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Interview with James Turk

James Turk has specialised in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics. His business career began at Chase Manhattan Bank (now JPMorgan Chase & Co.), which included assignments in Thailand, the Philippines and Hong Kong. He subsequently joined the investment and trading company of a prominent precious metals trader based in Greenwich, Connecticut. He moved to the United Arab Emirates in December 1983 to be appointed Manager of the Commodity Department of the Abu Dhabi Investment Authority, a position he held until resigning in 1987. Thereafter he held various advisory roles in money management until founding GoldMoney, which was launched in 2001.

1. Gold is trapped in crosswinds – prices can rise on economic concerns, but then fall due to fears about European banks’ insolvency and related liquidity concerns. What’s your take on this push-pull dynamic?

Turk – I always recommend focusing on the long-term big picture. Gold has been in a bull market for more than 10 years, during which there have been countless price fluctuations over weeks and even months that were meaningless relative to the relentless rise in the gold price over the long-term. The key to successful portfolio management is accumulating assets when they are undervalued and useful, and then selling them when overvalued and no longer useful. Don’t be distracted by short-term price fluctuations. Given that gold is still undervalued and useful, I expect its price will climb much higher in the years ahead.

2. Will LTRO be able to solve the European crisis? What does the European Central Bank need to do as far as bank recapitalisation is concerned? How would new money creation affect precious metals?

Turk – The ECB’s LTRO has solved nothing. All it did was give the EU a few months more time to find the solution, which by the way is not recapitalising the banks. The only solution is to reduce the excessive debt load of banks, companies, individuals and most importantly, governments. This excessive debt has to be repaid by borrowers or written off by the banks. We had the economic boom that resulted from the years of excessive bank lending, so we are now going through the inevitable economic bust, which I think still has a few years to go. The ECB and other central banks think they can fight the economic tide by money printing, but they are mistaken. If, however, they continue to print through LTROs, QEs and other programmes, the result will be the same as we have been seeing this decade, namely, a higher gold price. These central bank schemes are simply debasing currency, and the gold price rises as a consequence.

3. Several central banks have increased their interest in gold this year. What is your observation on this issue? Do central banks, especially those in heavily indebted countries, think of gold reserves as being more important than they are willing to admit in public?

Turk – The purchases of gold by central banks is an important new trend. Many central banks outside of Europe and the US recognise that their country’s reserves are too heavily dependent upon dollars and euros, and more importantly, that both of these currencies are losing purchasing power. So it is prudent for central banks to accumulate gold, and by the same logic, it is prudent for individuals to accumulate gold to protect themselves from currency debasement. As the sovereign debt and bank insolvency problems in Europe worsen, I expect more central banks will be adding to their gold reserves, which is what individuals should be doing too.

4. Investment opportunities in gold are growing all the time. Is gold to be bought as a financial asset or as a tangible asset?

Turk – Gold is money. It is not an investment because gold does not have a balance sheet, a management team, nor does gold generate any cash-flow. I am of course talking about physical gold, which is a tangible asset. But as you say, there are a lot of paper gold alternatives available these days. With paper gold, you only own exposure to the gold price. You do not own gold. Some of the more popular examples of paper gold are futures contracts, options, ETFs and certificates. All of these are financial assets, meaning they all have counterparty risk. In other words, the value of your asset is dependent upon someone’s or some company’s promise. This important point was made clear to the people who owned paper gold in Lehman Brothers and MF Global. When these firms collapsed, their customers’ paper gold became worthless.

5. Investment demand for gold and other precious metals has grown quickly in recent years. Do you think people have been overplaying the importance of negative real interest rates? What are the other drivers of gold investment demand and how sustainable are they?

Turk – Given that gold is money and not an investment, gold’s demand comes from its usefulness as money. Everyone should have some savings, but it doesn’t make sense these days to save any national currency because the interest income you earn is not high enough to compensate you for the risk. So save and own gold instead. In my view, the gold a person owns is his or her savings. So gold’s rate of exchange to other monies is driven by four forces – the supply and demand for gold and the supply and demand for the national currency being used to express the gold price. Given that central banks around the world are generally doing a poor job managing national currencies, more and more people are logically moving to gold. I expect that this trend will continue because there has not been any indication that central bankers are going to change their ways. They will continue to print, print and then print some more, with the result that national currencies will continue to be debased.

6. Portfolio managers are still keeping a low proportion of their total assets in gold, despite the consistent gains in gold over the last 10-plus years. Do you think this ratio will increase in coming years?

Turk – Yes, I do. It seems inevitable to me that portfolio managers will see gold as a valuable asset with excellent liquidity because of the growing problems with just about all of the world’s national currencies.

7. Jewellery accounts for the lion’s share of gold consumption in India and China – the two largest national markets for the metal. How important are these countries for gold and silver price determination?

 Turk – There is a lot of misunderstanding about so-called “jewellery demand” and gold “consumption”. First, gold is never consumed. It does not disappear. Essentially all of the gold mined throughout history still exists in gold’s aboveground stock. In this regard, gold is completely different from everything else we humans produce. Soybeans, crude oil, wheat and all other commodities are consumed and disappear. But gold gets accumulated because it is money. Second, gold is fabricated in many different forms, including coins, bars and jewellery. But to accurately analyse demand, one has to understand why gold is being purchased. Clearly, when someone buys a gold coin or bar, the demand is monetary. The demand for jewellery, however, is not as clear-cut. Is the jewellery being bought for adornment or because gold is money? The big buyers of jewellery as you say are China and India, but most of the jewellery purchased in these countries is bought for monetary reasons. In other words, Indians and Chinese buy gold fabricated into high-karat jewellery for the same reasons people in the West buy gold fabricated in coins and bars – because it is money. The form in which gold is fabricated is different simply because of cultural traditions in these countries compared to other parts of the world. The reality is that when looking at the total demand for gold, relatively little gold is purchased for adornment, particularly during economic downturns like we have at present.

8. Many argue that gold is still undervalued compared with the 1980 price-high adjusted for inflation, and that gold is not in a bubble. Do you agree with this view?

Turk – Yes, I do. Gold is clearly undervalued, and more importantly, useful because it does not have counterparty risk. The world is, though, in the grip of a bubble. It is what I call a Fiat Currency Bubble, which is now 40 years old. This bubble is popping, which is why the gold price is rising. People increasingly understand that the attributes and characteristics that made gold to be accepted as money for 5,000 years have not disappeared or been destroyed. Those attributes remain, but have been ignored or forgotten, allowing the Fiat Currency Bubble to emerge. As we know from reading the newspapers everyday, this experiment with fiat currencies is not going well. So when the Fiat Currency Bubble finally pops, the gold price will soar and fiat currencies will collapse, just like all fiat currencies have done throughout monetary history. As a consequence, I expect that gold will at that time return to its rightful and traditional role as international money at the centre of global commerce. So my recommendation is to continue accumulating physical gold to protect your wealth in preparation for this event.