Prefer Dollars to Gold? You Better Consider This!

October 6, 2003
Author: Jim Sinclair

If you prefer dollars to gold, then think about the potential of a cumulative US Budget Deficit approaching five trillion dollars in a decade.

Ten years is not that far off and the scene in the rear view mirror won&Mac226;t be pleasant for anyone who is not prepared. In fact, it might well resemble the world of the cult movie „Mad Max‰ but with meaner characters.

This gold market is not a short-term blip but rather a generational event that will allow its participants to preserve their buying power through the potentially trying times ahead.

Consider for a moment the following excerpt titled, „Fiscal Doomsday in the Offing‰ which was penned by the Washington Post&Mac226;s David S. Broder this weekend:

"Those numbers are incomprehensible. But a better sense of their meaning comes when the groups say that if current policies remain, balancing the budget by 2013 will require raising individual and corporate income taxes by 27 percent, cutting Social Security by 60 percent, cutting defense by 73 percent or cutting all programs -- except defense, homeland security, Social Security and Medicare -- by 40 percent.

That sounds like scare talk. But the reality is that after 2013, things will get worse. The first of the baby boomers reach retirement age in 2008, and from that point on, Social Security and Medicare payments will explode, as the number of claimants rises each year. As Pete Peterson, the Republican former secretary of commerce, told the news conference where this report was presented, anyone who thinks those programs are solidly financed ought to think again. "To talk about a Social Security trust fund is a fiscal oxymoron," he said. "It isn't funded and it can't be trusted." Rather, the government faces $25 trillion of unfunded entitlement obligations.

Is this just scare talk? Peterson, a major financier, doesn&Mac226;t think so. Neither does another panelist, Robert Reischauer, the former head of the Congressional Budget Office. And neither does Robert Rubin, the former Clinton administration treasury secretary who helped design the policies that briefly put the federal budget into surplus and contributed to the economic boom of the late 1990s.

Rubin said, "There is no question that these [budgetary] conditions pose a very serious threat to our economy." The massive borrowing that the government will have to do to finance these deficits will shrink the supply of capital available to the private sector when it needs to expand, and will force up interest rates "to substantially higher levels. It is a virtual certainty there will be a day of reckoning."

Are all of them wrong? I would love to think so. But I hate to bet my grandchildren's future on it -- as we are doing now."

Now considering what Mr. Broder had to say, please review this commentary from the Sunday Edition of the New York Times as well:

„ Washington, October 4th &Mac246; The Bush administration&Mac226;s optimistic statement earlier this year that Iraq&Mac226;s oil wealth, not the American taxpayers, would cover most of the cost of rebuilding Iraq were at odds with a bleaker assessment of a government task force secretly established last fall to study Iraq&Mac226;s oil ministry, according to public records and government officials.

The task force, which was based at the Pentagon as part of planning for the war, produced a book length report that described the Iraq oil industry as so badly damaged by a decade of trade embargoes that its production capacity has fallen by 25%, panel members said.

Bush administration officials announced earlier this year that Iraq&Mac226;s oil revenue would be $20 to $30 billion a year, which added to the impression that aftermath of the war would place little burden on the United States. Mr. Bremer now estimates that Iraq&Mac226;s oil production from the last half of 2003 to 2005 will amount to $35 billions, running at the rate of $14 billions per year."

The oil production number Bremer spins - even at 50% of the original estimates - depends on gaining control over the forces opposing the US in Iraq. It is these forces that have clearly focused on sabotaging pipe lines and other basic services such as water and electricity.

Now take these two reasonable presentations into account with the recent front page story in The Economist headlined, „Wielders of Mass Deception‰ and you begin to get the picture.

Certainly all of those who bailed out of gold and gold shares last week failed to recognize the synthetic nature of the „incredible disappearing economic recovery‰ and the cost of our overseas military involvement.

When the monetary spigots of the United States open wide in the form of the „Bernanke Electronic Money Printing Machine,‰ the liquidity that&Mac226;s produced always affects markets.

In fact, the basis of the most recent rally in general equities was just that stimulus and not a meaningful, durable economic recovery.

When investors realize that they&Mac226;ve been suckered into paying outrageous prices for high Beta equities, the liquidity that will keep coming will energize the commodity market into a similar mindless run to the moon.

That reality brings to mind an excellent research report on <http://www.sortweb.com/cwsv3/trial530369/MiscFiles/TheCommodityCycleBS0809.pdf>commodity cycles by Cazenove & Co. which crossed my desk recently. I suggest reviewing the report written by analyst Michael Rawlinson concerning the phenomena of major cycles in general commodities with an emphasis on metals.

My divergence from the reasoning offered here is my belief that there is an even more inviting reason for a rerun of the 1970 to 1980 commodity market boom.

That reason then and now is that the simple explosion in all manufacturing nation&Mac226;s liquidity will be the motivating factor that fuels the commodity market&Mac226;s explosion.
Conclusion:

The economic errors of the 1960&Mac226;s, which gave rise to gold&Mac226;s explosion from 1970 to 1980, are kindergarten mistakes compared to what is going on today.

Considering the validity of the Washington Post and New York Times articles of this weekend, The Economist presentation, and the Cazenove report concerning the 20 year commodity cycle, Friday&Mac226;s sell off in gold was a classic rip off of the Gold Community based on a fallacious interpretation of economic figures distributed widely for maximum effect.

The decline in gold is quite limited and the unfortunate truth of what is taking place makes the upside potential enormous. So just relax, sit back and wait because it won&Mac226;t be long.

Gold is going to charge back and take out all the Community sellers that show up. Gold will run as it always does when the gold advisors least anticipate it will fly.

That is how it worked in the big bull market of the 7's and ditto this time too.