James Turk is legendary investor and commentator about gold.
Upner: For the past 6 to 7 months we have been witnessing a huge correction in the gold market. What is the major reason for that?
Turk: Corrections are a normal market event. They happen in all markets for a variety of different reasons. Unfortunately, corrections are a distraction, and they often cause people to lose sight of the big picture and the major trend, with the result that they then miss a good opportunity to buy, or even worse, are shaken out of the market. Investors should always focus on value, and not price. Gold has done exceptionally well the past decade, and its price is much higher now then even a few years ago. Nevertheless, gold remains undervalued and should therefore continue to be accumulated. I recommend including gold purchases in your household budget. Gold is money, so when you accumulate it, you are saving money. And everyone should have some savings, whether for retirement, an emergency or just to accumulate the money you need to purchase some consumer good. It does not make any sense though to save any national currency. In the present environment of artificially low interest rates, negative interest rates are the result. In other words, the interest income one earns on a bank deposit is not high enough to compensate you for the loss of purchasing power from inflation. So accumulate gold and silver instead for your savings instead of euros, dollars or any other currency.
Upner: We are witnessing huge demand for gold in the physical market, e.g. China. Could you explain for our readers the distinction between the physical market and paper market for gold?
Turk: Physical gold is a tangible asset. Its value arises from the market, or in other words, from the countless people who value gold. They recognize the usefulness of gold’s unique attributes and its time-tested reliability over its 5,000 years of history as money. In contrast, paper gold is a financial asset. It gives you exposure to the gold price, but you do not own gold. You only own someone’s promise to make good on their commitment to fulfil the terms of the financial asset they created and you own. In the financial turmoil of the ongoing bank solvency and sovereign debt crises we are experiencing, many promises have already been broken. For example, the paper gold issued by Lehman Brothers and MF Global became worthless when those firms went bankrupt. Always buy physical gold and physical silver.
Upner: When will the physical market in gold or silver override the paper market? Why must this happen?
Turk: No one can predict the future, so we do not know when the physical market for gold will override the paper market. But monetary history shows it will happen before the present financial bust, now several years old, is finally over, and I just explained the reason. As financial turmoil worsens, people move from just a promise to the real thing, or in other words, from paper to physical, because they no longer want all the risks of holding paper gold.
Upner: Gold is a so-called “safe haven”. Why do you think it is not still recognized by big institutional investors as a safe haven in these difficult times?
Turk: The reason is mainly a lack of understanding about gold. Many people, including sophisticated institutional money managers, have never bothered to study it – or if they were taught something about it at university, what they learned was probably wrong. Modern economic theory is complete rubbish when it comes to gold. In any case, much is changing as gold’s bull market continues. For example, many Asian central banks are actively building up their gold holdings to diversify their total reserves.
Upner:: Could you comment on what you believe will be future events for gold and silver? What can we expect in the near future?
Turk: Again, no one can predict the future, but we can learn from history. One thing that stands out over the centuries is that there is a boom-bust cycle to economic activity. This cycle is a basic building block of the Austrian School of economics and work by scholars like Ludwig von Mises. The boom ended several years ago, and we are now in the bust. The bust will continue until all of the excess debt created during the boom is repaid or repudiated by the borrower. The important point is that demand for tangible assets, and precious metals in particular, increases during depressions as people’s distrust of financial assets increases. Put simply, the demand for gold and silver rise during the bust, so their price rises. It happened in the 1970s, and it is happening again.
Matúš Pošvanc, zlatostribrocz.com,