Gold Will Hit $1,000 This Fall
Posted August 24, 2009on:
The economy may be perking up (maybe), but the dollar’s still worse for the wear, and you know what that means: Now’s a great time to buy gold. In fact, the yellow metal looks ready to break through a very key level – and once it does, there’ll be no turning back, says gold market expert James Turk.
Specializing in international banking, finance and investment, Turk is the editor of the Freemarket Gold & Money Report and the co-author of 2004’s eerily prescient “The Collapse of the Dollar.” Turk is also the founder and chairman of GoldMoney, a leading provider of gold, silver and platinum bullion worldwide.
Recently, Hard Assets Investor associate editor Lara Crigger chatted with Turk about the future of gold, including why investors should choose physical gold over “paper” gold, whether we’re nearing “peak gold” and why September will be a key month for gold owners.
Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): In a recent commentary, you predicted gold will soon climb above $1,000/oz and stay there. Why do you think so?
Turk: I expect it to happen fairly soon, maybe September, October. Really, I’ve been expecting it all this year, and there’s finally enough momentum now in the gold market, I think, to take it higher.
The reason is really quite simple: When you debase the dollar, you’re going to get a higher gold price. And the federal government and Federal Reserve are clearly on a path where the dollar is being debased. The government is spending and borrowing too much, and the Federal Reserve is just churning out currency. In that kind of environment, a higher gold price can be expected.
Actually, that’s what’s happened all decade long. Gold’s up eight years in a row, at an average annual return of 16.3%. This is the ninth year gold is up, and it looks like it’s going to finish out the year even higher than it is at present.
Crigger: Can gold really keep up this pace?
Turk: The real question is: Can the Federal Reserve keep destroying the purchasing power of the dollar? The answer is probably yes. So as a consequence, the gold price will continue to go higher.
The $1,000 level is very significant, in that it’s going to be like an international “buy” signal. As well as gold has done this decade, it’s still not being widely followed. It’s not really on many people’s radar screens. But once it goes over $1,000, that will be a worldwide news event that will attract a lot of attention to the gold market.
Crigger: Right; people will see that $1,000 price point and think, “I’ve got to get my hands on that right now.”
Turk: Exactly. Certain levels are important psychological points. For example, look at the Dow Jones Industrial and how long it took to get above 1,000. Then, when it finally did break above 1,000 in 1983, it just kept going. Obviously there was some backing and filling along the way, but that major uptrend lasted for 17 years.
So when gold goes through $1,000, I expect it will just keep going as well. There’s already been a decade-long bull market, and I think we’ve got many, many years left before this bull market breathes its last.
Crigger: Why do you think gold will breach $1,000 in September or October, specifically, versus any other time?
Turk: Normally, autumn is gold’s seasonal strong point. There’s a lot of buying because of various holidays in different parts of the world. Plus, people are coming back from the summer holidays, and they’re looking at what’s happened while they were gone. They’ll see that the dollar’s been debased, so they’ll go and buy the metals.
Also, my reading of the charts for gold (and silver, for that matter) is suggesting that the sideways action we’ve been seeing, the backing and selling and the base building, is coming to a conclusion. It looks to me like September or October is really the ideal time frame to see gold break above $1,000.
Crigger: Recently, HSBC put out an analysis arguing that poor jewelry demand and a surge in the scrap market could keep gold prices low for awhile. It doesn’t sound like you agree.
Turk: Well, no. There’s been a lot of talk about people cashing in gold; you see these various advertisements on TV. But relative to the total amount of gold out there, it doesn’t amount to anything, and it surely isn’t a sign of a top in the market.
People are cashing in gold right now because gold preserves purchasing power. When you get a rainy day, and have to rely on your savings, you can sell your gold and take care of your needs. Because the economy is so bad, you see a lot of people cashing in gold. But the amounts are inconsequential. You have 160,000 metric tons, which is the above-ground gold stock, and the amounts we’re talking here are dozens of tons, or a few hundred tons at most. It’s not as consequential relative to the entire stock of gold.
Crigger: You recently wrote that the British pound was faring pretty poorly against gold. What’s going on there?
Turk: I’ve been most bearish against the dollar. But recently, because of events in the U.K. – the economy has been really bad, the real estate market is even worse and the banking system is basically insolvent – the problems with the British pound have become even more apparent than the problems with the U.S. dollar.
It looks like gold’s going to do best against the British pound, versus the dollar, implying that the pound is going to fall against the dollar – even though the dollar will be weak against other world currencies. The British pound is emerging as the trouble spot.
Crigger: At the FOMC (Federal Open Market Committee) meeting, policymakers announced they’d start to phase out the $300 billion Treasuries buying program while keeping interest rates low and steady. What do you think the impact will be on gold?
Turk: There’s so much inflation baked into the cake already, that regardless of what the Federal Reserve says they’re going to do, I don’t think it’s really going to have a big impact. The only thing that would be significant is if they started raising interest rates, but that’s not going to happen in the foreseeable future. So this FOMC meeting – like other FOMC meetings preceding it – really doesn’t amount to much, in my view.
Crigger: Let’s switch gears and talk a little about gold investing. Inflows to bullion-based ETFs have slowed down, especially this quarter. What’s your take on this, and do you think the decline will continue?
Turk: I’ve always advocated owning physical gold, not “paper” gold in any of its forms. When you own paper gold, you don’t really own gold, you just own exposure to the gold price. If you’re a professional trader or a speculator, owning futures contracts or ETFs may be okay. But as an individual investor, you want to own the physical metal itself.
Recently, there was an announcement by Greenlight Capital, one of the big hedge funds, saying that they’d chosen to sell their shares of GLD and buy physical metal instead. [Editor’s Note: You can read more about Greenlight’s decision in Is GLD A Good Deal?.]
They didn’t really give a reason, but there’s probably two main reasons. One, the carrying cost of GLD at 50 basis points is much higher than owning the physical metal yourself, even when you have it stored for you professionally. And the other reason is the counterparty risk. So the question is: Will what Greenlight Capital has done be followed by other hedge funds too?
If so, I think this is actually going to be very bullish for the gold price. For one, I’m not really sure all the gold is not really there. But aside from that, even if all the gold is there, the ETF shares can be sold short; so if you buy shares that were borrowed and sold short, those shares represent the same amounts of gold, but they’re owned by two people. So as GLD contracts, you’ll ultimately see a bullish impact on the gold price, in my view.
Crigger: The recent World Gold Council’s Gold Investment Digest included an interesting chart that showed that the number of gold discoveries each year has sharply declined over the past decade. So are we nearing “peak gold”? Or has the decline in production occurred because gold mining hasn’t been economical?
Turk: You hit the nail on the head with that last point. Capital goes to where it’s best rewarded, and the government has been actively intervening in the gold market to keep the gold price managed, so it doesn’t run away to the upside. We don’t have a free market in gold – with the consequence that capital has not been attracted to the mining industry, and gold production has declined somewhat in recent years. And given the long lead time necessary to develop a gold mine, production will remain relatively slow for several more years.
I’m not a subscriber to the thesis that we’ve reached “peak gold.” The technology is constantly improving. They’re mining gold today in Nevada that 20, 30 years ago, people didn’t even realize was there. As we move forward, we’re going to find gold in all kinds of places.
Crigger: You mentioned gold’s seasonal strength in the fall. As we get closer to autumn, how should investors approach the market?
Turk: First, buy physical gold, not paper gold. Either buy it and store it yourself, or have someone store it for you, which is what we do at GoldMoney. We even have a third-party independent audit, which is available to our customers upon request, so they know the gold they own is being stored safely and securely.
Second, I really wouldn’t focus so much on the gold price. Gold is money; it’s really a form of savings, and saving money is always a good thing. So if you want to look at it in terms of accumulating a position, you should really take a dollar-cost-averaging point of view: Every quarter, six months, whenever, regardless of what the price is on that particular day of the month, just go in and buy.
Sometimes the price will be a bit lower, and sometimes it will be higher, but over the longer period of time, you’re going to be happier because you’re accumulating gold, sound money that preserves your purchasing power. So when we finally get out from this economic contraction that we’re in – it’s a depression, really – you’ll have your purchasing power intact and available for spending or investing in the next boom/bust cycle. But we still have a long way to go.