The 5th Element Shows Signs of Emergence
From: Jim Sinclair
Date: Friday, October 4, 2002
As you know from my various postings, I have been focused in on the US dollar and the US Treasury Bond Market, looking for any sign that non-US holders of US Treasury Securities were becoming concerned over their profits being eroded by lower dollar levels.
Well, today was the first sign of that possibility as the stock market declined significantly in the first five hours of trading. Surprisingly, when the market was off considerably and showing no sign of recovery, the long-term US Treasury Bond Market was also in a decline. This is the first break in the multi-year profile of this market, which has been rising in tandem with every significant stock market sell-off. Today, US Treasury bonds, rather than rising, were falling as the stock market marched towards a Dow at minus 300.
What makes me focus on this phenomena was that there are rumors that the Exchange Stabilization Fund entered into the US dollar Forex cash markets to support the dollar as the Dow went minus 200. I am therefore of the mind that this reaction from Washington was a reaction to the beginning of a liquidation of US Treasury Bonds by non-US holders. We shall see?
However, all efforts to stop a dollar decline here, except in the shortest-term, are a waste of time & money because of the concomitant events of US Budget Deficit - US Trade Deficit - US Current Account Deficit and the dollar reaction. The bonds did rally on the rally in the US dollar as did the stock market.
Regardless, today, Friday, October 4th, should be noted as the first time the bond market fell out of its inverse relationship with the stock market since March of 2000. That would be right on time, if I am to be correct in my assumption that the 5th Element necessary for the fundamental conclusion that we are in a long-term gold bull market was to fall into the equation, which is a top in the bond market before the end of November 2002. Of course, I put out an exploratory short again on the 30-year bond with a 32/32 stop loss.
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RE: Implication of IMF/World Bank Allowing Sovereign Debt
From: Jim Sinclair
Date: Sunday, September 29, 2002
What effect does the latest proposal by the IMF/World Bank of allowing sovereign debt to be bankrupted have on the
1) U.S. Banking System?
A: You can now expect bankrupt developing nations to declare this reality in their own best interest. This will cause rating agencies to recognize the worthless condition of this type of debt immediately upon cessation of payment on interest due, even if the nation in question has not declared itself bankrupt. More banking institutional downgrades in credit worthiness can be anticipated for US financial organizations. Debts of this type, now in arrears, will have to be scheduled from non-performing to bankrupt. No bank can pretend that this type of debt is functioning any more, if it is not.
2) The USD Index?
A: The question is no longer if the US dollar will decline below 104, but when. The US dollar, like all currencies, is the Common Share of the country it represents. In this case, it is the public corporation, USA. As USA Inc.'s economic factors falter, so does the value of its common share.
3) The price of gold?
A: The decision to recognize the bankruptcy of sovereign debt will via #1 and #2 above will now become a positive factor in the price of gold.
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RE: 5th Fundamental Building Block Required for Confirmation
From: Jim Sinclair
Date: Wednesday, September 25, 2002
5th Fundamental Building Block
Required for Confirmation of
A Long Term Bull Gold Market Developing.
I have outlined to you on www.lemetropole.com, www.financialsense.com and www.tanrange.com the five fundamental factors that must exist to confirm a long-term bull market in gold. So far we have four of the required fundamental criteria in place which has resulted in the rise from $248 to just below $330.
At the present time the opposition to the gold price from the gold cartel is beginning to soften because of the financial condition of these firms. As a past member of the executive committee of a significant clearing NYSE firm, I can assure you that management of JPM, for instance, is calling in all available cash credit balance from operations to central treasury. That is a standard reaction to a credit downgrade. As a result, the gold trading department will have precious little room for maneuvering. Therefore, all assaults on gold at this point made by the gold cartel will be more bluff and fury than reality. At the same time, gold shares have continued a defensive appearance as observed in my last VIP (I suggest all should review) posting to you.
At the New York Seminar yesterday I presented an analysis of the market spiral now in effect that will produce the final 5th element required to complete a fundamentally confirmed bull market in gold.
Definition
A spiral is a grouping of cause and effect
that work to accelerate each other towards an event.
The Present Economic Spiral which will cause a significant rise in the gold price.
In the Environment of a US Budget Deficit
We are experiencing
A US Trade Deficit
Which impacts
A US Current Account Deficit
Which, when it arrives at 5% of US Gross Domestic Product, produces
A lower US Dollar in Forex Markets.
The recent strength in the US Treasury Market has been primarily the product of flight capital from the general equities markets. However, it is a characteristic of Bear Equity Markets that the lower the bear goes, the lower is the average daily volume traded. As such, flight capital is greatest early in the RECOGNIZED (recognition comes some time after the actual beginning) bear market. The result of this flight capital is buoyancy of US Government Securities.
Concurrently, the US current Account Balance is building up the inventory of US Government Securities held internationally by all classes of investors from governments to individual. That simply is how the current account works. The rally in the US Dollar from its low of 104 on the USDX to 109 has not been impressive either is size or in internal market indicators. It is more like a Dead Cat Bounce. When the dollar closes under its recent low, the international holders of US Government Securities will begin to experience a loss. This loss is a product of the lower US dollar in terms of their own currency. At this point those investors will have lost all the benefit of the higher quotations in the US Government market as a result of flight equity capital. It does not take on balance selling of US governments to impact that market lower. All that is required is a deceleration of buying to create a downtrend. That is a market law. Therefore, I believe, a top in the bond market will occur when a new low is established in the US Dollar.
The Spiral continues with a New Low below 104 on the US Dollar as measured by the USDX -- which is because of the weak economic conditions and unexpected nature of an upturn in interest rates produces. Interest rates are US treasury bond quotation, as the bonds drop, by definition, interest rates rise. No-one is expecting this at this time. Such an event will cause:
A Drop in General Equities from any recovery level
Which produces
A Further Drop in the US Dollar.
The Spiral Continues and gold rises.
My next editorial will be: How to solve the problem, stop the spiral and restart the world economies.
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