, Anthropic, a few others, uh what they're doing is they're taking their large language model processing capability and their AI applications and they're tokenizing it. Um it's like buying a bus ticket, right? And so you as as a user, you can buy a certain number of tokens, which is basically processing power in these applications and then use them for whatever you want, you know, whatever application you want um in your in your industrial process or service process, could be a hospital, bank, could be anything. Um and what they're finding is that AI, you know, is it powerful? Yeah. Can it add some productivity? Yeah. But not that much. It's nowhere near what uh enough to justify the expense. So people are looking at the tokens and saying, I'm not going to pay this price for these tokens because I'm not getting that much productivity out of it. Now if you lower the price down here, okay, I'll use some. It has some value. But if you put the price down here, you can't pay the the the vendor can't pay the debt. Um so and so much of this is circular financing. So chip producers like Nvidia are investing in and users like uh you know OpenAI and Anthropic and Google and others um and those users are investing in Oracle and and Nvidia and Amazon Web Services and other service providers. The point is they're all investing in each other to prop the whole thing up. But the outside investor interest has not been that great. Um, and the the end users are like, you know, lower the price and, you know, talk to me, but the price is too high. So, they're not going to so it's not going to live up to the hype. I mean, I'm not saying it's not useful and I'm not saying it's going to be around. It is powerful and it's here to stay. I'll grant that. And it can add to productivity. I'll grant that. But not that much. Um and the confusion, the hallucinations, the unreliability, the slop, the fact that the um models, the AI models, the GPT models train on the internet. But you need a bit the large if you have a large language model, okay, what language you what are you what are you looking at with your large language model? Well, they're looking at the internet, you know, a billion billion pages or whatever. Um but what's happening is that as these models are being applied, they're producing output. The output is going into the internet. The output is flawed. They call it slop. So you're basically polluting the pond. The the internet is filling up with slop. And so you come back for more training and you're getting more slop in the outputs. And by the way, there there are this is not just a metaphor. There are good very regular scientific papers and I read a number of them that say that's exactly what's happening. Uh it's an engineering disaster. Uh it's not going to live up to the hype. The revenue models don't work and it's all going to come crashing down. It doesn't mean the end of AI. What it means is that some of these firms are going to fail. A lot of this debt is going to go into default and um you're going to see a major bubble pop. The problem with bubbles is people say they're hard to spot, which is not true. They're easy to spot. What's hard is to know when they're going to pop and that is difficult. They can go on for for a long time, but we're certainly getting closer to the end. And um what would what would you be now um more precisely looking at? For example, is it the earnings report at the end of the month from all the major companies? I think Alphabet is uh um having reports by the end of the close today, Meta next week, uh Microsoft as well. Um what exactly are you then looking at uh in terms of numbers or the balance sheets?"

"Well, the problem um I think the balance sheets are actually more important. The problem with the revenues and all that, it's just a game. I mean, they they beat expectations and then you know, Joe Kernen on CNBC says, you beat expectations, but they've set the expectations in a place they know they're going to beat them. It's just a big game. Um but uh what the the difficulty is those are all huge companies and they have a lot of other businesses and some of the other businesses are very good. I mean, they're basically advertising agencies. Uh and so the the advertising revenue and the social media revenue could be fairly strong even as the AI revenue is a disaster, but they don't break it out. Not to that level of specificity. So some good businesses are going to mask the weakness in the AI. Meanwhile, you've got pure AI plays that are trying to do IPOs like OpenAI, Anthropic, and other companies that are more pure AI like Palantir and others. I'm I'm not saying they're bad companies. I'm just saying that they're not going to live up to the hype. So, I don't I don't really take very much from the income statement because there's a lot there and they don't break out the level of detail you need to really figure out the AI. You need insiders to basically explain it. Um, but the balance sheet is interesting because all this debt is piling up on the balance sheet. And look at cash. I I do a lot of balance sheet analysis. First thing I look at is cash, you know, because cash doesn't lie. You know, if you've got goodwill or accounts receivable or,"

You know, uh, uh, other intangibles or whatever, fine. I just I just write those off, you know, show me the money. Um, but cash doesn't lie. And if you have negative and also the cash flow statement and the balance sheet. So, if your cash is dwindling, your cash flow is negative, your debt's going up, you're heading for a train wreck. I don't care what your earnings are.

One last topic if you have still time to answer one uh one question Jim.

Yeah.

Um is silver. We haven't talked about silver in this conversation. It dropped more than 50% even though obviously it had wild moves right before that. Um and it also has maybe some tie into everything we should said before military defense uh energy uh AI servers. We need silver to also build those hyperscalers and servers. Um so what is your like uh let's say concluding notes regarding uh silver on uh

Yeah, silver is for the reason you mentioned Alex. Um, silver is more difficult to analyze than gold because it's I mean gold's not good for anything except money. I think it's the best form of money, your store wealth, uh gold is the best, but it's not used for much else. I mean, they coat space helmets with it and some, you know, uh 59 59's uh wiring, but I've been in all the big refineries and talked to the top people about it. Uh, they, that that that's pretty, um, pretty scarce, but but gold is incredibly valuable as a store. Well, silver has a lot of industrial applications and you mentioned some of them, um, electronics, catalytic converters, uh, and other inputs, and it's a precious metal. So you've got two vectors. They can both be going up or down, or one can be going up, or one the other one up when the first one's down. So you have to take that into account. But, um, the uh, I would say both vectors are pointing higher, meaning the industrial vector is going to give silver a boost because there's so much more defense spending and electronic spending. Um, uh, we're talking about hardware, not, you know, AI software. Um, we're talking about, you know, missiles and cruise missiles, hypersonic missiles, um, anti-missile missiles, uh, uh, and other a lot of other applications and drones, um, which the US is ramping up, uh, but so is Europe, you know, Germany's talking about it. So, uh, so that input will remain strong, and then as far as the precious metals are concerned, silver is along for the ride. It tends to lag gold, but if gold goes up the way I expect, and I think it will, then silver is going to be along for the ride. So, silver, silver will do fine.

Thank you, Jim. Um, do you maybe have one last comment about China's uh policies regarding gold ownership or do you want to just run it off now?

China's policies on what? I'm sorry.

Uh, gold ownership. They were uh, they just recently forbid any kind of leverage trading and they're also inciting gold accumulation and also in like we've maybe also talked about this in the past, the fact that China has been accumulating consistently for many decades and surpassing much more the a few thousands of tons of gold that they actually reported to have. Some estimates like Alistair Mcllo say they have about 30,000 tons of gold, so hinting towards like they might be preparing a UN-backed gold system in in one way or another.

Yeah, as far as China and gold is concerned, China is accumulating a lot of gold, has been for a long time. Their reported reserves, uh, from the People's Bank of China, and again, I'll go back to 2009 because that's a good baseline, was 600 metric tons. Today it's closer to 3,000 metric tons, but there's every reason to believe that they have, uh, at least double that, possibly more. They have another entity called the State Administration for Foreign Exchange, SAFE or SAFE, uh, which is a, um, a sovereign wealth fund, but it's off the books. They don't, it's non-transparent. So, the People's Bank of China is transparent, but that's only where some of the gold is. A lot of the gold is in SAFE, and that's non-transparent. We don't know exactly how much is there, but every reason to believe that there could be three or four thousand tons, perhaps, um, more, and that would put China ahead of the United States in terms of go, uh, total gold reserves. And they are, uh, moving to, uh, diminish the role of, uh, futures markets or paper gold or leverage gold trading and move to physical gold trading, make Shanghai a center. It's very, very far down that road already. Uh, so that's all true as far as third estimates. I was doing my about 30,000 tons. I don't know where he gets that, but, um, if you have to be careful when people throw numbers around like that, if you're saying, let's combine all the gold owned by the central bank and the State Administration for Foreign Exchange and all the gold owned by the people of China, it could be 20 to 25,000 metric tons. That wouldn't surprise me. Um, but, you know, what's owned by the people is not the same as what's owned by the government. And I have this debate with friends in India. The, uh, uh, Reserve Bank of India owns about a little over 500 metric tons. And I have a lot of friends in India. I was there last year. I spent a lot of time there. And, uh, they go, "Oh, no, Jim. We have 15,000 tons. Don't you know?" I said, "I know you have 15,000 tons, but it's all on Indian brides. It's all personal savings accounts. It's you wear gold chains because it's going to pay for your home or your kids' education or your retirement or healthcare or whatever. So yes, there are there are 15,000 metric tons of gold in India, but only about 500 in the central bank. The rest is owned by the people. So if Alistair Mcloud is saying that the people of China have that much gold, I mean, I've been to China a lot of times. I've been in gold boutiques. You know, you go in, they, uh, they have ladies in tight silk dresses walking around with gold on display and, you know, and they're open late and and people buy it. But, uh, that's not the same as central bank, which is what I really look at because that, uh, is going to have more impact on currency. The gold back you want is nonsense. That's not that's not happening. Um, they don't have enough gold for that. They, uh, and, um, they also don't have any other, um, of the features that you need to run reserve currency. There's no such thing as reserve currency. They're only reserve assets. They are denominated in a currency. So that matters. But you don't have piles of cash in the basement of the central bank. What you have are US Treasury securities or buns or Italian government bonds or maybe Japanese government bonds. So you need reserve assets. So to be a so-called reserve currency, you you need a bond market. China doesn't have one. So they can't be a reserve asset. Clear.

Um, thanks a lot, Jim. Um, well, to the explanation regarding Alistair's calculation, he just laid it out in the videos, which I will not want to butcher now in in a way that I can recall and paraphrase him in the wrong way. Um, but thanks a lot for your for your wealth of knowledge, time, Jim. Always appreciate it talking to you. Um, do you have any, um, comments or or things that you want to give the listeners or viewers related to also your newsletter or any other things?

Um, yeah, we, uh, I publish a newsletter. Um, it's called Strategic Intelligence. Uh, my publisher is Paradigm Press. Uh, it's easy to find. You can just Google Paradigm Press, Jim Rickards, or Paradigm Press Strategic Intelligence. You'll find our landing page. Uh, and, uh, we put a lot into it. Uh, 12 months, um, uh, 12 monthly issues. Uh, I write all the lead articles where we have other contributors. So, uh, all the kinds of ideas we've discussed on this, uh, podcast, they're, they're all in that, uh, publication. We stay ahead of the curve and, uh, I'm on, uh, uh, X, formerly Twitter, but X today, Jim Rickards, uh, one word, at Real Jim Records. So, uh, hope people join me there or subscribe to the newsletter. Thank you.

Thank you, Jim. Heat. Hey. Hey. Hey.