Tuesday, July 3, 2012

The Rig Is Up

Let me be the first to say that I am no Jim Sinclair.  He's got loads more experience and prescience than I have had in previous decades.  What he called in 2001--the beginning of the great bull market in gold, I merely stumbled across and got lucky with.

However, his most recent prognostication exactly aligns with my timing--full valuation in gold won't be reached until 2013 - 2015.  My timeline is based on the knowledge that previous bull markets in gold lasted 14 years, from trough to peak.  Since gold made a double bottom in 1999 and 2001, my time frame accounts for that double bottom.  Others have a time window until 2020 before the dollar collapses due to the ending of its reserve currency status.  That fits neatly into generational cyclicality.  Generally speaking, defining price targets is one thing, and providing time frames is another.  Predicting both is a fool's game, so take either with caution.

I'm not sure how Sinclair came up with his "one- to three-year time frame" from today, but I'm not betting against him, given his precise timing of gold's peak in 1980 and its trough in 2001.  I do know he uses fundamental as well as technical analysis, with a heavy dose of Fibonacci numbers.  Here are his latest thoughts:


I also would like to add a corollary.  Even if the previous bull market in gold ended in a waterfall decline, I'm not so sure this latest run up will end dramatically--if at all.  After all, when a currency collapses, the nominal value of any asset, tangible or otherwise, becomes meaningless.  It's one thing to forecast $6300 gold or $400 silver as I have, but if in that scenario, a loaf of bread costs $40, then no real wealth has been created.  Possession of precious metals is a means to maintain purchasing power--the intent isn't to become wealthy (even if wealth is created nominally).

However, the inverse is also true:  maintaining faith in a paper currency which has collapsed is a surefire way to have said purchasing power destroyed.

In other words, if the Euro collapses, who really cares what the prices of anything are, because they would cost millions, billions, or trillions of Euros--pending the severity of hyperinflation and Euro devaluation.  The same could be said of any paper currency--including the USDollar.

The irony of gold bashing is that the country who is first to adopt the gold standard--or some form of a gold standard, will be the most sought-after currency, as said currency would then be backed by gold.  According to Gresham's Law, bad money chases out good money, as sound money is hoarded, while the bad money is spent as soon as possible like a hot potato, as consumers correctly know that tomorrow's prices will be inevitably higher.  The good money goes under ground, much like pre-1965 US coins have, which had 90% silver content in them.  One would be a fool to spend those coins at face value buying consumable items.  Hence, those valuable coins are hoarded, black market-style.

Under further scrutiny, these admittedly lofty price targets for precious metals aren't nearly as preposterous as they appear to be at first glance.  Thirty years ago, tuition at a University of California campus was less than $1000 annually.  Today, tuition is between $15,000 and $20,000, depending on the campus.

The same could be said of skyrocketing healthcare costs.  A barrel of crude oil was under $10 pre-911.  So when people roll their eyes at these suggested prices of precious metals, they don't realize history is on my side.

I'll pose this hypothetical test to put to rest any doubts about the value of gold once and for all.  Say in 1971, your grandfather gave you a choice:  a one-ounce gold coin which cost $35 at the time, or $35 in cash.  Which one should you have chosen?

Well, if you had chosen the first option, that one-ounce gold coin is now worth north of $1600.  The latter choice would still be $35 of paper USDollars.  Clearly, the former is the much better option, as it has been for more than 5000 years.

Yet, the financial Establishment and sovereign governments continue to promote their impaired paper currencies, alleging owners of precious metals holdings as borderline unpatriotic.  Even billionaires Warren Buffett, Charlie Munger, Bill Gates and George Soros have joined the chorus of gold bashers.  The media has contributed to the mass negative propaganda.  I find this incredibly insidious and evil of the status quo, whom I can only guess want to maintain their power and in doing so, will continue to discourage the masses to unwittingly yield theirs.

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