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Despite its great run, gold still has an image problem
By James Sinclair, Chairman
Tan Range Exploration Corp.
Friday, December 20, 2002
I have learned to recognize that when a Federal Reserve chairman
discusses subjects, it is wise to take seriously not only what is
said but also that it is said. It was this approach that gave me the
cue in 1980 that Chairman Paul Volker was going to take the anti-
inflationary stance he did.It was this understanding that gave me the
courage, after having led the 1968-1980 gold bull market as its
largest trader, to sell 900,000 ounces of physical gold overnight
plus 1.2 million ounces represented by Comex contracts the next day.
On the previous day gold had traded on the Comex at $887.50.
Something equally important happened this week and you must
be informed. It is the absolute opposite of March 1980 and means
that gold is in a very long-term bull market and will not be opposed
by central banks. This is a major starting point for gold for many
years to come.
We have already heard Chairman Greenspan suggesting we
might have come full circle from the Volker experience. Now let
me quote to you the opening remarks of Chairman Greenspan
on Friday at the Economic Club of New York.
quot;Although the gold standard could hardly be portrayed as having
produced a period of price tranquility, it was the case that the
price level in 1929 was not much different, on net, from what it had
been in 1800. But in the two decades following the abandonment
of the gold standard in 1933, the consumer price index in the
United States nearly doubled. And in the four decades after that,
prices quintupled.
quot;Monetary policy, unleashed from the constraint of domestic
gold convertibility, has allowed a persistent over-issuance of
money. As recently as a decade ago, central bankers, having
witnessed more than a half-century of chronic inflation, appeared
to confirm that a fiat currency was inherently subject to excess.quot;
You have just heard the chairman of the Federal Reserve
speak the Gospel of Gold.
It was not said randomly. When a subject is put at the beginning
of a presentation to an important group by the chairman of the
Federal Reserve System, it is there for a reason. I believe I know
the reason.
Gold is on its way back into the monetary system -- not, in my
opinion, as a matter of convertibility but rather as a Gold Cover
Clause different form from the previous Gold Certificate Federal
Reserve Ratio that affected the cost of money as a corrective
mechanism.
This time the Gold Cover Clause will function as a control over
the creation of fiat currency as a ratio to money supply in a free
market for gold and valuation of U.S. Treasury gold at market.
I will explain to you during Christmas how this will affect gold
trading in a firm range -- in my opinion, at higher levels than we
have experienced so far. I believe the price of gold is headed
higher without significant interruption. I believe that gold is
headed back into the monetary system as a control mechanism
with an adjustable market mechanism. Gold could easily be
trading between $450 and $550 in 2003.
Chairman Greenspan went on to say:
quot;Moreover, a major objective of the recent heightened level
of scrutiny is to ensure that any latent deflationary pressures
are appropriately addressed well before they become a
problem.quot;
This confirms the statements of Fed Governor Bernanke
that the Federal Reserve intends to use the tools at hand that
have historically (1930- 34) been used to stimulate economic
activity when decreasing interest rates fail to push business
activity forward, as is possible if not probable now.
Now the chairman says: quot;Although the U.S. economy has
largely escaped any deflation since World War II, there are
some well-founded reasons to presume that deflation is more
of a threat to economic growth than is inflation.quot;
To me this confirms that the Federal Reserve and the Bush
administration will do whatever is required to whatever degree
to stave off the political consequences of deflation. I have said
before that deflation would not be entertained. The Fed and the
Bush administration will burn the barn down before accepting
deflation.
I have defined quot;the barnquot; as the dollar. I am now more than
ever convinced of this. The dollar on the USDX is headed, in
my opinion, to between .73 and .80.
Greenspan goes on: quot;The expansion of the monetary base can
proceed even if overnight rates are driven to their zero lower
bound.quot;
This, in my opinion, guarantees two events: Interest rates will
continue to be reduced, and monetary aggregates will continue
to be expanded.
Greenspan's next important statement is: quot;Clearly, it would be
desirable to avoid deflation. But if deflation were to develop,
options for aggressive monetary policy responses are available.quot;
That means to me that a plan to fight deflation is in fact being
pursued now by the Fed, and the Fed is prepared to expand
significantly regardless of the effect on the dollar.
Bit there is herein a hint of a dollar rescue plan. That is the
reintroduction of gold into the monetary system via a somewhat
restructured Gold Cover Clause that recognizes the changes
of the last 75 years.
The Federal Reserve has announced to those with ears to
listen that gold is no longer a rejected subject. Quite to the
contrary, Governor Bernanke has described gold as a tool
for resuscitating economies.
Chairman Greenspan has introduced gold's new role in two
ways. First, gold is defined as a means of price predictability.
Secondly, he touched on the control function that gold offers
over the natural excess inherent in a fiat monetary system,
a control over the overproduction of money.
I firmly believe that you can now expect a rise in the price of gold
without significant interruption unless it runs too hard, too fast.
Since
that is the nature of gold, you can expect gold to be turned back at
certain levels, as it was today at $354.50. It will be turned back
again at $372.
But I am now convinced that we will see a price in the area of $529
in the not-too-distant future as the Federal Reserve acts to offset
deflation by significant expansion of monetary aggregates and
the attendant effect on the dollar.
Gold will be called back into the system somewhere in the
middle .70s on the USDX to prevent the dollar from going into
free-fall. In my opinion this plan will work. Since the need exists
now to expand the monetary aggregates, gold will not yet find
its way into the system.
I now believe that with this plan under way, the cyclical bottom
due in the general equities has a good chance of occurring by
June 2004.
Everyone laughed a year ago when I suggested that the bond
market would find a top by November 2002. Well, it did. So
grant me the possibility that I might be right in my cyclical
analysis that suggested equities as long-term investments as
of June 2004, along with gold shares. Yes, along with gold shares.
Gold companies that survive the excesses of over-the-counter
derivative hedging will be transmuted back into the utilities they
were when gold was trading at $35 an ounce and mining costs
were small.
South African gold shares then yielded 18 to 22 percent. As a
young trader, 19 years old, I bought physical gold and borrowed
against it in Swiss francs at 6 percent. I covered my currency risk
against the dollar by going long future Swiss francs to cover my
debt and used the 95 percent borrowed funds to buy high-yielding
South African gold shares.This was my first pyramid and my first
fortune.
Now you have seen the future. Sure, I will anger some of the gold
community Web site owners, but that seems to be my unintentional
habit.
There can easily be changes in timing and price levels in the
scenario described above, but I know what I heard and and what
it means.
When I sold 900,000 ounces of gold into the Asian, British, and
European cash market the night after gold had sold at $887.50
in the United States, I was blamed for having broken the gold
bull market. Barrons editor Bleigberg wrote an editorial that
criticized me sharply for having said publicly that Chairman
Volker was a quot;class actquot; and that he would attack inflation
successfully. It was my opinion that gold was finished then and
that it would be 15 years before interest in gold could revive it.
I was wrong. It was 22 years.
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