‘Buy gold. It’ll only rise from here’

James Turk, founder and chairman of GoldMoney, firmly believes gold will rise to over $1,000 per ounce in the next month or two, and stay above $1,000 for the rest of the year (that could mean over Rs 18,000 in India).

It may stay above $1,000 forever if the Federal Reserve ends up printing dollars to fund the borrowing the US government is planning for this year, Turk, co-author of the investment bestseller The Collapse of the Dollar, told DNA. Excerpts:

Investors across the world now seem to be taking refuge in US government treasuries. Is that a safe thing to do?
No, for several reasons. First, interest rates on long-term paper in the US are starting to rise, so the price of government T-notes and T-bonds will likely fall from here. More worrying though is the risk of a US default.

The US government owes over $110 trillion, when aggregating all of its commitments. It is very over-indebted, and the price of default insurance is rising because the market perceives a growing risk of default.

Also, it is likely the US government will need to borrow $2.5 trillion this year because its revenues will decline as the economy weakens and it’s spending rises as a result of the weakening economy, which brings up another worrying point. The Federal Reserve will need to monetise much of this debt, which will further debase the dollar and cause more inflation.

The only solution the US government seems to have for all the financial troubles is borrowing more and throwing them at the problems. It also wants its citizens to borrow more…

It is not going to work. Too much debt is the problem. We had the boom, and now we are getting the inevitable bust. Because debt is the problem, it is impossible for more debt to also be the solution.

The US government is terribly misguided. Fortunately, people know better. They have therefore cut back on spending and increased savings in order to help prepare for the tough times the US - and indeed, much of the world - is facing in the months ahead.

What will be the repercussions of the planned fiscal stimulus and all the dollars that are being printed?
The most important repercussion will be that the price of gold will continue to climb. That is always the result when governments create currency out of thin air in order to give to politicians the money they want to spend.

The prevailing feeling among a lot of experts right now is that the US dollar and US treasuries are the biggest prevailing bubbles…
Yes, the US dollar is the biggest bubble, and US government debt instruments are the second-biggest bubble. People do things during a bubble that are not prudent. That reality unfortunately only appears after the fact - after the bubble has popped. The gold price is rising because of increased demand from people looking for a safe haven to protect themselves when these two bubbles pop, which I think may happen as soon as this year or possibly next year.

Can you visualise a catalysing event that will lead to the outright capitulation of the US dollar?
It’s impossible to predict. It could be another major bank failure in the US. It could be when the Federal Reserve becomes the biggest buyer of US T-bonds. It could be when China or other trade surplus countries stop accumulating dollars and start spending them instead. The event causing the tipping point cannot be predicted, but once the tipping point is reached, history shows that the currency has less than a year before it totally collapses.

How soon do you see the world moving away from the US dollar as the reserve currency?
The world has been moving away from the dollar for years. In the 1960s, nearly 90% of world trade was conducted in dollars. Today it’s about 55%. People are looking for alternative currencies, and I expect gold to emerge in the future in its traditional role as international money - in other words, the money that is used for global trade.
So, investing in gold is the right decision to make right now?

Gold is not an investment. It is money. Gold doesn’t generate a rate of return like investments do. The price of gold is rising against all the world’s currencies because currencies are losing purchasing power, while gold is preserving purchasing power. For example, one barrel of crude oil today costs about 2 goldgrams, which is the same it cost 50 years ago. So always calculate prices in terms of gold in order to see how badly currencies are being inflated by central banks.

What price do you see gold rising to over the next one year, three years and five years?
I believe that gold will rise to over $1,000 per ounce sometime during the next month or two, and then stay above $1,000 for the rest of the year. It may stay above $1,000 forever if the Federal Reserve ends up printing dollars to fund the borrowing the US government is planning for this year.

Within five years, gold will go much higher. It depends on how badly the Federal Reserve and US government debase the dollar. Remember, it is not that gold is going up; rather, it is that the dollar is going down because it is purchasing less and less because of inflation and other debasement.

What are the other reasons investors should be buying gold right now?
They should be buying physical gold, not paper gold like ETFs and other proxies. The supply of physical gold is very tight at current prices, which indicates to me that the price of gold has to rise to bring the market back into balance. In fact, a short squeeze is possible.

Many central banks have loaned out much of their gold, which is one reason the gold price is lower than I think it should be. As buyers realise that central banks are holding much less gold than is generally thought, it will create another reason to leave national currencies for the safety and security of physical gold.

Do other metals like silver and platinum make for good buys right now?
Platinum is being hit hard by the collapse of the automobile industry worldwide. It will probably rise over time, but I prefer gold and silver. In fact, I am more bullish on silver than gold, but silver comes with more risk because it is very volatile. So silver is not for everyone. But I expect that silver will exceed $20 sometime this year.

You seem to be a great believer in the Gold Standard. What are the advantages of a currency system based on the Gold Standard?
Gold is indeed the standard. It always has been and always will be. It is the numeraire by which all goods and services are measured because gold is money. The advantage of the classical gold standard is that it provides an external discipline on the creation of currency.

If too much currency is created by bank lending and the government printing press, the economy heats up, and the currency becomes overvalued. So gold leaves the country for other countries and other currencies where it can purchase more.

The classical gold standard provides a very natural mechanism that controls the expansion of credit, and therefore the value of currencies. The big imbalances today in world trade occur simply because there is no mechanism to bring order and balance to world trade.

The huge sovereign wealth funds amassed today by many countries could never have happened under the classical gold standard.

Do you feel that the current financial crisis would never have occurred if the world was still on the Gold Standard?
There have always been cycles of boom and bust, even under the classical gold standard. These cycles are inevitable in a monetary system in which banks do not keep 100% reserves for their customers’ deposits.

So crises have been a regular feature, but never as bad as the current crisis. Even the Great Depression in the 1930s was the result of government disruption in the economy and monetary system because the classical gold standard ended with the outbreak of World War I in 1914. And I fear that this current crisis will lead inevitably to another great depression that will be worldwide in scope.

The best way to protect yourself against that possibility is to own physical gold.