Dear CIGA (Comrades in Golden Arms)
Jim Sinclair
What we have spoken about so many times when defining key elements
of a long term bull market in gold has in fact started to happen.
This is only the first of the predicted central bank reactions to a
significantly lower US dollar versus the over-the-top US Treasury
debt positions they hold.
The real news is not the South Korean Central bank's desire to
diversify its reserves with a preference for other currencies as
replacement of a percentage of the dollar denominated treasury
instruments it holds. The event of note in today's market and in the
markets to follow is the report of how many central banks around the
world took the same action last year.
So the real news then is that 52% of world central banks have
started to diversify their reserves out of the US dollar. We
declared the end of the US dollar as the universal reserve currency
over a year ago when this trend first surfaced. Now that it's
publicly reported that the majority of world central banks have in
fact taken this action, short covering rallies in the US dollar,
when they occur, will not reach their maximum price objective.
Rallies in the US dollar will only confirm in a classic sense head
and shoulders formations that simply pollute the entire decline in
the US dollar since it began. This report and its impact upon
traders strengthens my belief that after some more simple market
noise and market drama, the US dollar will trade below the now
important level of .8140 -.8160, giving strong indication that .8000
then is but a weak line drawn in the shifting sand of currency
trading.
As the US dollar makes new lows, gold will I believe make new highs.
In my opinion, $470 - $480 is the pull from the front that has not
lost it grip even for a minute regardless of the naysayers that
inhibit, influence, and have spoiled the good chances offered many
times so far in the gold market.
It is only the true believers that are going to reap the harvest
this time around. Most that read and listen to the "trade everything
all the time" people will be sitting out the major move when it
comes - not "if" it comes. As far as gold shares are concerned, as
in the 70s, I believe that gold shares will significantly outperform
gold itself.
There was then on the American Stock Exchange a bread making company
called Gold Bond. It used to rally significantly every time the gold
shares ran higher. The reason I share this strange piece of
information with you is that in time simply the word gold will
impact a situation. Those well-managed, properly financed companies
in compliance with the strict governance rules of today will reward
your patience. The liquidation now of anything gold is simply
complete madness, emanating from the lower classes in the market.
The options for financing the US Budget Deficit become grim with the
demise of the US dollar as the world's universally accepted reserve
asset. It is the non-US purchases of US Treasury instruments in
light of the US Trade Deficit that pays the bills at home.
When 52% of the world's central banks have declared that they are
not just buyers but are sellers of a percentage of their US dollar
holdings "times are a changin." The key factor here is not the
percentage of their holdings that they are willing to liquidate but
rather that they are NO LONGER buyers of US debt instruments. That
is a dynamic switch in the marketplace. I would imagine that the
other 48% are not now motivated to pick up the slack so let's watch
those TIC figures closely.
There is a domino effect hovering around the US dollar. Should the
non-US purchases of US Treasuries continue their decline,
experiencing two consecutive months reporting of less instruments
purchased by non-US entities than the amount required to finance the
US Federal Budget deficit measured by comparison to the US Trade
Balance, the US dollar will be blasted lower. A lower US dollar,
certainly one below the .8000 level, will then push the balance of
the 48% of world central banks to join their brothers as at least
NON buyers of US Treasury instruments.
Here is my next prediction. Before 2007, the majority of world
central banks will do the unbelievable: they will become gold
buyers. Any gold the IMF seeks to sell, which is a stretch of the
imagination anyway, will be purchased by CHINA just like it was the
last time. No IMF gold, if sold, will see the open market - not one
ounce. Because of the systemic dollar problem and the excessive
dollar inventories held by central banks- especially in Asia - gold
buying by official entities will NOT be a short term phenomenon.
From late 2006 until 2011, I will go on record as telling you that
the primary buyer of gold will be just those who for two decades
have pedantically derided the noble metal.
This analysis draws from past performances, present time systemic
dollar problems, the reality that the euro is a basket of junk
gaining its value from being named something that isn't a country,
and the small capitalization of other alternatives such as the Swiss
Franc.
Gold is the only monetary item whose supply is limited. Therefore,
as demand increases the practical result must be significant
increases in the price of gold. God help those entities that have
gold derivatives in their books. God help those entities that have
financed with non-recourse loans with gold derivatives imbedded in
the loan agreement so they can be keep off the books and hidden from
the stockholders.
Dollar Weakens as Bank of Korea Plans to Diversify Reserves
Feb. 22 (Bloomberg) -- The dollar fell the most in more than four
months against the yen and dropped versus the euro, Korean won and
at least 30 other currencies after the Bank of Korea said it plans
to diversify its reserves.
South Korea's central bank, which has a total of $200 billion in
reserves, said in a Feb. 18 report to a parliamentary committee it
will increase investments in assets denominated in currencies such
as the Australian and Canadian dollars. The country's reserves are
the world's fourth biggest, behind Japan, China and Taiwan,
according to data compiled by Bloomberg.
``The market will now be looking to other central banks and what
they will be doing, including the European central banks and Middle
Eastern banks,' said Mansoor Mohi-Uddin, head of currency strategy
at UBS AG in London. ``The market has got nervous and has continued
selling the dollar.'
more..
God help those juniors who are so stupid that they do not even know
that they are at risk. God help the wise guys that have illegally
shorted the junior mining group. Good luck to the brave ones that
are short legally. May the wind be at their back and may they cover
their gutsy positions before the grim reaper reaps them big time.
At my company's Annual Meeting in Toronto yesterday I was asked how
to identify any company that has a derivative risk if there isn't
one outlined in the risk factor section of their financial
statements. The answer is simple: Ask management if they have or if
the project is financed (perhaps by a major) with a non-recourse
loan. If the answer is yes then in all probability the company in
question has a derivative risk that could eliminate their ownership
of their percentage interest in the property in question. At a
minimum, it could dilute the junior to a percentage of net profits
which means not much of anything. This is because few mines make a
profit at the mine head.
There is a means to protect against this risk that few if any
companies are utilizing. I do not face such a risk, but if I did I
would seek to straddle the risk by being long gold on the same basis
time wise, making the deal with some subsidiary of the international
lending entity that was the grantor of the short of gold derivative
that allowed the lender to make the loan for development of the
property that has the derivative imbedded in the loan agreement,
Because the instrument is simply the loan agreement, the short of
gold derivative does not exist on the books of the major. The more
that rules are made, the more loopholes appear.
The other cute reality of these extremely dangerous instruments, the
short of gold derivative, is that in many cases they simply cannot
be unwound. The reason for this is that between 1991 and now, most
of the derivatives were not buried in the loan agreement but were
put on directly by the gold producer. During the long bear market,
they are to be congratulated for having made billions even if they
almost destroyed the industry.
Almost every new development during this period was financed this
way. To get rid of those derivates the loan must be paid off or
renegotiated as a recourse loan.
"No derivative = violation of the loan agreement = an immediate call
in of the balance of the loan outstanding"
This is in my opinion the primary reason why derivatives remain on
the books of some producers.
Conclusion
Shorts that did not cover before are focused tightly on the USDX
at .8150, making that number a key level of make or break on
whatever residue there is of the dollar rally that had so many going
wild only a few days ago. This dollar rally - like all those before
it - was only one more classical pullback and fall away in a chart
so dire that it makes Enron look solid.
The systemic problem is not as the static thinkers keep telling you,
a picture in time, and the last reported deficit position. The
problem with the dollar is the accumulated red ink looking at wars
and decisions driven ideologically, not long term goals, plans and
objectives based on disciplined economic and political principles.
That being said, we have not seen anything compared to the
juggernaut of political and now ideological expediency that's
coming.
Add to that the misconception that the end justifies the means, the
takeover of the US intelligence body, and the making permanent via
computer based gerrymandering of legislative representatives
supporting the current administration and you have the formula for
economic Armageddon before 2013. It will not take until then for
gold to reach its high side and the dollar its low to register the
coming of the four horsemen of the apocalypse, price inflation,
dollar depreciation, deflation in terms of debt roll-over and gold
equal in price times the amount of US debt instruments held
internationally.
When the book is written on this event and the many reasons are
examined why the US dollar failed, I believe the award will go to
the Bernanke Electric Mayhem Money Printing Machine as the non-
traditional method of an international liquidity explosion that
could not be undone. This phenomenon will be labeled as the event
that broke the back and therefore willingness to stay long dollar
instruments of those dollar holders that rode camels historically. |
