Turk: Central Banks Losing War On Gold

January 15, 2013

HAI: Why have we seen such a muted reaction in the last three months with gold prices, when coming off the heels of QE3 and QE4, certainly around the globe, Japan and other places are in the same theme? Why has it stopped reacting? Or has it?

Turk: Gold hasn’t lost any of the attributes or characteristics that make it useful. What you're seeing is just the latest battle in this ongoing war. The central planners are out in full force. The last thing they want to have happen when announcing QE3 or QE4, is to see the gold price rocket, because that’s going to send a message around the world that currencies are being destroyed. So they intervene as much as possible, to keep that from happening, to try to control the gold price. But even though they're trying to control the gold price, that hasn’t kept the gold price from rising 16.8 percent per annum on average over the last 12 years. Because central banks are not addressing the underlying causes of the problem here—that government spending is out of control—you're going to see a rise in gold price in 2013 as well.

HAI: You wrote an extensive report questioning the accuracy of the above-ground gold stock, which of course is in direct correlation to what central banks own. Are you saying that central banks don’t have as much gold as they say they do?

Turk: There are two elements to your question. The first is looking at the overall, above-ground gold stocks. That’s important to know, just like it’s important to know the total quantity of euros in circulation, or the total number of dollars in circulation. Because once you know the total above-ground stock of gold, you can relate it to the total above-ground stock of the national currencies, and make some determination as to whether gold is cheap or expensive, compared to those currencies.

This relative value can be determined by my Fear Index. I look at it, usually, just against the U.S. dollar, but you can do it globally as well. The Fear Index is still very low, suggesting that gold is still undervalued relative to fiat currency. That explains the importance of knowing the total above-ground stock of gold.

The second part of that question is, How much do central banks actually own? My view is that central banks own a lot less gold than they say they do. They don’t accurately report on their balance sheet how much gold they have in the vault, and how much gold they’ve taken out of the vault and loaned to various participants in the bullion market. There's a big difference between having physical gold in the vault and having somebody owe you physical gold. The fact that central banks don’t really report how much physical gold they really have creates a huge uncertainty in the gold market.


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