James Turk: Gold Worth $12,000; Dollar Is Backed By Empty Promises

May 29, 2015

Founder of GoldMoney.com shares his views on interest rates and gold.

 

This is part 2 of our interview with James Turk. Click here to read part 1.

James Turk is the founder of GoldMoney.com, which is a European-based precious metals firm that presently safeguards $1.3 billion of precious metals assets owned by customers. He is a popular speaker at conferences as well as on radio and television. Turk’s 2004 book, “The Collapse of the Dollar,” recommended buying gold and betting against the housing bubble, which were two of the best investment ideas of the decade. His latest book is “The Money Bubble: What To Do Before It Pops.” HAI Managing Editor Sumit Roy caught up with Turk to discuss his current views on gold and the financial markets.

HardAssetsInvestor: What's your forecast for interest rates?

James Turk: Interest rates are difficult to forecast because central banks are going to continue to try to keep interest rates low. By doing that, they intend to make the debt-servicing burden easier, particularly for governments.

Let’s look at it this way. The U.S. government has $18.3 trillion in debt. They're bumping up against the debt ceiling limit again, which is going to have to be raised in the next couple of months—by September probably at the latest.

Now, if interest rates just went up 1 percent, basically you're talking about $183 billion of additional expense the U.S. government would incur annually because of the higher interest expense burden. If the U.S. government were going to pay a fair rate of interest, let’s say 5 or 6 percent, we’re talking about $900 billion to $1 trillion of additional interest expense that the U.S. government will have to pay. Where is it going to get that money?

If interest rates go up, the government is not going to cut back spending in other areas. They're not going to cut back in welfare. They're not going to cut back in defense. That means they would have to go out and borrow more in order to plug the deficit just to pay interest. And that’s how governments get the currencies they print sucked into a hyperinflationary spiral.

At some point, you reach a stage where there's only so much borrowing a government can take on. The market either doesn’t have the capacity to lend more money to the government, or the market will say, “Lending to the government at these interest rates is just too risky."

But the government will want to continue spending money. Where is it going to get the money? It turns to the central bank and says, “Take my debt that the market doesn’t want. Turn it into currency. Put the currency in my checking account so I can continue spending money.”

That’s how governments put currencies onto a hyperinflationary path. The only reason we don’t have hyperinflation at the moment is because central banks have manipulated interest rates down to zero or even below. So those extremely low interest rates have lessened the burden that governments are carrying with this debt.

But zero interest rates don't do anything to change the fundamental problem: Governments are spending too much money that is far beyond the capacity of any economy to generate the wealth to service all of this debt. That’s the dilemma we’re facing.


 

 


HAI: Eventually when the bubble bursts, what do you see happening to gold?

Turk: I still see the underlying fundamental value of gold to be $12,000 per ounce. That's no more outrageous than saying in the early 1970s that when gold was at $35, that it would go to $850 an ounce by the end of that decade. We are in the same kind of situation today that prevailed back then, except circumstances now are worse.

Here is the way I look at it, and I'm looking at it objectively. Gold has this 5,000-year history as money. It’s been through all kinds of crises, wars, fads, political points of views, etc. And it has survived.

Now, for 40 years, we have been in this fiat currency system, which is a long time in people’s lives. It's our adult life; it’s half of our lifetime. But when you look at 40 years within the context of 5,000 years, the last four decades are just a blink of an eye.

People believe that what they're using today in commerce is money, but it’s not. It’s only a money substitute, which describes the essence of the money bubble. All the currency circulating today backed by nothing but promises is a money substitute circulating in place of money, which of course is gold and silver.

In testimony before Congress 100 years ago, famed banker J.P. Morgan gave a clear definition of money: “Money is gold, nothing else.” The money bubble has been created simply because people today have just lost sight of this fundamental, timeless principle.

Eventually people are going to understand that all of this fiat currency that is backed by nothing but IOUs is only as good as the IOUs are good. And in the current environment, the IOUs are so big, a lot of promises are going to be broken. The resulting collapse of confidence is going to have a negative impact on currencies as well as the economy.

The obvious question is, do you want to go and believe in politicians and their 40-year story that this era of easy money printing and excessive government spending is going to continue forever? Or do you want to look at gold’s 5,000-year history and say, “I think I want to go into a physical metal with no counterparty risk rather than taking the IOUs of overleveraged governments.” That’s what it comes down to in the final analysis.

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