James Rickards is a 35-year veteran of Wall Street and the capital markets. An avowed proponent of holding gold and a critic of the Federal Reserve, he’s the author of Currency Wars: The Making of the Next Global Crisis and a senior managing director of Tangent Capital in New York City. WealthManagement.com recently spoke to Rickards to get his take on the recent volatility in the price of gold.

 

WEALTHMANAGEMENT.COM: Gold has long been considered a safe haven for investors, but after a decade-long rally, the price is on a downward slope. Why the price drop, and is it still a good investment?

JAMES RICKARDS: Yes, gold has a place in every investor's portfolio. The price measured in dollars is volatile because the dollar itself is volatile in a world without a firm monetary anchor. I recommend an allocation to gold of 10% of investible assets for the conservative investor and 20% for the aggressive investor. The gold should be owned in physical form such as coins or bars. It should be stored outside the banking system. Investors should not use leverage to purchase gold because the price is volatile enough in dollar terms. Investors should avoid ETF's such as GLD and Comex futures and stick to physical gold.

WM: If gold falls to a point where it’s trading below $800 an ounce, as some predict, what is the impact?

JR: Prices do not move in isolation. If gold goes to $800 per ounce, this is a sign of extreme deflation. It means either that asset bubbles in stocks and housing will soon burst or that the Fed will redouble its money-printing efforts. Gold performs very well in deflation and inflation. In deflation, the government will ultimately raise the price of gold to offset the deflation itself and cause inflation in all asset classes. In inflation, gold will outperform other asset classes and maintain its real value.

WM: Gold ETFs have done well, particularly SPDR Gold Shares. Is that a better option for advisors who want to put clients into gold?

JR: No. Advisors who want to put clients into gold should recommend physical gold in the form of coins and bars, or physical gold funds where the investor can take physical delivery of gold if she chooses. ETF's are actually shares and not physical gold. They will not be liquid when the exchanges are closed by the government in response to financial panic. The same is true of COMEX gold futures, which should be avoided because of embedded leverage and the risk of exchange closings in extreme market conditions.

WM: Where can we see gold supporters putting their money over the next weeks, months?

JR: An interesting dichotomy has emerged in the wake of the drawdown in the dollar price of gold in recent days. Paper gold investors have had to sell to meet margin calls or when they hit stop loss limits. Hedge funds have had to sell to meet redemptions. But unleveraged, real money buyers of physical gold have lined up around the world to buy coins and bars and some spot shortages have emerged. The paper gold buyers are the weak hands and the physical gold buyers are the strong hands. Gold is moving from weak hands to strong hands. The strongest hands in the world are Russia and China and they are doing the most buying.

WM: You’ve received some criticism for your opinion on gold. How do you respond?

JR: I am always willing to engage in serious debate with critics. Unfortunately, many of the critics are not serious and resort to superficial or trivial arguments. Lord Rothschild once remarked that there were only two people in the world who truly understood gold. Not much has changed.

WM: Many people argue gold is not an investment, but speculation.

JR: Gold is not an investment. It is not a commodity. It is not a speculation. It is money. If you want money, you should own gold.