COT in the (Final?) Act

September 19, 2003
Jim Sinclair

Certain commercial interests are reaching the point of zero financial return. I believe that I know the exact price at which there is no discretion left and predict there will be a major defection within the Gold Cartel of Common Interest due to an intolerable loss on their short positions in gold in all the forms taken.
 
The cover will, IMO, take gold to the original post $400 target we gave you when gold broke above the $324.50 level.  However, the technical effect of that will be as dynamic to the gold market as it was when the gold price crossed $400 in the 1968–1980 bull market.

There are no defenses, IMO, against going over $400. The short side is in retreat as we speak. You are winning and I believe it is this encampment that by discipline will be credited with winning the war.

When it gets over $400, the entire character of the gold bull market moves into a dynamic second phase.  You, the Golden Comets, get the entire credit. Your pins will be worth much more than the gold it took to make them.

When this is done, I may elect not to issue any more Golden Comet pins.  So yours will become the merit badges they truly are.

Request them immediately if you haven't already. They came out beautifully. Along with a signed certificate of merit for you personally, they are my gift to you!

 
Thursday, September 18, 2003
Asia Times Article About Gold
     Author: Asia Times/Jim Sinclair

The following article, which appeared in the Asia Times Online, has important implications for gold and members of the Gold Community. My commentary will appear immediately after the article.
 
What Snow in Beijing means for gold

By Michael R Preiss
Asia Times Online
September 19, 2003

US Treasury Secretary John Snow visited Beijing recently to raise the yuan-revaluation issue with China's senior leadership. While the media focus was on currency values and unfair trade advantages, what is sometimes overlooked is the potential implications it has for gold.

First, let's us consider the background behind the pressure for yuan revaluation, and why for the foreseeable future the interests of the United States and China are interlinked. At the root of the international unhappiness with China's currency level is the country's rapidly growing trade surplus created by its "rented economy". The term "rented economy" applies since foreign investment controls much of China's low-cost production. China is becoming the "workshop/factory" of the world and is holding down global inflation.

China's senior leadership might still call themselves "communists", but in reality the country is run like a holding company along strict reporting lines with one clear objective, namely 7-8 percent annual growth. The currency peg between the yuan and the US dollar is facilitating this growth objective while at the same time it results in lower interest rates in the United States. This is because, in order to keep the yuan at the 8.3 percent level, China needs to buy up surplus dollars and reinvest them abroad, foremost in US Treasury bonds. The peg is mutually beneficial to both China's growth target and US Federal Reserve Board chairman Alan Greenspan's need to keep long-term interest rates and inflation low in the US.

As of last month China's holdings of US Treasury bonds rose to a record US$122.5 billion, less then Japan's but far more than any other country's. Together Japan and China hold 41.9 percent of the $1.3472 trillion debt the US government owes the world.

Even though hot money is not allowed in, an unprecedented amount of foreign currency is flowing into China, to buy land and construction material and to pay workers to build new factories. As these factories start producing, much of their production is exported and sold for US dollars, while the raw materials used and the workers' wages are priced in yuan. As more foreign exchange flows into the current account, the People's Bank of China (PBC) buys up these dollars, because the government is committed to keeping the exchange rate stable.

If it were to stop buying the dollars, the value of the yuan would quickly appreciate. But the People's Bank has a problem. If it simply uses new yuan - creating a liability on its balance sheet against the dollar assets - the extra money in circulation within China would soon cause inflation, as indeed happened in the mid-1990s. That would damage the economy and eventually hurt China's export industries, since the prices of Chinese goods would rise.

So instead of causing inflation inside the country, China is exporting deflation. This in turn has allowed the Fed to spark an economic revival in the United States by lowering interest rates to 45-year lows without risking inflation.

One weak spot of the recovery, however, is the stubbornly high US unemployment rate. And this is where Snow comes in. President George W Bush has already seen 2.7 million factory jobs disappear on his watch and he needs to be seen to be doing something about it in order to be re-elected. Viewed from this perspective, Snow's visit to Beijing is more about US domestic political issues than about seriously pressuring China to un-peg the currency.

All of the above leads us to the question of what full yuan convertibility would eventually mean for gold prices.

China can press on toward convertibility on the capital account, which would allow Chinese people more freedom to move their savings abroad, counterbalancing the inflow of US dollars. In many ways that is the best option and it is already being implemented, but it would threaten the steady increase of savings put in low-interest accounts at the state banks. This is the one thing that keeps China's financial system stable at the moment. Historically, the less trust there is in the financial system, the more demand there is for gold.

In addition, strong capital inflows and rising foreign-exchange reserves are already sharply boosting official demand for gold in China. This is because if the PBC is to retain its proportion of gold holdings at the current 2.4 percent of total reserves (European Central Bank standard: 15 percent), it will need to increase its gold holdings by an estimated 120 tons, or 60 percent of gold consumption in China in 2002.

China already enjoys, at 40 percent, one of the highest savings rates in the world. The closer we get to revaluation, the more US dollar savings will be converted into gold.

In order to pave the way, the PBC last year relinquished its monopoly on imports and exports of gold, the Shanghai Gold Exchange was established, and many Chinese commercial banks are planning to launch personal-gold-investment businesses.

The way forward for China's central bank and savers in the coming years is, surely, to diversify out of their huge dollar holdings and move to back its currency by gold as it heads slowly but surely toward convertibility on the capital account.

After the Beijing Olympics when the snow falls in the winter of 2008, gold might truly glitter.

Michael R Preiss serves as chief investment strategist at CFC Securities. He wrote this for KWR International Inc, a consulting firm specializing in the delivery of research, communications and advisory services. Posted with permission.

Jim Sinclair's Commentary:

The only item I disagree with in the above article is the timeline. Something could be afoot that will trigger a move in gold of Chinese origination much sooner. Read on!

Has a political deal been struck that could cause an  adjustment of the relationship between the Chinese currency and the US dollar thereby assisting the present political imperative inherent in the speech by Treasury Secretary Snow and the US pressure for a revaluation?

The tradeoff for China might be no punitive tariffs on Chinese manufactured goods.  Even a slight adjustment would trigger the beginning of the movement towards gold that Mr. Preiss has so well outlined. Market anticipation and any such scenario would have a profound effect on the gold market.

Here is a question. What corporate entity is the largest importer of Chinese  goods in the world? You guessed it, Wal-Mart.

Do you really believe that China is an ally of the US? Yes, but the war now is economic and in that conflict with China the betting is not on the US. Could China go for gold? The answer is yes and  everyone should know why. The Asian/Islamic program for world domination is economic and the dollar is the target.

So keep your eye on the ball and don't be mesmerized by too much focus on  minutia. Russia imploded because it overspent on client nations and the military. The US has the triple deficits of budget, current Account and trade. The US is on a path to an economic implosion and it could happen any day triggered by an exogenous event like another terrorist attack that disables key elements of our financial settlement system.

Keep no less than two thirds of your core position and cease trading on margin.This is my third night in a row that has run into the next day. I am working now 17 hours a day, so good night friends.

http://www.jsmineset.com/home.asp