Turk - Capital Controls, Panic, The Great Depression & Gold

With tremendous volatility in global markets, today King World News interviewed James Turk out of Europe. Turk told KWN that we are headed into an extraordinarily dangerous time for both the markets and the financial system, that will end in a massive panic. Here is what Turk had to say about what is taking place: “Today was a very important day, Eric, because gold was strong while the stock markets were weak. This is a trend I expect to continue, and one that will baffle many financial analysts, going forward, that don’t understand this type of cycle.”

James Turk continues:

“I was hoping to see more strength in the precious metals at the end of last week, Eric, given the pummeling gold and silver were given. But I guess that was too much to ask for with July option expiry this week.

Having driven the price of gold and silver down to this low level, I assume the paper-shorts will try to keep prices as low as possible, in order to maximize their profit by having calls they sold expire out of the money. We've seen this happen many times over the years....

“But there has not been any change in my thinking. Gold and silver are simply testing the May lows. So far the test has been successful. More importantly, we have to keep foremost in our minds that gold and silver remain in a bull market. I keep being reminded of this fact every time I look at the news, which keeps getting worse over here in Europe.

I think Nigel Farage got it exactly right in his interview with you on Friday. He said that the leaders over here need to resort to financial ‘repression’ to keep the euro project from falling apart. Of course that is not a solution, but simply a stop-gap by panicky leaders, who don't know what to do or who listen to bad advice.

Anyway, after Nigel's interview, the Spanish government announced the imposition of various capital controls, limiting the use of cash by companies and individuals. Expect more capital controls, soon, throughout the eurozone. That will only add to the panic, which is already bubbling just below the surface.

As we know, Eric, government actions like these do nothing to solve the problem. Financial repression is never a solution. Capital controls only buy more time, but you can't do that forever. So money continues to leave the European banks. The bank runs are not disappearing. In fact, they jumped across the Atlantic to South America, where Argentine banks are rapidly losing dollar-denominated deposits.

Bank runs were a focal point of the Great Depression, but they were just part of a bigger 3-step process that has parallels to today. After the 1929 stock market crash, people moved money out of investments and put it into banks. They wanted the liquidity, and, at first, did not fear for the safety of their money on deposit. We went though this step with the Lehman collapse.

As the economy weakened in the 1930s, people started to convert their deposits into cash currency. This was the second part of the crisis, when fear for the safety of one's money became more important than liquidity. We are now at stage two in Europe, and soon will be reaching this stage in the US. The downgrade of the major US banks, last week, is bringing heightened awareness of the fragility of the US banking system, meaning they are extremely very vulnerable to an economic downturn.

Europe's economy is clearly on a downward path, and economic activity in the US is slowing too. So the third step of the process might be closer than we think. That's when, in the 1930's, people moved out of cash, and into gold.

They did so back then because even though the US dollar was still formally tied to gold, people began to understand that there was more paper outstanding than there was gold in the US reserve. They believed that the US government could not possibly keep its promise to redeem $20.67 for one ounce of gold, so they moved out of paper-currency.

Importantly, they were right. President Roosevelt eventually devalued the dollar by 69.4%, dropping the gold content of one US dollar from 23.23 grains to 13.71 grains of fine gold. He adjusted the price of gold from $20.67 an ounce to $35 an ounce.

In the 1930's, if people we lucky enough to get their money out of any of the hundreds of banks that failed, they didn't want to take any more chances, Eric. They soon realized that the paper currency in their hand wasn't much safer than when they had their money on deposit in a bank. The panic to obtain gold or silver marked the bottom of the Great Depression. The solution was a higher gold price, and that is the same solution needed today.

President Roosevelt knew the solution in the 1930s, and lowered the gold content of the dollar, thereby raising the gold price. Central planners don't like that solution because it takes away the power they now have with fiat currencies, backed by nothing but their promises, but a higher gold price is coming nonetheless. It is the only solution.”