By Lars Schall

James Turk, a widely respected figure in the precious metalmarkets, hasgrown up in the “Buckeye State” of Ohio. He graduated with aB.A. degree in International Economics at George Washington University in 1969. Afterwards heworked eleven years forChase Manhattan Bank, with assignments for theInternational Department in Thailand, the Philippines and Hong-Kong. From 1980 – 1983, Mr. Turk was withRTB, Inc., a private investment and trading company. He subsequently served thenext four years as the head of the Commodity Department of the Abu DhabiInvestment Authority in the United Arab Emirates. In 1987 hebegan the “Freemarket Gold & MoneyReport”, a subscription-based investment newsletter that earlierthis year became a free online service (http://www.fgmr.com). Until 1995 he was the Chief Executive of Greenfield Associates, whichspecialized in investment research and trading advice for hedge funds,commodity traders and investment managers. From 1995 – 1999, Mr. Turk was aDirector of Lion Resource Management Ltd., a London-basedfirm which advised funds that invested in the equities of companies involved inthe mining and exploration of precious metals. In2001, he launched GoldMoney, a patented digital gold currency that allows the instant transfer of gold,silver and platinum between user holdings. GoldMoney is the largest digitalgold currency in the world. For more information on this visit: http://goldmoney.com/index/html.Moreover, Mr. Turk is the author of “TheIllusions of Prosperity” (1985), “SocialSecurity: Lies, Myths and Reality” (1992), several monographs on money andbanking, and the co-authorof a book which has attracted considerable international attention: “The Coming Collapse of the Dollar and How to Profit from It: Make aFortune by Investing in Gold and Other Hard Assets”, published by Doubleday and in December2004 updated in a paperback version entitled “The Collapse of the Dollar” (visit: www.dollarcollapse.com). He frequently speaks at investment conferences on gold, money, andthe international banking system. Mr. Turk lives in London.

Mr. Turk, we’re witnessingright now a crisis that you predicted five years ago together with journalistJohn Rubino in the book “The Coming Collapse of theDollar”. What is the real cause for this crisis?

There aretwo financial crises at present.  First,the dollar and other currencies are collapsing against gold, as John and Iforecast in our book.  This result hasoccurred because currencies are being badly mismanaged by central banks.  They are creating too much currency, whichcauses it to be debased, meaning it purchases less.  It is a matter of basic economics.  If you create too much of something, itsprice falls, which in the case of currency means that it loses purchasingpower.

Thesecond crisis is the bank crisis, which in my view is not finished yet.  John and I wrote about this too and concludedthat banks were going to be under pressure with the result that some wouldfail.  We recommended back in 2004 anumber of short-sale candidates, which proved to be very timely. 

It is myview that right now we are in the eye of the hurricane.  I expect the second half of the storm to hitin 2010, but it will be much worse.  Notonly will the creditworthiness of banks be questioned, but also that of manygovernments, particularly the US, UK and Japan.

What role do central banks and thefinancial system itself play in this drama?

Centralbanks are partly to blame, but there are also other culprits.  First, there are politicians because theirspending is completely out of control. What’s worse, in the US, whichis where I am most familiar, most politicians are acting for the banks and notthe people who are paying for the huge bailouts the banks are receiving.  And the bankers are to blame too because theyput themselves in this situation by lending too much money and therebyweakening their balance sheet, putting depositor money at risk.

Could the crisis have been avoided– and if so, why didn’t it happen then?

In theoryit could have been avoided, but in reality, human nature never changes. Peopleare always looking for a free lunch, and greed of course plays a big part. Sodoes dishonesty.  Instead of bailing outthe banks, the bad ones should be left to fail. 

Also,there should be investigations by independent third-parties to determine whatbankers broke the law and what politicians abused the public trust. I wouldexpect that if these investigations were undertaken, a lot of bankers andpoliticians would end up in jail, but they should consider themselves lucky.  In early America theywere ‘tarred and feathered’.

Would the world be better offwithout central banks? Would America do better without theFederal Reserve System? And moreover, if there was a cure for the enormous illsof our financial system, how would it look like?

Withoutany doubt, central banks are the real barbarous relic. I wrote a monograph onthis very subject a few years ago and explained the reasons why central banksare doing more harm than good. This monograph is available free on theGoldMoney website at the following link: http://goldmoney.com

The cureto fix the mess we are in is simple and requires two specific actions.  First, sound money is required, which meansgold or alternatively, silver, should be the currency.  Substitutes like paper currency and depositcurrency within the banking system should be redeemable into precious metal ondemand.

Second,in the US there is a basic principal that requires the separation of church andstate.  The separation of bank and stateshould also be required, which would be a big step to help ensure politiciansserve the interests of the American people rather than that of the big banks.

Do you see any signs in the publicdiscourse that we’re moving into that direction? Or  are we accelerating the speed while travelling the same old road which is acul-de-sac?

Well, inthe US there have been some discussions about penetrating the iron curtain thatsurrounds the Federal Reserve. For example, there is a bill working its waythrough the Congress that would require the Fed to be audited, which has neverbeen done before since its creation in 1913. But unfortunately, efforts like these are few and far between. 

Moreworrisome is the attitude and policies being followed by the Obamaadministration.  Simply put, the US has beenliving beyond its means for decades, which is the reason it is now in financialtrouble. The borrowing and spending binge finally caught up with it.  Consequently, more debt and more consumptionare not going to cure America’s ills. The sooner policymakers recognize this reality, the better. Itis never too late to have a sound plan of action.

Forexample, the present situation can be compared to that of the federalgovernment after the American Civil War. By the end of the war in 1865, therewas an economic and monetary mess created by the war, but policymakers put thecountry back on the right track.  They establisheda plan by which the dollar would be placed back on the gold standard by 1879,and then followed the plan to completion with essentially no governmentintervention in the marketplace. The last decades of the 19^thcentury as a consequence saw some of the best economic growth everrecorded.  If a sound plan were developedtoday – taking America back to its core principles and ending all government intervention – Ihave no doubt that its problems could be solved over the next ten years. Therewill need to be a lot of belt tightening, but the pain will be a lot less thanif policymakers continue to follow the road they are now on, which is what Icall the road to the fiat currency graveyard. Dozens of other fiat currencies are buried there – including America’s firstcurrency, the continental – and the dollar will be there before too long ifthere are no changes. But this point also highlights the tragedy of presentpolicy. 

America has abandoned the wisdom ofthe framers of its Constitution, which requires the currency of the US to begold or silver. Because the dollar is backed by nothing and not redeemable intogold or silver, the dollar is an unconstitutional currency.  It is fiat currency, just like thecontinental, which collapsed after the War of Independence. Because of themonetary turmoil created by the continental’s collapse, the framers of theConstitution in Article I, Sections 8 and 10, required that the dollar bedefined as a weight of gold or silver. The metal to be used was left to Congress to decide, which was given thepower to “coin money and regulate the value thereof”. This term ismisunderstood and misused today, but it actually means that Congress simply hadthe power to determine the rate at which gold and silver would be exchanged. Ineffect, this power meant that Congress could decide whether the US shouldbe on a gold or silver standard.

One ofthe first actions of the new federal government was to pass the Coinage Act of1792, which made clear the intent of the framers.  And so it was until 1971 when all pretence ofmetal-backing was finally abandoned by President Nixon.  So America isre-learning the lessons of history.  Thecollapse of the continental was one of the major reasons the new countrycreated a “more perfect union”, as it says in the Preamble to theConstitution.  It also explains why thefirst Congress and President Washington passed the Coinage Act into law.  They did not want the country to suffer theproblems of fiat currency, like it is now suffering.

The investment of theperiod 2000 – 2010 is definitely gold. This precious metal performed very wellcompared to the US-Dollar. What has been the root for this success? And whatare your expectations for the mid-term future of gold?

Gold has done well, but I do not consider it tobe an “investment”. It is money, and there is a difference. Investments arewealth-creating assets. Money is only a wealth preserving asset.  Money’s primary purpose is to provideliquidity, which one then uses from time to time to buy goods and services orto take risks and invest. 

You often use thecorrelation between the value of gold and the price of crude oil to explainthis point, right?1

Yes, exactly. An ounce of gold today buys thesame amount of crude oil it did at the beginning of this decade. In fact, itbuys basically the same amount of crude oil it did any time over the pastseveral decades. So gold during this period did not create wealth – it simplypreserved it. You cannot buy more crude oil with an ounce of gold, but rather,only the same amount. So in this example of crude oil, gold did not createwealth, which is what investments are supposed to do.

Gold preserves the purchasing power of everyonewho owns it, which is what money is supposed to do.   

In the past you statedthat a default on gold at New York’s Commodity Exchange (COMEX) might be possible. Why do you think so?

To understand this point, you have to recognizethat there is a fundamental difference between paper-gold and physical-gold.Paper-gold is a financial asset and has counterparty risk.  In other words, the value of that paper-goldis dependent upon some financial institution’s promise.  In contrast, physical-gold is a tangibleasset. There is no counterparty risk. With paper gold you own exposure to thegold price; you do not own real gold.

The second key point is that there is a lotmore paper gold outstanding than physical gold available for delivery. So ifthose who sold gold on the Comex as well as other forms of paper gold cannotget the gold they need to deliver when asked, they will default.  Maybe they can get the gold they need, butonly at a much higher price, so the default will occur because of their losses.For example, if they promise to deliver gold at $1200 per ounce and gold keepsclimbing above that price, the shorts will incur a loss. This example explainswhy some mining companies that ‘hedged’ their production have takenmulti-billion dollar losses.  Some ofthese mining companies even went bankrupt, and the same thing could in theoryhappen to any firm that has sold paper gold. 

The Comex clearinghouse is just one visiblepart of the paper gold position that exists. No one really knows how muchpaper-gold has been sold in its entirety, but it is huge. So when the scramblefor physical metal intensifies, as it has been doing in recent months, defaultsare possible by everyone needing to deliver metal to fulfil their promises. Inthe final analysis, the Comex is no different than the London Metal Exchangewhich defaulted on its nickel contract a few years ago.

One force that was/istrying to suppress the gold price, is the so called Plunge Protection Team(PPT). This Team, which is officially labeled as “The Working Group onFinancial Markets”, seems to loose its power grip. In an exclusive interviewwith investigative journalist and book author Mike Ruppert from April of thisyear, Mr. Ruppert stated:

“The PPT is overwhelmed now. This collapsehas been a tsunami that has rendered the PPT largely ineffective. It had theability to intervene artificially to prevent market collapses when it was onlybillions of dollars involved. Now that we're dealing with trillions the PPT isof little interest. Broadly speaking, the U.S. Treasury (almost a proprietary of GoldmanSachs) has become in itself a PPT with increasing ineffectiveness. The U.S. is currently having the biggest ’SuckerRally’ there will ever be.“2

Does this reflect yourobservations as well?

Well, if you are referring to the US stock market, I expect it to gohigher. It is not rising because of good economic conditions. Instead, it isrising simply because too many dollars are being created and they have to endup somewhere. So a logical place for them is the stock market. 

For example, I travel quite a bit and meet peopleall over the world.  There is a point ofview by some – particularly in Asia and the Middle East – that they would rather own $1million of copper than have $1 million sitting in a bank account. They reasonthat the copper can always be used in some factory application.  It is a tangible asset and does not havecounterparty risk.  In contrast, money ondeposit in a bank does have counterparty risk, and the interest income onereceives today on that deposit is next to zero, which is not enough to offsetthe risks.  So carry this logic one stepfurther.  In addition to buying physicalcopper people are buying the stocks of copper miners, plus with some of thesecompanies one can earn a dividend greater than the interest income from a bankaccount.  So as long as the FederalReserve continues its present policies, we can expect the stock market tocontinue going higher.

In the past youestimated on behalf of the Gold Anti-Trust Action Committee (GATA), that theInternational Monetary Fund (IMF) has much less gold reserves in their vaultsthan the IMF officially accounts. I have a triple question on that: a) withwhat kind of procedure have you reached that conclusion; b) why does the IMFoperate with wrong numbers; and c) what does this all mean if it’s true?

It is possible that the IMF has less goldreserves, but we really don’t know for sure. Unfortunately, the IMF is secretive like all central banks, so there isno hard evidence to confirm this conclusion. But it is possible that the goldreserves of the IMF are double-counted, meaning that the IMF records them asreserves but so does the country that used the gold for its subscription to theIMF. 

The IMF and central banks defy generallyaccepted accounting principles. For example, if you look at the balance sheetof the Bundesbank, it reports gold in the vault and gold out on loan as oneline item called “Gold and Gold Receivables”. That’s like calling cash andaccounts receivable as the same thing. So it is clear that central banks hide the truth.  They operate in secrecy as if they are abovethe law.

Why is the work ofGATA important to you?

GATA.org has been working to educate peopleabout gold and the ongoing intervention in the gold market by governments.These interventions are aimed to keep the gold price from reaching a price thatreflects its true value. GATA hopes to achieve a gold market unfettered bygovernment intervention, which is an aim that I share.

I am a believer in the free-market.  It is the free-market that produces goods andservices that has raised the standard of living of mankind.  The free-market has done this despite theheavy hand of government, which of course creates nothing but simply takes fromproducers and redistributes this wealth to whoever has the biggest politicalclout. The bailouts in the US are a good example. Polls show thatover 80% of the American people were against the bailouts, but the bankersinfluence over politicians won out. 

As I see it, and as is enshrined in theAmerican Constitution, governments have one primary role and that is to ensurethat the rule of law is protected. When it is, then there is a level playingfield for everyone. Unfortunately, the US government is abusing rather thanprotecting the rule of law, and the bank bailouts are just one example.

Could you tell usabout one more aspect of a manipulated gold price: what does a suppressed goldprice mean for Third World countries?

It means that countries like Ghana and South Africa receive less for their gold salesthan they should. Gold is an important export for many Third World countries, so if they are receivingless than they should for their resources, their development is hindered.

One report thatsupported GATA’s finding that the gold market is rigged, was written in 2005 byEckart Wörtz for the Gulf Research Center.3 Since you pay close attention to the rawmaterial markets and the crude oil sector, I believe you’re very familiar withthis report. Could you tell us about your reading of this report and put itinto context to the “rumours” published recently in “The Independent” related to the end of the dollar hegemony?4 I mean, the US-Dollar is the reservecurrency of the world (with all the pleasures that this includes for theAmerican economy), because crude oil is solely purchased in USD since the early1970’s, right?

The dollar became the world’s reserve currencyin the 1930s because the British pound, which carried that mantel for over twohundred years, was no longer capable or worthy of serving that role. Inessence, the dollar was the only currency as “gold as gold”, which was thesaying back then, that could serve that important role as internationalmoney.  But the US today is not the US of 70 years ago, and neither is thedollar. Consequently, it seems clear that another currency for global commerceis needed. 

Some countries are already taking steps toprotect their interests by diversifying out of the dollar and completingbilateral trade agreements in currencies other than the dollar.  They recognize that the dollar is dying.

One topic that is widelydiscussed among gold bugs in Germany is the question whereGermany’s gold reserves are located at. What is meantby the 1.700 tons of gold in the US bullion depositoriesunder such terms like “Custodial Gold”and “Deep Storage Gold”?

I believe that the Bundesbank’s vaults areempty or nearly so. When Germany accumulated its 3400t of goldreserves in the 1950s and 1960s, most of it was held abroad in the US and UK. This was standard procedure at the time because it avoided the cost ofshipping the gold to the Bundesbank. Also, back then gold stored in the FederalReserve or the Bank of England was considered to be safe because central banksdid not lend gold to bullion banks, which for the most part only began in the1980s.

Eventually, however, bullion lending becameactive central bank policy, and even the Bundesbank’s balance sheet shows thatit is now participating in this activity. When the Bundesbank lends gold, the gold is removed from the vault andgiven to a bullion bank, which then sells the gold, receiving dollars asproceeds from the sale. The bullion bank then invests these dollars in assetswith yields higher than its cost of borrowing the gold in order to earn thisspread, which is the so-called “carry trade”.

Because of its misleading accounting as Iexplained earlier, we just don’t know how much of Germany’s gold the Bundesbank hasloaned.  My guess though is that theyhave loaned all of it, which is why I believe its vault is basicallyempty.  One half or 1700t was loaneddirectly by the Bundesbank to the big bullion banks like JP Morgan Chase andDeutschebank.  And there is enoughcircumstantial evidence to suggest that the remaining 1700t was loaned to the US government, which in turn loanedthis amount to various bullion banks. The record keeping for this transaction results in the change inaccounting terms that you mention.  Thisof course is a serious matter, and there is an important point here.

Because of the secrecy under which centralbanks operate and because of apparently bad decisions that have been made bymany central banks, we can no longer prudently rely upon central banks to dothe right thing.  We can no longer assumebecause of their deceitful accounting whether they actually have gold inreserve.  It may all be loaned out.  Therefore, each of us has to take those stepsnecessary to protect ourselves and our family, and that means each of us musthave our own gold reserve just in case the monetary and banking systems of theworld continue to melt down.

Mr. Turk, at the finish-lineof our interview I would like to talk with you about the subject of a globalcurrency. As we have witnessed, you’re arguing that the US-Dollar will tank bigtime. Now, with regard to a single global monetary system: The US-Dollar would need to tank big time in order to letthe instalment of such a currency occur on the world scenery, don’t you agree? Itseems like one cannot have the one thing without the other. And if this was true,wouldn’t it mean that some bankers have much to gain from the Dollar’s fiasco?

Yes, many insiders have much to gain if theybet against the dollar and then take actions that cause the dollar to collapse.Some have argued that outcome is what unscrupulous insiders are aiming toachieve. They argue that insiders want the dollar to collapse, and becausethese insiders are properly positioned, they will profit from this collapse.But this argument goes even further. Once the dollar collapses, the insiderswill propose a new fiat currency for the US, Canada and Mexico called the amero run by a centralbank that is beyond the control of any one country. Much discussion andplanning by the US, Canadian and Mexican governmentshas already been done in this regard. The objective would be to keep the fiat currency scheme going longer andon a new supranational level, replicating what is already happening with theeuro.

Proposals and calls fora global currency are on the table – not just since there are SDR’s or here andnow via the UN5 but at least sinceSeptember 1988 when the British Economistmagazine predicted the creation of a global single currency for the year 2018,which it called the "Phoenix".6What are your reflections on a world currency? Is it a joyful vision to you orrather a nightmare? Would it solve whatever our problems right now look like?And wouldn’t that be the much discussed-never seen Caroll Quigley-like “New World Order” highly concentrated in thehands of the world leading central banks?

There is an ideal world currency, and it iscalled gold. And restoring gold to its rightful role at the centre of commerceis a joyful vision. The strongest economic growth the world has everexperienced occurred under the classical gold standard, which was in my viewthe ‘best world order’. It marked a period when the rule of law was respectedand protected by governments, except those occasional periods when dictators orother demagogues assumed power. 

There is an essential point made in John Locke’streatise on silver in 1697, which is particularly illuminating when it is readin conjunction with his two treatises on government.  The basic principal he explained then ofcourse remains true today. It is that human freedom and precious metals are inseparable.

Thank you very muchfor taking your time, Mr. Turk!

Thank you for the opportunity to share mythoughts.

SOURCES: