Sinclair on gold and the greenback

Reverse-circulation drilling into the Kisunge zone at Tan Range Exploration's Luhala gold project in Tanzania.Reverse-circulation drilling into the Kisunge zone at Tan Range Exploration's Luhala gold project in Tanzania.

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 current-account], 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 decade-long 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 non-traditional “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-of-hand 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 knuckle-dragging 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.

— James Sinclair provides daily gold commentary at www.jsmineset.com, a free service to the gold community. Monex Deposit Co. can be reached at www.monex.com or 1-800-489-0839.

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