MINEWEB: A very good evening to Jim Sinclair, the man the Americans call Mr Gold. Well, Mr Gold, it seems like we got you on the right day. The gold price is up nicely, $342.50 as we speak right now. Before we go into more of the broader background and where you think gold could go, Jim, what caused this last little rally?
JIM SINCLAIR: It's all in the dollar, Alec. Watching gold trade during the day, around the night, and around the world, it's been lock-step, in an inverse relationship, of course, with the action of the dollar almost to the moment. And the story of gold lies primarily in the potential cost of this new policy of pre-emptive strike, and possibly a beginning of an era of a more imperialistic, powerful and somewhat pugnacious democracy and its effect on the major holders of the dollar in the Mid-East.
MINEWEB: The next, you say, pre-emptive strike and also expanding of democracy, etc. Is this a foregone conclusion in your mind that Iraq is only the start?
JIM SINCLAIR: Iraq is the story for this period of time, but the real story is the shift of the national policy. And the question that’s being determined right now in the dollar is what is more dangerous – a potentate with the potential of significant weapons, or a democracy which has turned belligerent. A hard thing for me to say, because I’m part of the equation, over here, but it is the real sorting-out that’s taking place in the US dollar, therefore in gold. Most unexpected, I’d say, by most of the people who have been watching the gold market, that the US dollar should in fact have reached the low end of its support range here today at 96.5 on the USDX index. That should have been much greater support between 96.5 and 97.5, rather than trading the dollar on the downside, like a hot knife slicing through butter.
MINEWEB: What is it telling us, this? What is the market telling us?
JIM SINCLAIR: Well, it's basically telling us that those that have been the major buyers of the US dollar over the past six years, basically Islamic Asia, and the great success of the sales policy, salesmen in fact, of the dollar reserve standard, which now is internationalised everywhere – that we basically have overstuffed the central banks around the world and the dollar has become a non-performing asset, because the depreciation of the dollar is orders of magnitude larger than the present interest being earned on US treasury instruments by central banks. So, if the central banks were to continue their policy of sale of a non-performing asset, which for 22 years was gold, now they would be in fact holding the gold and selling the dollars. Well that’s not happening yet. But the potential is there, as the dollar continues to decline, the loss being accumulated by dollar-holders is certainly an increment for disinvestment. However, the dollar weakness we see now is primarily out of the Mid-East, primarily out of Saudi interest, where the US has had a major divorce in the last week, if you’ve been watching the news concerning the withdrawal of military bases from Saudi Arabia, to be relocated – guess where? – in Iraq.
MINEWEB: And the implications of that for the house of Saud?
JIM SINCLAIR: Implications can be seen right in the marketplace. We have the Exchange Stabilisation Fund, which is run by the President and by the Secretary of the Treasury, which was established in 1934 by $40m in gold back then, and has the obligation and the legal right to participate in markets, primarily in the market for the dollar, to create a somewhat stable environment. But recently, from 99.20 down, each time they’ve entered the market to stabilise, they’ve run right into tremendous amounts of dollars for sale. And that had a distinct effect on the gold price, as I said before, because of the fact that gold and the dollar are your primary reserve assets held by central banks. And a great shift right now is to say gold is a non-functioning asset, [indistinct] a possible statement while unfortunately now the dollar is the primary non-performing asset of world central banks. And at the same time the apparent lack of an ability to find weapons of mass destruction certainly has brought a great deal of thinking in the oil-producing Mid-Eastern nations – that the purpose of the Iraq campaign might not have been weapons of mass destruction. And the conduct of the Iraq people also strains people’s belief – in the purpose of that campaign being to give freedom to people who don’t seem to be able to function under freedom. So the net result of that is to have caused a great deal of increasing hostility, in a financial sense, between the oil-producing nations in the Mid-East and the US, which is now being fought in a different battleground, the battleground of the marketplace for the US dollar. And that’s always been that way, with all the argumentation that you could do, with all the supply-demand factors that you might review. Unfortunately, the dollar and gold are very clearly lock-step in the inverse relationship, because of the outrageous success the World Bank and the IMF have had in selling the concept of a worldwide dollar-reserve standard, and the tremendous amount of dollars. And the primary consumers of dollars, and therefore US Treasury instruments, has been just those people that we’ve so significantly alienated in the last few months. There’s a court case …
MINEWEB: Sorry?
JIM SINCLAIR: There are other reasons too. There’s a court case here in the US naming certain members of the Saudi royal family as allegedly having supported the 9/11 situation financially. Now that’s allegedly. But it's just the wrong time when it's being prosecuted by an attorney of very high standing in Washington DC. There’s a lot of things we’re doing all at one time to cause the major dollar-holders to, let’s say, be much less obligated to take a loss holding US dollars. So a major divorce has just taken place between the United States and Saudi Arabia at the same time as we’ve taken a military stand and, after the military stand, having a difficult time sustaining the reasons why we were there.
MINEWEB: I guess it's the old thing of demand and supply, and what you’re saying is that those who were responsible for much of the demand for the US dollar in the past are, for new reasons, now responsible for much of the supply. But when you have a look around – just to elaborate on your view on how the IMF and the World Bank has done such a successful selling job – if you look at the central banks around the world, they have, for decades, been selling gold and holding dollars. Our own Reserve Bank in South Africa has got virtually no gold and plenty of dollars as its major asset, which seems a strange thing from a gold-producing country. Are you getting any indication that that might reverse?
JIM SINCLAIR: I don’t think that that would reverse just yet. The dollar has, for those that are technically orientated, four head-and-shoulder neckline breaks. Now the only two other entities that had the same circumstances would be Enron and General Electric. So let’s take a company of good standing, General Electric. It still lost 50% of its price structure in that because of that. The US dollar, right now, having just come through its fourth neckline, has a price objective of 0.72 on the USDX. And in all probability it will find that level.
MINEWEB: What is that? You’ve mentioned that a few times, USDX, what exactly is that?
JIM SINCLAIR: The US dollar index, trade- weighted index. Just picking something by which you would value or look at it. So the USDX is very popular here in the continent as a way of looking at the dollar in trades. So it's had a high of approximately 122, recently dropped to a support level at 99.20 where you could clearly see the Exchange Stabilisation Fund very active in supporting. Got filled at 99.20. Dropped this morning through the next very important level of 96.5, 97.5 as if it didn’t even exist. The Exchange Stabilisation Fund entered then approximately 38 minutes ago, and even that rally now is starting to fade. So gold, seeing this, is taking its lead. Central banks at this point are being strained by the loss they have in the dollar. But the dollars, as of yet, are not embarrassed enough to find themselves making a shift. In the 70s, when this happened, and it happened to less of a degree than it has now, the central banks did shift, becoming, from being sellers of gold, as we well remember – the IMF in our monthly transactions central banks also selling – to buyers. So there’s a good probability that somewhere along the line of this experience some central banks will shift. But different from you and I and those that are listening, central bankers don’t have to make a profit. They have to make a politic. And if we required the central bankers to be profitable in their transactions, we would do away with the central banking system. So the answer is no, profit isn’t going to drive them, but embarrassment will in time.
MINEWEB: Jim, it's quite interesting, last night we had Bobby Godsell, the chief executive of AngloGold in our studio, imploring that the South African Reserve Bank start investing in gold rather than its obsession with having our assets of this country in US dollars – and I guess if you get more of that kind of pressure from people like him and others in this country and others around the world, we could indeed see the central banks listening to what the marketplace is suggesting they should be doing.
JIM SINCLAIR: Well the market, the weakness of the US dollar is in all probability going to bring gold back into the system in a most unique way. And the unique way that it's going to occur is a revitalised, modernised, gold-cover clause, whose proper name is the Federal Reserve Gold Certificate Ratio, but tied this time to M3, and probably some time in 2004, if the dollar does go to 72, you can almost be assured that gold will go back into the system, not in the form of convertibility but for the simplicity of creating a firmer dollar at that time, tied to monetary aggregate growth, in order to get a successful election and market rally and general equities some time in June of 2004. So, in a very perverse way, gold will stop the gold price from rising and the dollar from falling, but most likely at higher levels than we see now.
MINEWEB: Well that’s the point. If the dollar were to go down to this weighted average basis of 72, where is the gold price likely to settle?
JIM SINCLAIR: At that level, the $400 would be behind us, but $500 would not be breached. If gold was to go over $529 it would move out of the norm of a bull market into a runaway, and as a result of that disqualify itself due to volatility.
MINEWEB: But …
JIM SINCLAIR: So the probability is more in the area of between $400 and $450, but not as a fixed price. The question would be when would it occur after that. The probability in gold is that it would become somewhat boring and trade within a $50 range of whatever the price was at the time of the event. But it would be fixed, not by a government, not by convertibility but, believe it or not, by derivatives that would be created on the formula dealing with M3, and traded most likely on a listed exchange.
MINEWEB: Let’s just step back a little. Last time we spoke in January you were pretty confident that the gold price would get through $400 an ounce in the course of this year. Just after we spoke this year, it looked like it would get there, because it got to $375 at one stage, but eased back a little.
JIM SINCLAIR: $390.80 – the dollar price of gold after we spoke.
MINEWEB: It has, however, come back subsequent to that. Do you …
JIM SINCLAIR: Yes, I do still believe gold will go through $400. I think the only thing that could reverse that is the dollar, and dollar strength, and I don’t see a snowball-in-you-know-where chance that the dollar will become significantly stronger and be able to reverse that. Today there are very few dedicated people in gold and the people in gold shares and gold are two entirely different crowds that I don’t even believe speak to each other. In a time when gold shares used to forecast gold, now gold shares forecast gold shares, and gold forecasts gold, but it's truth tied to the dollar. Maybe that will come back again but in today’s information world there’s simply too much information and too little facts. And the gold share crowd are not informed of what they’re in. That may change in time, but it's a hard road and would take a significant length of time. Everyone is a gambler today. Everything is casino, the gold share traders are momentum traders without a conviction for gold, unfortunately.
MINEWEB: Last time we spoke as well, you were quite convinced that the increase in the gold price would outdo any appreciation in the South African rand. And again it happened for a brief period of time, but the South African rand has been so terribly strong over the last few weeks that it has pounded South African gold share prices. Your reading of the situation?
JIM SINCLAIR: As long as the story of gold is between the recent lull and, it should be, $390.80, the rand will remain as the most, let’s say, critical element holding back the South African gold shares. However, if the gold market does what I think it will do, then the appreciation of gold will go beyond the vexing character of the rand and it will lose its position as the main determinant. Gold will become it again. I believe that will happen. In a sense, I hope it doesn’t happen too much because the future of the gold companies would be better with a higher and more stable gold price, because the rand has its seasons. And many of the currencies around the world are only doing what they’re doing, not for economic reasons, as much as they are because they are to some degree – and it's in varying degrees – mirror images of this dollar problem, which is really becoming the battleground of the Middle East war, not with singularly Iraq, but rather the US presence controlling the Iraq oil fields, versus a huge divorce ceremony that’s just taking place with the Saudis, but, in truth, with the six major oil producing nations of the Mid-East. We can be pugnacious, but we ought to pick our battle fields with a little bit more care.
MINEWEB: The rand, however, has been strong against virtually all currencies. Not just the US dollar. Do you see that …
JIM SINCLAIR: So in truth has the euro, but the euro only gains its strength because of public relations. It's not named after any country and therefore it can’t have any political agenda. Currencies are moving today not because of intrinsic value, but because people are seeking other avenues and haven’t realised yet that gold is the avenue against all currencies. When the currencies reach levels, including the rand, where it strains your imagination to be a buyer and a bull in it, the interest will shift to gold. Thank about that.
MINEWEB: And that could be months?
JIM SINCLAIR: For instance, there is no chance, in my mind, that the euro is going to venture too deeply into the 1.20 area versus the dollar. It's already simply a basket of countries with their own serious problems and not a true alternative. It's a mirror image. There’s a lot of that in the rand. It's not as dollar-related as it is a dollar-let's-get-out-of-it-and-find-something-else-related. If this dollar was not sitting on a cliff and falling off right now, I don’t believe the rand would be as extraordinarily strong as it's been.
MINEWEB: But as the dollar continues …
JIM SINCLAIR: But bear in mind this is not because the world revolves around the sun of the US. It's because the US, via its sales people, the IMF and World Bank, stuck you with dollars. Your bank is loaded with dollars.
MINEWEB: Jim, in the shorter term, though, with the dollar continuing in its weakness, is this not a signal that the South African rand will remain strong for at least a period?
JIM SINCLAIR: Yes. Yes, of course, there’s no denying that fact. That’s a reality in the marketplace. But it will exhaust that reality when people begin to look at the currencies they’re buying and the country’s economic position – and I’m not speaking of the rand here, but the clear example is the euro. It's a public-relations success. It's not a value buy.
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