James Turk discusses the macro environment with a focus on Europe with Beurs Magazine.
Since last summer the euro has been on the rise. Is that a trend you see continuing going forward?
JT: It’s hard to predict the euro’s moves against other fiat currencies. All are being debased at a rapid rate by central banks. This means that the euro doesn’t really stand out as a poor performer in this context. In fact over the last decade, it’s held its value slightly better than the US dollar, Chinese yuan, Indian rupee, Japanese yen and the British pound – as can be seen from the following chart I produced as part of a recent article for the GoldMoney website.
What I can say with confidence is that over the medium to long term the euro will continue to lose value relative to sound money: gold, silver and other precious metals – though this doesn’t preclude short-term rallies in the euro/gold exchange rate (as we’ve seen since last Autumn).
With bank assets of €47 trillion, the EU has officially the largest banking system in the world. It almost crashed in 2008, but since then the banks have been kept afloat by a string of interventions. Have the authorities averted a banking crisis, or have they just postponed it?
JT: They’ve postponed it, but the day of reckoning will come eventually – given the banks’ huge exposure to sovereign debt. Governments all over the world continue to spend way beyond their means, which means that the bonds they issue to pay for this spending will be made steadily worthless in the years ahead – either by outright default (as in Iceland), restructuring of the debt (the case with Greece), or by inflation (the Anglo-Saxon preference). It’s a case of picking your poison as far as bondholders are concerned. Add to this the systemic risk inherent to the tens-of-trillions worth of derivative products in the banking system, and it should be clear that another 2008-style crisis – or worse – is a very real risk.
The Basel III regulations were meant to insure that banks have more capital buffers to help them withstand future crises. However, recently the Basel III liquidity requirements have been eased again. Why is this, and do you think this tells us something about what's ahead?
JT: Higher liquidity requirements would hurt banks’ abilities to inflate the money supply, and politicians know that for all the talk post 2008-crisis about the need for “responsible” “conservative” banking, they are deeply reliant on banks as engines of inflation and credit expansion. Not to mention the fact that governments need to borrow huge amounts from lenders.
What lies ahead as a result? Continuing instability in the banking system, ever-larger doses of money printing from central banks – and eventually runaway inflation and the death of our current monetary system.
Even though you live in London, I know you travel a lot to Spain, which has been in a recession that is deeper and longer lasting than most other European countries. What have you seen happen there recently?
JT: It is very bleak. Official unemployment is 25%, and youth unemployment is now approaching 56%. These numbers indicate that the Spanish economy is in a depression, even though it is not called that. Ongoing government spending gives the illusion that the economy is doing better than it really is, but what happens when the government cannot borrow any more?
We need to recognise that we are reaching that stage. The Spanish federal government as well as those of the provinces are desperate for cash, but are unwilling to reduce their role in the economy and let free-market wealth creation emerge. So Spain is following the same path being pursued by socialist politicians pretty much everywhere these days, and like other countries has also turned to chicanery. It has been reported, for example, that the federal government raided the national pension system, which is now stuffed full with Spanish government debt. It is an unconscionable act given that it replaced good assets with its own debt that is not too far from a junk rating.
What about the other countries in Europe, are there any specific events that caught your attention?
JT: I’ve been saying for a long time now that the euro is not the Deutschmark, and that the ECB is not the Bundesbank – despite the promises made at the euro’s founding, when it was promised that it would be a hard currency successor to the D-mark. So it’s been interesting if sadly predictable to see the continuing marginalisation of the Bundesbank and its president, Jens Weidmann, by the likes of Angela Merkel, Mario Draghi and other senior eurozone politicians and bureaucrats. The politicians and bureaucrats seem determined, in the name of holding the eurozone together, to turn the euro into the spiritual successor to the Italian lira.
The Bunkdesbank grumbles about this – see an interview Weidmann gave to Frankfurter Allgemeine Zeitung at the start of the year – but to no effect. Taken together with the on-going Swiss efforts to weaken the franc, and as far as sound money advocates are concerned, the lamps are going out all over Europe.
How do you see events unfolding in the eurozone in 2013 and after? What will be the signposts that the markets understand that the emperor has no clothes?
JT: So far the street demonstrations have been relatively civil, though there have been exceptions. These are perhaps the most visible events. I think a noticeable increase in civil unrest is likely as the European economy continues to weaken, which is ironic. The euro has been portrayed as a force to unify Europe, but it has had the opposite effect. The vocal separatists in Catalonia, Spain’s largest province, are an example of the tension that is brewing.
What about the dollar, do you see it as a good alternative to the euro?
JT: Far from it. The dollar is if anything an even worse bet than the euro as far as preserving wealth and purchasing power is concerned. Budgets at all levels of American government are bleeding red ink. The recent fiscal cliff deal is expected to raise federal government borrowing by over $4 trillion over the next decade – and if past Congressional Budget Office estimates have taught us anything, it’s that they’re always too optimistic. Cumulative deficits will likely far exceed this amount. As economist John Williams points out at ShadowStats.com, if the US government were forced to use Generally Accepted Accounting Principles (GAAP) its real 2012 deficit would have been $7 trillion rather than the “mere” $1.1 trillion it reported.
A trillion here, a trillion there: pretty soon we’ll be seeing real currency debasement. The economy is too weak to support this level of borrowing and spending, which is why the Federal Reserve is printing $80bn a month, with no firm end date for these purchases. This will eventually result in a total loss of confidence in the dollar and hyperinflation in the United States.
Nathan Sheets, head of international economics at Citigroup and former top Fed official, has said: "I will start worrying about the dollar's status as a reserve currency when we open up trade with Mars. Only an extra-terrestrial currency can challenge the dollar." Do you agree with that?
JT: No. Go back 100 years and I bet you’d have found plenty of top economists and financiers prepared to swear that nothing could challenge the British pound’s status as world reserve currency. Or going even further back, the French franc, Spanish real or the Dutch guilder. Simple consideration of the fiscal state of US government, Federal Reserve policies, the state of the banking sector and the growing demand for gold from emerging-market central banks should make it obvious that the fiat dollar’s days as the undisputed reference point of international finance are numbered. A country cannot go on abusing this privilege as the US has been doing and expect to keep it.
Back in in 2002 you correctly identified a historical turning point for gold, saying that "it seems very clear to me, Alan Greenspan is giving everyone the 'green light' to buy gold" because of his indication that he would let interest rates drop and make money cheap. With central banks holding interest rates at zero or near zero in the West, should gold investors now fear a rise in interest rates?
JT: Nominal rates may well rise in the coming years, but real rates will remain negative, so cash savings will still continue to lose money. Negative real rates are key as far the bull market in precious metals is concerned, because they mean there’s no opportunity cost to holding non-interest yielding assets.
Most developed world central banks can’t afford to offer savers real returns, because the governments and societies they serve are too heavily indebted. Real rates would crush the budgets of these governments – with spiraling debt interest payments – and lead to devastation in housing markets where owners are heavily exposed to adjustable-rate mortgages. The bond market would fall off a cliff. It would make the 2008 crisis look like a cakewalk.
This is why governments and central banks are resorting to “financial repression”: maintaining negative real rates as a means of deleveraging economies. The problem is that they can only do this by continually printing money to buy bonds. This may not lead to rising prices in the short-term – with much of this new money simply sitting in bank reserves – but you need to understand the cumulative psychological effect money printing has on the demand side of the currency equation. A mountain can only take so many snowflakes before there’s an avalanche. Likewise, the US dollar and other fiat currencies can only take so much abuse before a demand-side crisis erupts literally overnight.
To sum up: central banks are stuck between a rock and the mother-of-all hard places.
You have done a tremendous amount of research and analysis on the topic of gold price manipulation. Why do you think this issue is important from the point of view of the investor?
JT: Gold is the numéraire of economic calculation. Its total supply is not determined by central bank decree, and increases at a rate of between 1-2% per year. It is money, because unlike commodities such as oil or corn it is not consumed. It is accumulated, and all the gold mined throughout history still exists in its aboveground stock. I recently completed a study for the GoldMoney Foundation noting how the aboveground stock grows around the same annual rate as world population and new wealth creation, which are factors explaining why gold preserves purchasing power over long periods of time.
This means that it is a perfect barometer of the health of national currencies. In present-day context, a rapidly rising gold price – coupled with backwardation in the gold futures market – would be an unmistakable sign that the fiat US dollar was approaching death. Therefore the US government and its close allies have an obvious interest in preventing a rapid rise in the gold price (and that of silver, given silver’s monetary dimension). They can’t stop gold from rising completely, but they can slow its ascent by leasing central bank gold into the market. Which is what they’ve been doing for the last 20 years. I call it a managed retreat, but at any time it could turn into a rout.
The general population have no idea about this, because the banks and governments involved have gone to great lengths to conceal their tracks. We owe the Gold Anti-Trust Action Committee (GATA) a great debt for the work they’ve done over the last 15 years in shining a light on this murky area of market intervention as central bank policy, which itself is a result of decisions made behind closed doors. Any government decisions made in secret are anathema to a free society.
Why is this important for the average investor to understand? Because in many cases, as citizens of countries with governments involved in this scheme, their gold is being leased into the market without their permission. Once a government’s gold is removed from the vault in this way, it is not likely to be returned. So most governments own a lot less gold than they actually report. And secondly, because people are being deceived as to gold and silver’s status as money, and true worth as long-term preservers of wealth.
In 2011 Belgian central bank Vice Governor Françoise Masai told shareholders that 41% of the Belgian gold, or 88 tonnes, was "on loan". And in a 2005 article from the central bank of the Netherlands (that has now been removed from their website), official Jan Lamers stated that the majority of the Dutch gold is stored at the Federal Reserve in New York, as well as at the Canadian and British central banks. What would happen if Belgium and the Netherlands start asking for their gold back? Is there a risk that the gold is just not there anymore?
JT: There is likely far less gold in central bank vaults than they claim. I’ve written and spoken about this issue extensively (see: http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/10/25_James_Turk_-_The_Entire_German_Gold_Hoard_Is_Gone.html; http://www.fgmr.com/more-proof.html. Countries who ask for their gold back first may well get it all, because the New York Federal Reserve and others won’t want to admit that they can’t honour all the gold claims against them. It will be those governments who wait or who have been deceived into thinking there’s no problem who will be left holding the bag.
Deliberate price manipulation in the gold markets has a long history, going back the 1960s London Gold Pool. What are the signs you see that this long-standing paper gold ponzi scheme is now unwinding?
JT: Germany's decision to repatriate a portion of its gold reserves; Venezuela asking for its gold back from London; Dutch politicians demanding answers about their bullion – and above all, the consistent buying from central banks in developing countries (particularly in Asia) at the expense of their dollar reserves. The price suppression scheme is pitting paper short-sellers in the West against Asian savers who are buying physical. There is only a limited amount of gold in the world, which is why it has been money for 5,000 years. In contrast, government currencies can be printed and printed until they collapse, and monetary history shows this outcome time and time again. So we are heading for an epic short-squeeze.
You were in your early 30s, living through the economic crisis of the late 1970s, when you first conceived of the idea to found GoldMoney. Talking to a young person growing up in the current economic crisis of today, what are some of the paths you would suggest they explore?
JT: Internationalise your assets and the applicability of your skills base as much as possible. Don’t accept conventional wisdom as far as economics and personal finance is concerned. Don’t believe a word an economics professor tells you, unless he is teaching you the Austrian School of Economics, which brings up another important point – education. Read as much as you can to learn how the world really works. Not only does knowledge make people confident, it makes them self-reliant, which is the opposite of being dependent. The former nourishes human liberty by expanding individual freedom, which in turn encourages Adam Smith’s “invisible hand” to its maximum effect, while dependency only expands the dead-hand of the state.
When I asked you "When should I sell my gold?" You told me: "You won't sell your gold, you are going to spend it!" It took me a while, but here I am with a comeback question: when then, do you think it will be wise for an intelligent investor to start investing part of his gold savings back into the economy?
JT: When gold becomes overvalued, and we are still far from that point as far as price is concerned. We are getting closer each day as far as timing is concerned, but we cannot predict when that overvaluation will occur. We do know though from the nature of bull markets that it will happen, and we can even guess as to a price. Using my Fear Index and Gold Money Index, the price will be greater than $11,000 per ounce, as I presently calculate it. However, the price could be more – or even less – depending on what policies the US government and Federal Reserve pursue.
Where do you see gold and silver heading in 2013?
JT: Much higher. Gold and silver have been in a two-year consolidation pattern, after their big jump from 2009-to-2011. This pattern is normal for markets, and we’ve seen it before in gold. For example, after the big back-to-back gains for gold and silver in 2006 and 2007, the metals went through a correction in 2008. So gold and silver have now built a huge base of support that will launch them higher in 2013.
This interview was originally published in the February issue of Beurs Magazine.