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San Francisco, California
By Thomas Calandra
4 February 2003
A funny thing happened on the way to the gold rally: One analyst issued specific, month-by-month forecasts that thus far are hitting the mark.
The spot gold price Tuesday morning rose $5.20 to $376 an ounce, its best levell since November 1996. The gain earned the precious metal a 9 percent return since Jan. 2, when gold stood at $345 an ounce.
Nearly all bullion analysts, on Wall Street and Main Street, link gold's continuing rally to tensions in the Middle East and in North Korea. For his part, James Turk is convinced the talk of war in Iraq, or a nuclear showdown in Asia, have little to do with gold's 25 percent gain in 2002 and the metal's current gains.
The longtime editor of New Hampshire-based Freemarket Gold & Money Report, Turk instead points to monetary metrics that compare the ascent of gold, or its decline in the 1990s, to government budget spending trends, gold-reserve assets at central banks and the supply of paper money flooding the globe.
On Tuesday, for instance, Russia, joining China and several other countries in a shift toward bullion-linked reserves, said its central bank will boost gold and foreign-currency holdings to $55 billion by year's end, a rise of 17 percent. Many countries in Asia that are running large trade surpluses with the United States, among them Taiwan, Japan and China, have less than 4 percent of their foreign reserves in gold, leaving plenty of room for future gold purchases.
Turk, in following his early January forecast that the gold price would surpass $370 an ounce in the coming weeks, on Tuesday told me he expects the metal's price to reach $434 an ounce by the end of February, less than four weeks' time. Such a gain, 15 percent at current levels, would hearken back to the middle of February 1996, when the metal peaked at $415 an ounce before beginning a 5 1/2-year slide into the dungeon.
The researcher's forecasts are bold in their specific timing and price level. Turk's predictions depart from those found at investment banks in London and on Wall Street, where analysts are reluctant to forecast an average gold price higher than $360 an ounce or so for all of 2003. Turk is confident gold, logging inevitable gains as international investors flee the 'dollar bubble,' will reach $600 this summer and surpass $900 an ounce by February 2004.
Another longtime gold researcher, John C. Doody of Gold Stock Analyst, notes, 'Jim has been very aggressive on his timing.' Doody adds. '[A gold price of] $450 by year-end is the best I can do.'
Turk's favored metric these days -- a link between U.S. gold assets and the country's M3 money supply -- could take the financial world by storm. A former international banker and manager of the commodity department for the Abu Dhabi Investment Authority, Turk calculates a 'fear index' by multiplying U.S. gold reserves by the gold price, then dividing it by M3 money supply, which is growing at 7.5 percent a year.
At its most basic interpretation, the index represents the lack of faith most investors have in gold and the surplus of faith they have in Federal Reserve paper assets. Turk's index just five weeks ago stood at 1.06 percent, a historic low since 1971, when Richard Nixon took the dollar off the gold standard.
For Turk, the fear index quantifies the lack of faith that central banks, led by the Federal Reserve, have had in gold as a reserve currency since the early 1970s. With just 1.06 percent of the American dollar backed by gold and 98.94 percent backed by debt owed to the Federal Reserve and the banks, it is easy to see why Turk sees the U.S. currency as the next 'peso.'
In 2002, the M3 money supply, effectively America's money in circulation, averaged 7.5 percent growth to $8.5 trillion by the close of the year. Turk pegs the U.S. gold reserve at 261 million ounces.
Turk has more than his monthly newsletter riding on the gold price. After spending the gold-bust years of the mid and late 1990s advising fund managers, Turk started GoldMoney.com, a transaction system for consumers and businesses. GoldMoney.com uses gold grams as its unit of value.
Turk, I discovered after dining with him and longtime mining analyst Robert Bishop in Vancouver, is also playing a part in the development of an exchange-traded fund that would allow investors to buy and sell gold as a security on a major stock exchange. No exchange-traded funds -- the equivalent of a Nasdaq 100 QQQ -- exist for pure commodities.
An ETF for gold, the surging precious metal, is said to be working its way through the regulatory process and would be the first for a commodity. Both Turk and his backers and the World Gold Council, a London-based trade group, are working separately on a so-called QQQ for gold. The fund would be backed by real bullion and trade every second of the market day. The largest index asset managers of ETFs include Barclays Global Investor and State Street Global Advisors.
As it stands today, individuals have few easy ways to buy physical gold. A closed-end fund, Central Fund of Canada (CEF: news, chart, profile), trades on the American Stock Exchange and owns 261,000 ounces of gold and 13.06 million ounces of silver. The company's shares sell at a roughly 20 percent premium to the spot price of gold.
On Tuesday, as gold rose in the face of a sinking dollar and a melting stock market, I asked Turk what it will take before Americans, who on average have less than 1 percent of their holdings in gold, gold mining stocks or bullion funds such as Tocqueville Gold Fund, consider buying the metal.
Thom Calandra: 'Gold won't be on the front of The New York Times until it crosses $400, and maybe not until $500. Why is that?'
James Turk: 'I agree. When it does, we will probably have reached some short-term overbought level. My guess is that we won't get overbought until the $430 level, which remains my month-end price projection for February.'
Calandra: 'James, a large part of your forecast comes from the notion that history tends to repeat itself, as it did from 1971 to 1980, when the gold price reached $840 or so an ounce against a horrible world landscape of accelerating inflation, oil-price shocks and political upheaval.'
Turk: 'Yes, the factors driving gold higher are still very much in place. I've seen nothing yet that would cause me to change my projection of $434 for the end of February. So I am expecting gold to post a double-digit gain in February, the first monthly double-digit gain since September 1999. Gold will then I expect take a breather by cooling off in March and April.'
Calandra: 'And then, a high of $934 an ounce one year from now. Your admirers, and your critics, can agree on one thing: You have conviction.'
Turk: 'One is never sure of anything when it comes to markets. The only thing we need to do is stay with the trend. The trend for the gold price is up. Therefore, we should be focusing on one and only one thing: staying with the trend. Let gold tell its own story, and let's see what unfolds.'
In my own professional view, Turk is on the money. His current advice is to own bullion and assets in foreign currencies. His favorite right now is the Swiss franc. Step in step with gold's rise will come a continued decline in the dollar, which fell about 16 percent against the Euro in 2002 while gold was gaining 25 percent for the year.
'The gold price is rising in every currency in the world,' Turk tells me. 'Euro buyers of gold will have far more purchasing power when they translate their gold back into Euros. That's the way gold as a reserve currency, gold as money, should work.'
Turk also sees large gains for gold mining shares as represented by the Philadelphia Gold & Silver Index, the Amex Gold Bugs Index, the Toronto Gold Index and the FTSE Gold Mines Index. In the past year, all have put between 25 percentage points and 75 percentage points of price performance between themelves and the ailing U.S. stock market, as measured by the Standard & Poor's 500 Index.