Interview with Mr. James Turk Founder of GoldMoney.com part 1 of 2
Mark Herpel
January 13, 2010
DGC: Regarding the "Gold Bull Market" there was a significant event which occurred when the price of gold recently went over $1000 USD. Can you help us understand what happened and why that event is so important for the long term bull market in gold?
Turk: It was a wake-up call. Until then, gold had been largely ignored by investors and the media. But once gold broke above $1000, everything changed. Gold is garnering more and more attention and rightly so. First of all, gold has been one of the best performing asset classes this decade. This table shows gold´s appreciation against nine of the world´s major currencies.
DGC: What is the most popular weight of GoldMoney bullion bars which gets delivered to customers through Baird & Co. 100 grams or kilo?
Turk: The 100 gram bar is more popular. It weighs approximately three ounces, so it is a lot easier to handle. Also, they are great gifts to give to children and grandchildren.
DGC: Have you seen an increase or a decrease in the P2P, P2B or B2B digital payments side of the GoldMoney business?
Turk: Yes, some increase is inevitable simply as a result of the growth of new customers. But it is still a relatively minor part of our business. Most people use their Holding as a savings account, not a current account, which is understandable. We are seeing Gresham´s Law at work, namely, bad money drives out good money. National currencies are used for spending but people save the good money, gold and silver.
DGC: You were quoted as saying that the price of gold in U.S. dollars will rise to $8000 and the DJIA will fall to match that 8000 figure. I can see the Dow at 8000 again, but that figure of $8000 for gold is going to require some extraordinary events or movement in the dollar. Do you have any specific reasons that would push the POG up so high?
Turk: You are referring to an interview I gave to Barron´s back in October 2003, when gold was trading about $350 an ounce, and I forecast that gold would rise to $8000 an ounce by 2013-2015. I based this forecast on key historical events – specifically, the relationship between the price of gold and the Dow Jones Industrials Average and what happened in the 1970s.
We have a clear boom-bust cycle in our economy, and it arises because of the way banks operate. They lend too much, and borrowers borrow too much, which cause the boom. A bust inevitably follows. So for example, the boom of the 1920s led to the bust in the 1930s. The boom of the 1950s and 1960s led to the bust in the 1970s. The boom of the 1980s and 1990s led to the bust of the 2000s, which we are now experiencing, but here´s the important point. The end of the bust comes when the Dow Jones average and gold are the same price. In the 1930s, gold was $35, and the Dow was 35. In 1980, gold was $800, and the Dow was 800. So in October 2003 I recognized that we were already in a bust and concluded that before this present bust is finished, history would repeat and the Dow and gold would be the same price. But I know what you are thinking – how did I forecast they would be 8000?
Well, again I used history. In October 2003 it took about $10 to purchase what $1 purchased in 1971 because of all the inflation during those 32 years. So my thought was that if gold could rise from $35 to $800 during the bust of the 1970s, history could repeat in the present bust, with gold rising from $350 to $8000. In other words, the rise of gold´s purchasing power would be identical to what happened in the 1970s, but in dollar terms, we need to add a factor of 10 because a 2003-dollar only had 1/10th the purchasing power of a 1971-dollar. In today´s world of fiat currencies – which are currencies backed by nothing – the name of the currency remains unchanged, but the dollar is purchasing less and less over time.
DGC: Can you share with us, what countries around the world contain the most GoldMoney account holders? Where are the GoldMoney products most popular?
Turk: We have customers in over 100 different countries, but North America is the most popular area. The biggest growth in percentage terms though has come from the UK. People there understand that gold can protect them from currency fluctuations as well as inflation. The pound has lost nearly one-half of its value against the euro over the past couple of years. Brits who held gold during this collapse protected their purchasing power.
DGC: How many online merchants does GoldMoney have at this time? (Merchants are companies selling products or services and accepting GoldMoney as an online method of payment)
Turk: I don´t know the number, but if you are referring to accepting GoldMoney through an online interface, it is small. Most merchants who accept gold as payment do so directly, without an online interface.
DGC: Just for the record, GoldMoney now offers digital precious metal accounts and vaulting for Gold, Silver and Platinum. With a GoldMoney holdings account, can I make a digital metals payment to another user in all of these metals?
Turk: Yes, each one can be used as currency, though ´digital gold currency´ is the most popular.
DGC: Ben Bernanke was just named Time Magazine´s Man of the Year. If Bernanke keeps U.S. interest rates low or at zero for much longer isn´t there a chance his policies will seriously damage the U.S. dollar...the type of damage which cannot be repaired?
Turk: Absolutely. He thinks he can jumpstart the moribund US economy with easy money. He thinks he can avoid the inevitable ´bust´ that followed the ´boom´ that ended in 2000. But he is mistaken. What´s needed to end the bust is more capital to bring overextended balance sheets back down to prudent levels of debt. Capital cannot be conjured up ´out of thin air´ like all the new money the Federal Reserve is creating. Capital comes from savings and hard work, not from debt and consumption. So not only is Mr. Bernanke not going to save the economy, but he will probably end up destroying the dollar.
Think about it. All one has to do is compare what Mr. Bernanke is doing during this current bust to what Paul Volcker did at the end of the last bust. In the early 1980s he kept raising interest rates to convince the market that he would save the dollar, which he did. The economy went into a bad recession, but the dollar reversed the downtrend of the 1970s and particularly during the Carter years, and began a new period of strength coinciding with the Reagan administration. But Bernanke is keeping interest rates near zero, and when adjusting for inflation, real interest rates are negative. Why hold dollars when negative interest rates are in effect ´paying´ you to hold gold instead?
So Mr. Bernanke´s honor of gracing the cover of Time probably signals the peak of his acclaim, just like when Alan Greenspan was hailed as the "maestro" at the top of the boom he helped foster. It will be all downhill from here for Mr. Bernanke, and the dollar too I am sorry to say.
DGC: Regarding the Indian central bank purchase of 200 tonnes of gold from the IMF, do other countries around the world see this "buying gold and selling dollars" as thumbing their nose at the U.S. and the dollar?
Turk: Yes, I think so. Ever since the 1960s, the US has tried to reduce gold´s role in the international monetary system. It is has done this by disparaging gold, passing laws to make it difficult to circulate, imposed taxes, and changed the rules of the International Monetary Fund. So it is significant that India, China, Russia and Sri Lanka have been building their gold reserves. They want to reduce their holdings of dollars and are willing to accept the ire of the US government when doing so.
DGC: What does it mean when Central Banks around the globe begin buying gold as they have lately?
Turk: At its most basic level, it is a clear sign that even central banks are losing faith in the US dollar in particular and more generally, that the international monetary system as it is presently structured is no longer workable. It is also their recognition that Washington´s policymakers are willingly allowing the purchasing power of the dollar to be inflated away.
DGC: What is ´deposit currency hyperinflation´ and how might this effect the United States?
Turk: I´ve written a lot about this recently. These articles are posted on my www.fgmr.com website and free to everyone. The dollar is on the road to hyperinflation, but it won´t be like the hyperinflation that devastated Weimar Germany in the 1920s or more recently, Zimbabwe. Those were ´paper currency´ hyperinflations. Instead, it will be like the ´deposit currency´ hyperinflations that happened in Latin America in the 1980s and early 1990s.
The point is that hyperinflation manifests itself in two different ways, depending upon the nature of the banking system. In Weimar Germany and Zimbabwe, very few people had bank accounts. Most goods and services were purchased with paper currency. But in the United States today most commerce is conducted with checks, wire transfers, plastic cards and the like. So the dollar will suffer a deposit currency hyperinflation, just like those that devastated Latin America a couple of decades ago.
Though hyperinflation manifests itself in two different ways, it always has the same cause – too much government spending. The government is then forced to borrow more than the market is willing to lend to it. Consequently, the central bank steps in and creates currency out of thin air, which it then gives to the government for spending. Today the Federal Reserve calls this process "quantitative easing", as if giving it a nice sounding name will change its pernicious nature. Of course, it won´t. So unless the reckless spending and over-borrowing by the US government are soon stopped, dollar hyperinflation will be the result. Importantly, I don´t think that point is too far away. I am talking months, not years, and I fully expect that hyperinflation will become increasingly evident in 2010.
DGC: What are the more obvious symptoms of hyperinflation and what should we be looking out for?
Turk: The most obvious one is a rising gold price. Also, the rising stock market in the face of deteriorating economic conditions is another. All the new money creation has to end up somewhere, so the stock market is an obvious alternative. Rising long-term interest rates is another sign. It is noteworthy that rates on 10-year US government bonds are again rising.
DGC: How does converting dollar assets into gold protect us from this inflationary environment?
Turk: Well, as the table I referred to earlier clearly illustrates, gold appreciates when the purchasing power of currencies is eroded. Gold does this regardless how rapid is the rate of inflation. So if inflation is just single digits, gold goes up in single digits. But if inflation increases to triple digit annual rate of increases or more, the gold price will rise accordingly.
DGC: In 1963 President Kennedy implemented the Interest Equalization Tax, which, "..was meant to make it less profitable for U.S. investors to invest abroad by taxing[15%] the interest on foreign securities." Wasn´t that just a form of capital control, trying to restrict the flow of money in or out of the country and could the U.S. be looking ahead at similar controls in order to keep all those foreign held U.S. dollars from returning to America?
Turk: Yes, that is exactly how I see it. I even mentioned in my October 2003 Barron´s interview the likelihood of capital controls being imposed before this bust is over. We cannot predict what form those controls will take, but we can read from monetary history, that rather than reverse course and pursue sound money policies, governments impose capital controls to try to buy more time. The controls you mention from President Kennedy bought time, but only until the Johnson administration, when years of money mismanagement by the Federal Reserve along with new bad policies being imposed caused the dollar to unravel.
DGC: Isn´t this a very good reason for average American´s to diversify their financial holding outside the U.S. and by holding the gold metal in London or Zurich does GoldMoney effectively do that for its users?
Turk: I believe the precious metals to be the bedrock asset of everyone´s portfolio. Consequently, you do not want to take risks with it, and geographically diversifying your metal holdings is one of the ways to mitigate risk. Gold was confiscated by the US government in 1933 and made illegal until 1974. It happened once, and it can therefore happen again.
DGC: I know you probably don´t give any tax advice, but since the UBS scandal I´m asked this questions a lot. Can you tell us if a GoldMoney account held by an American is considered an offshore bank account or asset account, the type which is reportable on the additional filing for a U.S. annual tax return?
Turk: You are right; I can´t give tax advice. But let me give you my observations, which of course are not to be relied upon. Everyone should get advice and guidance from their tax adviser. As I understand the regulation, it applies to "accounts". In GoldMoney, our customers have a "Holding". This difference is meaningful because accounts are liabilities of a financial institution, like a bank, but a Holding simply records your ownership of an asset. In other words, we are talking about the fundamental difference between assets and liabilities.
For example, when you take $1000 to your local bank and deposit it, the ownership of those dollars transfers from you to the bank. You leave the bank with its evidence of their debt – their liability – to you. It could be a Certificate of Deposit, a savings book, or your checking account statement, which depend upon what kind of deposit you made. This is fundamentally different from GoldMoney. Your Holding records the asset you own. The ownership of your gold and silver do not transfer from you to GoldMoney, which is simply storing previous metal you own. More to the point, the bank can take the dollars in your account and lend them to whomever they want. But GoldMoney cannot do that because it does not own the precious metals stored with it.
DGC: What is the importance of having my gold or any U.S. resident storing gold with GoldMoney outside of U.S. borders?
Turk: When gold was confiscated by President Roosevelt in 1933, only gold in the US was affected. Gold held by US citizens outside the US was not affected. That gold could continue to be legally held by US citizens.
DGC: A lot of people are buying ETFs lately. Concerning counterparty risk, can you explain for readers the difference between a gold ETF like GLD and owning the actual allocated bullion through a GoldMoney digital account?
Turk: There is a difference between paper-gold and real, physical metal. When you own an ETF, you do not own gold. You own shares in a fund that is supposedly backed by gold, and I say "supposedly" purposefully because I still have uncertainties about whether the gold backing some ETFs really exists. In any case, when you own an ETF, you only own exposure to the gold price. An ETF is a financial asset. It is not a tangible asset. And financial assets come with counterparty risk. In other words, the exposure to the gold price you own through the ETF is only as good as the promise of the backers of the ETF. In a world where paper-gold claims are many, many times the amount of available physical metal, there is a real risk that much paper-gold is not worth the paper it is printed on.
DGC: What is this new item I see on the GoldMoney web site called the Video Vault?
Turk: It is a video of the inside of the Via Mat vault where GoldMoney stored the precious metal owned by its customers. We agreed with Via Mat that for security reasons, the vault would only be made available to our customers. So the video is only available after you have logged into your Holding. It is really a pretty neat video. It is rare to see a video like this, but it gives an indication of the tight security that vaults protect the precious metals stored with them.
DGC: Congratulations! I see that that GoldMoney has a new German language web site which is obviously targeting a healthy segment of the the EU marketplace.
Turk: Yes, thank you. It is another indication of how GoldMoney continues to develop and broaden its products and services. This new website is complemented by our German-speaking support staff.
DGC: Can you share with us if German customers prefer delivery of their products or digital goldgrams?
Turk: At this stage, digital goldgrams are more popular, and I would expect this result to continue. Digital gold is far more convenient and economical.
DGC: It´s my opinion that while DGC is the best way to do business around the globe, there is a speed bump right now which all DGCs must get over before moving ahead. That obstacle is --how to account for transactions and what profits or loss transactions are considered taxable. Has anyone ever sought or received a private letter ruling from the IRS (or a State revenue dept) about the permissible characterization of DGC income?
Turk: Not that I am aware.
DGC: Is there any legal reference material online which would help those businesses to understand the accounting or tax structure of digital gold currency for their daily operations?
Turk: I have never googled for anything like that, but I imagine that something has been written on this subject somewhere.
To be continued.
About James Turk
James Turk is founder and chairman of GoldMoney, which provides a convenient and economical way to buy and sell gold, silver and platinum online using the digital gold currency for which he was awarded four US patents. He has specialized in international banking, finance and investments since graduating in 1969 from George Washington University with a B.A. degree in International Economics. He began his business career with The Chase Manhattan Bank (now J.P. Morgan Chase), which included assignments in Thailand, the Philippines and Hong Kong. In 1980 he joined the private investment and trading company of a prominent precious metals trader. He moved to the United Arab Emirates in December 1983 to be appointed Manager of the Commodity Department of the Abu Dhabi Investment Authority, a position he held until resigning in 1987 to begin FGMR. Free Market Gold Report (http://www.fgmr.com//) a free, web-based commentary aimed at educating readers to better understand gold, money and currency through James Turk's commentaries and insights.
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