25th of September 2016
I have just finished reading James Rickards latest book "The New Case for Gold", published in 2016. The title of the book is actually a clever play on word of a book written in 1982 by Ron Paul and Lewis Lehrman called "The Case for Gold". The original book was a minority report written by The U.S Gold Commission which examined the role gold played on the monetary system. The original "The Case for Gold" is freely available from the MISES Institute, which is a nonprofit organization which promotes the Austrian economics school of thought. As the book title suggests, the new case for gold is about new reasons for investing in gold (since the last book was written). Since gold is considered a fringe investment class, it is often poorly understood by the general public. The benefit of reading this book is that it provides you with information why people should be invested in gold and how to counter the common arguments against gold.
One of my favourite parts of this book is how to counter the arguments against the case for gold.
- Gold is a 'barbarous relic', according to John Maynard Kaynes.
- There is not enough gold to support finance and commerce.
- Gold supply does not grow fast enough to support World growth.
- Gold caused the Great Depression
- Gold has no yield
- Gold has no intrinsic value
Given that gold is often the "forgotten metal" when it comes to the general public's understanding of gold, knowing these counterarguments will allow you to clear up common misconceptions about gold investing.
The book is relatively small at only 182 pages. The book is split into six chapters:
- Gold and the Fed
- Gold is Money
- Gold is Insurance
- Gold is Constant
- Gold is Resilient
- How to Acquire Gold
Firstly, Rickards examines the Federal Reserve System's balance sheet and questions the solvency of the system. What he uncovers is very interesting around gold holdings and the Fed's leverage ratio.
Next Rickards shows that there is a shadow gold standard developing around the World, for reasons including it is money, not an investment, not a commodity, not paper and not digital. Moving on to gold as insurance, he explores complexity theory which is the study of complex systems. Economics is a social science and we can behave in complex manners based on a set of circumstances. Our behaviour can be adaptive based on "critical thresholds" which can lead to some unexpected results, and can often explain the irrationality to past economic events on how humans think. Interestingly he argues that gold will do well in inflation and deflation, inflation is obvious, but in deflation he believes other things will deflate more and hence gold preserves real purchasing power. One analogy that Rickards uses is gold is like insurance, if your house burns down then you are glad you have it (analogous to a unforeseen financial crises).
The last few chapters cover how gold is constant, it is resilient, and how to acquire gold. The constant discussion reminds me of investing in general, there are always going to be people "cheating the system" per se, trying to make money from nothing; either economic rent seekers or fraudsters (think "Bernie" Madoff - he made off with a lot of money!). Gold speaks for itself in terms of resilience as it has been used as a form of currency for thousands of years (and is still being used today!). Lastly, he discusses physical versus mining stocks and the benefits of gold holdings in different jurisdictions.
One thing that I really like about Rickards is that, unlike most gold bugs, he advocates a sensible asset allocation of only five or ten percent in gold. Everyone is familiar with risk versus return. If taking more risk meant greater return, then everyone would do it. A basic business definition of risk is "the probability that an actual return on investment will be lower than the expected return" .
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
The moral of the story is that diversification reduces both risk and portfolio volatility which is why I like Rickards sensible asset allocation recommendation.
Overall, I really enjoyed reading The New Case for Gold is Rickards inside knowledge of Wall Street and the investing community in general. Me coming from an engineering background, I am a numbers guy and I like to stick to the facts. Rickards does this in the book and uses analysis to draw logical conclusions about the gold market. The book, despite its relatively small size, holds a lot of interesting facts and figures which will enlighten even the most astute gold aficionado.
James Rickards is a regular commentator on new and developing financial issues. He has an educational background in economics, taxation, and law. He has had a long and distinguished working career on Wall Street, the highlight in my opinion, was general counsel overseeing the bailout for Long Term Capital Management (LTCM). He has also played a role in discussing economic and financial threats to the US government. Today he is an editor for the newsletter 'Strategic Intelligence' and a member of the advisory board of the 'Physical Gold Fund'. Rickards has authored two 'The New York Times' best sellers (see under previous books).
Follow James Rickards on Twitter: @JamesGRickards
 J.Rickards, The New Case for Gold. New York, Penguin, 2016, pp. table of contents, 3.
 BusinessDictionary.com. Risk Definition [Online]. Available https://www.businessdictionary.com/definition/risk.html