Commenting on one of his favourite topics, the gold market,
Sinclair says that the five conditions he believes necessary for a long-term bull market for gold are now in place:
— The U.S. current account is in deficit and growing;
— There is an overall negative trend in the U.S. dollar;
— The general commodity market is in a confirmed bull phase;
— Trust in paper assets as a storehouse of value is waning; and
— There is a confirmed top in U.S. Treasury intermediate and long-term bonds.
Moreover, increasing U.S. interest rates will cause a crisis in the estimated US$72 trillion notional value of all derivatives of all assets worldwide.
Speaking to shareholders at the Tan Range annual meeting earlier this year, Sinclair said that when trust in paper money and paper assets is strong, gold moves towards a being a commodity and becomes worth less. Conversely, when trust in paper money and paper assets declines, gold moves towards its currency role and becomes worth more.
“If that’s all you know about gold, that’s all you need to know about gold; that is gold’s heart and soul and the basic foundation of the price.”
After 22 years of declining values in most commodities, most especially gold, he believes we stand on the “threshold of market environments that will once again sustain the commodity wealth of developing nations in Africa, including, most certainly, Tanzania.
“What’s so unique about this bull market in gold — not perceived by the general public — is that it’s a market of remonetization of gold.
“It’s all a balance-sheet consideration,” he continued, explaining that gold functions in a currency not through convertibility, but by controlling the asset-to-liability ratio — what he calls the gold-cover clause, alias the Federal Reserve gold-certificate ratio.
“We’re in a new era for gold whether we like it or not,” said Sinclair, who reckons that if the U.S. dollar drops into the 70s on the Federal Reserve Bank’s U.S. dollar index, it will trigger a move by the Fed to reinstitute and remonetize, in a modern and non-constrictive way, gold back into the U.S. dollar.
“That will have an effect from that day forward of controlling the balance sheet,” said Sinclair. “Because what does gold try to do when it gets out of hand? It tries to balance the balance sheet of the United States of America. But anyone here who wants to see gold at US$1,650 per oz. also prays for a drought to kill all the farmers to make money on wheat…”
He cautioned, however, that if gold gets out of hand, as it did in 1978-80 and could again, it would destroy its own potential for remonetization by being too volatile.
“The one thing that could ruin this marketplace (for gold) is not that gold isn’t in a bull market…I’m concerned that it’s in too big of one,” said Sinclair.
He said there will be a contingency plan in Tan Range, where management starts thinking about selling gold when money supply starts affecting prices of goods and services.
“If gold goes over US$529 per oz. anytime before June 2004, it’s gone out of a normal bull market into a runaway market, (and we should) start thinking about selling it. Believe me, there will be buyers out of their minds if something like that should happen and you should look to being satisfied with the price and leaving and feeling very bad because gold spoiled itself. The worst thing that could happen to us would look like the best.”
“Every short cover in history, since the beginning of time, has been followed by a collapse,” concluded Sinclair.
Responding to one shareholder who piped up that he had put his money into Tan Range to fund his children’s education, Sinclair cautioned that “this is speculative at this time, and is no place for your child’s education. However, if we do well, your child will be educated magnificently.”
Sinclair’s most up-to-date views on gold are available at his free online newsletter www.jsmineset.com.
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