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San Francisco, California
By Thomas Calandra
28 May 2002
James Turk's GoldMoney digitizes real gold stored in a London vault. The service, one of several that creates gold-backed payment systems, is predicting an increase in business as gold prices eclipse the $320 an ounce mark. Turk, a former commodities manager for the Abu Dhabi Investment Authority in the United Arab Emirates, sees gold's spot price toying with the $325 level as the next step in a multi-year bullion rally. That rally, he said from his New Hampshire office, could set historic highs for the gold price.
The gold-based economy, long hidden from the view of most consumers and investors, is getting more attention in this year's gold rally, which has seen the metal's price rise more than 20 percent. Turk's GoldMoney.com service now counts 3,500 customers who transfer gold grams electronically as a substitute for a national currency.
The former Chase Manhattan banker and precious metals trader secured two U.S. patents for the technology behind the gold payment system, which can be used online to buy goods from merchants such as Amazon.com. 'People are looking for low-cost alternatives to acquire bullion,' Turk said Tuesday morning, as the price of gold rose $2.20 to $322.20 and the Euro gained almost 1 percent on the dollar.
Turk sees gold benefiting from a slow erosion of the almost-universal belief that national currencies such as the dollar, the yen, and even the Euro will carry the day in coming fiscal storms. 'What drives the gold price, probably more than anything, even war mongering, is the perception that a currency or a currency system will function well or not function well,' he said.
Turk remembers how gold's price tripled from $35 an ounce in 18 months, starting when then-President Richard Nixon broke the dollar link with gold.
'My view at the time was typical -- that gold was going to $7 when the U.S. government stopped supporting it at $35. I subsequently learned how gold's price is really determined. Remember, no one could own gold in the States until 1974. People learn very fast when they see the need,' he said.
In the same way, the low gold hit in July 1999, $252 an ounce, marked a psychological bottom for the metal. Two months earlier, the Bank of England had begun a series of bullion sales that shone a spotlight on central bank sales of gold. Investors were shunning the metal and instead devoting every spare dollar and minute of the day to the stock market.
Turk sees an actual physical impact of new bullion buying in the market, in part from gold companies that are reducing their controversial use of derivatives and bullion leasing to sell 'forward' their mined metal in an attempt to enhance the price. 'So you have the psychological impact that the companies themselves have the expectation that gold will rise and they can no longer hedge,' he said, pointing to the latest possible gold merger of Canada's Placer Dome and Australia's Aurion. Placer Dome would buy AurionGold, Australia's No. 2 gold producer, for a price 30 percent greater than the company's shares were worth. Placer Dome says if it winds up owning AurionGold, subject to other, competing bids, it would sharply reduce the hedge books of the entire merged company.
Turk, like a growing number of money managers, sees demand for the dollar and dollar-based stocks, bonds, and real estate declining dramatically as America's debt levels cripple the financial system. The relentless growth of the world's central bank-fed money supplies since 1992 or so could add to the woes of the dollar, and other major currencies.
'Gold is an advance indicator of monetary problems, and inflation and deflation are two monetary problems,' Turk said, when asked if he believes gold is a reliable leading indicator of commodity inflation. 'My own perception is not the quantity or supply of money but the demand for the dollar, which will decline.'
Turk's GoldMoney, of course, would thrive in the event of a fiscal meltdown or a prolonged battering of the world's currencies, and the way those currencies are exchanged for one another. Based in the British Channel Islands, with a vault on the outskirts of London, GoldMoney offers users the ability to exchange their 400-ounce gold bars, coins, and currencies into electronic gold, then transfer it in grams via the Internet. There are other digital bullion services, such as E-Gold Ltd., that exchange assets into vault-stored gold ownership that is then circulated electronically.
Turk says three gold mining companies are considering using GoldMoney to distribute actual dividend payments in gold to shareholders: Iamgold, Goldcorp, and Durban Roodepoort Deep. GoldMoney does not charge for the transfer of a 400-ounce gold bar into its London vault, as long as it is coordinated by the London Bullion Market Association.
A wire exchange of funds to an intermediary, which then is converted into gold grams for a GoldMoney account, can run between 1 percent and 2 percent of the total. Turk points out such a fee is far less than the commissions, storage, and insurance costs involved in a consumer purchase of gold coins or bars. An independent audit of the amount of gold in GoldMoney's vault is forthcoming, he said.
Turk is also the editor of the 15-year-old Freemarket Gold & Money Report, an investment newsletter.
'I think people need to take the Warren Buffett approach to gold right now; accumulate it and put it away, any way they can. People are expressing more of an interest in diversifying their assets, and I think gold will benefit,' Turk said.