James Turk On Why Bullion-Buying Central Banks Fight High Gold Prices

January 14, 2013

Founder of bullion-dealer GoldMoney says reserve banks know rising gold prices are reflection of their failed policies.

 

James Turk is founder and chairman of GoldMoney.com, which is a European-based precious metals firm that presently safeguards $2.1 billion of precious metals assets owned by customers. Turk is a popular speaker at conferences as well as on radio and television. His latest book is “The Collapse of the Dollar.” HAI Managing Editor Drew Voros caught up with Turk to discuss central bank gold buying, the debasing of the dollar and why he favors silver over gold.

 

HardAssetsInvestor: What is the issue in the gold market that most concerns you?

James Turk: The biggest issue is government policy. It’s been quite clear that governments have been trying to keep the gold price from rising. But it’s inevitable the gold price will rise when national currencies are being debased, as they all are being now. And rather than let the free-market forces take over, governments are trying to deny reality. They're trying to force the market into thinking that gold really isn't worth what the market says it’s worth. Governments are engaging in anti-gold propaganda and various interventions. It’s exactly like the 1960s, which I lived through and remember well.

HAI: Why would a central bank, which presumably is also buying gold for its reserves, want the price to be lower? Isn't that an investment that the bank has as well?

Turk: First of all, gold is not an investment.

It’s money. It’s not an investment because it’s a sterile asset. It doesn’t generate cash flow. It doesn’t have a balance sheet, management team, PE/ratio or anything like that. And in fact, gold doesn’t create wealth. Money doesn’t create wealth until you put it at risk. Money only creates wealth if you invest it or you lend it or you deposit it. But gold itself doesn’t create wealth. Dollars don’t create wealth unless you deposit them in a bank, lend it to somebody, or invest it in securities. It’s the same thing with gold.

Central banks own some gold, but they own it because of the legacy issues when the dollar and all national currencies used to be backed by gold. That formal link to backing gold was broken back in 1971 by President Nixon. And ever since then, national currencies have been dependent upon government promises rather than physical metal in the vault.

The physical metal that’s actually sitting in central bank vaults is a reserve. That’s why the central banks around the world are called the Federal Reserve, or the Reserve Bank of Australia, or the Reserve Bank of India. They are each bank’s reserves, so that if there are problems with the paper currency, or the deposit currency that’s circulating, the bank can always rely on the physical gold reserves to rebuild or reconstruct the monetary system.

You have to look at gold from that point of view. The reason central banks want to keep the gold price down is that in this fiat currency world in which we live, a rising gold price is an indication that a currency is losing purchasing power and that central bankers are doing a poor job managing the currency’s purchasing power. Central bankers don’t like to have that red flag waved when the gold price rises, because governments today rely on the power of creating money out of thin air to fund their deficits and meet their spending aspirations.

HAI: But they're caught in a Catch-22, right? They don’t want a high gold price, but they are constantly introducing monetary-easing policies that fuel higher gold prices.

Turk: You're absolutely right. And the way I describe it is that there's a war going on between the gold market and central bank policy. While the central banks win an occasional battle or two, they are losing the war. I describe this war as a managed retreat. Gold is up 12 years in a row at an average annual appreciation of 16.8 percent. What that shows is how badly the purchasing power of national currencies is being eroded.

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