Sinclair on gold and the greenback
A gold guru takes a look at the big picture
THE GLOBAL MINING NEWSPAPER DECEMBER 10–16, 2004
Looking ahead to the coming year in
gold, we present an edited version of
an interview with James Sinclair, gold
trader and chairman of Tan Range
Exploration (TNX-T). The interview
was conducted by Walter Birch of
Gold Market Insights, which is sponsored
by Monex Deposit Co., a gold
broker based in Newport Beach, Calif.
Walter Birch: Do you feel that gold
is a good investment now, and why?
James Sinclair: The investment
characteristic of gold has certainly
changed in the past two years, and
what has changed is the definition of
what role gold is playing in the present
environment. That role is no longer of
a commodity nature but rather of its
historical currency nature.
The proof of the fact that gold is a
currency is the way it trades. If you’re
watching the action of gold, as we do
here, you’ll see that it’s tied directly to
the U.S. dollar.
Regardless of what the circumstances
are, whether we’re discussing
oil or the condition in Iraq or the economic
realities of the triple U.S.
deficits [budget, trade and currentaccount],
it’s the action of the dollar
that commands the price of gold.
So the answer to your question is
yes, gold’s an attractive investment,
because it’s a currency based on fundamental
factors that have historically
given birth to and sustained decadelong
gold bull markets.
WB: What portion of an investment
portfolio should an average
investor have in gold?
JS: To define gold correctly as an
investment, it should be defined as an
insurance investment — a policy that
you take out and hope you need
never collect on. But if you do need
to collect, you’ll find that a modest
position in gold goes a long way.
The percentage that, in my opinion,
forms the foundation of the
insurance purpose would be 10% of
an individual’s portfolio, defined as
10% of your liquid net assets.
GMI: What are your thoughts on
the stock market? How bad can it get,
and how can gold help in that regard?
JS: One of the primary, fundamental
factors for a long-term bull market
in gold is that you must have a period
of time in which the value of paper
assets — that is, their ability to store
value — comes into question.
When the paper asset comes into
question, then the hard asset becomes
more attractive — subjectively, even
if an individual wouldn’t (ordinarily)
be the type to invest in gold.
So, when the stock market is in
question and has reached a level that
might be considered over-valued in
light of present economic conditions,
or when the economy itself is negative
to the best interests of the stock market,
the tendency to shift from paper
to a harder asset is historically sound
and historically real, especially if
inflation is there.
The equation between the stock
market and gold is not that the stock
market has to be in a significant
down; rather, the stock market has to
have a question of its value as a storehouse.
This is a currency characteristic,
because a storehouse of value is
one of the primary definitions of what
a currency needs to be.
A sideways-to-weak stock market
is positive for the precious metal gold,
for gold as an investment, and for
gold-related investments.
WB: What do higher oil prices
mean for gold in the months ahead?
JS: I don’t see the direct relationship
that most people interpret.
Rather, the oil price affects the dollar,
and the dollar affects gold.
If oil prices are to rise, as they most
certainly would if there were any continued
terrorist activities in the major
oil-producing nations of Saudi Arabia
or Kuwait — those that sponsored a
token increase in production in order
to attempt to offset price — then the
dollar would be affected directly by
that because of the impact of higher
oil prices on the U.S. economy.
A lower dollar would immediately
be translated into higher gold, just as
a higher dollar is usually translated
into lower gold.
WB: Can you comment on the
Federal Reserve’s monetary policy
and its impact on gold?
JS: The Fed, when it creates money,
creates it from its own member banks.
The Fed has two choices: it can either
buy bonds or sell bonds to them. And
it’s not as if the bank members make
any decisions; it’s either debited or
credited to their account.
When they want to expand money
supply, they simply go to their member
banks, which are held within the
Fed system (it’s an internal bookkeeping
measure) and they put in
cash and take out the bonds, no questions
asked.
If they’d like to reverse that later
because they put too much liquidity
into the system, they just do it the
other way around: they stick the bond
into the member bank’s account and
take out the cash. That’s how the
manager of monetary aggregate has
control in the traditional way.
These days, everyone is reading this
huge expansion of M3 and saying ‘Oh
my goodness, what’s going on?’ The
truth is, because the Fed system is
inefficient, compared with the nontraditional
“Bernanke Electric-Mayhem
Money-Printing Machine,” which
is defined as the Japanese intervening
in the yen, then you’ve got to increase
what the Fed would do traditionally
— I’d say, by orders of magnitude 3 —
just to get the same effect.
What you see in the price of milk
and in everything we consume, from
clothes to food, is a tsunami [seismic
sea wave]. It’s huge and travels across
the ocean of the economic world at
700 miles per hour, as a tsunami does
from an earthquake. It is a wave of
hyperinflation caused by the use of
this outrageously foolish, non-traditional
tool [yen intervention].
Because of the enormous amount
of liquidity injected into the world
system and the inability to reverse the
transaction, we’re going to be hit by a
wave of inflation that no one’s going
to understand.
When you see milk at more than
US$4.40 a gallon, in a sense, that’s as
bad as paying US$3 on the coast for a
gallon of high-test gasoline.
It’s negative to the U.S. dollar, and
anything negative to the common
stock of the United States of America,
the U.S. dollar, offsets positively
the gold market.
No one can offer an argument
against it because it simply is a fact.
Anybody who watches a 3-minute
chart on the USDX [U.S. dollar index]
and a 9-minute chart on gold has to
know that the dollar creates the direction
of gold constantly. And then, during
the U.S. hours of trading, the maniacs
on the floor of the Comex multiply
that times infinity and create wild
moves in the gold price. The minute
the dollar reaches new lows, gold will
reach new highs. I firmly believe that.
So the extraordinary expansion in
aggregates we saw in mid-2004 was
the Fed stepping into the breach that
the Japanese left after their completion
and abrupt end to yen intervention.
When a huge buyer of U.S. treasuries
all across the maturities
stepped out of the market, the Fed
had no choice but to step in, and
that’s the whole story.
WB: Can you comment on the U.S.
election, and its effect on gold?
JS: I don’t think it mattered who
got in, because the fundamental,
underlying reality is that you have
three extraordinary deficits.
You have a deficit in the U.S. budget,
which is not going away because
there is no way to pull out of Iraq, to
de-mobilize our special forces in
Saudi Arabia, Jordan and all the
other countries where they’re
presently operating, without opening
up Pandora’s Box to al-Qaeda.
Regardless of who had taken
office, Bush or Kerry, the problems of
2005 are negative to the dollar and
therefore positive to gold. The first
phase of this bull market in gold
didn’t end with the election but most
likely will run through the end of 2005
as a minimum.
No matter who had taken office,
there would have been a bullish gold
environment. Timing is always a critical
question to the person who is trader-
orientated, but to those who see
gold correctly as a currency and as an
insurance mechanism, does it matter
exactly when you purchase insurance?
In light of present fundamental
conditions of budget deficit, of current-
account deficit, of trade deficit,
and without any policy programs
being instituted that have a historical,
substantive basis for correcting those
problems, there’s only one way the
dollar can go, and therefore there’s
only one way gold can go: it’s lower
for the dollar and it’s higher for gold.
The insurance investor, the fundamental
investor, the person who wishes
to build a foundation by increasing
his or her asset base and decreasing
or eliminating debt should simply
make that commitment in what I
think is the most logical gold investment:
the 1-oz. gold coin as the fundamental
building block of an investment
which functions as insurance.
To be a bit early is not going to be
costly in what is a generational bull
market, but to be 10 minutes late
would probably make the investment
impossible. And with so much adjustment
of circumstances that some
might call manipulation of markets
and events, one single trigger event
could make it too late to make the
investment.
I believe every single person reading
this analysis should get off this
manic, trading-everything, speculative,
gamble-holic, casino approach
and get into the insurance mode. The
theory here is you reduce your debt
or eliminate it, you build up your
assets and recognize that homes go up
and down just like securities, while
debt stays at one level.
For those who have borrowed on
their homes and refinanced their
homes, it’s extraordinarily important
to pay attention to the difference
between what they owe and what
they have, what with the potential for
interest rates to rise.
You need to bear in mind that the
U.S. dollar is a piece of paper, a
promise to pay, built on psychology,
guaranteed by nothing, while gold is a
currency, not a commodity.
A gold coin seeks no agenda, has
no nationality, and is universally
acceptable. It’s a storehouse of value
because it will buy for you right now
exactly what it would have bought
many, many generations ago.
Although our regulatory bodies
suggest to us that it is not correct to
say that the past is the proof of the
future, on what else do you have to
make judgment?
Gold coin is right. It’s right for fundamental
reasons, it’s right for fundamental
people, and it’s right for making
the fundamental decision to
insure your family and to insure your
ability to weather problems and
storms that you don’t cause but are
caused by others.
In my opinion, it didn’t matter who
was elected, because the problems are
set, there are no solutions, and I don’t
see any statesmen coming down the
horizon.
Whenever you manipulate and
hold a price down, as happened with
the Swiss franc in the 1960s and gold
for 40 years or more under US$40 per
oz., markets create a coil effect by
“stabilization,” if we use a kind word,
or “manipulation,” if we’d rather use
a different word.
A market that finds itself
restrained by spin, by adroit intervention
by the Exchange Stabilization
Fund, is counter-productive, because
what you’re doing is creating pent-up
emotion.
So when it finally lets go, when one
drop of Saudi oil goes up in flames,
gold will be US$529 per oz., in my
opinion, and oil, if we’re lucky, will be
US$55 per barrel.
Are you willing to take that risk?
Are you willing to take a risk that now
everything is fine in Iraq? That this
new appointed government is, in fact,
going to receive sovereignty and that
there will be elections, and that those
elections will be in the best interest of
the West? That’s a long shot, a real
long shot, . . . almost an impossibility. It
is not, by any means, a defined affair
over there, and the investment that is
least favoured by any further complexities
in the Middle East — embarassments
or worse than that — is the U.S.
dollar. If the U.S. dollar is affected negatively,
it offsets into gold positively.
How do you insure yourself against
further terrorist actions, against more
complexity in the Middle East,
against one drop of Saudi oil going up
in flames, and how do you do it conservatively?
You own 1-oz. coins
without any debt attached to them.
They’re not the promise to pay;
they’ve already paid you.
If you could take a look at all the
gold in the world, you’d find a cube so
small you’d go into shock. A standard
is something in which the supply is
controlled; you can’t increase it, most
certainly not by political edict.
There’s only one way you can
increase the supply of gold, and that’s
by increasing its price.
So, the probabilities are strong, the
fundamentals support, and the technicals
will underlie a rise in the price of
gold to a minimum of US$529 per oz.
in this first phase of a generational
bull market that has at least until the
end of 2005 to run.
WB: Do you have a near-term
price target for gold?
JS: I hope the maximum level for
the price of gold in the first phase of
this bull market will not exceed
US$529 per oz. The simple reason is
that: US$529 is the normal price that
would be assumed to be attainable
within the bull characteristic of this
market; a price above US$529 is a
runaway.
Gold will, at some point in a generational
bull market, go into a “runaway.”
A runaway is a characteristic
of gold when it attempts to balance
the balance sheet of the United States
in terms of its external liabilities.
This means that you take the gold
owned or ostensibly owned by the
U.S., multiplied by the market price
of gold, and it should equal the external
liabilities of the United States.
In 1980, that number was US$900
per oz., and gold reached a high of
US$887.50. The number at present is
US$1,450 per oz. and rising. If anything
like that were to happen, it
would be most unfortunate. But if it
does occur, it would likely happen in
the second or third phase of the bull
market in gold, probably in the 2007-
08 and 2010-11 area.
WB: Can you comment on the current
Bush-Greenspan years, and compare
them to the Nixon and Carter
presidencies as they relate to gold?
JS: You have a public now which is
desensitized, and an economic system
which is desensitized, in terms of the
removal of alarms. There are no more
currency parities, for instance, which
would have been an alarm. We can
have the 30-year, U.S.-treasury market
move two full points in a day and
no headlines will read CRISIS! We
have Enrons and Long Term Capital
Managements that turn upside down
and the public fails to perceive a crisis.
The world today is in more dire circumstances
than it ever approached
during the Nixon-Carter years, and
we have a public which is desensitized
and fed news which is replete with
spin and fabrication.
All of that doesn’t lead to solution
but rather allows the circumstances to
become so skewed and so out-ofhand
that when the public does realize
what the situation is, if you
haven’t made your investment in gold
prior to that, the probability is that
the price will prevent you from doing
it by rising violently.
WB: With the public being desensitized
and the news controlled, do you
see more and more coil and tension
building up that could lead to a crisis
and a need for gold insurance?
JS: You’re in an environment that’s
being “painted” every day to look
fine. The news reports have a marching
order, as it were, a principle of
“never upset the social order,” and
they constantly massage events.
The news morphs constantly, and
Saudi Arabia could easily be that trigger
event that sets all of this spin spinning
out of control.
WB: To summarize, can you
review the primary reasons for owning
gold now?
JS: The primary reasons for owning
gold are the lies, falsehoods, manipulations,
lack of corporate ethics, and
amoral business environment that
have created a potential for a significant
alteration in the value of the U.S.
dollar. A new low in the U.S. dollar is
a new high in gold, and it’s just that
simple.
Technically, fundamentally, there’s
no question in my mind that a new
low in the dollar is coming. Historically,
people have wanted to see the dollar
rise. Historically, there’s been a
subjective desire to come to the aid of
the U.S. common stock.
But the U.S. has never had as
many enemies as we have now, nor
has the country ever suffered the
degree of embarrassment that the
present conduct has caused the U.S.
to experience. The total of that is a
poor potential for the value of the
U.S. dollar, which is the ultimate reason
for owning gold. We’re in deep
trouble, and you don’t even need to
go to economics; just go with geopolitics,
and it’s a good reason to own
gold. If you examine economics, it’s a
wonderful reason to own gold.
The maniacs on the Comex, who
are really just a bunch of knuckledragging
morons, only multiply whatever
happens in the U.S. dollar by 100
in the gold price. Gold can go up and
down 20-30 points a day, but when it
finally goes, it’s going to be just like it
was back in the 1970s, when I remember
appreciations of US$100-150 per
oz. — except that, this time, I don’t
think it’s coming down.
It’s not a good prognosis: we’re in a
lot of trouble. Finally, you’re going to
run out of fingers and toes to put in
the dyke, and the water’s coming over
the top and down through the middle.
And the price of gold will go straight
up, and if you don’t own it, you won’t
have a chance to own it.
If you do own it, own it for insurance,
not for just another game of
casino that we’ve turned every market
in the world into through the creation
of paper. And a little goes a
long way: every investor should have
10%, and you should have coins. It’s
an insurance policy that you hope you
never collect. It’s as simple as that.
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