Back in 2004, James Turk in his book “The Coming Collapse of the Dollar and How to Profit from It” predicted that gold prices will go up to $8,000 an ounce, when they were trading at $ 440 an ounce. He still holds his view and believes that even at current prices ($1,722 an ounce) gold holds good value. In an interview to Jitendra Kumar Gupta, Turk also talks about the global economic crisis and why he thinks silver is a better bet. Turk is chairman of Goldmoney, which provides a platform to purchase precious metals. It safeguards precious metals worth $2.04 billion and almost 19.6 tonne of gold.
Why would gold prices go even higher from current levels?
Our longer term forecast for the price of the gold is $8,000 an ounce sometime between 2013-2015. The reason is central banks' action of debasing currencies. Historically, before the Gold Standard, the Fear Index (a term coined by Turk), which is nothing but how much worth of gold is sitting in the US treasury's vault for every dollar circulated in the system, was usually 40 per cent. The fact that it is now only 3 per cent means that gold prices should go much, much higher.
What is the rationale behind your prediction of a dollar collapse?
The dollar is going to collapse unless they change policy. However I see no indication at Washington or any desire to change those policies. We know from monetary history that a government spending and borrowing too much will ultimately destroy its currency through hyperinflation. As a result there could be a collapse of currency or collapse of the economy which is where the US is headed. In this scenario, gold is very much an under-valued asset.
Like in 1933 in the US, is there a risk that at $8,000 an ounce that governments might confiscate gold and how do you protect your investment?
That is true, it is a risk. Gold has been confiscated even after 1933 in other countries. Since it has happened in the past one cannot rule out that probability. Possibly to mitigate that risk hold gold in different ways. In this case a geographic diversification could be a help.
What is the case for silver?
I am more bullish on silver than I am on gold. Right now the ratio (silver/gold) is 50 ounce of silver to an ounce of gold. Historically this ratio is about 16-17 ounce of silver to an ounce of gold. As the bull market in precious metals continues in the future I expect this ratio to fall meaning that silver will outperform gold. But silver comes with a lot of volatility. Silver is an industrial commodity but also a substitute to gold. Silver has a long history of being used as money. At current levels, silver is trading at very good value.
Is it just the US economy that gives strength to you argument in favour of gold?
It is not just the US but the whole world. The reason why the whole world is in a mess is that central banks have been following loose monetary policies and borrowing excessively. Governments have been spending more than they can earn and borrowing to meet their operating expenses rather than investing. Ultimately that system is going to come to a conclusion and that's what I think we are facing now. There aren’t enough jobs being created around the world to service all the debt, particularly government debt, which has become huge. I should say not only in the US but countries like UK and even to the some extent the Asian countries are affected by the huge government debt.
What about the fallout?
It is hard to predict the future. We have never been in a situation like this before where the world's reserve currency is backed by nothing except the promises of the politicians. What hyperinflation can do is evident from situations that unfolded in Zimbabwe, Soviet Union in 1993 and Argentina in 1991. But this is the first time that the world’s reserve currency is on the verge of hyperinflation. The reason is they are borrowing and spending too much. They will call it as quantitative easing but in reality it is printing of money.
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Problems in the western world are described as kicking the can down the street. When will this reach a conclusion?
Yes they are kicking the can but that can is no longer a can but a two-tonne bottle. They cannot kick it any further because the markets have reacted; they are reaching a stage where governments are forced to solve their monetary problems. One can see the warning sign; the prices of gold in the last three years have almost doubled. This is a clear indication that the markets are looking for a safety and exiting the dollar because of which the commodities, especially gold is benefitting.
But is there an end to the printing of money?
Eventually there will be a point where the confidence in currencies will be completely shattered. When this happens it is usually six months before you get to further collapse in the currency. Recently, back in August during the discussion and debate about increasing the US debt limit, there was a danger of reaching that point. Presently in Europe we have seen the problems with the sovereign debt and banking system. Last week we have almost reached that specific point again, but then the central banks stepped in order to fund a big French bank that was near collapse. So we are very close, however that specific point could come next month, it could come next year or it could come after three years. We just do not know. What we do know is that governments around the world with their loose monetary policies, huge borrowing and spending requirements are heading for the cliff and sooner or later they are going to go over that cliff. I think we know that the crisis is brewing like the central banks’ action last week.
We know what is happening in the swap rate and interest rates and most importantly what is happening to the prices of gold.
So there is no time frame to predict?
They are buying time by making all kind of promises. In Europe, what they are talking about is making changes to the EU treaty. But again it is almost just propaganda. Even if they can do it, it is going to be far too late. And why the US and Europe, look at UK or Japan. And probably the next crisis is going to be bigger than the crisis of 2008-09. Because, during the last crisis they did not solve the problem all they did is just bought more time by bringing more debt to the system.
Can liquidity help banks?
Remember, besides liquidity you also have to focus on solvency. What they have done in the case of a French bank, which was near collapse, is to make it liquid but they did not make it solvent. These banks have so many bad assets on their balance sheet, which if marked at the current market price will wipe out their capital. I do not know how much time they can buy, but the reality is there is not much time left.
How do we protect ourselves?
In this environment, you can protect yourself by buying physical gold.
During a financial collapse, financial assets have counter party risk and they tend to go down in value, which is why one should avoid financial assets and try to invest in tangible assets like gold and others such as farm land, mines and so on.
Should an Indian investor worry about what is going on in the rest of the world?
Look at the balance sheet of the Reserve Bank of India. The reserves supporting the rupee is mainly dollar. And if the dollar goes down what will be backing the rupee? Nothing. So the rupee, which has already depreciated will go down further. That apart if the global economy slows down, which is what we are currently experiencing, that will have its impact throughout the world including India.
Do you think the recent rally in the equity markets and commodities is sustainable in the near term?
It is a rally due to an increased supply of liquidity. It is not a rally that has come due to the solving of the underlying problems of sovereign debt and insolvent banks. I think we are going to see more bank failures and we are going to see more Lehman Brothers type collapses.