Yes, $8,000 an Ounce
An Interview with James Turk, Founder of Goldmoney.com
By Sandra Ward
Barron's
Monday, May 29, 2006
Not only did he pinpoint the beginning of the current bull market in gold in these pages in September 2002, but he has been spot-on in continuing to assess the direction of the metal and the drivers behind its move. James 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.
Barron's: One of your gold indicators, the "fear index," is based on M-3 numbers, but the government has stopped reporting M-3.
Turk: 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.
Barron's: You thought we would have had a dollar crisis by now.
Turk: 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.
Barron's: Let's talk about the pressures on the dollar.
Turk: 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.
Barron's: Concerns among whom?
Turk: 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.
Barron's: How do you measure that?
Turk: 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.
Barron's: What's broken about it?
Turk: 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.
Barron's: Any sign of that trend?
Turk: Yes, the fact that the Dubai and Unocal deals were rejected. Protectionism and capital controls are very closely related.
Barron's: Do you have a new gold-price target?
Turk: 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.
Barron's: Some reports say $2,000 is reasonable.
Turk: 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.
Barron's: Are there any signs of this trouble yet?
Turk: 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.
Barron's: Can this go on indefinitely?
Turk: A lot of people got out of the gold market, expecting a correction, as often occurs at the beginning o