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'...In gold money we've seen tremendous demand from Germany and Holland over the past few months, ever since Mr Trichet announced, after saying he wouldn't do it, that the European Central Bank would be buying government bonds and turning it into currency. And that created a lot of nervousness in Holland and Germany which are typically countries that favour sound money, countries where notably savings are considered to be important and protecting one's purchasing power...'</blockquote>
Gold at $1,300, where to from here? - James Turk, Founder and Chairman, Gold Money"Whether we hit that $1,800 or $2,000 target this year or next year really doesn't matter. You're running a bull market and what people have to focus on is continue to accumulate gold because it's still relatively cheap"Interviewer: Geoff Candy
Wednesday, 29 Sep 2010
SourceGEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. With gold slightly weaker than it was yesterday, but it did cross over the $1,300 level yesterday - we've got James Turk, founder and chairman of Gold Money on the line now. James we've seen gold move phenomenally strongly over the last couple of weeks. What is the latest driver?
JAMES TURK: It's still basically the same thing - a huge demand for physical metal. People are looking at the various currency problems around the world, and regardless of where you focus - Asia, Europe and even North America, the demand for physical metal remains quite strong. I just saw a note passing my desk this morning that the gold Buffalo coin in the United States for example, has sold out because of demand - and I expect this demand to continue because of all of the problems with currencies globally.
GEOFF CANDY: We saw an interview with the guys from Rand Refinery which is outside Johannesburg, and they're saying they have seen a slight downturn in demand for gold coins, but they expect it to continue pretty robustly going forward. In terms of the make-up of that demand that we're seeing now driving the gold price, do you think it has changed at all in recent months?
JAMES TURK: No it's really the same thing - people want gold because it's money. In other words, it's a form of liquidity, but it's a special kind of liquidity or a special kind of money because it's not subject to someone else's counter-party risk. In other words, there's no default risk when you own gold, as gold is a tangible asset as opposed to financial assets when you have money on deposit in the bank or when you own a government bond or a government Treasury bill (T-bill). There is no default risk with gold and with all of the uncertainty that we have today with the banking system globally, all the uncertainty that we have with the sovereign debt risks and crisis really, that we're seeing globally - people are moving more and more into physical tangible assets. So we see gold doing very well for that reason, and the fact that we see commodity prices doing quite well for that same reason. A lot of people think that they're better off than having money on deposit in the bank, because when you own that tangible asset there is some usefulness to it, and there is no default risk.
GEOFF CANDY: In terms of the economic realities that we're facing at the moment, there has been a lot more talk about a further bout of quantitative easing. Clearly there is still continuing concerns about the state of the global economy. How do you see the lay of the land in terms of that, and as a result of that where does gold fall into the state of play?
JAMES TURK: Ye, from the big picture point of view it's becoming increasingly clear that the system is broken and the tools that central banks are using are not the right tools. When you have a broken system, you have to sort of step back and take a look at what's going on. Similarly, if you're driving a car and you press on the throttle and the car doesn't go anywhere - there's something wrong. Well central banks have been pressing on the throttle now for years and the economy is doing nothing - there's obviously something wrong so the talk about more quantitative easing is absolutely foolhardy in my point of view. And when people see central banks talking about more quantitative easing and that it's not doing anything to the economy, the impact means that it's going to destroy the purchasing power of crises from inflation and other problems. So it's quite natural and understandable that in reaction to central bank actions, people are moving back to gold. From a longer-term point of view as well, you have to consider that for thousands of years gold has been the centre of global commerce. We've had four decades now where gold has certainly moved to the side - now are we going to deny thousands of years of history and say the four decades is really the basis for going forward, or are we going to say these four decades have been aberration and in fact are going to come back to gold as a centre of global commerce. I think it's clearly the latter - gold is going to continue emerge because there are attributes that you can find with gold, that have not been lost even though we've ignored those attributes over the past couple of decades - and those are attributes like there is no counter-party risk when you own gold. It's outside the control of governments although they do influence the price, they can't control the price. So as a consequence you're going to see gold continue to move towards its traditional role as money.
GEOFF CANDY: What is that likely to mean then for global finance?
JAMES TURK: That's a good question - I don't know how all these things are going to unfold, and I don't know what kind of events we face in the future that could trigger this increasing movement toward gold and out of paper, but clearly there's going to be a major shake-up and these things happen every several years - once you get off the basic fundamental principles and basic fundamental principle that we lost here or that we've lost recently is that money is a function of the market process, it's not something handed down by governments which people are supposed to use. And if the market doesn't like the money that's coming out of governments, they're going to move to other alternatives and the natural place they will move is gold.
GEOFF CANDY: Realistically though, is there enough gold in the world to serve that purpose for an entire global financial system?
JAMES TURK: Absolutely - and the reason is that the background stock of gold grows by the same amount as world population and new wealth creation. So as a consequence an ounce of gold today buys basically the same amount of crude oil it did 60 years ago. An ounce of gold today buys a Colt 45 just like it bought a Colt 45 in the Wild West 140 years ago. Gold has this natural ability to grow at the same rates as world population and new wealth creation, so you have this very steady growth in the above ground stock of gold - that's the gold money supply and this stock of money differs very much from natural currencies which in one year might be growing at 18%, next year it might be growing at 15% and the following year it might be growing at 3% which is effectively what's happened with the US Dollar as measured by M3 over the past couple of years. So you have this steady growth in the supply of gold - the gold money supply and as a consequence gold has this consistent purchasing power over long periods of time. There is in fact enough gold today to continue to handle global commerce.
GEOFF CANDY: Just to close off with moving to the Asian markets which have clearly been a significant portion of the demand, and is likely to be in the future, we're seeing some interesting remarks coming out of India in terms of jewellery demand, particularly because prices are so high - how do you see that playing out and then possibly if we look at China, and its role.
JAMES TURK: To answer that question, you first have to focus on what you call jewellery demand because there's a lot of misunderstanding on this point. People in Asia have gold fabricated in the form of jewellery for the same reason we in the west have gold fabricated in coins and bars. They're fabricated that way because of tradition, but it's the purpose that it's being used that is for its monetary purpose - it's not being used for adornment. The amount of gold that's actually used in jewellery for adornment is very inconsequential and therefore it is not a major impact on the price of gold. So as the economy does poorly the adornment jewellery does poorly as well because people are buying less luxury items, but the demand for gold as money continues to strengthen. Now the other part of that question to answer it is there are two types of gold buyers. You get what I call the accumulators and you get the trend followers. Now the people in Asia tend to be the accumulators. So they're not going to follow a higher price, but if the price sets back, they will accumulate. In the west on the other hand, people tend to be trend followers so if the price is going up and they read about it in the newspapers, then they'd tend to buy. Therefore my expectation is that gold's monetary demand which is its driver and which is the major factor that causes the gold price to be what it is in exchange for all of the different currencies of the world, this monetary demand for gold is going to continue because of all of the currency, banking and government debt problems that we're facing.
GEOFF CANDY: To end off with, you spoke at a conference earlier this year when you said you reckoned that the gold price could hit $1,800 to $2,000/oz by the end of the year - are you still comfortable with that prediction?
JAMES TURK: Yes, maybe it's a little bit over optimistic, but it's still a realistic number. We've run into a little bit of headwind here at $1,300 this week being option expiry week and there's always pressure on the gold price at the end of the month during option expiry because of the shorts trying to keep as many calls as possible from being exercised. But once we get through this $1,300 area which I expect to happen within the next week or so, we've got clear sailing - it's uncharted waters, record highs and given the fact that gold is still relatively undervalued on an historical basis. There's a lot of room on the upside and we could see $1,800 to $2,000 this year - that's a realistic target.
GEOFF CANDY: One final question, if we look at the world as it stands now in terms of the current economic situation and the various centres of demand, where do you see the most demand coming from over the next 12 to 18 months, in terms of region?
JAMES TURK: That's a tough question because it depends which central bank does the worst job in terms of managing its currency. Presently the focus has been in Europe because of the problems with euro, the sovereign debt crisis that is continuing to worsen. As we speak I see Portuguese, Irish, 10-year spreads over German bonds at a record high, so that suggests there are more banking problems and sovereign debt problems going to be hitting Europe and the euro. In gold money we've seen tremendous demand from Germany and Holland over the past few months, ever since Mr Trichet announced, after saying he wouldn't do it, that the European Central Bank would be buying government bonds and turning it into currency. And that created a lot of nervousness in Holland and Germany which are typically countries that favour sound money, countries where notably savings are considered to be important and protecting one's purchasing power. Maybe the focus for the near future is going to be Europe but there are problems in the United States, there are even problems in Asia - basically global demand is going to continue to grow and as a consequence I think the gold price is going to be going much higher over the foreseeable future. And whether we hit that $1,800 or $2,000 target this year or next year really doesn't matter. You're running a bull market and what people have to focus on is continue to accumulate gold because it's still relatively cheap and that's the key thing.