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Q and A with James Turk On Precious Metals
CK: What are the current drivers and factors for gold and silver prices?
JT: Fiscal incontinence on the part of governments across the developed world is a key factor. Their spending promises are completely unaffordable. So either the politicians fess up and admit this is the case, or they inflate their currencies in an attempt to disguise the truth. Human nature being what it is, they have chosen the second option, so far at least.
Closely linked is the dire health of the banking system. Our exponential credit-based economies require ever-greater levels of debt in order to function (exponential credit being the mirror image of exponential debt). But consumers in the West are tapped out as far as debt is concerned, and show little appetite for taking on more. The big money-center banks are sitting on piles of cash - courtesy of quantitative easing from central banks - but are reluctant to lend, given all of the political uncertainty and the bombshells that may exist on their balance sheets or their counterparties'.
So central banks are inflating in order to maintain extravagant levels of government spending, but they are also doing so in order to bailout the banks. The hope is that the banks will then start lending again, and we'll be back to economic happy days. The problem - aside from the unprecedented amount of current public and private debt - is that these policies shift the risk onto currencies, and seem guaranteed to produce serious inflation in the coming years. I think the US dollar will hyperinflate, along with one or more other major currencies.
The other major factor is Asian gold and silver demand. This reflects a long-standing cultural affinity for the idea of precious metals' use as money and savings: as people in these countries get wealthier, they can afford to spend more on gold and silver, which given the number of people involved (in the hundreds of millions) should have a dramatic impact on prices. Central banks in the developing world are also steadily accumulating gold in order to hedge their exposure to the US dollar. All of the above will help push gold and silver prices much higher in the years to come.
CK: What is currently happening to gold and silver prices, why is there a correction, do you expect the current correction to continue, and if so, to what levels?
JT: Corrections and consolidation periods are a healthy part of any sustainable bull market. As the cliché goes, bull markets take the stairs up and the elevator down. We've endured some pretty sizable corrections in gold and silver over the last 12 years - the silver ones have been spectacular at times - but you can't let this type of price action alter your understanding of the bull case for these metals. The longer the period of consolidation lasts - and it's been over 16 months since we've seen new price highs in gold and over 20 months for silver - the bigger the eventual breakout.
CK: Do you see governments and/or central banks confiscating and/or expropriating gold and/or silver in the future and if so, under what circumstances and if not, why not?
JT: Governments don't want people saving in gold and silver. They want to keep them trapped in fiat currencies, which the government then debases through central bank policies. This system is advantageous to governments because debased currencies reduce the government's debt burden. This comes back to the madness of Keynesianism, which assumes that people's natural inclination to restrict spending during recessions is a bad thing (the so-called "paradox of thrift") and that the masses need to be cajoled into spending for the good of the greater economy. Central banks can enforce negative real interest rates which discourage cash savings, but as a consequence encourage saving in metal - as there's no opportunity cost to holding a non-interest yielding asset when real rates are negative.
I doubt that outright confiscations will occur, as it would seriously damage the notion of property rights in whichever country implemented expropriation. To say that this would be shooting themselves in the foot is an understatement, given the highly globalized nature of modern finance. But as far as government is concerned, it usually pays to hope for the best while preparing for the worst.
One final point: the confiscation threat is not limited to precious metals. Pensions represent a far larger, juicier piece of low-hanging fruit for cash-strapped governments; and unlike gold, we've actually seen serious moves by governments in recent years - notably in Hungary, a European Union and NATO member, Ireland, which is in the eurozone, and not to mention Spain - to expropriate private pensions and replace them with governments "IOUs".
CK: Do you see any possibility of the global financial system going to a gold-based currency standard and if so when and how?
JT: It's possible - but is just one of many scenarios that could play out in the years ahead. I think you have to distinguish between government-backed gold systems, and the possibility of private free-market money. The latter is more desirable as far as I'm concerned, given that governments will always give into the devaluation temptation when they are the managers of gold standards. That said why would governments voluntarily surrender their rights over legal tender to the free market? What I can say with confidence is that our current monetary system is on its last legs. Only time will tell what exactly replaces it.
CK: What are your price projections for gold and silver prices 3 to 5 years out?
JT: I was interviewed by Barron's back in October 2003, and predicted that gold would trade at $8,000/oz sometime in the period 2013-15. Given all that's happened in recent years though, I actually think that this estimate is too conservative, and have increased it to $11,000+ in the 2013-15 period. My reasoning is explained in this GoldMoney video.
I expect silver to outperform gold, and that it will return to the 16-1 price ratio with gold that's been common throughout history. So at $11,000, this puts silver over $700/oz.