Two more reports from Vancouver

By James Sinclair, Chairman
Tan Range Exploration
www.TanRange.com
January 27, 2003

As the short interest in gold shares started to increase, it was
easy to excuse the phenomenon as a product of what occurs
in markets when active listed options exist. However, that
excuse for the short position now defies logic because the
short side of the gold shares exceeds the open interest for the
appropriate options that would apply.

Are you totally perplexed by the action of gold, which is robust,
and the action of the shares, which is debilitated? Have you
noticed that when gold strengthens, the shares hit a brick wall?

Yes, I know you have, but have you seen the timing of that
strange and contradictory occurrence?

The answer to what is going on is shouting at you if you have
the ability to see the charts in real time on a one-minute bar
overlaid as shares over gold. You will see that as gold is being
purchased, the shares are being shorted.

Major ratio traders (those who develop mathematical
relationships determined by back-testing to balance potential
loss and gain on either leg, which is subsequently adjusted to
their bullish or bearish desires) and hedge funds are the
source of the gold share short, being long gold and short the
shares.

In truth, I cannot blame them where the gold producer hedgers
are concerned, but it seems they may have gone bonkers with
this spread and simply shorted all listed gold-producing
companies with 100,000 ounces per year and up. It also looks
to me as if there might be a little hanky-panky going on, since
the short of certain shares seems to exceed the number of
shares reasonably available to borrow.

A requirement of a short sale is delivery of shares. These shares
are obtained by borrowing. Every major brokerage concern has
a loan clerk for this purpose. Only shares on margin are
automatically available for lending. Fully paid shares require
the permission of the lender to make them available to the short
seller.

I have given you one lesson on Felony 101: explaining how
it is likely that Enron was the largest money laundry ever. I will
also give you a felony lesson on how to short-sell a listed stock
without an up-tick: Back the sale through Canada or elsewhere
over-the-counter where delivery laws are different.

This is a key reason why some stocks face inexplicable bear
raids on NASDAQ.

Now please do not be tempted to employ these illicit strategies.
They are explained only so you will understand market phenomena.

In my opinion the culprits in the shorting of gold stocks now are
hedge funds and hedge operators long gold and short the shares.
The interesting point is that these funds plan to sell gold between
$372 and $386 into the Iraq invasion with a plan to cover the short
gold stock on a gold bullion price pullback after the invasion.

What have the hedge funds gotten wrong?

Why are these hedge operators going to be hurt financially on
this play?

First and foremost, they have the wrong price at which gold will
likely top in the short term as we begin the transition between
Wave 1 and Wave 2 of this long-term bull market in gold. I believe
I know the right gold price number but am not eager to put it in
print so the hedge funds can hurt the gold community they are
already taking advantage of.

For those who wish to know the gold price that maximizes this
leg and who are not already on my e-mailing list, please go to
www.tanrange.com and register. That way you will go on my
private list and save my staff a great deal of work and potential
error in your e-mail address. I will have the list carefully
reviewed.

I will soon e-mail you an attempt to do the impossible: That is,
outlining the future of gold in terms of time and price. You will
have to bear with me, knowing, as I do, the impossibility of such
a task. I will present it under two different conditions. However,
we will constantly monitor progress, as the ability to predict the
gold price, from point to point, is doable, or at least it has been
so far in my career.

The Hedge Fund Errors

1) The hedgers and hedge funds are going to exit the futures
on gold at the wrong price, thereby leaving themselves increasingly
exposed to the debits developing on their gold share positions.

2) The hedgers and hedge funds have shorted the gold shares too
hard in light of the relatively small floating share supply. In some
cases, as I see it, the entire float on certain issues may well be
shorted.

3) The hedgers and hedge funds are not familiar with the tenacious
nature of the gold share investor vs. the gold share trader and
therefore will not get the volume of selling they are hoping for.

Conclusion

As gold approaches the $381 to $386, shares will start to firm and
gold's momentum will slow slightly. This will be due to the operations
of the hedgers and hedge funds getting ready to rake in their expected
profits. However, as gold trades into the middle $390s you will see
the gold shares start to move ahead of gold momentum-wise, as some
of the faster and smarter hedgers will see an abyss of losses opening
in front of them. As gold passes $400, which will be to almost
everyone's surprise, the hedgers will panic and gold shares will go
ballistic.

These gold share shorts, in certain instances, are simply too large
and therefore cannot be covered under any circumstances I can
envision. As with the mountain of derivatives, the hedgers have gone
wild in this shorting of the smallest capitalization that can be
found in any publicly traded industry, the gold mining industry.

What quot;fundamental factorquot; have the hedgers and hedge funds forgotten
that will bury them in their gold share shorts well after the Iraq
invasion is history?

The mistake made by these greedy hedgers and hedge funds is the
definition of the United States going it alone. I mean that one will
share the cost of the operation with the United States and, more
importantly, no one will share the cost of the reconstruction of
Iraq.

I gave you a must-read in the current issue of Foreign Affairs.
Basically a mouthpiece of the sitting administration, this journal
tends to reflect foreign policy trends well. Read that way, and not
critically, it can be a useful tool in understanding the impact of
international politics on markets.

I have already told you that since Lawrence of Arabia, the mistake
made by the West in the Middle East has been to fight battles and
then, as recently as the first invasion of Iraq, leave the results in
the hands of despots, international criminals, and our sworn
enemies. As a result, the Middle East only gets worse for its
inhabitants.

This new invasion will be followed by a rebuilding of Iraq, as
President Bush will not stop the fight unless Saddam Hussein and
Osama bin Laden are history or, more likely, occupying the same hut
somewhere in Mongolia.

The cost of this invasion, assuming a short war and the rebuilding,
is well more than a trillion dollars. That will be paid for by
expansion of the monetary aggregates. As a result of quot;going it
alone,quot; the United States, which will bear at least 90 percent of
this cost, will gain from the business demand but lose on the impact
on the dollar.

The dollar is building multiple head and shoulders patterns, as did
Enron and General Electric, with a dollar downside maximum
potential well under the low I already have suggested to you: 72
on the USDX. This insures that gold will find its way back into
the monetary system to prevent the multiple head and shoulder
potential for the dollar from becoming real in market prices.

In the final analysis, the war against Iraq will help business
activity and hurt the dollar. Gold will rise to a level not expected
by the hedgers and hedge funds, and will nail them.

Recommendations to the gold share community:

1) Do not let these hedgers spook you out of your shares now.
They certainly are trying as of this evening's close. Look at the
fight on Royal Gold as it tried to make new highs today. Who do they
think they are kidding? Not an old pro like me.

2) Get ready for gold shares to improve their performance quite soon.

3) All of you who have fully paid for your shares should take
delivery immediately, and do not take no for an answer. Most Internet-
based brokers have never had a client ask for delivery of his
securities, and some such brokers have actually said they are
uncertain of the mechanism for making delivery.

4) To you who are on margin long gold shares, shame on you. But
the instant you make a sale and as a result eliminate your debit,
order delivery of your shares and do not take no for an answer.

5) Go to www.TanRange.com and register. I will email you the best
guidance I can. Please remember that I am a seasoned trader and
major market risk taker but not a seer.