Wednesday, March 25, 2009


Is the Gold ETF (GLD) Right For You?
by James Turk

Copyright © 2009 by James Turk. All rights reserved.

The exchange-traded fund for gold (NYSE:GLD) has been described as a convenient way to buy and sell gold bullion. Consequently, GLD has been heralded as a major breakthrough for gold buyers, but is it?

I have been and remain critical of GLD, and have written several reports since its launch five years ago. I consider GLD to be risky because its prospectus says that gold reportedly owned by the fund but stored in subcustodians and sub-subcustodians is not audited and cannot even be inspected to ensure that it really exists. Nor is it insured. Further, the prospectus allows for the possibility that all of the gold supposedly owned by GLD is subject to the considerable numerous risks spelled out on pages 6 through 13 of GLD’s prospectus, including the significant risk that “Shareholders do not have the regulatory protections provided to investors in investment companies.”

GLD presents its financial statement in 10-K reports filed with the Securities & Exchange Commission, and these are revealing. GLD's balance sheet states its major asset to be: “Investment in Gold”. It does not say just: “Gold”. This classification declaring GLD's asset to be an investment in gold rather than gold itself provides an easy hurdle to meet for auditing purposes.

Investments in gold can be nearly anything gold related, and for example, include gold certificates and other promises to pay gold. GLD does not have to prove to its auditor that each share in issue is backed by gold in the vault. Rather, all GLD has to do to satisfy its auditor is to simply show them an account statement (i.e., a piece of paper) from any subcustodian or sub-subcustodian that says gold is owed by them to GLD.

If GLD declared its asset to be “Gold”, it would have to substantiate to its auditor that the gold really exists. The auditor would need to visit each and every vault where gold is stored, which neither the management of GLD nor an auditor can do because of the inability stated in the prospectus to audit or even inspect gold stored in subcustodians and sub-subcustodians.

Thus, the 10-K clearly re-confirms what others and I have concluded all along – that GLD is just another paper scheme. It should not be considered as an alternative to physical gold ownership because it is not. But we only need logic, and not the 10-K, to tell us that.

Since launching in November 2004, GLD has reportedly gathered over 1084.3 tonnes of gold ($34 billion at current market value). Of this amount, 420.5 tonnes – which is 17% of all the gold mined last year – were added in the past twelve months, a 63% increase in just one year. But what has happened to the gold price during this period?

Gold has fallen from its $1,003 record high one year ago by as much as $298 (a 30% decline) to $705 on November 13, 2008, and even now as I write one year later on March 18th, gold remains $114 below last year’s high price. How is it possible that GLD increases the demand for gold by 63% and absorbs the equivalent of 17% of all the gold mined last year yet the price of gold still declines?

Its sponsors would have us believe that these 1084.3 tonnes are newly created gold demand, but this proposition is self-evidently outlandish.

So instead of creating new demand, one should be asking, what would be the impact on the gold price if the $34 billion GLD manages would have been used to purchase physical metal if GLD hadn't existed? How much higher would the gold price be today if GLD wasn't launched?

My point is that without any third-party verification that all of the gold owned by GLD really does exist, GLD is just another paper product offering exposure to the gold price. The prospectus clearly states: “The investment objective of the Trust is for the Shares to reflect the performance of the price of gold bullion, less the Trust’s expenses.” The objective is not to provide individuals an alternative way of owning physical metal.

So do not view GLD as an alternative to physical gold, because it's not. GLD should be compared to a gold futures contract, not to physical metal.

1) A futures contract tracks the future price of gold in the form of a tradeable contract. In a similar vein, GLD tracks the spot price of gold in the form of a tradeable security.

2) There is no gold backing any individual futures contract outstanding, and there is no audited proof that there is physical gold backing every GLD share in issue. What’s more, to the extent that GLD is sold short, even if the gold in GLD backed every share in issue, the gold equal to the amount sold short would be owned by two shareholders – the original buyer and the buyer who purchased the shares sold short.

However, there are differences of course between a futures contract and GLD. One can convert their futures contract into gold by taking delivery. An individual GLD shareholder cannot do that. Only a so-called ‘authorized participant’, which are the big bullion banks, can. So in my view this limitation makes GLD less useful to individuals than a futures contract.

I favor the concept of a gold exchange-traded fund. However, physical metal is one thing, and the paper representation of metal like GLD is something entirely different. Importantly, it is physical gold itself – and not just the promise to pay metal – that is the bedrock asset of one's portfolio.

Consequently, use GLD as you would a futures contract – as a trading tool. It is not an alternative to owning physical metal.

Copyright © 2009 by James Turk. All rights reserved.
James Turk is the Founder & Chairman of He is the co-author of The Coming Collapse of the Dollar.

Friday, January 25, 2008

The "Real" Gold Price

Now that the gold price has climbed above the $850 high reached back in January 1980, many are proclaiming that the gold price is at a new ‘record’. That’s true of course when gold’s exchange rate to the dollar is viewed in terms of nominal dollars, but nominal dollars provide a distorted picture.

After all, everyone knows that because of inflation a dollar today purchases much less than it did twenty-eight years ago, so clearly, $850 today does not have the purchasing power it did back then. The question therefore arises, what price does gold have to reach in inflation adjusted dollars to equal the purchasing power of eight hundred fifty 1980-dollars?

The answer to this question depends upon which Consumer Price Index is used to calculate the inflation adjusted gold price. The two alternatives are the US government’s CPI or the CPI provided by John Williams of

These two different CPI measures provide very different inflation adjusted gold prices. So which CPI should we use?

The ShadowStats CPI eliminates the changes made by the US government since the early 1980s to its own CPI measure. In other words, the ShadowsStats CPI is the same one the US government used to calculate inflation while Jimmy Carter was president.

The changes made by the government to its CPI were clearly introduced to lessen reported CPI inflation. A lower inflation rate reduces the cost-of-living increases the US government makes to welfare and Social Security recipients, thereby reducing its budget deficit. Welfare and Social Security recipients suffer the consequences. Their purchasing power is reduced because the payments they receive do not keep up with the real rate of inflation.

An example will be useful to illustrate this loss of purchasing power. Let’s assume that a recipient received $850 per month from the US government in January 1980. Using the US government’s CPI, that recipient is today receiving $2,310. However, if the US government had not made any changes to the way it calculates CPI, the recipient would today be receiving $6,255. This difference can be seen in the following chart, which presents the January $850 gold price adjusted for inflation using both CPI’s.

There are a couple of important conclusions from the above chart. First, gold at its present price of $900 today is still very cheap. In other words, it is a long way from the purchasing power an ounce of gold achieved in January 1980. Second, both measures on the above chart show that the dollar is losing purchasing power every month. So if gold in the future were to reach a $6,255 gold price, the inflation between now and then would require gold to reach an even higher price to equal the purchasing power it had in January 1980.

Rather than reduce inflation, the US government instead shot the messenger. By fiddling with the CPI, the US government wants us to believe that inflation is not as bad as it really is, which is the same strategy it has pursued with the other important inflation messenger – gold. Government interventions to cap the gold price prevent the gold barometer from alerting everyone that inflation is a growing menace.

To conclude, even though gold is trading at a record high in terms of nominal dollars, the real gold price is far below the old January 1980 record when adjusted for inflation. Gold is still good value, and more importantly, government interventions have kept gold cheap, thus enabling us to buy gold at gold prices far less than would be the case if the government wasn’t intervening. Therefore, continue to spend overvalued dollars to accumulate undervalued gold.

Copyright © 2008 by James Turk. All rights reserved.
James Turk is the Founder & Chairman of He is the co-author of The Coming Collapse of the Dollar.

Tuesday, September 12, 2006

8 Things Everyone Should Know About Gold

Gold is one of the world’s most misunderstood assets. There are many reasons for this unfortunate situation, but one stands out. Gold exists in an environment in which there are many powerful forces fiercely hostile to it. Most notable among these are governments and the myriad of vested interests that feed from the public purse or rely upon some government-issued license or privilege. Governments have confiscated gold, taxed it, propagandized against it and even outlawed it.

Gold does not have any powerful sponsor championing its cause. In fact, the opposite prevails. Apologists for central banks as well as government toadies clamoring for continued state control of money have worked hard to discredit gold where possible, for example, by blaming it for things it was not responsible – like the Great Depression – and by denigrating gold as a fondling of speculators or a superstition better suited for primitive economies.

In short, conventional economic wisdom and monetary thinking has one aim; it is to justify and perpetuate today’s monetary system. It does not undertake a critical review of the system nor take an unbiased, unprejudiced look at alternatives such as gold.

Yet despite this hostile environment, gold continues to be valued throughout the world. Stripping away the misinformation and half-truths about gold, it is clear that gold continues to serve an important role. Why is that?

It is because gold is useful, and as a consequence, it therefore has value. And how does gold’s usefulness arise?

Here is a basic primer highlighting eight essential features of gold that everyone should know. By evaluating them, it is possible to determine whether gold’s usefulness could be of value to you, just as it already is of value to countless millions of people around the world.

1) Gold is a special, unique commodity

Gold is a special, unique commodity because it is the only commodity produced for accumulation; all other commodities are produced to be consumed. Essentially all of the gold mined throughout history still exists in aboveground stocks. Nevertheless, gold is rare.

The entire aboveground gold stock is only about 155,000 tonnes. If all this gold were put into one lump, its size would be 8,000 cubic meters, the volume of which is equal to the bottom one-fifth of the Washington Monument or 3¼ Olympic size swimming pools. It is also astonishing to note that in one day twenty-times more steel is poured than the total weight of gold mined throughout history.

2) Gold’s supply is its aboveground stock

Because it is accumulated and not consumed, gold’s supply is its aboveground stock. This fact changes everything in terms of how to analyze gold.

Gold’s price is still a function of supply and demand, but the supply that matters is not the relatively little amount mined each year, which history shows only increases the aboveground stock year after year by a relatively consistent 1.7% per annum. Rather, gold’s supply is the total weight accumulated in its aboveground stock for the simple reason that a gram of gold mined today is no different from a gram of gold mined by the Romans two-thousand years ago. In other words, gold in the aboveground stock is perfectly substitutable for newly mined gold.

In the short-term gold’s supply is relatively unchanged because new mine production cannot be meaningfully increased quickly. As a consequence, gold’s price is principally a function of demand.

While it is common to hear that gold’s price is determined by jewelry demand, that belief is misguided. Just like wet streets do not cause rain, the price of gold does not depend upon jewelry demand. The important point is not the form gold takes when it is fabricated, but rather, the use to which it is put. Most jewelry is high-karat gold acquired because of gold’s monetary characteristics, not for reasons of adornment.

Therefore, the price of gold – or more precisely because it is money – gold’s rate of exchange to national currencies depends upon monetary demand, or what some people mistakenly call its investment demand. It cannot possibly be otherwise, given that gold’s supply is its aboveground stock and that some 80% of this amount is held for monetary reasons, and not for fashion, adornment or other factors.

3) Gold is money

This observation about monetary demand means that gold is money. In other words, gold is hoarded because its greatest usefulness arises from those attributes that make it money.

Gold’s advantages as money are numerous. Perhaps most important in our present age marked by the perennial inflation of national currencies, gold is money that cannot be debased by creating it ‘out of thin air’ by government fiat.

Another important factor in gold’s favor is the mountain of debt and financial derivatives that overhang the world economy. Gold is the only money that is not contingent upon anyone’s promise, an attribute that explains why gold is called “sound money”.

4) Gold is an alternative to the US dollar

The US dollar is in trouble because it is being debased – it is being inflated by newly created dollars that are used to fund the growing federal government budget deficits and other public and private debt. This insidious inflation erodes the purchasing power of the dollar month after month. Consequently, more and more people are turning to gold as their preferred money.

It used to be that the dollar was “as good as gold”. The dollar achieved that distinction because it was formally defined as a weight of gold under the rule-based system known as the gold standard. Under that system, which ended in August 1971, gold and dollars were interchangeable and essentially the same. But no more, to the detriment of those who hold dollars. By some estimates, the dollar has lost more than 90% of its purchasing power since then.

Despite this dreadful deterioration the dollar has suffered, it continues to circulate as currency. Those same inexorable forces that create a hostile environment for gold are at the same time promoting and propagandizing the dollar to talk-up its demand. The Federal Reserve’s pro-dollar, anti-gold propaganda is aimed to maintain the illusion that the dollar is reliable money. Consequently, in contrast to their interdependent and complimentary role under the gold standard, gold and the dollar have become competitors. In fact, gold is the dollar’s only serious competitor. They compete for holders, and it is their relative demand that determines their rate of exchange, or what we call the ‘price’ of gold.

The relative demand for gold and dollars also explains the importance of dollar interest rates, which need to be raised from time to time to entice people to accept the risk of holding dollars instead of gold. But remember, only real (i.e., inflation adjusted) interest rates matter. Nominal interest rates are not important. For example, if dollar interest rates are 10% and the inflation rate is 10%, real interest rates are zero, and low or negative real interest rates are bullish for gold.

5) Gold preserves purchasing power

Gold preserves purchasing power, but there’s another way to describe this essential feature of gold. Don’t view gold’s price to be rising. Rather, recognize instead that the purchasing power of the dollar is falling. This conclusion can be made clear by looking at the price of goods and services in terms of dollars as well as gold.

For example, the above chart presents a base-100 analysis of the price of crude oil in dollars and goldgrams from December 1945. Since then crude oil prices have experienced a 64-fold price increase in dollar terms. A different picture emerges though when crude oil prices are viewed in grams of gold. A barrel of crude oil today costs about the same amount of goldgrams as it has at any other time shown on the above chart. So even though the dollar is no longer defined as a weight of gold as it was under the gold standard, this chart clearly illustrates that gold remains the most useful standard by which to measure the price of goods and services.

6) Gold’s value is determined by the market

Gold’s value comes from its usefulness, not from central banks. It is important to understand that the market gives gold its value, though central banks would have you believe otherwise. Central banks tell you what they want you to hear. They would like you to think that they control gold’s price, as that perception makes it easier for them to bolster the demand for the dollar. But the reality is quite different. The market determines gold’s price, just like it determines the price of a Picasso or a loaf of bread.

Central banks intervene in the gold market – just like they intervene in many other markets. The reason for their attempts to manage the gold price is simple. By keeping the gold price low, central banks make the dollar look better. With their interventions central banks are trying to make the dollar look worthy of being the world’s reserve currency when in fact it is not.

The gold price is a barometer that measures whether a national currency is being managed well (i.e., no inflation). So by trying to keep the gold price low, central banks artificially make the demand for dollars higher than it would otherwise be. Intervention is also consistent with the statist philosophy of many governments these days, namely, that they will usurp whatever power is needed to try maintaining the status quo that preserves the privileged position politicians enjoy at the expense of taxpayers.

Though central banks do not control the gold market, they can influence gold’s price. Importantly, their influence is diminishing. Central banks have been dishoarding much of the gold in their vaults, so they now hold a relatively small part of the aboveground gold stock. After the Second World War, about 68% of the aboveground gold stock was in the vaults of central banks. It’s now about 10%.

Less gold within their control means that central banks have less influence on its price, which is one of the reasons central banks are no longer the factor they once were. To learn more about central bank involvement in the gold market, you need to know what GATA knows. The Gold Anti-Trust Action Committee has published the combined research of many analysts, including several articles by me, and it is all available for free at

7) Gold is in a bull market

Gold has been rising since 2001, and the many problems national currencies are suffering mean gold is headed higher still. How much higher?

No one of course knows because there is never any certainty when it comes to markets. But in my October 2003 interview in Barron’s I identified $8,000 as my 10-12 year target. I reaffirmed that target price and remaining 7-9 year time frame in a subsequent interview in Barron’s in May 2006. Now before you say that target is outrageous, consider the following.

It takes about $10 today to purchase what $1 purchased in the 1970s, which saw gold rise that decade from $35 to more than $800 in 1980. I expect history to repeat, achieving the same mathematical ratio in gold’s gain, but with the dollar result being 10-times greater to account for its loss of purchasing power. Thus, I expect gold will climb from $350 in 2003 to over $8000 within a decade’s time.

It is not unreasonable to expect that gold will once again command the purchasing power it once did, particularly given the ongoing inflation and debasement of the dollar. One should never underestimate the capacity of central banks to destroy the purchasing power of a currency. In other words, gold is not rising – as the above chart shows, it still purchases the same amount of crude oil it did 60 years ago. Rather, the dollar is collapsing.

8) Buy physical gold, not paper ‘gold’

It is prudent to buy gold because of the alarming problems facing the dollar and other national currencies. Gold offers a simple means to diversify and therefore hedge the risks inherent in national currencies, but make sure you buy physical metal, not paper. There is a big difference between owning metal and just a promise to pay metal to you. Sometimes the promise is not worth the paper it’s written on.

Examples of physical metal that you can own are coins, bars, high-karat jewelry and the gold offered by my company, GoldMoney, which stores the gold you own in a specialized and insured bullion vault near London, England. Examples of paper ‘gold’ are gold certificates issued by banks and mints, pool accounts, futures accounts and the NYSE listed exchange-traded fund. With these products you own a piece of paper rather than gold itself. These paper products give you exposure to the gold price, but they come with the risk of default, namely, that you won’t be able to get your metal when you need it.

Gold should be viewed as the bedrock asset in your portfolio, so do not take any risks with it. As a consequence, own physical metal instead of just someone’s paper promise.


One objective of this short essay is to present the rationale for buying and owning physical gold, but another aim is paramount. It is to present facts that enable one to use reason, and not emotion, in analyzing gold’s essential nature and therefore its usefulness. In our world, some things are not what they seem at first blush, a maxim that is particularly true for gold, which in recent decades has become one of the world’s most misunderstood assets.

Gold may not be for everyone, but a fresh look at the facts never hurts. The 8 facts presented here should be carefully considered to better understand gold, which is the first step in determining whether gold may be useful to you.

Copyright © 2006 by James Turk. All rights reserved.
James Turk is the Founder & Chairman of He is the co-author of The Coming Collapse of the Dollar.