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Midas Touch:
James Turk believes today's gold price
is cheap and can only go higher

By Sandra Ward
Barron's, October 2003

These are glorious days in the north country of New
Hampshire, which Turk, publisher of the Freemarket
Gold and Money Report, calls home. Equally glorious
has been the performance of gold since we last
checked in with the longtime gold authority, who also
happens to be founder of Goldmoney.com, a company
intent on establishing the metal as the dominant
currency in cross-border transactions. He correctly
called gold's push higher last year and now sees the
yellow metal reaching $400 an ounce by the end of
this year. Why the bright prospects? Here's why.

Barron's: You seem fairly confident that gold will
continue to climb higher. What leads you to that

Turk: One of my major contentions has been that
you are better off holding gold than the Dow Industrials.
That surely has been the case the past few years and
that trend is only beginning. When we last spoke, I
said gold was going to move to beyond $325 an ounce
by the end of last year, and it did. That was very
significant. It was as significant as gold tripling to more
than $100 an ounce after President Nixon took the
dollar off the gold standard in August 1971. What you
have is a huge six-year base of accumulation.

Q: Meaning?

A: Gold has formed all the classical patterns, including
a selling climax after the Bank of England announced
in 1999 it would sell half its gold. Gold has been
accumulated by so-called strong hands, and it is going
to take much higher prices to shake that gold out of
those strong hands. Looking at gold purely from a
technical point of view, one has to be bullish.

Q: What about the fundamentals?

A: Gold is money. People move into gold and out of
national currencies in response to financial uncertainty.
There is a lot of financial uncertainty.

Q: Is there, though? People are becoming more and
more convinced we are in a recovery, and we've seen
gold move lower on that. So, again, what fundamentals
are in place for gold to continue higher?

A: It is true there has been a lot of crosscurrents of
opinion about whether this is a recovery, and whether it
is a jobless recovery or not a jobless recovery, and gold
has been buffeted as a result of these crosscurrents.
But gold is going higher in the long term. It's important
to look at things that impact the dollar because gold will
respond to problems or perceived problems with regard
to the future of any currency. Comments by various Fed
governors talking about creating any amount of dollars
necessary to get the economy jump-started is very
scary because it suggests they will debase the dollar.

In the past 12 months, we've created $600 billion of M3,
the broadest measure of the money supply. It hasn't
really produced much economic stimulus, but it has
done a lot to debase the dollar, not only against gold,
but also against the euro and some other major

Then there's the increasing deficits of the federal
government. Those deficits are going to have to be
financed. Already, we are borrowing $2 billion a day
from overseas sources. That implies more debasement
of the dollar, because as you create more dollars by
extending more credit and increasing the supply, there
is an inherent loss of purchasing power.

Finally, there is accelerating demand for gold worldwide.
People are increasingly recognizing that gold is cheap.
Changes occurring in China could be huge for gold. The
Chinese are easing various laws prohibiting gold
ownership, making it legal once again to own gold. Some
also think that rather than revalue the yuan, the Chinese
might enable the conversion of yuan into gold, so the
Chinese can continue to accumulate gold for savings.

Q: Gold has had a great run. Why do you think it is still

A: Well, that's where my Fear Index comes in. The Fear
Index is a very important indicator of which way the trend
is going. When the Fear Index is rising, you want to be in
gold and out of dollars and when it is falling you want to
be in dollars and out of gold.

I also use the index as a valuation model. Historically,
when the Fear Index is less than 2.6 percent, gold is good
value and should be accumulated. Right now, we are at
1.12 percent, just a small bounce from the historic low of
0.9 percent. On that basis, gold is very cheap.

Everybody talks about the $850 an ounce level that gold hit
in 1980, and here's gold today at $370 an ounce. If you
adjust that $850 for inflation and debasement of the dollar
over the past 23 years, it shows how cheap today's gold
price is, even in nominal dollar terms. Adjusted for inflation,
that $850 an ounce becomes something like $2,005. Even
if you cut that in half and say $1,000 is too high, something
over $500, $600, $800 an ounce would not be unreasonable.

We are very, very close to breaking a 20-year downtrend
line in the Fear Index going all the way back to the 1980
highs, but we need the gold price around $400-$415 an
ounce to do it. If that happens, the whole monetary and
banking environment is going to shift, and we will enter a
period like the 1970s, in which there will be increasing
concern about the purchasing power of money and the
banking system.

Q: Because?

A: It could be inflation. It could be banking problems. It
could be currency wars. It could be capital controls to try
to finance this deficit and keep it from spiraling out of
control. It could be any one of a number of different events.
We don't know why the market is shifting the way it is,
but the Fear Index tells us the shift is occurring. At the
top of my concerns, ever since the collapse of Long Term
Capital Management, is the possibility of a derivatives
blowup. I'm in complete agreement with Warren Buffett,
who called derivatives "financial weapons of mass
destruction." We haven't seen that mass destruction
yet, but the potential is there.

Q: Are you really concerned about inflation, given the
Fed's stance?

A: We shouldn't be focusing so much on the supply of
dollars; we should be focusing more on the demand for
dollars. Ever since the world was supposed to collapse at
Y2K, the growth rate of M3 has been tracking lower and
lower. Though the increase in the supply of dollars has
been generally declining since those peaks, the dollar
has been falling even more rapidly on the
foreign-exchange market. That suggests there is too great
a supply of dollars relative to demand or, conversely, that
demand isn't growing fast enough to keep up with the
increase in dollars.

Q: This is October. Are you making any predictions?

A: I've been in favor of holding gold and preserving
purchasing power and buying stocks cheaper down the
road. In gold terms, the stock market is going to continue
to fall. At the peak, it took 1360 grams of gold to purchase
the Dow Industrials. Today it takes 812. Historically, when
it takes less than 100 grams to purchase the Dow, gold's
purchasing power is at a high point. So we have got a long
way to go down when you look at the stock market in gold

Q: Do you see parallels to the '87 crash?

A: I've been looking at that a lot. If there is a move out of
dollars, people might sell stocks just to raise liquidity and
convert their wealth back into their own home currency,
which they may perceive to be safer. The bond market is
more vulnerable than the stock market. The bond market
has been propped up because the foreign central banks
have been buying huge amounts of dollars. Those dollars
are being recycled back into the bond market and
government-paper market. I don't know how much longer
that can be sustained without the dollar getting hit in a
dramatic way in the foreign-exchange markets.

The big swing down we saw a couple of months ago in the
bond market was the first shot across the bow. Bond
investors should be very wary here. Given all the selling
pressure in bonds, we've been looking for a bounce, but
so far the bounce has been very weak.

Another interesting parallel is the early 1970s, when gold
was at $35 an ounce and the Dow was about 800.
Throughout most of the decade, the Dow traded between
600 and 1000. Eventually, gold and the Dow crossed at the
end of that decade at 800. Adjusting for 2003 dollars, and
multiplying gold by a factor of 10 because it takes $1 to
buy what 10 cents purchased then, you get gold at $350.
If you take the 800 Dow level of 1971 and multiple it by
10, you get 8000. If we repeat this, and that's what I'm
expecting, the Dow will trade between 6,000 and 10,000
for the next several years. And gold will move from $350
an ounce up into the thousands. Gold could go from
$350 to $8,000, which is no crazier than going from $35
to $800.

Q: But this isn't the '70s.

A: That's what's worrisome. Back in the 1970s, we had
an out. [Fed Chairman Paul] Volcker raised interest rates.
He took government bonds up to 14-15 percent, the prime
rate was 21 percent, and he saved the dollar. That is no
longer an option. Can you imagine what this over-leveraged,
over-indebted economy would do if interest rates even went
up to half those levels, let alone a 21 percent prime rate?
Or what the government deficit would do if interest rates
rose 3 or 4 or 5 percent from current levels?

We have a $7 trillion debt. Standard intervention weapons
aren't going to work. The normal weapon would be to raise
rates, and I don't see that as an option. We might have to
resort to nonstandard weapons like capital controls such
as were implemented in the 1960s, but they might be more
draconian than the ones implemented then. In the early
'60s we had the "Interest Equalization Tax," which was
intended to keep dollars from flowing overseas. It was a
fairly mild capital control, but relative to the time it was
quite a controversial issue.

Q: So you're still a fan of gold stocks?

A: Yes, but I would stay away from the stocks of companies
that hedge, the stocks that sell future production. Look at
Barrick Gold, which hedges, and Newmont Mining, which
doesn't. The stocks used to trade one-to-one, and Newmont
is now nearly $20 higher than Barrick. That outperformance
suggests to me that the market rewards stocks that don't
hedge. Additionally, there is a lot of complexity and risk
added to a mining company when you have a hedge book.
My preference is to avoid the risk and go for the simple

Q: Why is Barrick still hedging? I thought they recognized
it was a problem.

A: Barrick and J.P. Morgan Chase have been sued by
Blanchard and Co., a dealer in physical gold, under the
Sherman Antitrust Act, alleging that Barrick and Morgan
were conspiring to fix the gold price by keeping it lower and
enabling Barrick to take advantage of the low price to buy
mines on the cheap. Whether there is any truth to that, the
courts will decide. But it may be why Barrick is sticking to
its hedge position. But another reason is that its hedge
position is so huge, at 15 million ounces, that there is no
practical way you can go into the market and cover 15
million ounces without causing the gold price to
skyrocket. I think they've locked themselves into a box.

Q: What's the impact on the gold market if Blanchard wins?

A: Extremely profound because it would suggest the gold
price has been low because of price fixing and not because
of its own merits or demerits. By way of disclosure, I should
note I've had some discussions with the Blanchard attorneys
as a potential expert witness should the case go to trial.

Q: What else should people look for in choosing gold stocks?

A: How much leverage a company has to the gold price. The
high-cost producers have more leverage than the low-cost

Q: Who fits that bill?

A: Durban Roodepoort Deep, a South African company that I
recommended last year.

Q: That hasn't performed well.

A: It is down. Durban Deep got hurt when the rand strengthened
against the U.S. dollar. Though the dollar price of gold was going
up, the rand price was going down and they had a significant
cost squeeze and their earnings were hit because of the impact
of declining margins on their cash flow. Agnico-Eagle Mines, a
Canadian mining company, is another I recommended that didn't
do well, either. It faced currency pressures, as well as a rock fall.

Q: A what?

A: A mine collapse. It set back production for two quarters. They
had significantly reduced production and it created a lot of
uncertainty as to whether they were going to have extra costs
associated with re-establishing the operations on the mine.

Q: But you're sticking with them?

A: Yes. They both have good management and good mines.
Durban has rationalized part of its South African operations to
reduce its costs. If I'm right about gold going higher, these
stocks will do well, particularly Durban, because of their
leverage to the gold price. Durban's leverage, however, makes
it a more risky bet.

Q: Where will gold be by year end?

A: I've been predicting it is going to be $430 by
September-October, and that is looking less and less likely.
I'll stick my neck out and say we'll take out $400 before the
end of the year.

Q: What else do you like here?

A: Newmont is still one of my top choices. Newmont has
gone from strength to strength, and it is clearly the gold
stock everybody wants to own.

Q: Isn't that just because it's got the biggest market cap?

A: Some things feed upon themselves. Its big market cap
enables it to do things others can't. But President Pierre
Lassonde has laid out a good strategy for the company.
They've positioned themselves globally with a diversified
asset base and a great operating team. I also still like
Harmony Gold, which I mentioned last year. It's a South
African company with good leverage to the gold price.

Q: How about something new?

A: Another major blue chip is Gold Fields, also based in
South Africa. It has a no-hedging policy and not only does
it have good mines in South Africa, but it has got a good
mine in Ghana. Ian Cockerill, who is the CEO, has done
a great job since taking control a couple of years ago.


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