Below is the transcript to James Turk: Gold Is Our Defense Against the Fiat Currency Graveyard:
Chris Martenson: Welcome to another Chris Martenson.com podcast. I am your host of course, Chris Martenson. And today we have the distinct privilege of speaking with James Turk, founder and chairman of GoldMoney which offers investors an easy and inexpensive online solution for buying precious metals with international storage options. James is one of the foremost authorities on precious metals and has long offered market forecast commentary including co-authoring The Coming Collapse Of the Dollar and How to Profit From It, with our good friend, John Rubino, of DollarCollapse.com. He has built his career on decades of experience in international banking and finance spending many of those years living outside of the US, which gives him a critical advantage to look at our economy with an outsiders eyes. I am really delighted to have you here, James, and I have a tall stack of questions prepared for you. Are you ready to dive in?
James Turk: I sure am, Chris. It is a pleasure to speak with you.
Chris Martenson: The pleasure is mine. So, short-term, what I’m really interested in here is to start diving into where gold is going to go short-term. Where do we buy gold? Do we buy it now? Over the short-term people are very concerned about the price of gold and where it’s at and where it might be headed. So with QE2 ending here at the end of this month – we are in June right now – how do you expect the precious metals to be impacted?
James Turk: Well I think the precious metals are going to do quite well this summer. And I don’t agree that QE2 is going to end in June. It may “end” in June, but it is not going to end on August 2nd because on August 2nd the US government is going to increase its spending limit probably by $2 trillion and the Federal Reserve is going to have to step in and start buying some of that government debt and run the printing presses again with all this new money creation. And I think that is what is going to light a fire under both gold and silver this summer.
Chris Martenson: So you are of the view that QE whatever, 3, is a done deal because they are in something of a box. The federal government has enormous borrowing needs and you are of the opinion that really without the Federal Reserve being there, there is insufficient buying power for all the borrowing needs they have?
James Turk: Yes that’s exactly right. Look at what has happened since August of 2010 when the Federal Reserve announced QE2. During that period of time, up to the present, the US Government debt has increased about $900 billion, about $500 billion of that has been purchased by the Federal Reserve. What is happening is that the US Government is spending so much money it is forcing it to borrow more money than the market is willing to lend to it. When that happens, only two things can happen: spending has to be cut back or the Federal Reserve steps in and buys that government debt and turns it into currency. And that is what QE is all about. This policy of buying government debt is going to continue once the debt limit is increased on August 2nd. Maybe the Federal Reserve will claim victory and say that they will stop QE on June 30th but the reality is it is only going to happen until the debt limit increase is approved. And I do believe at the end of the day, despite all the posturing we are seeing now Congress and the President are going to approve a $2 trillion debt increase by August 2nd.
Chris Martenson: So really we are talking about July as a possible pause. And I have my concerns about that because we are looking at the data here for the first week in June roughly and what I’m seeing is a lot of weakness out there. The Fed’s so-called mandate around employment, around economic growth, there is a lot of weakness in that data right now. So you are of the opinion that QE if it does pause will only maybe for a month.
James Turk: Yes, maybe for a month unless Congress finally chooses to act sooner than August 2nd, although I don’t expect that to happen. It is really just a question of numbers and mathematics, Chris. The US Government has to stop spending so much money or the Federal Reserve has to come in and turn that government debt into currency, those are the two alternatives. And I don’t see any discipline or intent by Congress to stop spending.
Chris Martenson: Yes, everything they have done so far is a bit of a dog-and-pony show without much substance; $30 billion, $90 billion. Please, that is meaningless at this point. And when we go over to the other side of the pond, we see that Europe also has just extraordinary funding needs right now. They are using all sorts of fancy terms for a Greek default which will probably be the first of several shoes. But when you add it all up, it looks like there is, again, enormous funding gaps there and the need for a massive amount of liquidity. What is your view of Europe then? Is Europe going to print? The ECB – are they too in a box or will they actually go for austerity and allow the chips to fall where they lay?
James Turk: No, they have been printing all along and, in fact, I think they are going to continue to print as well. You know, the turning point here in Europe was last May, May 2010, when the politicians got together when the Greek crisis sort of erupted and became quite serious. And on Monday morning after the politicians met, Mr. Trichet, the President of the European Central Bank, said that he is going to start buying Greek bonds, despite his pledge not to buy sovereign debt of any country. And despite the fact that it is against the EU Constitutional Principals for the ECB to be buying and sovereign debt. You know, the law is basically just being ignored. It is being ignored by 13 of the 16 Euro-zone countries who have debts exceeds 3% of – deficits, excuse me – 3% of GDP. So the rule of law has basically been thrown out the window. Money printing is the order of the day. And when politicians take control of central banks, which they have done in the United States and they are also doing in Europe, that basically destroys the currency. It puts the currency on the road to what I call the Fiat Currency Graveyard, so I expect there is going to be some massive currency problems as we go forward. The financial crisis that we have been dealing with for the last several years has not been solved.
Chris Martenson: I agree completely, and so similar dynamics in both the US and Europe, also Japan, let’s not wade into that too much. What we see is the advanced, developed nations all pursuing the same rough policy which is to try to print their way out the great credit bubble that they all got enmeshed in. So let’s switch then to the end game. So you agree I think if I can put it this way, that the political will doesn’t really exist or the structural or institutional processes aren’t really there to enforce any sort of law in the area that printing is the path of least resistance, always been true historically, probably today is not different in that regard. Given that, what do you see as the endgame here? Many call for a deflationary collapse and crunch and other people call for an inflationary and some call for hyperinflationary. You mentioned that it ends in the Currency Graveyard, how do we get to a currency graveyard if all the currencies are pursuing the reckless policies? Who falls against whom?
James Turk: Yes, that is all of the currency for the exception of one, which is gold. So to answer the inflation/deflation question you have to actually first decide which currency are you going to use to measure prices. In other words, if you measure prices in terms of dollars you are going to see a hyperinflationary blowoff and the dollar will end up in the Fiat Currency Graveyard that way. The hyperinflation will come because of continued quantitative easing by central banks around the world. But if you look at the price of goods and services in terms of gold you are going to see a massive deflation. In other words, the purchasing power of gold will continue to increase in the years ahead which is basically what happens during the deflation, the purchasing power of the currency increases. So we are going to have deflation when prices are measured in terms of gold or inflation when prices are measured in terms of dollars or Euros or British Pounds or Japanese Yen. So clearly, everybody should be focusing on owning as much as gold as possible within the liquidity part of the portfolio.
Chris Martenson: You know, I started accumulating gold in 2002 and I did it principally as a way to preserve my wealth. And it turns out, it has also been a way to enhance my wealth for this dynamic you have described. We are closing in on 10 years in my personal experience with gold and in each one of those years it has been a great way to not only protect my wealth but also increase my wealth on a purchasing power basis and you are predicting that that dynamic is going to continue.
James Turk: Yes. And let’s put it into a bigger term perspective because what you have been witnessing over the past 10 years is just a recurring pattern that has occurred throughout monetary history. You know we have these – what economists called booms and busts. During the boom banks lend and lend and lend borrowers borrow and borrow and borrow until both banks and borrowers become over-leveraged and then you have the collapse. You have the boom in the 20s, the collapse in the 30s, the boom in the 50s and the 60s, the collapse in the 70s. The boom in the 80s and 90s and we are in another collapse. Now when you are in a collapse, be it the 30s, the 70s or the present period that we are in you want to own gold because gold preserves your purchasing power during this financial reckoning.
And when we get out of this particular financial collapse or bust that we are in, which is going to take a few more years, you will then have your wealth and purchasing power preserved by owning physical gold. And you will then use that gold to make investments, acquire consumer goods because by that moment in time gold’s purchasing power will be at a maximum. Gold will be over-valued compared to where it’s been these past couple of years which is under-valued and gold is still very under-valued. So that is the biggest strategy to what everyone should be aiming toward and looking for.
Chris Martenson: Well, so let’s talk about that. I’m interested in your timeline here. I was going to ask you when you think the wheels are going to come off but it sounds like you are saying the lug nuts are off and the wheels are already wobbling on the axles here. So the question becomes when do you need to have your core position in place before it’s too late? Is it too late? A lot of people think that gold is in a bubble, it is really hard to buy at all time highs and I completely sympathize with that, but given where we are in the story you said there is still a few more years in it. How many years and is now an okay time to begin establishing a core position if you don’t have one?
James Turk: Yes, you know, your question is a good one. And I get this one all of the time. In fact, I have been getting it since I started GoldMoney back in 2001. Is it too late? And my answer is: don’t look at the price of gold, look at the value of gold because that is what is really important. What has been happening over these past 10 years the price of gold has risen but the dollar is being debaced every year by policies that are destroying the purchasing power of the dollar. You know the purchasing power of the dollar has been constantly eroded by quantitative easing and all types of other things that the Federal Reserve and the government is doing. So the question is: is gold still good value? And to answer that you have to say well what does gold do for you? And what it does is it preserves purchasing power over long periods of time and it does this when you have physical gold, it does this without any counter-party risks. In other words the value in your gold is not dependent upon someone’s promise. Now what happens during a bust like the one we’ve been going through is promises get broken. People who had money at Lehman brothers saw that promises were broken at Lehman Brothers. People who own Greek debt are seeing those promises being broken. This is going to continue recurring until balance sheets are brought back down to leverage, and we are nowhere near that.
I did an interview back in 2003 and they asked me to forecast the price of gold and I said it was probably going to be $8,000 an ounce at some point between 2013 and 2015. I’m sort of sticking to that price target and I am also sticking to that time frame because normally a bust lasts about anywhere from 10, 12, 15 years so 2015 would be 15 years from the peak of the last bubble in 2000. Now, it could be longer than that. If government continues to intervene and prevents the free market from cleansing all of the bad debts and all of the bad decisions that have been made all along, we probably would be much closer to the end of that had the bailouts not taken place back in 2008 and let the system cleanse itself then.The people who had made right decisions would be doing okay, the people who made bad decisions would be bankrupt and as a consequence of that, we wouldn’t be dealing with these ongoing problems with the banking system that we have today.
So as government continues to fiddle around and intervene maybe it is going to be six years before we finally get to the end of this but on the other hand if we get a hyperinflationary loss on the dollar and I think that could happen here as well, maybe the end is finally going to come sooner when people start to realize that what we are addressing here is the point that you are raising. This is not a cyclical issue it is a structural issue. It is a structural issue that there is too much debt. And the system of allowing governments to just borrow, borrow, borrow and put the debt on the backs of the taxpayers that is just about to come to an end. I think that is what we are facing presently in Europe and will soon be facing in the States when that August 2nd decision is made.
Chris Martenson: One of the things that truly surprised me so far, James in all of this was how long we have been able to kick the can down the road. And you mentioned that one of the things that will happen is gravity eventually takes over so that maybe the timeline extends or contracts a little bit depending on the decisions that are made. I have one other thing I want to get your view on, which is I see that the longer we continue to kick the can down the road and pile up the public debts that the greater the risk we have of something even worse happening that might have happened otherwise. That is I see a risk of the loss of the dollar’s reserve currency, maybe in a fairly dramatic way, maybe transpiring over a couple of months. Something really dramatic. Low probability still in my mind, but it is now possible. And that I am growing more and more concerned that the more reality is attempting to be denied I guess with all of these policies is that the risk to these currencies is now growing larger and larger. And I don’t have a really great way to quantify that yet but it is certainly something that is very strong in my gut and it is something that I think I’ve got a reasonable handle on looking at historical examples and looking at how these things have played out. What is your view on the risks here?
James Turk: Yes, I agree with what you are saying completely except I think the risk is much bigger than just the dollar’s loss of status as the world’s reserve currency. The real risk when you have a currency collapse is ultimately political. If you look at the issue of currency collapses more often than not you move toward dictatorship and totalitarianism. And just to give you a couple of examples: after the Weimar Republic collapsed at the Reichsmark in the 1920s it ultimately led to increasing fascism and we all know how that worked out. But I mean if you look at the collapse of the French during the period of the French Revolution, you know, ultimately led to chaos and Napoleon. Now if the US Dollar collapses it is not the first time that a currency has collapsed in America. During the War of Independence, the currency was the Continental and it collapsed because it was over issued. Politicians were spending too much money, nobody wanted to lend to the government and they put that currency, they printed the currency and put it into circulation. What they call bills of credit at the time but it was basically what we call paper currency. But because the Continental collapsed one of the reasons why the framers got together to create a more perfect union was to create a common market with a common currency. Much like Europe tried to do with this common market. And the common currency of course was the silver dollar, which was confirmed – first of all, it was put into the Constitution but it was reconfirmed in the Coinage Act of 1792 which was one of the new acts of the Congress which had just been created under the Constitution.
And that system worked more or less pretty well. There were some problems along the way but it worked more or less pretty well up until 1971 when the last remnants of precious metals were kicked out of the monetary system. And what those metals did is they put an external discipline on the spending by Congress. And without that external discipline you run into problems. Getting back to the political issues I’m making; when you have a currency collapse you can go the right way or you can go the wrong way. Germany went the wrong way. America after the collapse of the Continental went the right way. And I hope after the dollar collapse this time we will go back in history and look and see where it errs and by abandoning the precious metals and get back on the right track.
Chris Martenson: Well this is a subject near and dear to my heart now because I own gold for two main reasons. One is wealth preservation and the second is, I think there is an option value on it and like all good options this one is pretty far out of the money but boy it has got a really attractive strike price if it hits and that is that gold and maybe silver might be remonetized at some point. That I truly believe we are at risk of a major currency failure, particularly in international settlements, and in a time of crisis often what happens is that you refer to the last thing that you know that worked The last thing that I am aware of in the international financial scheme that really worked was gold as backing. Do you see that as a possibility? What are your views on re-monetization and what might that look like and how would that happen?
James Turk: You know it’s a really good question and it is basically what we intended, what we are arguing really with GoldMoney. You know when you have money you can do two things with it: you can save it or you can spend it. Right now when it comes to gold and silver most people are saving it rather than spending it. But within GoldMoney based on the patents that we have we enable gold and silver to circulate as a form of digital currency instantaneously 24/7 anywhere in the world, completely outside the banking system. So will gold and silver become currency once again in the future. As an aside, you used the term monetization. You know, gold is money because it is still useful for economic calculation and the same thing with silver. They just didn’t they were stopped by governments as circulating as currency but they can still be used to calculate the price of goods and services. They still are money and that is basically where gold’s value arises – for monetary use not from any other application.
In terms of having them circulate once again as currency, this is the interesting part. Are they going to circulate again as coins? I don’t think so. I think they are going to circulate again digitally. In Gold Money for example, you can use your iPhone to click gold from your holding to someone else’s holding and I think ultimately a new form of gold currency that we are making available in GoldMoney will be how the precious metals will once again circulate in commerce globally.
Chris Martenson: So you don’t have to flip bits of actual metal from one person to the other but there would be in your system 100% gold backing for whatever amounts are being transacted.
James Turk: It’s even better than backing. You know, when you talk about backing you are talking about banks where there is al inability circulating as currency that is backed by an asset on the bank’s balance sheet. But in Gold Money you are using what is in effect a digital gold coin. If I put a gold coin across the counter top to pay for some good and service, the exchange is extinguished at the moment that I get the good and the shop keeper gets the gold coin. There is no lingering obligations like you have in the banking system when you use checks or plastic cards. There is a lot of payment risk in the banking system. But with digital gold currency, the gold and silver remain in the vault and you just click the ownership of whatever weight you are transferring from your holding to another person’s holding. So it is extinguished at the moment that you receive the good and click a payment to the other person’s holding. It is like a gold coin but you are not bound by any physical location.The gold and silver remain in the vault and that ownership of gold and silver is being transferred instantaneously.
Chris Martenson: I really like, I mean I love the whole concept and it appeals to me greatly. I want to shift here to talking about investing in precious metals. So you mentioned before a portion of a person’s assets definitely should be in gold and silver; absolutely a song I have been singing. Let me get this for you, what would your percent portfolio recommendation be, maybe there is a range you have given where people are in life. What is that percentage for you?
James Turk: It is hard to make a sweeping generalization, Chris, because everybody’s circumstances are different. What might work for one person may not work for another person. Age is a big factor, the older you are the more conservative you should be so the higher percentage of gold you should actually have in your portfolio. A younger person may want to be focused more or less on savings, having less liquidity having less gold and silver, and more in investments maybe mining companies or tangible assets like timber land and other types of tangible assets that produce cash flow. But the older you are the more gold you basically want to have in your portfolio. And so that by the time you are in your 70s or 80s and near the end of your life, I kind of think you are getting closer and closer to 100% gold to make an easy transition of any assets you want to distribute to your heirs as well as have liquidity available for any needs you might to make your retirement years as comfortable for you as possible.
Chris Martenson: So for me I think everybody ought to have at least 10% exposure to start. I am much higher personally but I totally recognize and understand and support the idea that individual circumstances vary a lot. But assuming somebody wants to build some exposure, starting even now at gold at $1,500+ How would they go about doing that given that where gold is today? How would you personally coach somebody to build a portfolio?
James Turk: The best way to do it is through a dollar cost averaging program. In other words determine what portion of your portfolio you want to put into gold. And then divide it by six or 10 or 12, some number representing months at which you will accrue or accumulate. You know, maybe you want to do it just over three months. So you decide that – let’s say for example, you have $100,000 dollars that you want to put into gold and you want to do it over four months. So you divide that by four, you have $24,000 and you choose to make the purchase, for sake of argument, the 20th of each month. So regardless what the price is on the 20th of the month on the first month you buy $25,000 on the 20th of the month, the second month another $25,000 on the 20th of the month, the third month and fourth month you do the same thing, regardless of what the price is and you will have averaged in. Because what we are talking about here Chris, is a major bull market. And one thing that a bull market does is regardless of when you buy that you are going to come out whole or you are going to have your position improved as the bull market continues to move forward.
That is why I come back to this point about the difference between price and value. The price of gold may seem high but the value of gold is still – by all of my historical measures – very, very low. In other words, gold is very under-valued. So as this bull market moves further the price will go up and it will become less and less valued but we are still years away from gold becoming over-valued.
Chris Martenson: So, somebody has done this they are putting away $25,000 on the 20th of every month. They are fortunate enough to be able to do that for 12 straight months. How do you recommend allocating – there are all these various ways of owning precious metals. We have got gold in hand, maybe you got gold and bars and in gets or junk coins in the case of silver, numismatics, where you buy it from, where you would store that kind of stuff? Compared to say allocated storage or paper gold or miners you mentioned maybe there is other derivatives. How would you advise somebody to sort of structure that? Let’s say they are just starting.
James Turk: Okay. Let’s first look at a from a big picture point of view; when you have your portfolio you have two different asset groups in your portfolio. You have investments and you have liquidity. Your investments are you wealth-producing assets. You put your money at risk in order to generate some kind of return. And then you have your money, your liquidity – where you have either sold an investment and you are waiting to buy a new investment or you sold an investment and you are waiting to make the purchase of some kind of consumer good. Gold mining stocks are an investment. They have to be treated like all stocks. You have to look at management, the quality of the balance sheet, the quality of the company and all those types of things. But buillon is not an investment, it is really money. So you compare bouillon to other monetary alternatives like the dollar or the Euro or wherever you happen to live. Now in an environment where you are not earning any interest income on your dollars, as is the present case, you may want to have a much larger holding of gold because there is no cost in holding gold. And in fact, because gold has been going up in dollar terms, 18% per annum on average for the past 10 years. You are much, much better off owning bullion than owning dollars in this environment. The broader sense is investments are your mining stocks, bullion is your liquidity position.
Now, looking at gold, people say they “own” gold, but when you actually analyze it they don’t own gold they own paper gold. Paper gold is different from physical gold. Paper gold is the various representations out there where you are exposed to the gold price but you don’t actually own metal. And that exposure to the gold price comes with counterparty risk, options and futures and even the ETFs – they are basically paper gold products. Because you don’t own physical gold, you have a stock in funds that supposedly owns gold on your behalf. What I recommend when it comes to your bullion part of your portfolio, the liquidity of your portfolio, you own physical gold. And there are only two ways to buy physical gold, you buy it and you store it yourself or you buy it and you have someone store it for you, which is what we do in Gold Money. Now each approach has advantages and disadvantages just like anything in life. You got to weigh the pros and the cons and make some decision that best suits your needs. When you buy it to have it at hand, store it at home, you have it right there at hand which is an advantage but that comes with disadvantages too. What is the risk of theft? Can you get insurance, is the insurance expensive? If you have to sell because you need the money you have to take the coins or whatever you have back to the shop. If you own bars that might force the dollars to be refined and you incur that cost. So there are disadvantages to storing it yourself. Also, if you store it in a bank safe deposit box there is a risk of confiscation. Gold was confiscated in 1933 who is to say it couldn’t happen again in the future?
If you store the gold with others there is also advantages and disadvantages. The disadvantage is that you don’t have it in hand. But there are advantages like GoldMoney: you have the gold stored for you outside of the United States, which is useful because when the gold was confiscated in1933, gold held by Americans outside of the United States was not confiscated. Whether it happens again in the future, who knows? It is worth noting historical precedent for it. The other thing is it is in a secured bullion vault, it is insured. But most importantly you have liquidity. If you need your money for any reason you can sell your gold and silver and have the money wired to your bank account, the proceeds wired to your bank account the same day.
So what you have to do is look at these different alternatives between buying and storing yourself and buying and having someone store it for you and see what or probably both methods make sense. If you are going to store $5,000 in gold at home that is one thing you might be prepared to take the risk. But you are obviously not prepared to store $100,000 in gold in your basement – it just doesn’t make any kind of sense. What you have to do is make your decision between two alternatives but there is one thing to keep in mind because if you are using other people to store your gold and silver for you there are certain things you have to be careful about. You have to make absolutely certain that your gold and silver are there in the vault and the only way you can do that is to have independent third party audits, and you have access to these audited reports, showing that the weight of gold and silver is exactly equal to the quantity of gold and silver that you own. This is one of the backbones of GoldMoney. What I basically recommend to people is if you are looking to store others make sure that you have the same industry-leading governance principals that we follow in GoldMoney so that you know that your gold and silver stored with others is not at risk.
Chris Martenson: Excellent. And if people want to find out more about that they can go to GoldMoney.com and you got a great website there and it explains a lot. What I have heard so far is that gold is in a major bull market here and there are probably several years left to it. And in the near term what we are looking at is the QE, that is the printing of money in Europe, whatever they call it and in the US is really set to continue and by the way it will continue in Japan as well. We have more and more defacement of money in a vain attempt in my opinion to sustain the unsustainable which is a credit market that went too far. So here we are and it looks for a variety of reasons there is time left in that particular story. You have set a target that we can slide the date a little bit depending on what policy decisions get made but that $8,000 gold is not an unthinkable num