Important Gold Observations

September 10, 2003
Jim Sinclair

First, I want to give you a market outlook. Three failed attempts to push gold down ran into buyers. Each failed and all our ammunition remains intact due to immediate sales by the gold bull market Askaris (guards).  Cannons are loaded and awaiting the buggers.
 
Do you want some reasons why gold should be above $400 now? Here are a few:

1. In a pamphlet titled, “Fiscal and Generational Imbalances: New Budget Measures For New Budget Priorities” by Jagadeesh Gokhale, American Enterprise Institute, and K. Smetters, Assistant Professor, The Wharton School, University of Pennsylvania, the authors note that if the US Office of Budget and Management was required to adhere to the Sarbanes, Oxley Act,  the US budget deficit would be 1 Trillion 500 billion - not what’s been reported.  I have ordered this pamphlet and will report to you when I’ve read it. The fact that the Financial Times carried a review speaks well for its contents.

2.You also know that the worst thing that could happen to the US is an upward climb in China’s currency. There are various reasons for this: Such a thing would reduce the currency inflow to China, diminishing  its ability to be one of the major buyers of US debt instruments; It would also reduce business activity in a country where the banking system is holding together by a thread. A breakdown in the banking system would create a need for funds that would not only prevent China from buying US debt instruments but could result in sales of these instruments. This would have a severe negative impact on the US economy, resulting in the exportation of deflation back to the US.

Recognizing the possibility of such a scenario, Treasury Secretary Snow is demanding that China float its currency which is setting in motion negative US economic forces that will unseat both his boss and the incipient economic recovery. What a web these people have weaved.

3. On September 5, 2003 President Bush made a televised presentation in which the following was said: “We don’t think we are being treated fairly when a currency is controlled by a government. We believe the currency ought to be controlled by the market and ought to reflect the true values of the respective economies.” Maybe it would be a good idea for the US to allow the trading activity of the Exchange Stabilization Fund (ESF) to be public. Keeping its activities secret only adds credence to the internationally-accepted belief that the US manipulates the dollar as it has the legal right to do. It is somewhat embarrassing to be harping about the Yen and the Yuan while the ESF is working hard to keep the dollar rally intact.

4. The recent figures that have caused embarrassment to all those flogging the prospects for US economic growth, are transparent spin-doctored numbers. The total growth reported and heralded was $73.1 billion - of which $40.6 billion was defense related. This was dismissed because US capital spending figures looked attractive until it is understood that these figures are a product of annualizing.

 Simply stated, compared to other countries’ reporting procedures, the US multiplies capital spending by four times in its accounting procedures. Try that on your income tax reporting as applied to expenses and you will do time at Danbury Federal.

How about business fixed investment that reportedly soared 12% from $319.1 billions to $357.5 billon? Well, that is another accounting trick called a deflator. Excluding the deflator, the actual hard dollar increase was not 12% but 4%.

Dr. Kurt Richebacher, former Chief Economist for Dresdner Bank, did this analysis. He is no lightweight but the figures on the increase in the US GDP are just that. What is the dollar worth on the real numbers USDX .72?

5. A read of the September 9, 2003 IMF World Economic Outlook seems to support the liquidation of dollars by Asian nations. Someone there is going back to his teaching job as that is blasphemy from one of the organizations that flogged the “Dollar Reserve Standard” to the world. That’s like spraying Raid on a bug’s nest where the dollar is concerned. This is not generally known on the street.

6. Somewhat lighter weight but possibly as important, is that fact that Bill Gate’s charitable foundation holds more than $2 billion of inflation-protected US Treasury notes called “TIPS.” Another way of looking at TIPS is that they are insulated from a significant drop in the long bond market. Bill have you covered the currency risk as well?

With all of the above, do you need a more fundamental justification for gold over $400? I don’t.

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