James Turk – GoldMoney: New Worlds of Financial Transaction

It’s Rainmaking Time!®
GoldMoney: New Worlds of Financial Transaction with James Turk
Original air date: December 8, 2009
Host & Interviewer: Kim Greenhouse
Guest: James Turk, Founder & Chairman of GoldMoney

Kim: Ladies and gentlemen, I want to welcome you to It’s Rainmaking Time! At a time when the G20 have announced and decreed the call for the end of the dollar, and a new supercurrency — an international supercurrency — as special drawing rights are becoming more formally used as a form of a basket of currencies — now is the time to understand clearly what’s at work. And not only is it the time to understand what’s at work, ladies and gentlemen, it’s the time to understand why metals are so important — gold, silver, platinum.

Kim: And I’ve met a lot of people in the metals industry, and in the finance industry, but I must tell you, our guest today, I call the “Yoda” of the metals industry. Because he’s so wise, and his knowledge is so far reaching. I’ve never heard the synthesis of explanation and understanding the way I have with James Turk. James Turk is the Founder and Chairman of GoldMoney, a riveting, convenient and economical way to buy and sell gold, silver, platinum — online — using digital gold currency.

Kim: He was awarded 4 US patents, specializing most of his life in international banking, finance and investments, as he graduated from George Washington University with a BA degree in International Economics. He began his business career with Chase Manhattan Bank, now JPMorgan Chase, which included assignments in Thailand, the Philippines and Hong Kong. In 1980, he joined the private investment and trading company of a prominent precious metals trader. He moved to the United Arab Emirates in December of 1983, to be appointed Manager of the Commodity Department of the Abu Dhabi Investment Authority. This position he held until resigning in 1987, to begin the Free Gold Money Report.

Kim: He’s written several monographs on money and banking. He is the co-author of The Coming Collapse of the Dollar, now available in a paperback version, entitled The Collapse of the Dollar. Please welcome the “Yoda of Metals,” James Turk.

James: Hi, Kim. Thank you for that introduction.

Kim: It’s true. You are the Yoda of the metals industry, and I’ve never heard anybody put it together the way you have.

James: Thank you, very much.

Kim: Let’s go right into your book, The Collapse of the Dollar and How to Profit From It. You say in this book that gold is not a commodity like eggs. For the general populace, who does not have historical background into gold and silver, you say — and it has been said that gold is money — it’s sound money — what does that mean?

James: Yeah, gold is different from everything else we humans produce. Everything we produce is consumed and disappears. But gold is different. It’s accumulated. It’s hoarded. And in order to understand this, all of the gold mined throughout history still exists today, in this aboveground stock, which comprises approximately 160,000 metric tons. Which, to look at it visually, is approximately the bottom 1/5th of the Washington Monument. And to put that into perspective, there’s 20 times more steel poured every day, than there has been gold mined throughout history.

James: But the question is why does gold have this value? It has value because of its usefulness as a monetary unit of account. Gold preserves purchasing power over long periods of time, so it’s different from other commodities. These other commodities — soybeans, crude oil — you know, they disappear. Even copper disappears, in a sense that it’s dispersed through millions of applications, and you’ll throw away a spare piece of copper wire. But if you have a piece of broken gold jewelry, you don’t throw that away. You put it in a drawer until eventually you have it fixed or replaced or repaired.

Kim: You say, and it is said, through 5,000 years of history, that fiat currencies always fail. If that’s so, for the general listening audience, why is that so, and then why are we using it? Why are we using paper currencies?

James: Well first of all, when you have paper currency — paper currency was invented as a convenience. If you look at the history of money and currency — and I like to distinguish between the two — because they are different. Money does the same thing today that it did 100, 1000, 5000 years ago. Money is what I call a mental tool. It’s something that we use for interacting with each other, when we go into the marketplace, to fulfill our needs and wants.

James: And currency is what we actually use day to day, hand to hand, when we go into the marketplace. And there are basically two types of currency. There’s paper currency — the cash in our pocket. And then there’s deposit currency, which is the money that moves around within the banking system. But these two forms of currency are really a matter of convenience, because it’s too difficult to move gold coins around. The logic had been that gold is too valuable to move around, because it wears out. So let’s leave the gold and silver in the vault, and make these paper currencies redeemable into gold and silver that sits safely and secure in the vault.

James: But what we’ve done is we’ve moved away from that redeemability, and we now just have pieces of paper out there — circulating — backed by nothing. Fiat, by the way, means just currency that’s issued by a government, and circulates because of government force. It’s a Latin word. And this fiat currency circulates because of rules and laws and regulations by the government. But the reason why it fails is when you eliminate the link to gold — when you eliminate that redeemability back into gold, an infinite amount of paper currency can be created. The only thing that stops the government from issuing an infinite amount of paper currency is discipline.

James: And unfortunately, politicians and governments don’t have that self-discipline, and inevitably, they issue more and more currency, until eventually they reach that breaking point, where confidence in the currency collapses. And the currency then collapses, as a result. My view is that the dollar has been on this road. This is what John Rubino and I laid out in our book, The Collapse of the Dollar. The dollar is on this road to what I call the fiat currency graveyard. There are hundreds of other fiat currencies that are buried there. And unless we get off this road, the dollar will be there, too.

James: And I think it’s going to get there pretty soon, because we’re reaching the point now, with the US dollar, that the lack of discipline on politicians, in terms of creating money, is becoming increasingly apparent. And the confidence in the dollar is breaking. It’s already broken badly, internationally. And I think it’s starting to break domestically, with the rise in the gold price over $1,000 an ounce.

Kim: Do you actually think, at this time, that free markets really exist anymore? I know it’s a difficult question. But do you think they really exist anymore, at this time, the way things are operating?

James: Yeah, they do. When two individuals interact with one another, and they do so without the force of government, they are operating in a free market. They don’t have to use a national currency to transact. They can use other currencies to transact. But as far as government involvement is concerned, and markets in general, free markets are becoming — let’s say imperiled by government actions.

James: And the thing that I really don’t like to see happen, Kim, is that rather than turning to the free market for answers, more and more people are turning increasingly to government for answers. And that’s really the wrong way, because goods and services come from the free market — new ideas, new technologies — they come from the free market. They don’t come from government. All government basically does is take away from producers and redistribute it, according to how it wants to redistribute wealth. But it’s the free markets that create real wealth. And it’s the free markets that raise humankind’s standards of living. So we should be looking to the free market for answers, rather than government.

Kim: Most of the money that’s being printed is referred to as M3. Could you explain what M3 is? And then explain why it is that the amount of money being printed, as M3, does not equate in equal and balance to the goods and services that are being made available, and why that’s a problem.

James: Yeah, OK. First of all, M3 is just a definition of the quantity of money. You have M1, M2, M3 — M3 being the broadest, and it basically includes all dollars in circulation. And by dollars in circulation — I mentioned earlier the two different types of dollars: the paper currency — the green notes that we carry around in our pockets, and then deposit currency that we have sitting in our accounts, in banks, that circulates by check, wire transfer and plastic card. M3 encompasses basically all of that currency.

James: And the issue that’s happening is M3 is growing more rapidly than economic activity. One of the reasons why gold has emerged as money, over thousands of years, is that the aboveground stock of gold grows very consistently. It grows by approximately 1.7% per annum. Every year, it gets 1.7% larger. And that’s approximately equal to new wealth creation, and also approximately equal to world population growth. So you have this consistency in gold’s purchasing power.

James: So I can look today and see that an ounce of gold buys the same amount — the same barrels of crude oil that it did 40 years ago, or 50 years ago. Or an ounce of gold today buys a Colt 45 handgun, which is what it took to buy a Colt 45 handgun in the Wild West, back in the 1880s. And they also say an ounce of gold, today, buys a good man’s suit. An ounce of gold, in Roman times, bought a good toga for a Roman Senator. So you have this aboveground stock of gold growing by approximately the same as new wealth creation and world population growth.

James: Whereas, the money that’s created by government — M3 — dollars and even the other currencies — there is no consistency to the growth rate. Recently, we saw M3 growing as rapidly as 19% per annum. This was last year. And over the past year, it’s gone down to about 1.5% per annum. So this volatility in M3 growth basically makes the currency less effective, because the purchasing power of the currency can change very dramatically, by just changing the growth in M3.

James: Now that’s one-half of the equation — these M’s — M1, M2, M3. These deal with the quantity of currency in circulation. But as we know, price is a function of supply and demand. So it’s the demand for dollars that are also important, in order to determine the dollar’s purchasing power. The problem that the dollar is facing now is that the demand for the dollar is falling dramatically, around the world. We see this all of the time — central banks diversifying out of the dollar, central banks buying gold, individuals buying gold — diversifying out of the dollar, to minimize dollar holding. So the dollar’s losing purchasing power, even though M3 growth rates have been declining over the past year.

Kim: Why do you think it is that the average public has a perception of owning gold as risky, and sees it as potential confiscation — like it’s something that can be confiscated? So since it was done in the past, don’t get involved with it now. And yet, at the same time, the average person feels seemingly very comfortable having US dollars in banks, even though there’s a decree by the G20 and leaders of the world, that they want to get rid of the dollar. What is that about?

James: Yeah, it’s really crazy, isn’t it? There’s no logic to it. It’s all emotion. For 100 years, governments have been at war with gold. Up until 1914, national currencies were on the classical gold standard. And under the classical gold standard, which was invented by Sir Isaac Newton, in 1700 —

Kim: I didn’t know that. I don’t think the public knows that.

James: Yeah, he invented it. It’s actually an interesting story. The Bank of England was established in 1694. Again, this was an advancement in the form of currency. Instead of using silver coin, which was the coin of the realm in Britain at the time, the Bank of England said keep the coin in the vault, and we’ll use these bank notes — pieces of paper — cash currency — instead. And let that circulate as currency, instead of coin. Well it was a good idea, because it was a more efficient form of currency.

James: And the first bank crisis occurred two years later, in 1696, when the Bank of England had issued too much paper, relative to the amount of currency in circulation. Now at the time — this is when John Locke, for example, wrote his treatise on silver, and commented on the debasement of the currency that was being pursued by the Bank of England. But at the time, King William did not have — the finances of the crown were very poor. He was fighting wars against France. The Stuart monarchy had just been overthrown, in the Glorious Revolution of 1688. So they were still worried about being usurped by the possible Stuarts — or what they called pretenders to the throne. So he was strapped for cash, and the Bank of England basically came up with a way of financing the wars and the money that he needed, in exchange for the royal charter that was given to the Bank of England.

James: But the monetary turmoil that was created by the banking crisis in 1696 had King William perplexed. So he turned to the brightest mind of the day — Sir Isaac Newton — and said figure this all out. And what Newton did is he essentially created the rules of the classical gold standard, that turned Britain into a gold-standard based economy. And the British pound — which is basically another way of saying gold — reigned supreme for 214 years, until 1914. So it was a complementary relationship between gold and national currencies, under the classical gold standard.

James: And what central banks did, under the classical gold standard, is they managed the currency, in order to make certain that a pound always had the purchasing power of gold — at the weight that it was defined. One British pound was .2435 ounces of gold. And so it was. So a pound in 1914 had essentially the same purchasing power that a British pound did in 1700, in terms of buying bushels of wheat or commodities, and things of that nature. So the classical gold standard was a complementary relationship.

James: But getting to where we are now, and where we’ve been really, for the last 100 years. In the late 19th century, early 20th century, governments and central banks realized that they didn’t have to follow Newton’s rules, which were voluntary. And if they could control gold and move away from the gold standard, they could create fiat money and create as much money as they wanted, out of thin air, in order to pursue their objectives. The way I put it is that governments need power, they therefore need guns. But they can’t create guns out of thin air, so they create fiat money out of thin air, to buy guns. And that’s basically the system that we’ve had for the past 100 years.

James: And gold plays a key element of that, because gold is really the natural form of money. And if you can suppress the price of gold, you make fiat currencies look better. From 1914 to the present, instead of having a complementary relationship between gold and national currencies, it’s been a competitive relationship. The government’s been trying to fight gold and keep gold controlled, to make national currencies look better. But we’ve reached the stage where — I think that essentially, despite all of the government propaganda — which is why people think gold is risky — we’ve reached the stage where I think the end of the dollar is within sight.

James: National currencies are probably going to collapse, if the dollar collapses, and we’re going to go to a new system. Now the people that brought us the fiat currencies and the unconstitutional dollar system that we now have, are going to probably try to bring in more fiat currencies, at a supranational level, like the Euro in Europe, or like rumors have been talked about — the Amero — in the United States, Canada and Mexico — for a North American currency to compete with the Euro. But the question is whether or not the American people, the Canadian people and the Mexican people allow that to happen.

Kim: I understand this morning, from your Free Gold Money Report, that the Euro is in trouble and spiraling out of control. Can you explain that?

James: Yeah, you know right now, most of the currencies of the world are backed by US dollars. Most bank reserves today are not gold — most bank reserves today are US dollars. And that’s particularly true for the Euro. So if the US dollar collapses and goes into a black hole, the gravitational pull will pull other currencies along with it, unless those currencies get rid of the dollars as reserves, and back their currencies by gold or silver.

Kim: Do you think that’s possible?

James: That the dollar’s going to go in the black hole? Yeah —

Kim: You know, whatever new currency evolves, or is put into place, can or will be backed by gold or silver.

James: Well what my hope is — and what we aim to do in GoldMoney — is to give people the opportunity to transact in gold, outside of national currency systems. So you can completely avoid fiat currency, and just transact in gold or in silver.

Kim: There’s this psychology for most people that: (a) if you buy gold, you should have it with you, (b) there’s a lot of people that still think leveraging gold and ETFs and buying contracts for gold is the same, which you stated clearly in your book, it is not. But the other thing is there is this psychology that if the gold is stored away from you — physically — it’s not within your reach — that somehow psychologically there’s more risk. But yet, when I look inside the banks and look at what’s going on with currencies, I see more risk because governments can come in, make decrees, leaders of different governments can get together, make secret deals and say we’re ending this, it’s over. And the rest of us are sitting here, like sitting ducks.

Kim: So in your system, that you created — which I think is elegant, but I still think is like a well-kept secret, even though you have huge reserves now — when you’re storing gold and transacting business, using GoldMoney — which involves gold, silver and platinum — it’s stored in a vault. But what happens with that vault? Take the listeners into what happens, and how is it really protected? Because I bet you money, in the mind of 90% of the public, that this feels foreign, and they’re not used to having anything they own separated from them.

James: Yeah, there are a number of points there. First of all, let me start from a big picture point of view. There’s a difference between physical gold and paper gold. I talk to people all over the world, and they say well, they own gold. And then, when I ask them about it, they really own paper gold. They don’t own physical gold. They’ll own an ETF, they’ll own a bank certificate, or they’ll have a pool account or something like that. In other words, they own exposure to the gold price — and that exposure to the gold price comes with counterparty risks.

James: In other words, they’re dependent upon someone’s promise to make good, if the gold price rises, and pay them some national currency in return, or to deliver physical metal to them, if they have that type of a contract. But basically, paper gold has counterparty risks; physical gold does not. Paper gold is a financial asset; physical gold is a tangible asset. There’s a fundamental difference between those, because when you own physical gold, you do not have counterparty risks. You’re not dependent on some bank’s, or some government’s, balance sheet.

James: Now when you buy physical gold, there are basically two ways to do it: You either buy it and you store it yourself, or you buy it and have someone store it for you, which is what we do in GoldMoney. Now both of these alternatives have advantages and disadvantages. When you buy it and store it yourself, you have it in hand. But how much gold are you going to store in your basement, or buried in the backyard? And if you’re talking about silver, which is presently about 60 times the volume for the same amount of dollars as gold, where are you going to put all of that silver? And are you going to run the risk of the US government confiscating gold again, like they did from 1933 until 1974 — by having it buried in your backyard, or having it in your house?

James: Now the other alternative is to have someone store it for you. But when you use this alternative, you need the assurances of integrity, that the gold and silver are absolutely safe. What we do in GoldMoney, is we have independent third-party verification, by two different groups of auditors, every other month, going in and confirming that all of the gold is there, all of the silver is there, and platinum, too, and that it’s equal to the quantity of precious metals that are owned by our customers. So our customers have the assurances of integrity that the gold and silver are there.

James: So the difference between owning physical gold and storing it yourself, or having someone store it for you, depends upon performance risk. We talked about counterparty risk, when you have paper gold. Physical gold has a type of performance risk. First of all, if you store it yourself, you have to be absolutely certain that it really is gold, and not gold-plated lead, or gold-plated tungsten, or counterfeit coins that look like real gold, but really aren’t real gold. So you always have to be dealing with someone who is completely trustworthy.

Kim: What makes somebody trustworthy, then?

James: Well there are a number of different things. Basically, the reputation, the time in business, but more importantly, the control mechanisms that they use. What we do in GoldMoney, is we have various governance procedures and the auditing, and things of this nature. And the audit reports, which are these independent third-party verifications — they’re available to our customers upon request. So because it’s economical and convenient, and also — importantly — very safe. We’ve grown very rapidly and we’re now storing over $900 billion of gold and silver, that’s owned by our customers.

Kim: So my question is, with this advanced governance model, that is transparent — with the fall of AIG and the behavior of a company like AIG, as an insurance company — and we know that GoldMoney is insured — that everything in these vaults is insured. What happens if Lloyd’s of London goes belly-up? Then what happens to the insurance policy? And I bring this up to deal with practical realities, that people have in their heads, who want to buy GoldMoney, but because other insurance companies have acted improperly and cooked their books or had bad assets — toxic assets — or credit default swaps, or other shenanigans going on with derivatives, how do you keep the insurance company that’s connected with your company clean? Or how do you make sure that they’re acting properly?

James: Well first of all, the insurance only comes into play if the gold is stolen — if there’s some kind of theft of the gold, or silver, or the platinum. And all of the metal is contained in highly specialized bullion vaults that are very, very secure and the likelihood of a theft from a bullion vault is very, very low. So you first have to have the theft from the bullion vault, and then at the same time, have the insurance company go under, and it’s just a very, very unlikely occurrence to have both of those things happen at the same time. We do use Lloyd’s of London to underwrite the insurance, and we always have the insurance with first class insurance companies.

Kim: It’s an important question. It’s also — in GoldMoney, how do you assure the people that are taking their money and buying gold and silver and platinum, that a government that decides they don’t like you can’t come in and confiscate the money in the bullion vaults.

James: Yeah, this has been something that’s been on our mind, even before we formed the company. I am American, but we formed GoldMoney in Europe. GoldMoney’s a European company, European based, and European operated. And the reason is that the US confiscated gold once before, and gold has never been confiscated in Europe.

James: What we’ve also done is we’re operating in the British Channel Islands — the Island of Jersey — which basically relies on traditional Anglo-Saxon Common Law, the basic principles of which are property rights. So the Island of Jersey has become a major financial center in the world. There’s over 1 trillion of assets managed there, because of the reliance on traditional Anglo-Saxon Common Law.

James: And then, what we do is we store the gold for our customers — the gold that our customers own — in vaults either in London or in Zurich, and the customer can choose where he wants to place his gold. And in the new year, we hope to have an additional vault in Hong Kong. And over time, we’re going to have additional vaults around the world. So customers can choose to place their gold in different jurisdictions, different countries, where they may feel comfortable, or perhaps diversify their gold and silver holdings among several different countries, because you don’t want to take risks with your gold and silver. It’s the bedrock asset in your portfolio. So by diversifying it geographically, you’re mitigating the risk to help protect your metal that way, too.

Kim: I usually tell people think of gold as a huge savings account — a wealth-building account. And don’t think of your currency anymore, as wealth building. Am I correct, when I tell them that?

James: You’re absolutely right. And this is basically what I’ve been saying all decade long. First of all, savings are always a good thing. It’s always a good thing to save money. But it’s a particularly good thing, when you’re saving sound money. I mean look at it this way. Eight years in a row, gold is up against the US dollar at an average annual return of 16.3% on average, per annum. This year, it’s going to be the 9th year in a row that gold is up against the US dollar, and at the moment, we’re up about 30% this year.

James: If you put $100 in a savings account, or in a bank account, at the end of the year, you’re going to get $102, but your purchasing power is only going to be like 92 or $93. We have negative real interest rates. By putting money in a bank, you’re actually losing purchasing power. And what you really should be doing is measuring purchasing power — not how many dollars you have, or how many Euros you have, but how much purchasing power you have.

Kim: And how do people do that?

James: Well, you have to calculate the price of goods and services in terms of gold. And that’s why I’m very fond of using these examples of saying that an ounce of gold today still buys the same amount of crude oil it did, 50 years ago. So despite the fact that gold is up 16% for 8 years in a row, and 30% against the dollar this year — an ounce of gold still basically buys the same amount of crude oil.

James: Here’s another example. I remember, as a kid in the 1950s growing up in the States, my parents could fill the family car with two silver dollars. That would buy enough gasoline to fill the family car. Well if you take two silver dollars today, and you take it at the market value, which is approximately $36, you can fill up the family car. So you have to calculate the price of goods and services in terms of gold and silver, to truly understand how the dollar is being debased — how you’re losing purchasing power by continuing to hold dollars, instead of looking to other alternatives, like gold and silver.

Kim: What is this Fear Index, that’s on your Free Gold Money Report?

James: Yeah, what that does is — I use it as an indicator — whether the trend in gold is up or down. We got a buy signal of the Fear Index back in May of 2002, and we continue in a buying mode, indicating that the trend for gold continues to go higher. But basically, I use it most importantly for an indication of gold’s relative value. And the way it’s calculated is I take the gold in Fort Knox — the US gold reserve — determine its market value and divide it by M3, and I get a percent. And it basically says what percent of the US dollar is backed by gold, and what percent of the US dollar is backed by debt.

James: Because that’s basically the rest of the US dollar. When a bank makes a loan, they’re creating dollars, and they’re putting debt on the balance sheet, and that’s what’s backing the dollar. So it’s either gold or debts — in government debt or commercial debts — on bank balance sheets. Now historically, it would normally be about 40%. That’s what it was typically, when the British pound reigned supreme, because you could calculate the Fear Index for every currency. In other words, it meant that 40% of the paper currency issued by the Bank of England was backed by gold.

James: In the 19th century, as new forms of currency developed — checking accounts and things of that nature — the amount of backing tended to fall. And by the beginning of the 20th century, it was closer to 15% to 20% or so, was backed by gold, and the rest of it backed by debt. In the 1920s, during the Boom, the Fear Index fell to 10%. In other words, 10% gold backing for the US dollar. During the Depression, it rose back to almost 40% — the dollar backed by gold. And then since then, we’ve basically been in a long decline.

James: In the early 1970s, the Fear Index was 1.7%, meaning $1.70 of every $100 of M3 was backed by gold, the rest was backed by debt. The Fear Index rose to 10% in 1980. And today, we’re at 2.1%. So the Fear Index is still relatively low. If the Fear Index were to go to 10%, as it did in 1980, the gold price would have to increase by about 5 times, and M3 would have to remain unchanged. So on a relative basis, the Fear Index is still very low. And as fiat currency becomes increasingly doubted, the Fear Index is going to rise. As people have fear about the purchasing power of national currencies, the Fear Index rises, because the gold price is rising, in terms of that currency.

Kim: I want to go back to something that confuses me. And if people are paying attention, it may confuse them — basically that an ounce of gold could buy the same amount of oil. In other words —

James: The same — yeah. An ounce of gold today buys the same number of barrels of crude oil that it could 40 years ago or 50 years ago, or even 20 years ago, or 10 years ago.

Kim: See I don’t understand that. Let me just tell you what I don’t understand, and the reason I don’t understand it is, because if oil — if the reserve currency for purchasing oil is the US dollar, how is that possible? That’s confusing to me. Like could you explain it a little?

James: Yeah, it’s not just oil that has this consistency to gold’s purchasing power. We look at the price of oil, and in 1950 the price of oil was $1.17 a barrel. Last year, it went up to 150, and today it’s still around $76 or $78 per barrel. And therefore, we think that the price of oil is becoming more expensive. But what’s really happening is that the purchasing power of the dollar is declining. And that’s why I say an ounce of gold buys the same number of barrels of crude oil as it did 10 years ago, 20 years ago or 50 years ago. Yeah, there are some small fluctuations, but those are just things that are normal occurrences, in terms of supply and demand. So the dollar is losing value.

James: And in order to truly understand what’s happening to the dollar, you have to calculate the price of goods and services, in terms of gold. And not only tangible assets, like crude oil, but also financial assets can be calculated in terms of gold. And one of the things I like to do is look at the price of the Dow Jones Industrials, in terms of gold.

Kim: Explain what that is. Explain what the Dow Jones Industrial is, to the common person.

James: The Dow Jones Industrial average — we normally think of it in terms of dollars. And it’s — you have $10,000 or $14,000, or whatever the number. 10,000 or 14,000 on the Dow — that’s basically a dollar calculation. But what we can do is we can go back throughout history and find out what the dollar-gold exchange rate was, and then determine what the Dow Jones Industrial actually was, in terms of gold.

James: And back in the 1930s, the Dow, at its low was 35, and an ounce of gold was 35. So there was this one-to-one relationship between the Dow and the gold. Which is the exact opposite of where it was in 1929. It took over 20 ounces of gold to equal the Dow Jones Industrials. Then in 1968, it took 35 ounces of gold to equal the Dow Jones Industrials, or approximately 35. But by 1980, the Dow was 800 and gold was 800. So you came back to this one-to-one relationship. One ounce of gold equaled the Dow. In 2000, it took 42 ounces of gold to equal the Dow Jones, giving an indication of how overvalued stocks were, and how undervalued gold was. And today, it still takes about 9 or 10 ounces of gold to equal the Dow, depending on what day of the week it is.

James: But at some point in time in the future, I think we’re going to see the end of this boom-bust cycle, where one ounce of gold again equals the Dow. In fact, I was interviewed back in October of 2003, when gold was around $340, $350 an ounce. I was interviewed by Barron’s — the financial newspaper in the States — and they asked me to project the price of gold. And I used this comparison. And I said — we have two previous boom-bust cycles. At the end of those previous boom-bust cycles, in the 1930s and in 1980, one ounce of gold equaled the Dow. And I said it’s probably going to take 10 to 12 years — so I was — this was 2003 — so I was saying 2013 to 2015 — for this next bust to end. And when it does end, one ounce of gold will equal the Dow.

James: And they said well that’s interesting, but put a dollar price on it. I said you can’t really predict a dollar price, because it depends whether the Federal Reserve inflates or deflates. They said well take a guess, and I said well the history of the Federal Reserve is basically one of inflation, so they’re probably going to inflate. So I said to Barron’s that in 2013 or 2015, one ounce of gold will equal the Dow. The Dow will be 8,000 and gold will be 8,000. Now it sounds outrageous, but if you remember back in October, 2003, gold was about $350 — 10 times more than it was when it was $35, in 1971. So I was basically saying that history was going to repeat.

James: But basically, given what’s happened in the Federal Reserve since then, and particularly in the last couple of years, I think my upside forecast for the gold price is too conservative, and I think we’re going to see a gold price over $8,000, because I think the US dollar’s very, very close to hyperinflation.

Kim: Explain what that is.

James: Well hyperinflation basically means a very rapid increase in the money supply, a very rapid decrease in the demand for currency. And it essentially translates, or manifests itself, as rapidly-rising prices. And when we talk about hyperinflation, there’s a lot of misconception. People look at Weimar, Germany in the 1920s and they see people moving paper currency around by wheelbarrows and bushel baskets. Or they look at what happened in Zimbabwe more recently, and the terrible hyperinflation that that country had. And that’s one kind of hyperinflation. It’s a paper currency hyperinflation.

James: But Argentina and other Latin American countries in the 1980s and early 1990s had a different type of hyperinflation. They had a deposit currency hyperinflation. The currency was hyperinflated by creating more deposit currency within the banking system. So hyperinflation appears in two different forms. You have this paper currency hyperinflation, or deposit currency hyperinflation. And it depends on the nature of the banking system in the country. In Weimar, Germany and in Zimbabwe, very few people had bank accounts. Almost all commerce was conducted with paper currency. Even the government — at the end of the month — would hand out paper currency to its employees, rather than giving people a check, because there were so few people with bank accounts.

James: Argentina, on the other hand, in 1991, had a very sophisticated banking system. Almost everyone had a bank account, and very little commerce was conducted by paper. Almost all commerce was conducted by bank checks, wire transfers, or plastic cards. So they ended up having a deposit currency hyperinflation. But here’s the important point: Regardless whether you have a sophisticated or unsophisticated banking system, hyperinflation always has the same cause. It’s government spending too much money, forcing the government to borrow more than what the market is willing to lend to the government. So the central bank steps in and buys that government debt and turns it into currency.

James: In the case of Weimar, Germany, they ran the printing presses. In the case of Argentina, they ran the bookkeeping machines, or the computers, by adding zeros to the government’s checking account, and the government then wrote checks to create the hyperinflation. Now I went to Argentina in 1991, specifically to analyze what was happening there. The currency at the time was the austral. And in January of 1991, the austral was 14 to 1 — 14 australs to purchase 1 US dollar. When I arrived the first week of May, the austral had already devalued to 64, so it took 64 australs to purchase 1 US dollar. When I left at the end of the week, it was 96 australs to purchase 1 US dollar. In December of that year, it took 10,000 australs to purchase 1 US dollar.

James: I think the US dollar is on the road to an Argentine-style hyperinflation. Because what was happening in Argentina, is exactly what’s happening now in the United States. The Argentine government was spending more money than it had on hand, forcing it to borrow. It was borrowing more than the market was willing to lend to it. So the Central Bank of Argentina stepped in, bought the government debt and created australs out of thin air and put them in the government’s checking account, which the government spent. What’s happening in the United States today is the US government is creating these huge deficits.

Kim: Is it really the US government, or — I really want to get the terms right. Is it really the US government that’s creating the debt?

James: Yes, it’s — the US government is spending much more than it has in revenues. It has huge deficits, and so it’s building up a tremendous amount of debt. There is debt obviously being created elsewhere in the US, as well. But it’s the government debt that turns into hyperinflation. Because what happens is the government’s spending so much more than it’s receiving in revenue, and you have to go into the market to borrow those dollars. But the market is not willing to lend all of those dollars back to the government, because there just isn’t the capacity for it. So the central bank steps in — the Fed is calling it quantitative easing — but they’re basically doing the same thing the Central Bank of Argentina did — they’re buying US government debt, and they’re turning that US government debt into currency, by creating more dollars out of thin air, by adding it to the US government’s checking account, which the US government then writes checks on, to spend. So we’re on the road to hyperinflation.

James: Now when I was in Argentina, we were at the tipping point. You could sense it in the way shopkeepers were acting, and the general population was acting. They knew it was coming, because they’ve gone through hyperinflation before. And they were taking steps to protect themselves — buying gold and silver, getting rid of financial assets, and basically making sure they had hard currency or tangible assets to protect themselves from a collapse of the currency. So the demand for the Argentine austral was declining very rapidly. People were getting out of the australs as quickly as they could.

James: The same thing is happening with the US dollar, internationally. The demand for the dollar is falling internationally, with central banks getting out of the dollar, foreign dollar holders exiting the dollar, buying gold and anything tangible. The key point, though, is that the dollar, domestically, has not yet reached the tipping point. But I think it’s probably going to happen very soon, because people sense that the US government cannot create these huge trillion-dollar deficits, without consequences. And they see the gold price rising, so they know something’s going wrong with the monetary system. So I think you’re going to reach the tipping point, domestically, very, very soon, within the US.

James: And typically, if monetary history is any guide, you’ve got 6 to 10 months or so, before currency totally collapses, once the tipping point is reached. What the US government has to do, is it has to get off this road to the fiat currency graveyard, do an about-face, read the Constitution, go back to the system that we had previously, where the dollar was tied to a weight of gold or a weight of silver, and go back to a sound money basis. I don’t think the government’s going to do that. They probably will impose capital controls, which is another thing governments do, to try to keep the fiat currency game going longer. What the nature of those controls will be is anyone’s guess, but it basically will restrict your freedom to do what you want with your dollar currency. So that’s, unfortunately, the way we’re headed, I believe.

Kim: Why do you think it is — and there’s three very pivotal questions I have for you. And I thought we’d just go boom, boom, boom. Number one: There are so many people who psychologically believe that they’re covered by the FDIC — totally covered, protected, no worries, the government will handle it, whatever’s in the bank is handled.

James: Well that’s an easy one. It’s easier to believe what you hear on the television than it is to go out and analyze the FDIC’s balance sheet. When you actually go out and analyze the FDIC’s balance sheet, and look at it in relation to the overall government finances, you’ll see that the FDIC is insolvent. It’s only remained afloat because of government backing. But eventually, all of these things that government is backing — just like Fannie Mae eventually collapsed — all these other things are going to eventually collapse, as well. Because the government can’t create wealth out of thin air. It just creates paper money out of thin air, and paper money is not wealth. And eventually, the FDIC is just going to fall apart, as well — just like Fannie Mae fell apart. It’s just a question of time.

Kim: My concern is that the good faith in lending, and the confidence in currency, which is perceived as money — that the average public person, the average individual is going to have complexity with regard to letting go and using GoldMoney as money, because they’ve lost faith, and they’ve lost confidence. In other words, are you concerned that the baby, called GoldMoney, will be thrown out with the bathwater, called toxic waste and a falling, crashing dollar, that you will somehow get lost in the mix?

James: Yeah. No, I’m not concerned about that. First of all, you bring up a very good point about confidence, because when confidence goes, that’s when you’ve reached the tipping point and people start exiting the currency. Because they sense that the currency is starting to collapse. And that’s ultimately what leads to the hyperinflation.

James: What we’ve done with GoldMoney, is we’ve done a number of things. First of all, as I mentioned, we’re European based. We’re based in the British Channel Islands. One of the reasons why we’re there, as I explained, is because it relies on traditional Anglo-Saxon Common Law. But it also is a place where property rights are very much protected. You don’t have politicians interfering with private property, or politicians interfering with the monetary system, and things of that nature.

James: So we believe that regardless what happens to the US dollar, GoldMoney’s going to continue to operate, because people around the world find GoldMoney to be very, very useful, in terms of their own situation, be they corporations, or be they individuals. So we think GoldMoney is well positioned to take advantage of the chaos. And in fact, it is the answer for the chaos, because it’s a very efficient, modern, economical and safe way of transacting with one another, with sound currency. So we think that GoldMoney’s role in the future will become increasingly important, as national currencies become less important, because of the mismanagement by central banks and governments.

Kim: I have a few more questions. But very important is — typically, when you’re dealing with currencies, personally or in business, you are operating inside an accounting universe. How do people transition psychologically, and on a protocol level, in terms of accounting for the transactions that are being had through GoldMoney, using gold as money, with regard to reporting. Do you have any suggestions about that? How do you — the whole accounting is going to be different, isn’t it?

James: Yeah, all I can — I can’t give tax advice and things like that. That’s not our business. We’re in the business of gold and silver. And the other thing that we do, is we follow the rules and the laws in the country where we operate, which is the British Channel Islands. We don’t do any external reporting. We require, in our user agreements, that our users comply with the rules and regulations from where they access GoldMoney. But because we’re not allowed to do any external reporting to governments around the world, because of privacy laws in the Channel Islands — we don’t do any external reporting.

Kim: So in a sense, could we say that GoldMoney, as a system for transacting business, is a parallel system?

James: Yeah, it is a parallel system. Once you’ve sent national currency to GoldMoney, in order to purchase gold or silver, and once you make the exchange out of national currency into gold or silver, you now have gold or silver that’s in a parallel payment system to the existing national currency banking system.

Kim: But if all — for example, if all the currencies crash — OK? They crash the dollar, they crash the reserve currency, and they start to use special drawing rights, which is this basket of currencies — which they’re not telling us yet what basket of currencies will be used, or how long that will be a transitional form of currency — won’t people be losing all their value and their purchasing power, if they wait too long to move into a GoldMoney system?

James: Yeah. The gold price is going higher all of the time. So eventually, you have to make the decision as to when you’re going to use gold and silver to help protect your purchasing power. And it goes back to the point we were discussing before. What I basically recommend is use it as a savings account. Every month, or every quarter, or every 4 months or 6 months — whenever you feel comfortable — regardless of what the price of gold or silver is at that moment in time, just move out of national currency into gold or silver, and view that gold or silver to be your savings account.

James: Dollar cost averaging basis is the best way to accumulate the precious metals. I’ve been saying this all decade long, and even though gold has done as well as it has, gold is still undervalued, so I think dollar cost averaging gold or silver, going forward, is definitely a very good strategy.

Kim: When I’ve shared about GoldMoney with people, some people have said to me, look there’s only a finite amount of gold in the world, whereas with currency, you can just keep printing it. So there’s only so much gold in the world to go around. Eventually, people are going to not be able to transact in GoldMoney or silver money, because there’s only so much to go around. And some people have said because silver — most of it is in demand, and the aboveground amount of silver that’s available is more limited, and gold is often hoarded — that there’s not going to be enough to go around to be in a GoldMoney transaction system. What do you say to that?

James: Yeah, the fact that there is a limited amount of gold is one of its greatest attributes. It can’t be created out of thin air, like paper currency. You can’t have a central bank bailing out financial institutions by creating gold out of thin air, like they’ve created dollars out of thin air, to bail out all of these insolvent banks. So that’s gold’s greatest attribute.

James: But it goes back to the point I made before. You have this aboveground stock of gold. It’s now approximately 160,000 metric tons, and it grows by about 1.7% per annum, which is approximately equal to new wealth creation and world population growth. So you have this natural form of money. The second aspect to that is velocity. You could have even a smaller amount of gold, but if it moves around much more quickly, it will be able to accomplish what you need to accomplish in terms of commercial transactions. So I don’t think that argument is correct. Because I think most people looking at gold, look at it more like they look at other commodities, rather than looking at what gold really is. It’s different than other commodities, because it’s accumulated, it’s not consumed.

Kim: But in your GoldMoney system, I can use it to transact business. If people want to advertise with It’s Rainmaking Time!, if somebody wants to do a deal with my company, The Rainmaking Company, they can pay for services or do transactions via GoldMoney, in gold, silver or platinum. Correct?

James: Yeah, that’s right. You could even price your transactions in terms of Euros, for example. Let’s say you have an import business in California, and you’re importing 5,000 Euros’ worth of goods from somebody in Italy. You can pay for that transaction with gold, online through GoldMoney, and the weight of gold that transfers is the exact equivalent to those 5,000 Euros, at the prevailing exchange rate, at the moment that you make the transaction. Or you can just transact with other people and say yeah, I’ll do this for you, for 1,000 gold grams, and you just pay 1,000 gold grams to completely avoid all national currencies.

Kim: So you don’t think that it matters if metals are in shorter supply, in terms of only a certain amount of people will be able to get in. Can the whole world participate with GoldMoney?

James: Yeah, we have customers in over 100 different countries around the world. And anybody who wants to open an account, and they meet our application process, can go ahead and transact and become an accountholder in GoldMoney.

Kim: And the last question I have, which is very much part of complementing and completing the loop in this broadcast interview with you is the following: Most attorneys, in my experience, are used to doing transactions and contracts, relative to the reserve currency, which is US dollars. Don’t we need people to begin showing up and being trained, and being able to write contracts, for metal payments?

James: Yeah, and that’s legal to do, under US law. Anybody who wants to can write a contract, in terms of gold. But the first step is people actually have to start calculating the price of goods and services, in terms of gold, to truly understand what’s happening to national currencies. So it’s going to take a while, but I think as the problems with national currencies become increasingly serious, more people will turn to gold and hopefully, people will continue to turn to GoldMoney, as they have been doing since we launched, back in 2001.

Kim: And the last question is, if I’m pricing my goods and services, in terms of GoldMoney or gold grams, if we lose — if the dollar crashes — which it’s apparently on its way to crashing, as well as the Euro — how do you attribute value for goods and services, without something to compare it to? A context for the value usually is in a currency. What do you do?

James: Yeah, the value is in an item’s usefulness. So it’s a question of how the two individuals who are transacting view the item — how they value the item that they’re transacting in. But again, it goes back to calculating the price of goods and services, in terms of gold. Looking at barrels of crude oil, in terms of gold, or how many silver dollars it takes to fill up the family car. It’s calculating prices of goods and services, in terms of precious metals, which is the way it was under the classical gold standard. We just happened to call them pounds or dollars, but basically, they were just pieces of paper, circulating in place of gold.

Kim: So this is a whole mental state change, really. It’s a paradigm change, is what you’re doing — is what you’re offering, too. Not only a system, but a paradigm change.

James: Yeah, it’s basically going back to the point where gold is a form of currency. Keep in mind, too, currencies — terms like pound, mark, lira, franc, dirham — these are all weights. They’re all weights of gold or weights of silver. It was only a dollar that was called something that wasn’t a weight, and that was because of historical reasons, in terms of a nickname that was given to the silver dollar, because the silver came from a valley in a German-speaking part of Europe. And the word for valley is “tal,” in German, so they started calling them “talers” — coins from the valley. And talers eventually became dollars. But all other currencies used terms that were a measure of weight, and they were a weight of precious metals.

Kim: And the last question, before we close is, what do you think, given your life and business experience internationally, it is going to take to expedite bringing minds to fruition?

James: I think it’s going to take the collapse of the dollar. And I think the collapse of the dollar is coming. I say that — I often say that the bubble is not the Internet, not the NASDAQ, not the stock market, not the real estate market. The big bubble is the dollar, and that bubble hasn’t yet popped. But I think it’s going to pop probably pretty soon. And by soon, I’m talking maybe in 2010.

Kim: Ladies and gentlemen, we have been interviewing James Turk, the Founder of GoldMoney and the author of The Collapse of the Dollar and How To Profit From It. James, we look forward to having you back soon, and we’re delighted that you took the time out of your day, today, in Spain, to talk with us.

James: Thanks, Kim. It’s always a pleasure to speak with you.

Kim: Thank you, for being here. It’s Rainmaking Time!