Please read Part 1 of Franklin Sanders’ interview with James Turk. Mr. Turk has been describing the use of inflation by the Federal Reserve System. Mr. Turk is the creator of an electronic currency, GoldMoney®. You can receive his articles by subscribing at www.fgmr.com and learn about GoldMoney® electronic gold-backed currency at www.GoldMoney.com. If you mention that the Moneychanger newsletter referred you when you open a GoldMoney holding, it won’t raise your cost but will earn us a small commission. GoldMoney is the only Internet precious metals storage service that we recommend. He kindly made time for this interview on 22 May 2013.
MONEYCHANGER Bernanke keeps saying that he has an “exit strategy.” Realistically, is there any way he could pull any substantial part of the $2.5 trillion dollars that he’s created out of the money supply over any reasonable period of time?
TURK Honestly, only an academician who has never had any real life experience of dealing with markets could make a statement as stupid as that. I’m being very bold here. Warren Buffett was perhaps a little more gentle to Bernanke by saying, “Well, it’s going to be interesting if they ever try pulling out any of that money.” It’s an impossibility in my mind because as soon as he flashes any indication that he’s trying reversing QE, everybody will rush to sell T-bonds. Interest rates will soar. That will cause the federal budget deficit to swell, causing the Federal Reserve to stop reversing and, in fact, start buying more bonds. That’s how you’ll end up with hyperinflation.
I’ve always felt that 2013 to 2015 is the timeframe that all of this will play out. Now that we’re in this timeframe, I still think it will play out pretty soon. Everything seems to be coming together. The only fly in the ointment, Franklin, is the lull in gold price. I keep asking myself why that is. There are various reasons, as I said before: government intervention, hedge funds piling on, etc. But what’s happening in gold’s paper markets is very different from what’s happening in gold’s physical market for gold, as we previously discussed, and I put more credence in the physical market rather than the paper market.
Inertia vs. collapse
MONEYCHANGER The commodity market proverb says that in the end everything comes back to physicals. Even though the paper market tail may wag the physical market dog for a while, eventually the dog resume tail-control. Every day I deal with people who expect the global financial system to collapse at any time, today, tomorrow, maybe next week. But collapse, even hyperinflation, is a rare discontinuous event, and the inertia that keeps the world stumbling along (even when it’s stumbling) is very, very strong. On the other hand over the past 30 years, the financial and monetary crises have become more frequent, more encompassing, and now crisis is chronic. It won’t go away.
How will this mess ever be resolved? With some kind of hyperinflationary collapse?
TURK We were almost at a collapse in 2008. That was a different collapse in the sense that they did everything they could to re-liquefy the system, and other than Lehman Brothers, they didn’t allow anyone else to liquidate themselves. They didn’t want the derivative markets to blow up and all these trillions of dollars of promises to disappear because of a massive liquidation. Instead, they’ve unleashed the inflationary, and I think eventually, the hyperinflationary course.
You raise a good point. When is it going to happen? No one can predict that. It could happen next week, or it could happen next month, or it could be a few years away. But looking at everything that’s happening, you can intuitively sense that things are heading in the wrong direction.
When you’re heading in the wrong direction, you’re heading towards the cliff. If you keep driving towards it, sooner or later, you’ll roll over that cliff. That’s what really concerns me. What I expect to happen goes back to the book that John Rubino and I wrote in 2004, The Coming Collapse of the Dollar. I expect the dollar will collapse just like the Continental, this country’s first currency, collapsed during the American Revolution.
After the Continental collapsed, the framers tried to create a more perfect union, as they said in the preamble. One of the key planks of that constitution was sound money, which was enacted by the Coinage Act of 1792, passed by congress, and signed into law by George Washington. That defined the dollar as 371.25 grains of pure silver. It wasn’t until 1971 that Nixon took us off any kind of metallic monetary standard. Now we’re re-learning the lessons of the constitution’s framers learned back in the 1780s. It’s really quite sad.
Who’ll be the saviors amid hyperinflation? Same old crowd
MONEYCHANGER One fear gives me nightmares: that the reform after this hyperinflationary event might be hijacked by the same people who are running things now, so we end up with a gold-plated standard without any genuine convertibility and genuine reform, only a new lease on life for the same old system and the same old banks.
TURK You’re absolutely right, that is the concern. You know, Edwin Vieira makes the point that just as we have separation of church and state, we should also have separation bank and state. I like to say we should have separation of money and state. The framers did not put the power of creating money into the state’s hands. They gave congress the power to coin money. They didn’t give congress the power to print money. There’s a fundamental difference. We must return to that principle and take the power to create or define money out of the politician’s hands and put it where it’s supposed to be, in the free market.
MONEYCHANGER Precisely. What’s your outlook for silver?
TURK I have been and remain more bullish on silver than I am on gold. I use my Fear Index and my GoldMoney Index as a mathematical formula to show that gold is historically undervalued based on all measures we’ve seen in the past. (The other benefit that gold offers is that it’s money that has no counterparty risk. When you hold that gold coin in your hand, that coin’s value doesn’t depend upon any bank or central bank or government. It’s based on the market’s perception that this has had value for 5,000 years, and it’s likely to have value for the foreseeable future.) Historically, the normal ratio between gold and silver is 16 or 17 ounces of silver to one ounce of gold, but at the moment one ounce of gold costs more than 60 ounces of silver. Gold is historically cheap, but relative to the historical norm, silver is even cheaper. I’m more bullish on silver going forward than I am on gold because I expect the ratio to fall back down to 20, 18, or maybe even 16 to 1 as this financial collapse continues.
Silver has more upside potential, but is volatile
Here is silver’s drawback: it’s more volatile than gold. You saw that in 2011, when the gold silver ratio plunged from 47 in January to 32 in April and bounced up to 58 in December – huge swings. Not everybody can accept that volatility.
One other thing to keep in mind about silver: two different demands drive silver’s value. It’s both an industrial metal and a monetary metal. Right now most people look at silver only in terms of its industrial demand. I’m not talking about the metal people. They understand silver, but the vast majority of the world’s population doesn’t really understand silver from a monetary point of view. They just view it as something that’s used in industry.
But what will happen as this monetary problem continues to move forward? That ratio will fall, and, indeed, it has been happening already. Back in 1992, that ratio was 105 ounces of silver to one ounce of gold. Since then it’s been generally downtrending, even though with a lot of volatility. Silver is a perfect substitute for gold. It does the same thing for you that one ounce of gold does, but the historical norm should be 16 ounces of silver to one ounce of gold, not the 62 ounces of silver it takes right now. Both are money outside the banking system, and I think the ratio will fall below 20 to 1 again as this bull market in precious metals continues.
MONEYCHANGER This conversation has been very refreshing to me, like touching base or re- grounding. Even though we haven’t talked in a long time I see that your feet are still firmly grounded in history and reality, in spite of the propaganda storm that we live in. I deeply appreciate that stability of mind.
TURK One thing that I always very much keep in mind, Franklin, is something you told me years and years ago. It went something like this.
When you were in jail [for not charging sales tax on gold and silver money] and people asked you why you were there, you answered, “I can’t read.”
You said they’d get a quizzical look and say, “Nobody put you in jail because you can’t read.” You answered, “They did me. I read the law, I read the constitution, I read the statutes, and I thought I knew what they said, but here I am. Clearly, I can’t read.” Do you remember that?
MONEYCHANGER Oh, yes.
TURK I keep that very much in my mind. I learned from the history books, and I learned from reading the rules and the regulations, and just normal relationships. So I’ve always been very appreciative of that little story.
MONEYCHANGER The truth is the truth. Nobody can change it, and if you try to fight against gravity, nothing good will happen to you. You’ll only get hurt. That’s all that this economic turmoil is, fighting against monetary gravity.
TURK And monetary history. It just makes no sense. But politicians never did make sense. They’re out there for other purposes, rather than being logical.
MONEYCHANGER Thanks so much. I deeply appreciate it.
[End of interview]
Used by permission from the May 2013 Moneychanger. Subscribe to the Moneychanger’s daily commentary by dropping your email address at Franklin’s website, the-moneychanger.com. Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focuses on gold and silver and the application of Christianity to economics, culture and family life. We have subscribed to this newsletter for more than 20 years, and consider it a must read. F$149 a year. Franklin is a trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. F. Sanders, The Moneychanger, P.O. Box 178, Westpoint, Tenn. 38486 Tel. 888-218-9226.