Puplava's continuing interview with TanRange's Sinclair
(this guy has been on the mark with #305 floor call
and with his message that mid-August would end gold selloff)
Q & A with Jim Sinclair
August 11 - August 18, 2002
Monday, August 12 "JPM & POG"
Q: You made the statement that if JPM went to 26 intra-day, that gold could go to $289. Well it did today. This is a confirmation to you that gold will retrace. If so, do you think it will be slow or swift? What is the next thing to look for? Thank you so much for sharing your knowledge. God Bless You!
A: JPM did in fact make a one day close slightly above the 26 level, at 26.35, as its then total improvement on a 650 point Dow rally from the lows. This morning, JPM dropped back under 26 where it is now. The inference was that if JPM was able to throw off the concern over its entire derivative position, as a result of the "Show Museum Money" loan to Brazil, then gold's present positive pressure would fail. I also later said that the $302-$305 was IMO the bottom of the recent gold price reaction. So far JPM is not continuing it momentum or price appreciation and gold is quite firm. I believe, IMO, the chances of gold going to its maximum reaction low of 288 is now remote.
Monday, August 12 "GOLD AND MR. PRECHTER"
Q: I just read your "Hollywood or Hobeken article. What's your take on Robert Prechter's work? Conquer the Crash is 'right on' and he does recommend buying some gold, even though he forecasts gold going much lower soon.
A: I wrote a small piece for www.financialsense.com [See last week's Q&A] on the reasons why I disagree with Mr. Prechter. The one that screams at you is, if we, in the USA, were to fall into a deflationary situation like Japan, Mr. Prechter discounts gold as a functional investment vehicle. Then please tell me why Japan is the major buyer of gold over the last year? Mr. Prechter proclaimed that the Dow Jones would crash so early before it occurred and so low before the top as to make the prediction PRACTICALLY useless for an investor, in my opinion. You need to be right at the right time, in order to, as you categorize the contents of your prediction or a book as "Right ON." I believe, IMO, that Mr. Prechter contributed to the degree of the decline in gold shares which was major on the last reaction by that prediction. Time will tell if he is or I am correct. The market place is a more efficient equalizer than the Smith & Wesson "Peace Maker" was in the old west.
Monday, August 12 "GOLD'S GOLDEN FUTURE & THE GOLD COVER CLAUSE"
Q: If the dollar systems breaks again as the world currency (or backing of the world currencies), is there enough gold to go around? That is, how would this actually work? We can't base all transactions on physical gold. In addition, even if gold was worth $1000 per oz, it's total value (excluding un-mined reserves) is far less than the capitalization of the financial system. I may have a fundamental misunderstanding of how gold preciously functioned as backing to the dollar (before my time), but it seems that gold cannot be a currency unless we deflate all the world's assets to the total value of all outstanding gold. Of course, the price of gold could rise to the value needed to cover the world's assets, but that sounds like a very chaotic transfer and governments (and most individuals) would clearly oppose it.
A: Such an extreme a break in the dollar system need not occur to support a higher gold market. A break in the dollar system would be defined as an international preference not to use dollars as a reserve currency. I am assuming your question does not deal with this extreme possibility, and gold takes its place. Gold to go around is a simple question of price, not volume in ounces. Therefore the answer to your question is, YES there is plenty of gold to go around at higher prices. I will answer you question starting with hard fact and then novelizing a future of economic events built on my understanding of the marketplace, government reactions and technical analysis longer term. Let's give it a name.
Gold's Golden Future
Hard facts novelized to a conclusion
Gold's primary function, as a monetary item, is its ability to control the amount of currency produced by nations. In the USA, this was accomplished under the "Gold Cover Clause." The Gold Cover Clause limits, by law, the amount of currency that can be outstanding by mandating that a certain amount of currency outstanding had to be covered (equated to) by a certain percentage of gold in the Treasury. The Gold Cover Clause was abrogated by its mandate level being reduced to zero in the Nixon Administration. Therefore the Gold Cover Clause still exists on the law books, but at zero percent mandate, making it functionally sterile.
I foresee a return of gold into the monetary system as a result of an inability of the present Administration and the Federal Reserve to resuscitate the state of the US economy prior to the next election. A war with Iraq may occur before the next presidential election, but will not stimulate the US economy to the degree that the sitting Administration has envisioned. The only functional tool now potentially useful (cutting interest rates have stimulated nothing but homeowners borrowing on their houses to live) to the Federal Reserve is to expand monetary aggregates (the money in the economy is now created by quasi-political decision at the helm of the Fed since the Gold Cover Clause is sterile) which is, as I write this, at unprecedented high levels when comparing the degree of creation of money for the length of time this high creation has been policy. These aggregates will be increased in the size of monetary creation yet again around election time.
The US dollar, as measured by the USDX, will be in free fall under 100. The Chairman of the Federal Reserve system will resign either just before or just after the next election. The new incoming Administration and the new Chairman of the Federal Reserve will re-institute the Gold Cover Clause at 5%. The world central banks will publicly initiate a floating band for the price of gold as buyers and seller at a $100 differential of lower and higher limits corresponding to the market at that time. A world central bank band is already in existence today using the tool of gold leases to gold dealers in secret. The amount of gold leases granted by the world central banks in existence is a figure which today is hidden from the public. The higher level gold upper and lower limit gold band publicly visible will be initiated because of the increased value of gold having a positive effect upon the reserve basis of the central banks at that time. This novelized set of events is not as impossible as you might think. It has a significant chance of occurring.
Sunday, August 11 "NEM & HEDGERS
Q: My question does not pertain to T/A, but to gold/silver. You intimate percents of gold position for gold producers such as NEM in your Saturday, August 10 "Investing in Physical Gold" Q&A session. Where can I find data about the percent production gold producers have hedged? Thanks.
A: The data you require can be obtained by reviewing the most recent statement from the company of your interest. Look at the Risk Management review or footnote to their statement. You want to find the amount of ounces of gold they have hedged. Although they will scream bloody murder, I compare the amount hedged to expected production for this year. If they are more than one year's production hedged, they are starting to look for trouble. That is my opinion. If you prefer someone else doing the work to assemble the raw material, "The Mining Journal" out of London publishes a gold review quarterly with the necessary data. Nice to see raw data with no broker pushing something. NEM inherited a rotten hedge position by way of their Australian acquisition. When Gold was last at $315, they stated the loss was $400 million and they were financing the loss forward. Since then they have undone some part of that hedge position.
Sunday, August 11, 10:11AM "GOLD VS CURRENCY
Q: From an Australian perspective, will a drop in the value of the US$, and a simultaneous rise in Gold simply cancel out any benefits for a gold investor here in Australia? Reading the issues on this site has caused me to include physical gold in my portfolio. Will I see the same benefits here in ounces?
A: The primary trading currency for gold is the US Dollar. Therefore, when an investor purchases gold bullion, the movement of the US Dollar versus the currency most common to the investor is quite important assuming that the move in gold not dynamically greater than the move in your currency. That means the move in gold is not expected to be more dynamic on the upside than the expected upside movement in the currency most common to the investor versus the US dollar. If gold rises 25%, but your currency rises 50% versus the dollar, upon re-conversion to your currency, you would lose money. I believe, IMO (in my opinion -- no guarantees), the move in gold will be so significant over the next few years that the profit on gold will swallow any currency difference you might experience.
Regards, Jim |
