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By Sumit Roy

James Turk is the founder of GoldMoney.com, which is a European-based precious metals firm that presently safeguards $1.5 billion of precious metals assets owned by customers. He is a popular speaker at conferences as well as on radio and television. Turk's 2004 book, "The Coming Collapse of the Dollar," recommended buying gold and betting against the housing bubble, which were two of the best investment ideas of the decade. His latest book is "The Money Bubble: What To Do Before It Pops." HAI Managing Editor Sumit Roy caught up with Turk to discuss his new book and what it means for the financial markets and gold.

Hard Assets Investor: Let's talk about your new book, The Money Bubble, which you co-authored with John Rubino. When people think of bubbles, they think about the dot-com bubble in the 1990s or the housing bubble a few years ago. But you explain how those pale in comparison with the money bubble, which you say is the biggest bubble in history. Would you briefly tell us what the money bubble is?

James Turk: It's the belief that the national currency that people are using for transactions in commerce is money. But in fact, all of these currencies are not really money; they are a money substitute circulating in place of money.

Bubbles are characterized by having some conventional wisdom that everybody believes, but is flawed. When the bubble pops, they realize how wrong they were in believing it. So for example, in the dot-com bubble, everybody said profits don't matter, only market share does. When that bubble popped, everybody realized how wrong that was. Then in the housing bubble, everybody said housing prices only go up, and we know what happened there.

Well, in the money bubble, everybody thinks that what we're using in commerce is money. That's the conventional wisdom, and it's wrong because national currency is just a money substitute circulating in place of money. Money of course is gold or silver.

There's an important point to make here. Basically what I'm saying is that goods and services pay for goods and services. We individuals work in order to fulfill our needs and our wants. And that in effect is saying that the labor we provide buys goods and services. This same principle has also always applied to money. Miners work in order to produce gold and silver that they use to buy goods and services.

But the problem today is that the monetary system is not based on a tangible asset anymore; it's based on credit. It's just based on promises and currency that's created out of thin air.

And that's the critical point. We've seen throughout monetary history the problems that have arisen when a currency is backed by nothing except promises; most recently we saw those in 2008. Those problems that shook the financial system in 2008 have not been solved. They're still here. There is a mountain of debt and derivatives that is even bigger now than it was in 2008.

HAI: When you talk about these money substitutes, you're talking about the national currencies like the dollar. You mention how, unlike gold - which is a tangible asset - the dollar is actually a liability for someone. Would you go into that?

Turk: Gold is a physical, tangible asset you can put in your hand, and you can use it as a form of currency by paying for something - by putting it down on a shop counter and walking away with some good or service. The shopkeeper is paid.

National currencies, in contrast, are financial assets. They're not a tangible asset. They have no substance to them. They're a bookkeeping entry on the balance sheet of banks. And they're not an asset of the banks; they're a liability of the banks.

So a shopkeeper is not "paid" in the real meaning of that word until the currency received is spent on some tangible good or service. Until then, the shopkeeper has what is called "payment risk." If his bank becomes insolvent, he loses what he put in the bank, like what happened to bank depositors in Cyprus last year.

So when you take your dollars and deposit them in a bank, the bank has a liability to you to repay those dollars when you choose to spend them. But what you've done is you've given title to your dollars over to the banking system, and they can do with them whatever they want. They can lend those dollars to overleveraged mortgage brokers. They can lend those dollars to third-world countries.

And that's the basic problem that we're dealing with in the monetary system. It's a system that's called "fractional reserves." The banks don't really hold in reserve the dollars that they owe to their customers. And we saw the implications of what that meant in 2008 with Lehman Brothers. Before that, we saw it in 2007 with Northern Rock here in the U.K., where I live. It was a U.K. bank that went bankrupt and became insolvent.

We've seen this bank insolvency time and again throughout history. Back in the 1980s, a bank collapsed called Continental Illinois, which was one of the biggest banks in the U.S. Back in the 1970s, another big bank called Franklin National Bank collapsed. There have been dozens and dozens of bank collapses throughout history because of this fractional reserve system.

HAI: What will cause the money bubble to burst, and what's going to happen when it does?

Turk: Basically the bubble will just pop as a result of its own weight. Why did the dot-com bubble burst? It reached a level at which it was no longer sustainable. And it's the same thing with any other bubble. And what we're seeing now with regard to the money bubble is that it's not really sustainable any further.

We're starting to see people moving out of currencies and into things - perceived safe havens - like real estate in London and Singapore. Prices in these cities are sky high.

If you look at the collectibles market - paintings, antique cars, things of that nature - those prices are also sky high, which is basically saying to me the super-rich get this; they understand what's happening. They want to get their money out of the banking system; they want to get rid of dollars and other national currency, and they want to put it into tangible things, rather than have this wealth tied up in currency and be dependent on some promise.

The stock market is going up not because of good economic conditions, it's going up because of money printing and the problems with the dollar and other currencies. When you own a stock like Exxon or a mining company like Newmont, it's not really a financial asset. It's a near-tangible asset in the sense that the assets of Exxon and the assets of Newmont are tangible assets - oil wells or gold mines. So it's almost like owning a tangible asset directly.

There are, of course, some stocks that you want to stay away from, namely, those that are related to the banking system, credit brokers, credit card companies and companies of that nature because their assets are not tangible assets, but financial assets.

The rise in so many asset prices means the money bubble has already popped, but it will worsen over a period of time. It is starting slowly, and over a period of maybe six to 12 months or more, you'll see the ultimate conclusion. It took the dot-com bubble a couple of years to unravel.

As for the consequences of the bursting of the money bubble, you can't really predict how it's going to play out. But we all remember what 2008 was like. And this time it's going to be, in my view, much worse.

People are going to recognize that all of these national currencies that are created at the whims of central bankers and politicians don't really have any substance to them. In other words, it'll be a recognition that all the promises that have been made by governments cannot be fulfilled.

HAI: Gold would rise in such a scenario, wouldn't it?

Turk: Yes, it definitely would. Gold will rise in price, but the reality is that the purchasing power of the dollar is declining. There's this misconception about what really is happening to money and currency because we calculate the prices of goods and services in terms of dollars, rather than calculating them in terms of ounces.

As an example, if you look at the price of crude oil, an ounce of gold today buys the same amount of crude oil as it did 60 years ago. But the dollar today buys only a fraction of what it purchased six decades ago. During the period of the classical gold standard from 1700 to 1914, the British pound maintained its purchasing power because it was tied to gold. The reality is that gold preserves purchasing power over long periods of time.

So when we talk about the price of gold rising, we're really talking about the value of the dollar declining. And I think that's definitely what we're going to see in the months immediately ahead.

But more generally, to answer the question, you have to recognize that wealth comes in two forms: financial assets and tangible assets. Tangible assets include gold, silver, land, oil wells, mines, things of that nature. And financial assets come with counterparty risk. These assets are based on someone else's promise, not on the essential usefulness of the asset itself.

And during a financial collapse or banking panic, people move out of financial assets and into tangible assets. So as the money bubble pops, I think you can expect to see the price of gold rise. Owning physical gold is one of the recommendations we make in our book, "The Money Bubble: What To Do Before It Pops."

HAI: Once this money bubble pops, that's obviously going to be the predominant driver of financial markets. Should we even care what's going on with Fed monetary policies or the CPI or any of these economic indicators?

Turk: Well, most of those economic indicators are false. Or they're massaged to make the situation look better than it really is. A few months ago, the policymakers were saying that the first quarter U.S. GDP was OK, but maybe it was going to be influenced by the weather, but no decline was expected.

Then their first report was that the GDP declined 1 percent. More recently they're saying that GDP declined 2.9 percent. But there's so much manipulation and distortion in the numbers that I think the U.S. economy declined even more than what's being reported.

And take a look at inflation. Everybody knows that prices are going up all of the time and much faster than the 2 percent the government says they're rising. The government massages the numbers to make the inflation sound better than what it really is.

This distorted reporting is one reason why politicians in general have such a low credibility rating these days. Fewer and fewer people are believing the stuff that comes from politicians because they see from their own experience and their own eyes exactly what's happening to the financial and monetary system. They're seeing what's happening to inflation and the price rise in goods and services.

HAI: What I think everyone wants to know is, how high do you think gold and silver could go under this scenario that could unfold over the next year or two?

Turk: In the book, we've completed a number of analyses that are mathematically oriented and based on historical precedent. Those analyses show that gold is very undervalued compared to its historical norms.

If gold were only to return to its historical norm, it would be $12,000 per ounce. The fact that gold is so far away from that price is a reflection of a couple things. One is that the gold price is being managed to stay low because a low gold price takes people's eye off the ball as far as the monetary system is concerned, because a rising gold price is a clear signal that central banks are doing a poor job in managing the purchasing power of the currency.

The other thing is that because gold is so cheap relative to its historical norm, it's an indication of how big this money bubble is. It's not just in the United States, by the way, it's global. This is the first time in history that people are ignoring gold and silver as the true forms of money. And people are thinking that all of this credit, all of these promises that are being made can circulate as effectively as gold or silver without any consequences.

In 2008, we saw some of those consequences. And when this money bubble pops - and I think it's close to happening - we're going to see those consequences again. And it won't be pretty. But what we have to do is to take those steps to prepare for it so that we and our families are as protected as much as possible, come what may.

Source: James Turk: Bursting Money Bubble Could Inflate Gold To $12,000