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Ask The Expert

Ask the Expert - James Turk

James Turk

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In this episode of Ask the Expert, host Craig Hemke and guest James Turk discuss:

  • The current state of the precious metals industry
  • Analysis of interest rates and their impact
  • Outlook on the economy, inflation, monetary policy and much more!

Watch the full video below. 

Craig: Well, hello again from Sprott Money News and sprottmoney.com. It is now the month of November. Gosh, hardly even six weeks left to go in the year. I don't know where time goes. And it is time for your "Ask the Expert" segment, you know that segment Sprott Money posts every month, where we get a mover and a shaker from the precious metals industry, and we kind of find out from them what their current thoughts are, and where they think things are headed. I'm your host, Craig Hemke, and joining me this month is Eric's Sprott's old friend, and my old friend too, James Turk. James, the legendary founder of GoldMoney, as I like to say. But he's also an author, and an analyst, and an expert on gold, and the bullion industry, especially how things flow through London. So, it's a pleasure to have him on, and it's always great to see you. James, thank you so much for spending some time.

James: Craig, thank you. It's great to be with you.

Craig: Yeah, I joke about how the year is flying by. It is almost the holiday season. It's gonna kick off pretty soon here. I wanna remind everybody that the holiday sale at Sprott Money is one of the biggest sales of the year. You can go to sprottmoney.com. Right there on the home page, you can just click a tab, and it will send you right to the holiday gift guide. Look it over. I mean, there's, I'm sure James would agree. You can buy toys, and you can buy stuff that people will just forget, or you can teach your kids and grandkids a little something about sound money. And boy, what a great way to do it with something from the Sprott Money holiday gift guide, so please be sure to check it out, and promote and help Sprott Money, because they are the providers of this content.

All right, James. Regarding this content, it was just last month that I had John Rubino in here for a little "Ask the Expert," I think is what it was. And over the course of that discussion, I said, "John, I remember," and I thought it was maybe just 4 or 5 years ago, but it was 10 years ago, and I got it right here. You and John wrote this book...

James: Yes, that's right.

Craig: "The Money Bubble." And I said, "John, you gotta reach out to James and see if you guys wanna send out a revised edition of that, with maybe a couple of extra chapters or something." All right. So, anyway, he said that's a good idea. What do you think?

James: I think it's going to withstand the test of time. You know, the things that we concluded in that book, we were talking about, you know, fiat... Maybe our timing was a little bit early. I admit that. But, on the other hand, everything that we said in that book, the trends are clearly developing. The bubble is that people believe fiat currency is money, when in fact, it's just a money substitute circulating in place of money, which, of course, is gold and silver. And, you know, one of the things we talked about in that book, of course, was interest rates, and what that's going to do as interest rates rise, how it's going to impact the bond market and government finances, which is really, I think, one of the most important things we should be focusing on at the moment as investors. You know, what's going to happen to interest rates, and is the market right in thinking that interest rates are finally not going to go up any more, and maybe even start lowering interest rates. I tend to think that that's probably not the way things are gonna play out.

Craig: But, you know, and I wonder, James, just focusing on that, on your book, again. I mean, you wrote that 10 years ago. I've been, at my site, I've been talking about this for 13 years. I call it the end of the great Keynesian experiment. With the benefit of, you know, that this hasn't happened yet over the last 10 years, as you look back and as you look forward, you know, some people, you [inaudible 00:03:29] call it "the money bubble." Will Middelkoop called it "the big reset." Do you think now, is your current thinking that it is a...the death, the money bubble, the big change of the system, does it come to fruition through a series of, you know, death by a thousand cuts? An accumulation, loss of confidence? Or is it, again, just one Big Bang moment, where, you know, everything just starts to collapse, and, you know, you get it over a weekend or a couple of weeks? What's your current thinking?

James: Yeah. My thinking has changed a little bit. Remember, John and I wrote "Coming Collapse of the Dollar," back in 2004, and in that book we talked about the real estate bubble was ready to pop, and we talked about, you know, buy gold, which was $300 an ounce back then, because it's headed a lot higher. And the logic in that book played itself out, and ultimately led to, you know, writing "The Money Bubble," as the next step. You know, back 20 years ago, I thought this thing was going to pop in 2008, and that would be the time that we go back to sound money, constitutional money, and...because the fiat currency system isn't working. But, you know, here we are, 20 years later from when that first book appeared, and it's still, you know, keeping things, they're still keeping things up in the air.

Craig: Yeah.

James: So, I think it's gonna be more like a death of a thousand cuts, until eventually, we realize, or the market realizes, that it's unsustainable, and that we use logic, hopefully, to go back to what has traditionally been, and rightfully should be, money, which is of course gold and silver. And the key, of course, is that when you have gold and silver as money, you're limited as to how that money comes into existence. You're limited by nature, you know, how it's dispersed in the Earth's crust, how gold and silver is not rare, because there's a lot of it, but we only mine it when it's profitable to be mined. And that in itself imposes a natural limit as to how much is introduced every year. And that's why purchasing power of gold and silver, over long periods of time, remains very consistent, which is, of course, one of the most important things of money. So, will we go back in a logical way? I'm hopeful that we will, because we've reached the stage now where we see the folly of governments just printing money with no limit, with, and, you know, reckless abandon, trying to spend money in a variety of different ways where money should not be spent.

Craig: You alluded earlier to the current thinking regarding monetary policy, as we end this year into next. Even as we record this here on the 17th, it's been a very busy week in terms of rate hike, rate cut expectations, after the latest CPI report and some of the slowing economic data. And I see arguments going both ways, you know, that the Fed is gonna stay higher for longer, and maybe even have to go higher, but then, you know, some people think... And I'm in the camp that, you know, that paradigm changed back in 2008. And when push comes to shove, the Fed will print, and monetize, and yield-curve-control, and all that stuff. What are your thoughts on this, James?

James: Yes. Yeah, exactly. You know, the touch point is is how much interest expense the U.S. government's paying on its debt, which is now over $33.5 trillion, and we're running deficits of $2 trillion a year. You know, we only, the government takes in only so much revenue, and some of that revenue is spent for a variety of different things. But we have to watch how much is being paid on interest expense. Currently, we're spending at over a trillion dollars in interest expense. That's a huge amount of government revenue, with interest rates rising, and the old debt coming off at, you know, next to 0%, and the new debt coming on at 5%, that means that the interest expense over the next 12 months is probably gonna be closer to $1.5 trillion. Now, is the government gonna cut back in other areas to pay this higher interest expense that's due on the bonds, or are they just going to go to the Federal Reserve and print that? Which is, I think, what they're going to do. That means there's a lot more inflation, you know, coming down the road, just simply because of government spending. And the market I don't think really understands that yet. And I think that's really what creates the big opportunity for people who understand what gold and silver really are, and believe that, you know, gold and silver are money, which is what it's been for 5000 years. It's only...the bubble that we're in, you know, we talk about the bubble. It's not the stock market. That's not the bubble. The bubble is what we believe, or what people believe is money, what really isn't money. It's just fiat currency.

Craig: So, do you think, James, as we go into next year, does it become about the Fed cutting rates, or do you think it's more about the Fed trying to fight inflation, but also fund the government at the same time?

James: Yeah, it's quite ironic, because, you know, the Fed creates inflation, then it fights inflation. And we're supposed to believe that they can bring inflation back under 2%. I don't think there's any chance of them doing that. And it's quite silly, really, when you look at what the CPI number was this week. It was one tenth of a percent lower than what the market analysts were expecting, and the market rallied the way it did? You know, bear markets in stocks, or bear markets in anything, you have sharp rallies, because Mr. Market tries to get you back in, into a bear market, to part you from your money, which is the opposite of a bull market. You know, Mr. Market tries to keep you out of a bull market by having you climb a wall of worry. So, to me, what happened in the stock market this past week is just a bear market rally.

But I want to make an important point. You know, we talk about the stock market, but we should really look at a market of stocks. I've been making the point that the market I think's gonna begin dividing into two major sectors, the financial sector, and the real, primary economy sector. Now, the primary economy sector is being hurt by a recession. I think we've been in a recession for over a year, and my primary evidence for saying that is the 9% decline in U.S. government revenue through the 12 months ending September. Usually, that's a sure indication, you know, hard proof, that when government revenue goes down from the previous year, you're in a recession. So, the primary industry is gonna be hurt to a certain extent by the recession, but you're owning tangible assets in the primary industry. Whereas in the financial stocks, you're only owning promises. You know, and most of those are debt-related, and a lot of that debt is going to be either reneged on or inflated away. So, you wanna be focused in the market in terms of the primary industries, the primary economy, and of course, you know, the mining shares are a factor of that, agriculture, and energy being the three components of the primary economy. I would avoid pretty much the rest of the economy, other than perhaps defensive, consumer defensive stocks.

Craig: James, let's shift our attention to gold, and in kind of two parts, and then we'll wrap this up. First, just in the present. Here we are, we're in middle part of November. It's been a crazy year. The dollar index has soared but pulled back, but still, it's up on the year. Interest rates, nominal interest rates, are well above what they were as we began the year. But yet, gold began the year, COMEX gold began at $1829, is where it wrapped up last year, and as we record this, about $150, $160 higher, right? Seven, eight percent. How do you kind of reconcile those two? What's keeping gold up?

James: Well, I think gold is cheap, actually. I think it's got a long way to go. What I do is I look at gold, and the purchasing power that's conveyed in gold, versus the purchasing power that's conveyed particularly in fiat currencies, and relate to two. In other words, I'm taking the market cap of gold compared to the market cap of all of the currencies out there in the world. And if you look at it from that basis, gold is very, very cheap compared to where it's historically been in the past, when it's measured as a percentage terms, in percentage terms. So, I think, you know, gold is very cheap. And it's going to head much, much higher. And I think the market's just been focused on other things. You know, that's what creates an undervalued sector in markets. You know, people start focusing on what's hot, like technology stocks, and ignore where the values are. So, I think, as the stock market itself starts churning, and, you know, looking pretty toppy, and some of the sectors are getting hit really badly, like the banking industry, people are starting to look in other areas, and I think you're gonna see the primary sectors of the stock market, the primary economy sectors of the stock market, stock doing much, much better.

So, yeah, you know, in any period of time, yeah, period of time, you can have a weak dollar and strong gold, or strong gold and strong dollar. There are a lot of different comparisons over a period of time that the market does what it wants to do, which is confuse a lot of people. But what you really should be focusing on those areas that are undervalued, and clearly, the precious metals are undervalued, as are the miners of the precious metals, because I've never seen such a divergence between how cheap the miners are versus where the precious metals themselves are. And given that crude oil prices are still relatively low, I think you gotta look at the miners sector, because of the basis [inaudible 00:12:50] and the cash flow that they're generating. Whether crude oil prices start climbing again in the next year or two, I don't know, but I just saw a news item that, you know, that OPEC is thinking about keeping these production cuts a little bit higher, you know, with the crude oil under $80 a barrel. My guess is that's probably pretty close to a low, and that we're gonna head much higher next year, even if there is a recession, or if the recession that we're in deepens, simply because of the loss of purchasing power in the dollar and the other currencies because of inflation.

And it does look to me that the dollar is finally falling off the edge of the table. It got hit really badly after the CPI number was released, and I think that was a wake-up call for a lot of people, that, you know, what has the dollar got going for it other than high interest rates? If the Fed's not gonna raise interest rates anymore, why own the dollar? Why not, you know, own other things that make more sense? And I think that's probably one of the big things that everybody should be focusing on at the moment. The dollar looks very weak. If it goes below 102 on the dollar index, you know, that, to me, is the final nail in the coffin.

Craig: Yeah. All right. Two things that I've been asked about lately, and I'm dying to ask you, because you've got more experiences than I do. I, you know, I look at... I was not even a teenager yet, you know, like, in 1978. I was 12. But I at least remember the period reasonably well. You know, you had stagflation. You had kind of a declining American power, you know. A lot of doubt in America. There was kind of an economic malaise that was going on, very high interest rates, trying to control inflation. And it was a tremendous period for gold, and gold ownership. But yeah, I mean, you were paying closer attention than I was back then. Do you sense some similarities to that period in the current time?

James: There are some similarities, but there are also some major differences. You know, back then, we were the largest creditor nation in the world, you know. Now we're the largest debtor nation in the universe. We've never reached this kind of position before financially in, you know, the U.S. government. Also, back then, you know, the political, the geopolitical situation was a little bit different than it is today. You know, some of the recent events, you know, Afghanistan, and things like that, have diminished the U.S., I think, view, or its position around the world, or how it's viewed around the world. So, it's not the same. There are similarities, though, but the big difference is that Paul Volcker was intent on fighting inflation, and he raised interest rates until it stopped.

Right now, Mr. Powell cannot continue to raise interest rates, for the simple reason that the U.S. government cannot afford it. We're already seeing how interest rates are causing the budget deficit to expand, and they're not gonna cut back in other areas if interest rates were to rise further. And given that interest rates are, practically speaking, the only thing that can really effectively control interest rates, or excuse me, control inflation, what other tools do they have? They can decrease the quantity of dollars, but that's not likely to happen because they don't want deflation either. So, they're between a rock and a hard place, as we were talking about before, before we went on air. And I just don't see how they're gonna play this out. I think my guess is that they're gonna try to keep interest rates at current levels, and continue to say that they won the battle against inflation even though they haven't. They're never gonna get inflation back below 2%.

Craig: Try to talk it into existence, that we've beaten it.

James. Yeah. Yeah, there's a lot of propaganda out there. That's a big difference between today and back then. There was a lot more honesty back then than there is today, particularly in a lot of the government statistics. I mean, I've seen some analyses of the CPI release, and there's been a lot of criticism of it. For example, healthcare insurance costs declined 33% in the past 12 months. I don't know if your insurance costs declined by 33%, but mine surely didn't.

Craig: Precisely.

James: So, you know, there's a lot of fudging in there. So, you know, there's gonna be propaganda, and you have to read between the lines when you see this stuff in the mainstream media.

Craig: Yeah. All right. The other thing I wanted to ask you about, again, given your experience, the time you spent your adult life in London, you know, how close you are, tracking the LBMA, and all the, you know, the banks that do business in London, trying to support the physical market with flows, the bullion banks. There's a little bit, a lot of talk this year about "How is gold price hanging up there?" especially with real interest rates, you know, and the, "Why hasn't the gold price collapsed? It should be $1000 or $1200." And I, my theory has been, there's just not enough physical supply, with central bank demand, and then what would come of retail and institutional demand. If the paper price traded down to $1200, there wouldn't be enough physical metal in London to flow through at that price to legitimize it. And I, with, from your view in London, how does it look? What do the vaults look like to you? Does it seem more stressed? Do you get any hints that supply is tight? Is it just the same old game? How does it look to you over there?

James: Yeah, supply is indeed tight. I haven't been in vaults recently, so I can't say first-hand by looking in the vaults and counting the bars or anything like that. But I look at other things in order to determine what supply's availability is. And one of the things I look at is the contango in both gold and silver. I do this on a regular basis, and compare that interest rate to interest rates in the marketplace, in order to evaluate, you know, how badly, you know, people are willing to pay for gold, in terms of forgiving an interest rate, and holding gold and silver instead. And the numbers suggest to me that we're very, very tight, both on gold and silver. So, but, you know, $1200 on gold? I mean, the market can do anything, and anything is possible, but the only way I would see something like that happening is if the quantity of dollars in circulation were to decline by a third overnight, and you have, like, a 1930s type of deflation. And maybe you can get down to $1200 in nominal dollar terms, but at $1200, if the quantity of dollars were to decline by a third, you'd have the purchasing power significantly higher at $1200 than gold here at, you know, $1980 or whatever it is today. Which is, I think, an important point that people really have to focus on, Craig.

You have to look at the purchasing power of those assets that you own, and including the money that you own. That's what's really important. You know, you just can't talk about money, and, you know, what's going to happen, because it's the purchasing power that's important. And the central banks can do basically anything in terms of changing the nominal value of that money, raising dollars relative to other currencies, or lowering the value of the dollar relative other currencies. But what does the purchasing power do? And that's the key in terms of owning gold and silver. You know, purchasing power, over long periods of time, when you own gold and silver, is protected. And that's one of the key functions of money, and that's one of the reasons why, you know, for my adult life, I've been bullish on gold. And that, you know, obviously, gold goes up and down, but it's been a long-term bull market, starting in 1913, when the Federal Reserve was created, and it was $20.67 in exchange for one ounce of gold. And look where we are today. And given all of the money that's being created by the Federal Reserve, and likely to be created in the future, and the runaway spending by the federal government, which causes all of these dollars to be created and put out there, and debasing the dollar over a long period of time, I expect, you know, the price of gold is gonna continue to rise, but the purchasing power of gold will continue to do what it's been doing for decades and centuries, and why it became money in the first place.

Craig: Yeah. Yeah, excellent point, my friend. And you just draw me right back to where we started. Look, it's holiday time. You wanna buy somebody a present? Here it is. This is right off my bookshelf, right here in my office. I keep it handy. I keep... I'll show you this one, too. I keep this one handy too. I'm sure you're familiar with that book, right?

James: Yes, I am. Yeah. Yeah. That's the Adam Fergusson book?

Craig: Yeah. Yeah. "When Money Dies."

James: Yeah. Yeah. I had the pleasure of actually interviewing Adam a number of years ago.

Craig: Really?

James: Yeah. And that's still on the internet, if you wanna look for it under the GoldMoney...you know, google "GoldMoney James Turk Adam Fergusson," and you can see that interview. I think it was, like, 2012 maybe, or 2013. Very interesting gentleman. And speaking of books, keep in mind my new book as well, "Money and Liberty," if you're concerned about...

Craig: That's right.

James: ...and the relationship between the loss of individual freedom, as we move more and more to fiat currency, and then, of course, you've got, you know, central bank digital currencies floating around in the background, which is even worse, if we were to go in that direction. There is a direct link between honest money and liberty...

Craig: Right.

James: ...which is why the framers of the Constitution put into it that the federal government can coin money, but they can't print currency. And if that power has not been delegated to the federal government by the states, that means the federal government doesn't have the power, so it cannot create the Federal Reserve and give it exclusive power to create currency and force that currency in circulation, which means that the Federal Reserve is unconstitutional, and I explain that in my book.

Craig: Yeah. And I would get up and grab that book off the shelf too, but that would require me actually have to stand up and leave the screen, and the Sprott Money people probably wouldn't think that would edit out very well. So, I, yes, I recall that, and I've got it. And I would encourage everybody to check. I mean, [inaudible 00:22:31] it's always good to give books at the holiday season, that's for sure. It's also, as I said, good to give sound money at the holiday season too. So, before you go, please, everyone listening, thank Sprott Money by visiting their website, sprottmoney.com, and checking out that holiday gift guide, and doing a little holiday shopping. Drop a couple of silver rounds in a stocking, and you'll see some lit-up faces on Christmas morning, that's for sure.

James, it's always a pleasure to talk to you, and you're just a fountain of wisdom, and experience, and knowledge, and I learn something every time we talk, so thank you so much for your time. It's [crosstalk 00:23:05]

James: It's always a pleasure, Craig. I really do enjoy speaking with you, and be happy to do it again at some point in time in the future.

Craig: We will certainly do it again in the new year, no doubt about it. For now, though, it's time to sign off. Again, thank you for watching, thank you for visiting sprottmoney.com, and keep an eye on this channel. We'll have more content for you later on this month.

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About the Author

Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities.

Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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