2011 Gold outlook: James Turk

“We are going to hit the $1,800 - it’s just a question of time. It will probably happen in the first quarter of 2011”

GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. Joining me on the line is James Turk, he's the founder and chairman of Gold Money. James, the last time we spoke gold had just hit $1,300 and you were hoping for around $1,800 by year-end but you did admit that it was possibly a little optimistic or a little unlikely at that stage. Given everything that has happened since that conversation, how has your forecast changed going into 2011.

JAMES TURK: We are going to hit the $1,800 - it's just a question of time. It will probably happen in the first quarter. This is normally a seasonal strong time of the year and there are a lot of fundamental factors that are driving gold higher so we won't hit $1,800 before year end but we could hit $1,500 though even though we have a few weeks left, it's still a reasonable target but we should be looking for $1,800 in the first quarter of 2011.

GEOFF CANDY: You mentioned fundamental factors, which in particular are the ones that you are focussing on?

JAMES TURK: First of all the big blockbuster was the fact that China is importing so much gold now that even though the world's largest gold miner, the demand domestically is exceeding domestic production for the first time in quite some time, so as a consequence that's a major factor still rippling its way through the gold market in terms of that information - but then there are the other things, the sovereign debt crisis, rising commodity prices, all of these things are a precursor of inflation and I am actually of the view that the dollar is going to hyper-inflate which probably means a couple of other national currencies will hyper-inflate as well. So I am always sensitive to signs that hyperinflation is near, aside from the commodity prices, which have been rising very strongly. Last week we had another piece of the puzzle fall into place when long-term interest rates on US government paper put the Treasury bond and the Treasury note started surging. Even though the Federal Reserve is buying $600 billion worth of paper, under their new quantitative easing programme, which is just a fancy name for money printing, US interest rates are rising which means that there are more people willing to get out of government paper than the Federal Reserve is standing ready to buy government paper and buying government paper and turning it into currency is a sure sign of hyper-inflation anyway.

GEOFF CANDY: To play devil's advocate to some extent, there was an interesting piece of work done by Resource Capital Research coming out saying that at one level given its role as a safe haven at the moment, gold's fundamentals are less important right now than market psychology and expectations around what is going to happen around other asset classes and as potentially as other asset classes start to recover and their expectation is that that might happen later on next year, gold's safe haven qualities might loose their appeal to some extent and perhaps we might see a decline in the price. What do you make of that?

JAMES TURK: Sentiment is indeed very important and I follow that quite closely and as you know every bull market has three stages. During the first stage you get apathy and neglect - very few people are paying attention. That's the stage that gold was in for most of this decade. It was up nine years in a row against the US dollar - double digit rates of appreciation against all of the world's major currencies and few people were paying attention, but when it went over $1,000 an ounce; that was a wake-up call. Gold went into its second stage an in the second stage more and more investors are starting to pay attention to gold - they are starting to pay attention because of other things that are happening and other asset classes which is the point that you were making but the third stage which is the speculative stage is still way in the future - that's the last few months of 1979 and early 1980.

GEOFF CANDY: One interesting point that I have noticed recently is there's been a lot of expectation around the Indian wedding season and what type of buying we might see, given the higher prices that we've seen over the course of the last couple of months and there seems to be almost an acceptance of higher prices from a jewellery point of view. Would you go along with that and if so what does that mean for that sector of the audience.

JAMES TURK: That's actually a very good observation. Back in stage one the gold price would drop 10% to 20% before that kind of demand came back into the market but once we went over $1,000 an ounce that demand for physical metal has trailed very closely all the way up - so it suggests to me that the demand for physical metal, not just from India but from all sources is right there under the market. You are not going to see these big corrections in gold like you did back in the earlier part of the decade. The physical buyers are right there ready to get rid of their paper and go into physical metal. I think that's another important trend. It actually started over a year ago when Greenlight Capital announced that they were switching out of the ETF into physical metal and I think that had a lot of people scratching their heads back then as to what they were thinking but a lot of hedge funds and savvy investors are starting to understand that owning physical metal with this financial crisis and sovereign debt crisis and everything else continuing to brew, owning the physical, tangible asset is much safer than owning any paper representation of gold.

GEOFF CANDY: There have been some discussions had - you've probably been involved in some of them around, the potential, or the difficulty some people have been having in actually obtaining delivery of that physical metal, is that something that people should be concerned about?

JAMES TURK: I think it is - gold is the bedrock asset in your portfolio. You don't want to take risks with it so you have to be very careful how you store it and where you store it and thing that I always recommend is if you store it in a vault somewhere you always have to get third party independent verification that your gold and silver, if you own silver as well, are actually there in your name, recorded, not encumbered in any way and not loaned out by some bank. So I don't recommend storing in bank vaults, I recommend storing in private vaults like we do in Gold Money - we use a large Swiss company, VIA MAT International to store our customers' gold. So what you really want to do is be careful with your metal. You don't want to take risks with it and storage is an extremely important part of that component.

GEOFF CANDY: On that topic of physical metal, I read a piece that you wrote I think it was last week, about the fact that gold futures are trading at lower levels than gold spot and you saw this as an indication that physical demand is very strong, could you perhaps take us through that thinking?

JAMES TURK: Basically interest rates are out of whack. Gold interest rates are higher than Libor and because interest rates are so out of whack there should be arbitrages coming into the market to bring interest rates back into their normal patterns. The net result of this, because there are no arbitrages I don't really think arbitrage opportunity exists which means that the reported rates are not actually accurate and that gold is really in backwardation, it's not really trading in contango which is really what is happening in the physical market as well. The demand for physical metal is very strong and as a consequence I really think there's a backwardation in the gold market and that the GOFO rate and the contango on the Comex are not really a true representation of prices at this moment in time.

GEOFF CANDY: If gold futures are trading at lower levels, is that not indicative of the fact that there are at least some people who think gold prices are going to go lower over the next couple of months.

JAMES TURK: No definitely not - because gold is not like other commodities. Gold is in fact not a commodity it's money. It's a tangible asset like other commodities but it is in a different asset class within this tangible asset group. Commodities are consumed and they disappear, gold does not get consumed, it doesn't disappear, it continues to be accumulated every year, there's about 1.5% more gold added to the above ground stock of gold - and the reason why gold is accumulated in this way is because it's money and as a consequence it has an interest rate structure that is determined by the market, so gold should be in backwardation even though interest rates don't show it.

GEOFF CANDY: Just to close off, if we look as we move into 2011, you are expecting gold to hit $1,800, how do you see it happening though in terms of the patterns of trading - where do you see the demand coming from and just in general how do you see the gold market playing out in 2011.

JAMES TURK: The demand comes from different places depending on what the circumstances are. For example a couple of years ago there was a lot of demand coming out of the United Kingdom when sterling was falling against the euro and people were looking to gold as a hedge against currency fluctuations. The past several months the demand for gold from Europe has been huge, ever since Mr Trichet broke his pledge not to buy government bonds and turn them into currency. That was a wakeup call for people particularly in Germany and Holland, that the ECB is not being managed like the Bundesbank was and that it’s in fact under political control which usually means currencies are going to be debased so a lot of money coming out of the euro now into gold and silver. Wherever the monetary problems arise that's where the demand flows from and there are so many different hot spots around the world in terms of potential monetary problems that you are going to see gold demand strong pretty much globally.