Tuesday, January 03, 2006


Gold Shakes Off It's PC Demons

Business Week interviews a 'gold bug. "James Turk..is a gold bug of long standing. Turk recently spoke about how high gold will go, who's buying it, and why."

"Why has gold climbed in the past few years? Gold responds to monetary problems. For the first few years gold was rising only against the dollar. But what has happened over the past years is that gold has been rising against all national currencies, and that's significant. Initially, when there were problems with the dollar, people saw the euro as safe. But in May, [after] the French and Dutch votes that rejected the European constitution, people began looking at the euro and realized it wasn't the haven they thought it was. Since then the riots in France and all the other bad news coming out of Europe have reinforced that view. Consequently, money has been moving to gold."

"How high do you think it's going to go? My expectation is that we're going to see $600 in the first quarter of 2006, and sometime over the course of 2006 we're going to touch that $850 level."

"The Economist called gold a 'barbarous relic.' Why is there such hostility? There's a lot of antigold propaganda, partly because economic theories don't explain what gold is and how it works. It became politically incorrect to think of gold as money once it had supposedly been demonetized in 1971, when President Nixon closed the gold window. But the reality is, monetary theory is one thing and the way gold works in the real world is entirely different."

"You mentioned that gold isn't politically correct. What do you mean? In 1971 Nixon closed the gold window, he said that gold was being demonetized. The reality is that gold still is money, but what's being demonetized is the dollar. Every year the purchasing power of the dollar is being eroded by inflation."

"Why is gold still a safe haven? The way it works is gold is money. Gold is the only asset we produce for accumulation. Every other good and service we produce is consumed. Gold is hoarded. Essentially all the gold ever mined throughout history currently exists in above-ground stocks."

"That's not true for anything else. Even copper is consumed in the sense that it is dispersed in millions of applications around the globe. The fact that gold is hoarded is what makes it money. And it's very useful for economic calculations for prices of goods and services over long periods of time."

"Who is interested in buying gold these days? The most significant buyers over the past few years have been individuals. Gold goes to where the wealth is being created. So for example, the European central banks have been disgorging gold from their vaults, and that gold is going to China and India because that's where new wealth is being created. Gold is also going to the Middle East with the rise in energy prices."

"So the central banks of China and India are accumulating gold? The Central Bank of China apparently is buying. There has been no evidence that the Central Bank of India is buying. But individuals in those countries are accumulating the gold."

"How can an individual invest in gold? We use the term investment, but that's a little bit misleading. The amount of crude oil that you can buy with an ounce of gold is the same as it was 50 years ago. So in that sense, gold hasn't really provided any rate of return. What we call the rate of return in gold is actually the loss of purchasing power of the dollar. You can only have a rate of return when you take that gold and take risks with it, as you would a normal investment. You either take that gold and buy stocks with it, or you lend it to generate some kind of rate of return."

"So when you look at an investment portfolio and you have stocks, bonds, and cash, gold should be counted as part of your cash. It should be that part of the portfolio that provides liquidity."

"What do you think of the gold exchange traded funds? iShares Comex Gold Trust (IAU ) and streetTracks Gold Shares (GLD ) are not an alternative to owning physical metal. They're a convenient way to speculate on the price of gold. They don't prove that the gold actually exists in the vaults of the custodians and the sub-custodians with an audit."

If the dollar becomes stronger again or another currency emerges as the sort of investment that people want to put money into, will it affect the price of gold?
In the past few years we've seen the price of gold rising not only against the dollar, but also against the euro, the Swiss franc, and the Japanese yen. Gold is rising in terms of every major national currency. You haven't had this since the 1970s. What happened then was there was a flight out of national currency because people became concerned about inflation and other monetary problems. This is going to continue in my view in the years ahead."

I like what he said about gold being part of liquid assets. One can always sell gold or silver.

It's also true about political correctness and gold. In business school in the 1980's, if you talked about gold you were looked at as some sort of domestic terrorist. Even Alan Greenspan caught flack for his past writings on gold.
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