Gold market authority James Turk talks in an exclusive interview about the demise of the US-Dollar, correlations between gold and oil, Germany’s gold reserves and the planning for a global single currency.
By Lars Schall
James Turk, a widely respected figure in the precious metal markets, has grown up in the “Buckeye State” of Ohio. He graduated with a B.A. degree in International Economics at George Washington University in 1969. Afterwards he worked eleven years for Chase Manhattan Bank, with assignments for the International Department in Thailand, the Philippines and Hong-Kong. From 1980 – 1983, Mr. Turk was with RTB, Inc., a private investment and trading company. He subsequently served the next four years as the head of the Commodity Department of the Abu Dhabi Investment Authority in the United Arab Emirates. In 1987 he began the “Freemarket Gold & Money Report”, a subscription-based investment newsletter that earlier this year became a free online service (http://www.fgmr.com). Until 1995 he was the Chief Executive of Greenfield Associates, which specialized in investment research and trading advice for hedge funds, commodity traders and investment managers. From 1995 – 1999, Mr. Turk was a Director of Lion Resource Management Ltd., a London-based firm which advised funds that invested in the equities of companies involved in the mining and exploration of precious metals. In 2001, he launched GoldMoney, a patented digital gold currency that allows the instant transfer of gold, silver and platinum between user holdings. GoldMoney is the largest digital gold currency in the world. For more information on this visit: http://goldmoney.com/index/html. Moreover, Mr. Turk is the author of “The Illusions of Prosperity” (1985), “Social Security: Lies, Myths and Reality” (1992), several monographs on money and banking, and the co-author of a book which has attracted considerable international attention: “The Coming Collapse of the Dollar and How to Profit from It: Make a Fortune by Investing in Gold and Other Hard Assets”, published by Doubleday and in December 2004 updated in a paperback version entitled “The Collapse of the Dollar” (visit: www.dollarcollapse.com). He frequently speaks at investment conferences on gold, money, and the international banking system. Mr. Turk lives in London.
Mr. Turk, we’re witnessing right now a crisis that you predicted five years ago together with journalist John Rubino in the book “The Coming Collapse of the Dollar”. If I would ask you about the causes for this crisis, how would you answer that question?
There are two financial crises at present. First, the dollar and other currencies are collapsing against gold, as John and I forecast in our book. This result has occurred because currencies are being badly mismanaged by central banks. They are creating too much currency, which causes it to be debased, meaning it purchases less. It is a matter of basic economics. If you create too much of something, its price falls, which in the case of currency means that it loses purchasing power.
The second crisis is the bank crisis, which in my view is not finished yet. John and I wrote about this too and concluded that banks were going to be under pressure with the result that some would fail. We recommended back in 2004 a number of short-sale candidates, which proved to be very timely.
It is my view that right now we are in the eye of the hurricane. I expect the second half of the storm to hit in 2010, but it will be much worse. Not only will the creditworthiness of banks be questioned, but also that of many governments, particularly the US, UK and Japan.
What role do central banks and the financial system itself play in this drama?
Central banks are partly to blame, but there are also other culprits. First, there are politicians because their spending is completely out of control. What’s worse, in the US, which is where I am most familiar, most politicians are acting for the banks and not the people who are paying for the huge bailouts the banks are receiving. And the bankers are to blame too because they put themselves in this situation by lending too much money and thereby weakening their balance sheet, putting depositor money at risk.
Could the crisis have been avoided – and if so, why didn’t it happen then?
In theory it could have been avoided, but in reality, human nature never changes. People are always looking for a free lunch, and greed of course plays a big part. So does dishonesty. Instead of bailing out the banks, the bad ones should be left to fail.
Also, there should be investigations by independent third-parties to determine what bankers broke the law and what politicians abused the public trust. I would expect that if these investigations were undertaken, a lot of bankers and politicians would end up in jail, but they should consider themselves lucky. In early America they were ‘tarred and feathered’.
Would the world be better off without central banks in your opinion? Would America do better without the Federal Reserve System? And moreover, if there was a cure for the enormous ills of our financial system, how would it look like?
Without any doubt, central banks are the real barbarous relic. I wrote a monograph on this very subject a few years ago and explained the reasons why central banks are doing more harm than good. This monograph is available free on the GoldMoney website at the following link: http://goldmoney.com/essays-archive.html
The cure to fix the mess we are in is simple and requires two specific actions. First, sound money is required, which means gold or alternatively, silver, should be the currency. Substitutes like paper currency and deposit currency within the banking system should be redeemable into precious metal on demand.
Second, in the US there is a basic principal that requires the separation of church and state. The separation of bank and state should also be required, which would be a big step to help ensure politicians serve the interests of the American people rather than that of the big banks.
Do you see any signs in the public discourse that we’re moving into that direction? Or isn’t it rather the case that we’re accelerating the speed while travelling the same old road which is a cul-de-sac?
Well, in the US there have been some discussions about penetrating the iron curtain that surrounds the Federal Reserve. For example, there is a bill working its way through the Congress that would require the Fed to be audited, which has never been done before since its creation in 1913. But unfortunately, efforts like these are few and far between.
More worrisome is the attitude and policies being followed by the Obama administration. Simply put, the US has been living beyond its means for decades, which is the reason it is now in financial trouble. The borrowing and spending binge finally caught up with it. Consequently, more debt and more consumption are not going to cure America’s ills. The sooner policymakers recognize this reality, the better. It is never too late to have a sound plan of action.
For example, the present situation can be compared to that of the federal government after the American Civil War. By the end of the war in 1865, there was an economic and monetary mess created by the war, but policymakers put the country back on the right track. They established a plan by which the dollar would be placed back on the gold standard by 1879, and then followed the plan to completion with essentially no government intervention in the marketplace. The last decades of the 19th century as a consequence saw some of the best economic growth ever recorded. If a sound plan were developed today – taking America back to its core principles and ending all government intervention – I have no doubt that its problems could be solved over the next ten years. There will need to be a lot of belt tightening, but the pain will be a lot less than if policymakers continue to follow the road they are now on, which is what I call the road to the fiat currency graveyard. Dozens of other fiat currencies are buried there – including America’s first currency, the continental – and the dollar will be there before too long if there are no changes. But this point also highlights the tragedy of present policy.
America has abandoned the wisdom of the framers of its Constitution, which requires the currency of the US to be gold or silver. Because the dollar is backed by nothing and not redeemable into gold or silver, the dollar is an unconstitutional currency. It is fiat currency, just like the continental, which collapsed after the War of Independence. Because of the monetary turmoil created by the continental’s collapse, the framers of the Constitution in Article I, Sections 8 and 10, required that the dollar be defined as a weight of gold or silver. The metal to be used was left to Congress to decide, which was given the power to “coin money and regulate the value thereof”. This term is misunderstood and misused today, but it actually means that Congress simply had the power to determine the rate at which gold and silver would be exchanged. In effect, this power meant that Congress could decide whether the US should be on a gold or silver standard.
One of the first actions of the new federal government was to pass the Coinage Act of 1792, which made clear the intent of the framers. And so it was until 1971 when all pretence of metal-backing was finally abandoned by President Nixon. So America is re-learning the lessons of history. The collapse of the continental was one of the major reasons the new country created a “more perfect union”, as it says in the Preamble to the Constitution. It also explains why the first Congress and President Washington passed the Coinage Act into law. They did not want the country to suffer the problems of fiat currency, like it is now suffering.
The investment of the period 2000 – 2010 is definitely gold. This precious metal performed very well compared to the US-Dollar. What has been the root for this success? And what are your expectations for the mid-term future of gold?
Gold has done well, but I do not consider it to be an “investment”. It is money, and there is a difference. Investments are wealth-creating assets. Money is only a wealth preserving asset. Money’s primary purpose is to provide liquidity, which one then uses from time to time to buy goods and services or to take risks and invest.
You often use the correlation between the value of gold and the price of crude oil to explain this point, right?1
Yes, exactly. An ounce of gold today buys the same amount of crude oil it did at the beginning of this decade. In fact, it buys basically the same amount of crude oil it did any time over the past several decades. So gold during this period did not create wealth – it simply preserved it. You cannot buy more crude oil with an ounce of gold, but rather, only the same amount. So in this example of crude oil, gold did not create wealth, which is what investments are supposed to do.
Gold preserves the purchasing power of everyone who owns it, which is what money is supposed to do.
In the past you stated that a default on gold at New York’s Commodity Exchange (COMEX) might be possible. Why do you think so?
To understand this point, you have to recognize that there is a fundamental difference between paper-gold and physical-gold. Paper-gold is a financial asset and has counterparty risk. In other words, the value of that paper-gold is dependent upon some financial institution’s promise. In contrast, physical-gold is a tangible asset. There is no counterparty risk. With paper gold you own exposure to the gold price; you do not own real gold.
The second key point is that there is a lot more paper gold outstanding than physical gold available for delivery. So if those who sold gold on the Comex as well as other forms of paper gold cannot get the gold they need to deliver when asked, they will default. Maybe they can get the gold they need, but only at a much higher price, so the default will occur because of their losses. For example, if they promise to deliver gold at $1200 per ounce and gold keeps climbing above that price, the shorts will incur a loss. This example explains why some mining companies that ‘hedged’ their production have taken multi-billion dollar losses. Some of these mining companies even went bankrupt, and the same thing could in theory happen to any firm that has sold paper gold.
The Comex clearinghouse is just one visible part of the paper gold position that exists. No one really knows how much paper-gold has been sold in its entirety, but it is huge. So when the scramble for physical metal intensifies, as it has been doing in recent months, defaults are possible by everyone needing to deliver metal to fulfil their promises. In the final analysis, the Comex is no different than the London Metal Exchange which defaulted on its nickel contract a few years ago.
One force that was/is trying to suppress the gold price, is the so called Plunge Protection Team (PPT). This Team, which is officially labeled as “The Working Group on Financial Markets”, seems to loose its power grip. In an exclusive interview with investigative journalist and book author Mike Ruppert from April of this year, Mr. Ruppert stated:
“The PPT is overwhelmed now. This collapse has been a tsunami that has rendered the PPT largely ineffective. It had the ability to intervene artificially to prevent market collapses when it was only billions of dollars involved. Now that we’re dealing with trillions the PPT is of little interest. Broadly speaking, the U.S. Treasury (almost a proprietary of Goldman Sachs) has become in itself a PPT with increasing ineffectiveness. The U.S. is currently having the biggest ’Sucker Rally’ there will ever be.“2
Does this reflect your observations as well?
Well, if you are referring to the US stock market, I expect it to go higher. It is not rising because of good economic conditions. Instead, it is rising simply because too many dollars are being created and they have to end up somewhere. So a logical place for them is the stock market.
For example, I travel quite a bit and meet people all over the world. There is a point of view by some – particularly in Asia and the Middle East – that they would rather own $1 million of copper than have $1 million sitting in a bank account. They reason that the copper can always be used in some factory application. It is a tangible asset and does not have counterparty risk. In contrast, money on deposit in a bank does have counterparty risk, and the interest income one receives today on that deposit is next to zero, which is not enough to offset the risks. So carry this logic one step further. In addition to buying physical copper people are buying the stocks of copper miners, plus with some of these companies one can earn a dividend greater than the interest income from a bank account. So as long as the Federal Reserve continues its present policies, we can expect the stock market to continue going higher.
In the past you estimated on behalf of the Gold Anti-Trust Action Committee (GATA), that the International Monetary Fund (IMF) has much less gold reserves in their vaults than the IMF officially accounts. I have a triple question on that: a) with what kind of procedure have you reached that conclusion; b) why does the IMF operate with wrong numbers; and c) what does this all mean if it’s true?
It is possible that the IMF has less gold reserves, but we really don’t know for sure. Unfortunately, the IMF is secretive like all central banks, so there is no hard evidence to confirm this conclusion. But it is possible that the gold reserves of the IMF are double-counted, meaning that the IMF records them as reserves but so does the country that used the gold for its subscription to the IMF.
The IMF and central banks defy generally accepted accounting principles. For example, if you look at the balance sheet of the Bundesbank, it reports gold in the vault and gold out on loan as one line item called “Gold and Gold Receivables”. That’s like calling cash and accounts receivable as the same thing. So it is clear that central banks hide the truth. They operate in secrecy as if they are above the law.
Why is the work of GATA important to you?
GATA.org has been working to educate people about gold and the ongoing intervention in the gold market by governments. These interventions are aimed to keep the gold price from reaching a price that reflects its true value. GATA hopes to achieve a gold market unfettered by government intervention, which is an aim that I share.
I am a believer in the free-market. It is the free-market that produces goods and services that has raised the standard of living of mankind. The free-market has done this despite the heavy hand of government, which of course creates nothing but simply takes from producers and redistributes this wealth to whoever has the biggest political clout. The bailouts in the US are a good example. Polls show that over 80% of the American people were against the bailouts, but the bankers influence over politicians won out.
As I see it, and as is enshrined in the American Constitution, governments have one primary role and that is to ensure that the rule of law is protected. When it is, then there is a level playing field for everyone. Unfortunately, the US government is abusing rather than protecting the rule of law, and the bank bailouts are just one example.
Could you tell us about one more aspect of a manipulated gold price: what does a suppressed gold price mean for Third World countries?
It means that countries like Ghana and South Africa receive less for their gold sales than they should. Gold is an important export for many Third World countries, so if they are receiving less than they should for their resources, their development is hindered.
One report that supported GATA’s finding that the gold market is rigged, was written in 2005 by Eckart Wörtz for the Gulf Research Center.3 Since you pay close attention to the raw material markets and the crude oil sector, I believe you’re very familiar with this report. Could you tell us about your reading of this report and put it into context to the “rumours” published recently in “The Independent” related to the end of the dollar hegemony?4 I mean, the US-Dollar is the reserve currency of the world (with all the pleasures that this includes for the American economy), because crude oil is solely purchased in USD since the early 1970’s, right?
The dollar became the world’s reserve currency in the 1930s because the British pound, which carried that mantel for over two hundred years, was no longer capable or worthy of serving that role. In essence, the dollar was the only currency as “gold as gold”, which was the saying back then, that could serve that important role as international money. But the US today is not the US of 70 years ago, and neither is the dollar. Consequently, it seems clear that another currency for global commerce is needed.
Some countries are already taking steps to protect their interests by diversifying out of the dollar and completing bilateral trade agreements in currencies other than the dollar. They recognize that the dollar is dying.
One topic that is widely discussed among gold bugs in Germany is the question where Germany’s gold reserves are located at. May I ask you what you believe is meant by the 1.700 tons of gold in the US bullion depositories under such terms like “Custodial Gold” and “Deep Storage Gold”?
I believe that the Bundesbank’s vaults are empty or nearly so. When Germany accumulated its 3400t of gold reserves in the 1950s and 1960s, most of it was held abroad in the US and UK. This was standard procedure at the time because it avoided the cost of shipping the gold to the Bundesbank. Also, back then gold stored in the Federal Reserve or the Bank of England was considered to be safe because central banks did not lend gold to bullion banks, which for the most part only began in the 1980s.
Eventually, however, bullion lending became active central bank policy, and even the Bundesbank’s balance sheet shows that it is now participating in this activity. When the Bundesbank lends gold, the gold is removed from the vault and given to a bullion bank, which then sells the gold, receiving dollars as proceeds from the sale. The bullion bank then invests these dollars in assets with yields higher than its cost of borrowing the gold in order to earn this spread, which is the so-called “carry trade”.
Because of its misleading accounting as I explained earlier, we just don’t know how much of Germany’s gold the Bundesbank has loaned. My guess though is that they have loaned all of it, which is why I believe its vault is basically empty. One half or 1700t was loaned directly by the Bundesbank to the big bullion banks like JP Morgan Chase and Deutsche Bank. And there is enough circumstantial evidence to suggest that the remaining 1700t was loaned to the US government, which in turn loaned this amount to various bullion banks. The record keeping for this transaction results in the change in accounting terms that you mention. This of course is a serious matter, and there is an important point here.
Because of the secrecy under which central banks operate and because of apparently bad decisions that have been made by many central banks, we can no longer prudently rely upon central banks to do the right thing. We can no longer assume because of their deceitful accounting whether they actually have gold in reserve. It may all be loaned out. Therefore, each of us has to take those steps necessary to protect ourselves and our family, and that means each of us must have our own gold reserve just in case the monetary and banking systems of the world continue to melt down.
Mr. Turk, at the finish-line of our interview I would like to talk with you about the subject of a global currency. As we have witnessed, you’re arguing that the US-Dollar will tank big time. Now, with regard to a single global monetary system: The US-Dollar would need to tank big time in order to let the instalment of such a currency occur on the world scenery, don’t you agree? It seems like one cannot have the one thing without the other. And if this was true, wouldn’t it mean that some bankers have much to gain from the Dollar’s fiasco?
Yes, many insiders have much to gain if they bet against the dollar and then take actions that cause the dollar to collapse. Some have argued that outcome is what unscrupulous insiders are aiming to achieve. They argue that insiders want the dollar to collapse, and because these insiders are properly positioned, they will profit from this collapse. But this argument goes even further. Once the dollar collapses, the insiders will propose a new fiat currency for the US, Canada and Mexico called the Amero run by a central bank that is beyond the control of any one country. Much discussion and planning by the US, Canadian and Mexican governments has already been done in this regard. The objective would be to keep the fiat currency scheme going longer and on a new supranational level, replicating what is already happening with the Euro.
Proposals and calls for a global currency are on the table – not just since there are SDR’s or here and now via the UN5 but at least since September 1988 when the British Economist magazine predicted the creation of a global single currency for the year 2018, which it called the „Phoenix“.6 What are your reflections on a world currency? Is it a joyful vision to you or rather a nightmare? Would it solve whatever our problems right now look like? And wouldn’t that be the much discussed-never seen Caroll Quigley-like “New World Order” highly concentrated in the hands of the world leading central banks?
There is an ideal world currency, and it is called gold. And restoring gold to its rightful role at the centre of commerce is a joyful vision. The strongest economic growth the world has ever experienced occurred under the classical gold standard, which was in my view the ‘best world order’. It marked a period when the rule of law was respected and protected by governments, except those occasional periods when dictators or other demagogues assumed power.
There is an essential point made in John Locke’s treatise on silver in 1697, which is particularly illuminating when it is read in conjunction with his two treatises on government. The basic principal he explained then of course remains true today. It is that human freedom and precious metals are inseparable.
Thank you very much for taking your time, Mr. Turk!
Thank you for the opportunity to share my thoughts.
1 In an online commentary, Reg Howe examined the correlation between gold and oil this way: “Averaging over many years, there is a rough equivalence of 20 barrels of oil to one ounce of gold. Thus $20 oil implies $400 gold, or $15 oil, $300 gold. When the gold price is lower than the formula suggests, the oil producer who saves in gold a portion of the price received actually gets more gold. For example, $20 oil at $300 gold means that if 10% of the price is saved in gold, $2 buys one-third more gold at $300 than it would at $400. But at $500 gold, $20 oil would be underpriced in terms of gold, fetching 20% less than it should.
Accordingly, low oil prices that may be tolerable to Middle Eastern oil producers under conditions of relatively low gold prices are unlikely to remain so should gold prices rise for whatever reason. Having for many years thought of gold prices as tracking oil prices, the world may be surprised to find oil prices tracking gold in the future. Indeed, the following October 7, 1998, quote attributed to a former Fed governor (Wayne Angell) appearing on CNN’s Moneyline seems to reflect considerable sensitivity to the oil-gold link: „The Fed has precise control over the price of gold and therefore over commodities such as crude oil. No inflation, therefore no need to raise rates.“ Note that this statement came not long after Chairman Greenspan’s July 1998 assurance to Congress that gold derivatives posed little systemic risk because „central banks stand ready to lend gold in increasing quantities should the price rise.“ See Reg Howe: “Beyond the G-7: People, Dollars, Gold and Oil”, published November 9, 1999 at: http://www.goldensextant.com/commentary5.html#anchor4076
2 Lars Schall: “The sinking Titanic”, Interview with Michael C. Ruppert, published April 29, 2009, at: http//:www.mmnews.de/index.php/200904292844/Rohstoffe/Interview-Michael-C.-Ruppert/html. For an early in-depth analysis of the Plunge Protection Team and its manipulation of the gold market see Michael C. Ruppert: “The Gathering Storm”, published June 7, 2002 at: http://www.fromthewilderness.com/free/ww3/070802_alert.html
3 see Trevor Lloyd-Jones: “Dubai study endorses GATA’s findings on gold and oil income”, published March 8, 2005 at “Business Intelligence Middle East” under: https://www.bi-e.com/main.php?id=616&t=1&c=3&cg=2&mset01021, and Robert Blumen: “Gold Currency System Proposed for Gulf Countries”, published March 13, 2005 at “Ludwig van Mises Institute” under: http://blog.mises.org/archives/003309.asp. The website of the Gulf Research Center based in Dubai is: http://www.grc.ae. The Report „The Role of Gold in the Unified GCC Currency“ written by Eckart Wörtz can be ordered there.
4 compare Robert Fisk: “The demise of the dollar”, The Independent, published October 6, 2009 at: http://www.independent.co.uk/news/business/news/the-demise-of-the-dollar-1798175.html. In his article, Mr, Fisk wrote: “In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading.” See also “Oil states deny plans to dump the dollar”, Daily Finance, published October 6, 2009 at: http://www.dailyfinance.com/2009/10/06/oil-states-deny-plans-to-dump-the-dollar/, and Jim Willie: “Death of Petro-Dollar, Told Ya So”, Financial Sense, October 8, 2009 at:
5 compare Declan McCullagh: “United Nations Proposes New ‘Global Currency’, CBS News, published September 9, 2009 at: http://www.cbsnews.com/blogs/2009/09/09/taking_liberties/entry 5298305.shtml. See also Robert Blumen: “UN: Global Currency Should Replace Dollar”, published September 9, 2009 at: http://blog.mises.org/archives/010685.asp, and Andrew Moran: “United Nations wants new global reserve currency”, Digital Journal, published October 6, 2009 at: http://www.digitaljournal.com/article/280142
6 compare Morrison Bonpasse: “The Single Global Currency – Common Cents for Commerce”, Munich Personal RePEc Archive Paper No. 7002, published February 4, 2008, at: http://mpra.ub.uni-muenchen.de/7002/1/MPRA_paper_7002.pdf