James Turk's Q&A with GoldMoney followers

2012-AUG-17

GoldMoney's followers on Facebook and LinkedIn recently had the opportunity to submit their questions on the gold and silver markets to James Turk. Here are James's responses to the thought-provoking queries he received.

1) John Garvens: Silver hasn't done much recently. Why is this? And what are your thoughts for its future?

James Turk: Silver does not appear to have done much recently because its price has been in a sideways trading range for 3 months. But the markets are always telling us something, even when prices go sideways. In the case of silver, the market is telling us that a big base is being built. Bases like these usually result in big rallies, which is what I am expecting for silver. It is subtle, but the rally I believe has already begun. The low in silver was $26.12 on June 28. Silver has been in an uptrend since then.

2) Steven Wood: In the case of mass deflation and/or/ hyperinflation, what are the chances of retaining one's ownership of mining shares in countries like Canada and the USA?

JT: I assume you are asking, what is the political risk of investing in America and Canada? It is high in the US, given past experience. A windfall profit tax – like that imposed on oil companies back in the early 1980s – cannot be ruled out if the gold price soars, causing mining profits to soar too.

Mining is a relatively small percent of US GDP, in contrast to Canada, where mining and natural resource development play a big role in economic activity. So the political risk in Canada is lower than the US, but it exists there too. For example, look how the tax increases changed the nature of the royalty trusts. The bottom line is that when politicians are desperate for money in countries where property rights are eroding and the rule of law gets bent for perceived political expediency, anything goes – and not necessarily for the better.

3) Wayne Sweetman: The Gold lease market is far beyond a 1:1 ratio of physical gold ownership to paper claims on gold. What ratio do you expect this is at today?

JT: To restate your question, there is a lot more paper gold than physical gold, which I wholeheartedly agree. I had always assumed it was about 20-to-1. But in CFTC testimony last year, one witness suggested it was 100-to-1. But here’s the key point.

Owning paper-gold instead of physical gold is like playing the children’s game, musical chairs. When the music stops, there are never enough chairs for everyone. Translating that into gold, when the music stops, someone who owns paper gold will end up with nothing but a broken promise. So why take the risk? Own physical instead. Monetary history shows repeated busts and collapses occur when people rush out of paper into physical metal. The reason of course is that physical metal does not have counterparty risk, which is something to avoid in a financial bust when promises are being broken all the time. When you own physical gold, you own a tangible asset, not someone’s promise, which brings up an important point.

There is no counterparty risk in GoldMoney. Our customers own the precious metals they store with us; GoldMoney does not owe these assets to our customers.

While there is no counterparty risk in GoldMoney, our customers do have performance risk – namely that our representations on our website are accurate. We use audits, governance procedures, ultrasound scanning, etc to provide our customers with assurances of integrity that any performance risk is mitigated, meaning that their metal is safe.

4) Karan Nagpal: What percentage of people (in your view) know that gold is money? And what percentage of them are (and will remain) brainwashed, not able to see the truth?

JT: In Asia, about 80% understand gold is money. In Europe and the Americas, maybe 20%. Everyone will see the truth when the fiat currency bubble in which we live today eventually pops, which it inevitably will. See No. 25.

5) Edward Durfee: When will we able to use goldgrams again?

JT: Unfortunately, I don’t know. We have had to stop this service in all countries except Jersey, where we operate, but it is our intention to re-establish this service eventually. We are studying how to do this.

6) Martin Phillips: How far do you think governments will go to suppress the price of gold and silver...?

JT: Not much further. They can only go so far because they use paper gold to suppress the price, along with anti-gold propaganda. To make good on their paper-gold promises from time to time they need to deliver physical metal into the market, which they have stopped doing. The Bank of England and other European central banks were willing to dishoard metal for several years beginning in the late 1990s and continuing into the new century. But the selling from these sources has stopped. In recent years central banks not involved in the gold price suppression scheme have become buyers. Given that gold remains very undervalued (see No. 15), I think we are very close to the price suppression scheme ending. I forecast back in October 2003 in an interview in Barron’s that my expected timeframe for this event was 2013-to-2015. I see no reason to change my thinking. I expect the next two years to be tumultuous.

7) Dr Christopher Payne: Is the purchase of precious metals i.e., gold, silver or platinum taxable if you purchase it? Is it considered a form of income? If so how do you protect it legally from the greedy feds?

JT: I can’t answer the first two questions because they involve matters outside of my area of expertise. Regarding the last question, the best way to protect your metal is to store it in different countries. When gold was confiscated by the US government in 1933 and made illegal to own, gold that was outside America and owned by Americans was not confiscated. You might find my article, “The Myths and Reality of Gold Confiscation”, to be interesting and helpful.

8) Laurent Torriani: Do you think Gold and Silver are going to be remonetized ? If yes, what country will be first to do that?

JT: No, I think it is unlikely. The precious metals impose too much discipline on governments, and politicians don’t like that, particularly the socialists. But as Margaret Thatcher presciently warned years ago: “the problem with socialism is that you eventually run out of others people’s money”. The relevant acronym is OPM (pronounced “opium”), and most politicians are hopelessly addicted to spending it. But governments have run out of money, and some have even run out of the ability to borrow money. So the European Central Bank and other central banks are taking this debt and turning it into currency. They call it “quantitative easing” or QE for short, but they should call it what it is – money printing.

9) Kim Greenhouse: What moved you to temporarily retire the transaction part of GoldMoney where people could buy goods and services with goldmoney.com, and do you think you will be able to turn it back on so that we can transact with goldgrams?

JT: As we mentioned at the time, it was to avoid increasingly onerous and uncertain regulatory burdens for our company as well as our customers. We also said that because the use of the metal payments was not significant, we anticipated that stopping this service would not be inconvenient for the majority of our customers, and hopefully it has not been. See No. 5.

10) Stijn Kox: Many people need to spend all their income and savings on housing, loans, bills, etc. They can't afford it anymore to buy gold and silver. How can they protect themselves against an economic crisis? What's the alternative to gold and silver?

JT: There is no doubt that times are tough for many people around the globe. And I wish there were some easy answers, but I do not see any alternative to owning some physical gold and silver. They are one’s savings.

11) Julian Seidenberg: With all this talk about money, gold and wealth, what are your thoughts on the wealth of free access to organic food, clean water, natural medicine, natural wilderness, etc? Many of the same parties that are manipulating the gold price also seem to be trying to stop us from accessing these. What can we do to prevent loosing access to the planet's natural wealth?

JT: These are complex questions, and I do not have an answer. I do, though, have an opinion. The fundamental building block of any society is the rule of law, and our society has developed the way it has to continually improve humankind’s standard of living because of the protection of individual liberties and property rights. The tragedy of the commons demonstrates that resources commonly owned get abused, and in some cases, even destroyed. So I believe that private property is fundamentally important to your questions. But there is also one other element, which is the building block of Anglo-Saxon common law. It is to do no harm. If people, acting as we all do in our interest to improve our situation, also followed this principle, we all no doubt would be better off. But of course, when there has been harm, damages and/or corrective measures should be available through legal judgments through a court system run by private enterprise, not government. In short, the world needs less government, not more, but I do not know how to make that happen.

12) Ricky Reemer: James, I am concerned about two things when events really heat up: 1) government confiscation, 2) new taxes on gold. Question: is there anything, really, that can be done to protect oneself against this kind of government intervention?

JT: As we all know, the future is unpredictable and uncertain. So all we can do is look at the things that have happened in the past and take steps to protect ourselves. It is clear from history that when governments are out of control, anything can happen, and there is only one way to protect yourself – diversify. You need to diversify your assets as much as practical. Not all governments act in unison, so even if you lose some assets by grabs from ham-fisted politicians and bureaucrats, if you are diversified, you won’t lose everything.

13) Dennis Cline: What is the best way to invest in gold, yet hedge against a serious downdraft in the event of a financial crisis?

JT: Gold is not an investment; it is money. Gold does not have a management team, balance sheet, P/E ratio, and does not generate cash flow. So one saves gold, rather than investing in it. The price of gold may go down in the future if there were a massive deflation, which I believe highly unlikely. Nevertheless, if a deflation did occur, the purchasing power of gold would likely rise, which is what happened during the Great Depression. In other words, if a deflation were to occur today (which would be different than the 1930s because the dollar is not tied to gold as it was back then), the price of everything else would fall more than the price of gold. So my point is that gold is the hedge in case there is a financial crisis, and I expect that there will be. But it will have a hyperinflationary outcome, not a deflationary one.

14) Adam Holland: Can I have some of yours?

JT: You mean my gold? Sure, if you offer a product or service that I would like, and I am once again able to use GoldMoney’s payment system to “click” some of my metal to you in payment.

15) Magdalena Michelle: Do you think gold and silver prices are being manipulated? If so, where do you believe gold and silver prices should be?

JT: Yes, I have made this point repeatedly since noticing anomalies in the gold market back in April 1997 when I wrote “Managing Markets”. Consequently, over the years much of my work in this regard has been publicised by www.gata.org, which has been the leader in bringing this manipulation to light.

My point has been that the central planners manipulating the metals have been in a managed retreat since the low prices reached back in 1999. They allow the gold price to rise a little each year, and gold is up 11 years in a row so far. But it is still far below its fair value, which the GoldMoney Index suggests is presently around $11,000 per ounce. Assuming the gold/silver ratio falls from the present level around 57 back to 20 ounces of silver to equal one ounce of gold (though 16-to-1 is really the historical norm), then the fair value of silver is $550 per ounce. Are these prices reasonable, and can we expect to see them in the future?

Yes, they are reasonable, based as they are on logically derived mathematical formulas that have proven their value over decades. If the US monetary authorities do not change direction 180-degrees and head in the right direction, I expect to see these prices in the future when the fiat currency bubble, now four decades old, eventually pops.

16) Elizabeth Denison: The legendary Jim Sinclair counsels to hold physical gold. Would you say that buying metals through GoldMoney is as safe as buying physical metals?

JT: When you buy through GoldMoney you are buying physical metal. But we store your metal for you, instead of you having to worry about storing it.

There are only two ways to buy physical gold, i.e., a tangible asset. You buy it and store it yourself, or you buy it and have someone store it for you. Each approach has advantages and disadvantages, just like most everything in life. If you store it yourself, you have your gold at hand, but there are risks. If you store it at home, you run the risk of theft, and the cost of insurance is probably prohibitive. Also, if you need to sell your gold, your liquidity is impaired. You need to take your coins/bars to a dealer, which takes time and may be inconvenient. Depending on the size of the bars you purchase, you may need to have them refined before the dealer accepts them, which costs money. Lastly, you do not want to store your gold in a safe-deposit box because of the risk of government confiscation.

In contrast, if you choose to store your gold professionally, you do not have it at hand. But you have good liquidity, convenience, insurance and most importantly, safety if you choose the right professional storage firm. With GoldMoney you also get the opportunity for international diversification.

My recommendation is to buy gold in both of these ways. The principle I am following in making this recommendation is that diversification mitigates risk. So buy some gold to store yourself at home and buy some to store professionally, particularly in different countries and political jurisdictions to again diversify as much as practical. The mix you choose between these alternatives is up to you, but basically, the aim is to choose whatever mix with which you feel most comfortable.

17) Jared Chin Jitfu: Hello James. What is your advice for the people from a developing country in southeast Asia (such as mine) in hopes of preparing for the coming inevitable global debt failure? Mainstream media shielding the public from what's happening in US and Europe isn't helping to promote the awareness of the coming crash.

JT: It is the same advice I give to people living everywhere. We have some difficult times coming in the months and years ahead. You need to prepare to make sure you and your family are protected, come what may. Fortunately, we have the tremendous resources available through the internet to help us achieve this objective.

We cannot predict the future, which of course means that uncertainty is something we must deal with. One of the best ways to overcome uncertainty is to accumulate physical gold and silver. View them to be your savings, which everyone needs whether you are saving for retirement, to purchase some consumer good or just for protection from a “rainy day”. It doesn’t make sense to save national currencies anymore because the low interest rates banks offer do not offset the risks or the loss of purchasing power from inflation. So save gold and silver instead.

18) Laurent Torriani: Do you think there is going to have more and more regulation about owning physical gold and silver in the future?

JT: Sadly, yes, it seems likely. Rather than focusing on individual freedom to choose, governments seem intent on more control. It seems inevitable that physical gold and silver will be subject to more regulation too.

19) Julian Seidenberg: Do you think the International Monetary Fund will try to step in when currencies start collapsing, and issue Special Drawing Rights (SDRs) with the intent of eventually establishing a single world currency? How do you think that will play out?

JT: The IMF and its banker friends will no doubt try everything they can think of to keep the fiat currency bubble from popping. Think about it for a minute. If you had the power to create currency out of thin air, which is what the bankers do, would you give up that power willingly? Wouldn’t you fight to protect the special cartel governments have given you as a banker? Of course you would, regardless whether you are speaking about a domestic currency or one that circulates internationally. Governments and the institutions they control like the IMF will fight the return of gold, but they will lose the war, even though they may win some battles occasionally. Eventually the forces of the market prevail, and those forces indicate that gold’s 5,000-year history as money proves it is preferable to fiat currency. After all, look how badly fiat currencies have been doing the past decade.

20) Terje Petersen: Should Australia adopt a gold standard? Can any single nation adopt a gold standard unilaterally or does it need to be a collective effort by many nations?

JT: The gold standard is history. I doubt if it will ever be re-established. I am not in favour of the gold standard. It is far better than the present system, but why let governments control currency? I am in favour of letting the creative forces of the free market develop technologically advanced currency, and do so in an environment where governments simply protect everyone’s inalienable rights to life, liberty and the pursuit of happiness. I therefore favour Ron Paul’s idea to allow competing currencies.

21) Scott Anderson: Frequent comments are made about the difficulty of getting all of the eurozone countries on the same page, each working toward the same goal as one. If a leader united the eurozone and they were indeed able to follow one plan to save the euro, what would this mean for gold and silver?

JT: The problem with the euro is that it has become politicised. It is under the control of politicians. The ECB is not like the Bundesbank, which was a point I made in a recent article.

If the politicians and eurocrats somehow manage to get all of the eurozone on the same page, they would only happen if they impose more controls and draconian measures throughout the zone. Controls erode free markets and destroy currencies because they restrict people’s freedom to act, thereby lowering the demand for the controlled currency. Money like every good or service is subject to supply and demand. The interaction of the supply and demand for money determines its purchasing power. Falling demand coupled with the never-ending increase in supply from government printing means a currency loses purchasing power. That outcome is bullish for gold and silver.

22) Thomas Fink: Will the world depression eventually become bad enough so that people will barter with silver and gold?

JT: It is not the depression that will cause this outcome, but rather, government controls. And it could very well happen, particularly in localised areas. It could also happen at the government level. For example, Malaysia has been very outspoken in restoring gold as a means of payment between countries.

23) Abu Llyas Lothringen: When will it be possible to use GoldMoney to make payments for European Union and Middle East & North Africa residents?

JT: Hopefully, yes. The use of gold as currency is an important objective of GoldMoney. But it is impossible to predict when this service will be restarted.

24) Anonymous: Where is gold headed, I mean how high can it go?

JT: In places like Weimar Germany in 1923 and Zimbabwe more recently, and many South American countries in the 1980s and early 1990s, gold went to infinity. In other words, the currency was destroyed in these countries, and no one would exchange their gold for currency. There have been dozens of currency collapses since Would War II. Expect more in the years ahead, unless governments suddenly start pursuing sound money policies, which I think is unlikely.

25) Felix Fms: When will I be able to fund/withdraw my GoldMoney Holding with Bitcoins?

JT: Probably never. BitCoins are the ultimate currency backed by nothing. It is not money in my view because money is a tangible asset, and BitCoins are not.

From time to time, new conventional “wisdoms” defying logic and historical precedent become fashionable and fixed in the mindset of the population, holding sway until the bubble brought about by this fallacious thinking pops. We saw this phenomenon during the internet bubble, when it was said that profits don’t matter – only market share does. We saw it again in the real estate bubble when it was said that home prices only go up. And we are seeing it now when people say the dollar is money. It is not money in the true meaning of that word. The dollar is only a money-substitute, as are all the national currencies of the world.

In recent decades, people have lost sight of the fundamental truth of economic activity that goods and services are paid for with other goods and services. One cannot consume the currency we accept in payment, which is used merely to facilitate the exchange of goods and services. Only goods and services can improve our situation in life. So to properly describe its purpose, currency is a tool we use to temporarily hold some wealth in the form of deferred purchasing power, until we are ready to purchase a good or service.

The deferred purchasing power embedded in national currency is not solely reliant upon the view of market participants, as is the case for physical gold and silver. Rather, it also relies upon the creditworthiness and reliability of the issuer of the national currency, which is a feature that highlights the fundamental difference between tangible assets (land, food, an oil well, gold, etc.) and financial assets (basically anything dependent upon a counterparty).

As society developed, the most liquid and reliable tangible asset – namely, gold and silver – became money in a market process that began in pre-history, thus giving the precious metals what is now a 5,000-year track record as money. When used as currency, the precious metals enable tangible assets to be exchanged for other tangible assets, resulting in an exchange that is immediately extinguished. There is no lingering obligation.

However, if a national currency is used to “buy” some good or service, the exchange is not complete because the currency is nothing more than an I.O.U. dependent upon the promises of both the government that is the issuer and the counterparty, which is the government and its central bank in the case of cash-currency while banks are the counterparty for deposit currency. The party accepting this I.O.U. does not extinguish the exchange until they can use the national currency to purchase a tangible good or service; this period of time often entails considerable risk to the holder of the national currency. This basic monetary principle applies regardless whether one is considering a purely domestic transaction, or an international one.

In our society, one works efficaciously to produce some marketable good or service, and we all accept currency in payment. We accept currency not only because it is useful to each individual, but also because more broadly, it makes possible the division of labour, which enables humankind to achieve a higher standard of living than if we had to rely on barter.

So to understand the essential nature of the ongoing fiat currency bubble, we need to recognise that currency today is a money-substitute. It is not money itself because the dollar and other national currencies are not tangible. And to avoid being caught up in this bubble, we should hold physical gold and silver. Even though they are not used much as currency – which is a paradigm that GoldMoney eventually hopes to change – they still are money.

Trillions of dollars have been widely accepted in global commerce in the belief that those dollars can eventually be turned into tangible goods or services. The fiat currency bubble will pop as the understanding grows that dollars – and indeed all fiat currencies – have been issued to too great an extent. There are not sufficient goods and services at current prices to satisfy everyone’s desire to spend their accumulated deferred purchasing power held as dollars. As confidence in the dollar erodes, the fiat currency bubble will eventually pop. It inevitably must because the banking system continues to create dollars “out of thin air” to provide the federal government with the dollars it is spending. The structural federal deficits and the undisciplined approach to creating currency that ultimately enables the issuing of unlimited dollars explain why we are approaching hyperinflation of the US dollar. And while BitCoins may not end in hyperinflation, like all national currencies, they are not backed by anything tangible.

26) Joaquin Carrasco Almazor: Why have gold price and silver prices been stagnant for so many months now?

JT: Bull markets as well as bear markets have periods where the price moves sideways. Markets require patience, and we are in one of those times. It was only a year ago that gold made a new record high, which is not a long-time within a multi-decade bull market like the one gold is experiencing.

27) Joaquin Carrasco Almazor: In this current world of speculative and virtual economy, what is the role in the future as a shelter value for something that is apparently anachronistic like precious metals?

JT: Anachronistic? The barbarous relic is central banking, not gold.

28) Joaquin Carrasco Almazor: Do you think in a “potential revaluation” of silver given its current non-accumulative situation like it is for gold?

JT: Yes, but the revaluation will be driven by market demand, not any formal government action to revalue silver, for example, to make it a currency again.

29) Marco Simanek: Does silver have more potential than gold?

JT: Yes, because their ratio is still abnormally high. Currently, it takes about 57 ounces of silver to equal one ounce of gold, whereas the historical norm is 16-to-1. So as this precious metal bull market moves forward, I expect the ratio to fall, meaning that silver will outperform gold in the months and years ahead. But remember, silver is more volatile than gold, so its not for people unwilling to accept the volatility.