Maurice ... read all about salvation
online.barrons.com
I made a few taps on my calculation, and determined that should such a price for gold be realized, and particularly if coffee remains at USD 2.5/cup, then events could be sweet. Sweeter if coffee would retreat to its all time low ;0)
Yes, $8,000 an Ounce
Interview with James Turk, Founder, Goldmoney.com
By SANDRA WARD
NOT ONLY DID HE PINPOINT THE BEGINNING of the current bull market in gold in these pages1 in September 2002, but he has been spot-on in continuing to assess the direction of the metal and the drivers behind its move. Turk, a longtime authority on gold and other precious metals, is the founder of Goldmoney.com, a company that enables online cross-border commercial transactions using gold as a currency. He is also a co-author of The Coming Collapse of the Dollar, published in 2004 by Doubleday. As you might surmise from the title of the book, Turk sees plenty of room for gold to climb higher. Here's a glimpse into his thinking.
Barron's: You've been right on the price of gold all the way up.
Turk: The theme has been correct. There are problems with the dollar, and that's being reflected in a higher gold price. So, truth be told, it's not that gold is going higher -- it's that the dollar is going lower. An ounce of gold still purchases as much crude oil, essentially as it did 50 years ago, but that can't be said about dollars.
One of your gold indicators, the "fear index," is based on M-3 numbers, but the government has stopped reporting M-3.
Yes, it's really unfortunate. They said the motivation for doing that was to save the time of reporting it, and they're also going to save a million dollars in the cost of compiling that data. I find it quite shocking they would stop reporting M-3, because it is the most important component of money, revealing the total quantity of dollars in circulation. My guess is they want to try to hide the amount of inflation that's in the pipeline. When they stopped reporting M-3, it was growing at well over 8% per year, and the annual growth trends were increasing. So I think it was all part of this policy to control inflationary expectations. But it is a major misstep because it will end up heightening people's concerns about the dollar. And that's going to make gold go up.
You thought we would have had a dollar crisis by now.
Yes, but one could argue we have a dollar crisis. If you look at where the dollar has come in the past few years in terms of loss of purchasing power, we haven't reached a panic point yet. But I still fear we are going to see a panic in the dollar at some point in the future.
Let's talk about the pressures on the dollar.
They are taking on a bit more urgency. One of the things I picked up on a recent trip outside the States was a much greater level of concern about the prospects for the dollar than had previously been the case.
Concerns among whom?
Among sophisticated investors -- wealthy individuals as well as some money managers. That's been linked to two specific events. First, Chinese National Offshore Oil Co., or Cnooc, was not permitted to purchase Unocal. Most people at the time shrugged it off as just a one-off event. But when the Dubai Ports deal was blocked, that really changed people's perceptions, because it made clear holders of dollars outside the United States are not going to be permitted to exchange those dollars for things of tangible value. There's an increasing desire to convert dollars into, say, commodities, which dollars can still buy. The boom in commodities to a large extent is the result of people exiting dollars. People are looking for alternatives to the U.S. dollar, and the dollar's role as the world's reserve currency is being questioned seriously now. The Russian finance minister raised the issue in the recent G-7 meetings. This questioning is a critical development. Financing the growing federal budget deficit and trade deficit requires that a large amount of dollars be created. These dollars are being created as demand for the dollar is declining.
Turk: The gold standard's greatest attribute was forcing discipline on the creation of national currencies.
How do you measure that?
You can't really measure it. We talk about M-3, which is the supply of dollars, but we don't really focus on the demand for dollars. There is an above-ground stock of gold and an above-ground stock of dollars, and my fear index measures the relative demand between the two. The fear index is rising, indicating demand for dollars is declining. But, anecdotally, the central banks are diversifying out of the dollar, as are individuals and corporations. So we know demand for the dollar is falling. The monetary system is broken.
What's broken about it?
There's no discipline on U.S. dollar creation. The gold standard's greatest attribute was forcing discipline on the creation of national currencies; if too much national currency was being created, gold would flow from one country to another and eliminate and minimize the impact of the boom- and-bust cycles. The huge trade imbalances we are seeing now between China and the U.S., and the U.S. and other countries, never could have existed under the gold standard. Ultimately, I see capital controls coming to the U.S. as a way for the government to attempt to deal with these huge trade and international capital-flow imbalances. Instead of limiting the amount of dollars in circulation and trying to get us back to some kind of a disciplined basis, we are probably going to move toward capital controls as the next step.
Any sign of that trend?
Yes, the fact that the Dubai and Unocal deals were rejected. Protectionism and capital controls are very closely related.
Do you have a new gold-price target?
It is going much higher, and the $8,000 [per ounce] I mentioned a couple of years ago is probably as good a target as any.
Some reports say $2,000 is reasonable.
I don't rule that out as a near-term spike. There are two aspects to what's driving the gold price: First, there is strong physical demand around the world. When gold crossed the $500-an-ounce level, people started buying gold in anticipation of monetary problems. Second, the physical demand for gold is causing a huge problem for the gold shorts. There has been a large gold carry trade in place. It is very possible gold could have a massive spike in the next six to 12 months to as high as $2,000, driven by these factors.
Are there any signs of this trouble yet?
Central banks loaned a lot of gold from their reserves. It was borrowed by various banks and others for the carry trade. You borrow gold at very low interest rates and sell it at the spot price. Then you invest the proceeds in higher-yielding dollars and other currencies. As long as the gold price doesn't rise, you are going to make a lot of money on the spread. But in a rising gold-price environment, you are stuck. You have to buy that gold back or suffer the consequences of ultimately having to deliver the gold at a much higher price than what you are earning from your assets. The bullion banks and others who borrowed it are short. What's happening in gold is probably even worse in silver, in the sense that the short position in silver looks even bigger than gold's. Recently, silver has risen more rapidly than gold.
Can this go on indefinitely?
A lot of people got out of the gold market, expecting a correction, as often occurs at the beginning of major bull markets. In December, when gold went over $500 an ounce, I said gold is never going back below $500, ever. Now we have to think about the possibility that gold is never going to go back below $600, ever.
It is too cheap and undervalued. I like to draw comparisons to the 1970s when gold went through $50 and never looked back. After Nixon closed the gold window in August 1971, gold went from $40 to $120 an ounce in the next two years. Adjusting for inflation, you could argue $500 today is like $42 in 1971. Multiply $120 by 11 times in order to get the inflation-adjusted dollar equivalent, and you get a potential target of more than $1,300 an ounce.
What's the relationship between the yield curve and gold?
The most important thing that affects gold in terms of interest rates is real interest rates, or rates adjusted for inflation. I measure this as the fed-funds rate less the CPI [consumer-price index]. Even though interest rates have risen, real interest rates remain close to zero, or are negative. John Williams, an economist, has an interesting Website called Shadowstats.com. He looks at the CPI and what level it would be at were it not for all the adjustments in the past 30 years. If the CPI were still calculated today as it was in the 1970s, the inflation rate would be about 8%. Depending on how you measure inflation, real interest rates are no better than zero and probably are negative. That is very inflationary. What will be negative for gold is when real interest rates go to 4% or 5%. It took Paul Volcker bringing real interest rates up to 6%, 7%, 8% in a short period of time before the market was convinced he was going to save the dollar and it was time to move out of tangible assets into financial assets.
Isn't the government in a bit of a box?
It is trying to fund the federal budget deficits without destroying the dollar, and trying to raise interest rates to save the dollar without destroying the economy. I don't think they can do it. The dollar will continue to lose purchasing power.
Are you recommending any gold stocks? Gold stocks are still relatively cheap. In the past several months, even as the gold price has gone up, the stocks have been reluctantly following rather than leading, which is contrary to what normally happens. If I'm correct that the price of gold eventually goes to four digits, the earnings of gold companies will be significantly higher. As a consequence, gold stocks are still cheap.
What do you say when people wonder if your views are self-serving because your company, GoldMoney.com, promotes gold as a currency for transactions?
My views on the markets are completely separate from my company. I started the company anticipating that more people would turn to gold, and I recognized the opportunity from a commercial as well as an investment point of view.
For gold investors, is there much difference between Bernanke and Greenspan?
Yes. Bernanke is very different. Greenspan clearly understood gold, and in his Fed testimony he used to talk about the "automaticity" of the gold standard. If you go back to Greenspan's testimonies, you will see him using that word from time to time. Bernanke doesn't have the deep understanding that Greenspan had about gold and perhaps about markets in general. Greenspan came up from the business world, Bernanke came up through academics. That makes a difference in terms of one's outlook and levels of experiences.
What has Bernanke said or not said that gives you the sense that he is not fully appreciative of gold?
It is a combination of what he has written in the past and what he said prior to his appointment as Fed chairman. He has been pretty cautious. He has only been chairman for about four months, but he seems to be focused on the deflation in the 1930s, and this is quite alarming. What we don't need today is a greater supply of dollars. What we need is a greater demand for dollars. The way you improve demand for dollars is to take those steps that will give people confidence in the dollar and its purchasing power for a long period of time.
Such as?
Raising interest rates, just as Volcker did, at a pace that is not measured, but rapid.
Wouldn't that come with a lot of pain?
When you take away the punch bowl, you are left with the hangover. We have to recognize we've far exceeded our ability to live at the level at which this country has been living for the past couple of decades. There is going to be some pain and adjustment. But if the dollar's purchasing power is destroyed, as a consequence of not taking strong action the pain is going to be much greater.
In what sense?
When Volcker raised interest rates, we had a severe recession, but eventually the adjustments led to a period of economic growth, and we continued to create new wealth from economic activity. When you create too many dollars in an environment where the demand for the dollar is declining, it could lead to a situation similar to Argentina a few years ago or to one that resembles Weimar Germany -- one deflationary and one inflationary. In Argentina, the supply of pesos declined by one-third from peak to trough, but the purchasing power of the peso lost 50%. In Germany, demand for the Reichsmark was falling and the central bank tried to offset that by putting more Reichsmarks into circulation. Both situations ended badly, and the net result was severe economic dislocations.
Gold and Black Gold: Throughout the past 60 years, the price of crude oil in grams of gold has remained essentially unchanged. The dollar price of crude has broken out of a 30-year range, suggesting either that oil is relatively overvalued or that gold is extremely undervalued. In Turk's view, gold is undervalued and oil is properly valued. As oil goes higher in dollar terms, he argues, so will gold.
The problem is the dollar is the world's reserve currency. What happens when you have a flight from the world's reserve currency? This is the point of my book, The Coming Collapse of the Dollar. The flight from the dollar is going to accelerate. The dollar has only 5% of the purchasing power it did maybe 50 years ago.
What is the impact of oil on all this?
Oil is interesting because you have two dynamics. The oil producers seemingly are less and less willing to take dollars, because dollars are being depreciated.
Where is the evidence of that?
The Russians are questioning the dollar's role as the reserve currency. And in Venezuela, when President Hugo Chavez takes a swipe at the U.S., he is taking a swipe at our ability to create dollars out of thin air. And as Charles de Gaulle used to say, "deficits without tears." That's what he finds unacceptable.
And the other dynamic?
The second dynamic is Matt Simmon's argument that we are running out of easy-to-produce light, sweet crude. If the supply of easily refinable crude oil is diminishing, all the more reason for the price of crude oil to rise. So, we have a weakening dollar and a declining supply of the best-quality crude.
And that translates into...?
...$100-a-barrel crude oil before too long.
And in terms of gold?
There is a close historical relationship between crude oil and gold. Normally it takes about 2.2 grams of gold to buy one barrel of crude oil. Now it takes about 3.4 grams to purchase one barrel of crude oil. Either oil is relatively overvalued or gold is very undervalued. My view is gold is undervalued and that oil is properly valued. So as oil goes higher in dollar terms, gold is going to continue to go higher, as well.
Are exchange-traded funds a positive for gold or a complicating factor?
They are positive in the sense that people are looking at gold and coming up with new products. But I do not recommend people buy the ETF [streetTracks Gold Shares, or GLD]. If you want to speculate on the gold price, the ETF is one way to do that. Futures contracts are another way. But owning the physical metal in your own name is something entirely different. There are too many parties between you and the gold in the ETF. And they don't audit the gold to prove it really exists. This is the only type of fund the SEC has ever approved for the retail level that isn't required to audit the assets supposedly backing the fund. It is a great way to speculate on gold's spot price, just as futures contracts are a great way to speculate on gold's future price. But neither should be viewed as an alternative to owning the physical metal.
Thanks, James.
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