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$372 then between $410 & $420

War Premium or Economic Impetus?

by James Sinclair, Jan 27/03

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The Answers & Implications

What a world of contradictions. Elliot Wave practioners are pounding their chests saying we told you so --- maybe. Gold stock traders are gold bears! Others ask: "Gold is over $354, so where are the derivative bankruptcies?" The stock market is suffering from acid reflux and the strongest medication available won't even help. Remonetization is being discussed openly in North America and Great Britain. So what in the world does all this mean?

What this gold-related cacophony means is that, as always, bull markets must climb a wall of worry and total disbelief. The instability in the gold community is a phenomenon common to the infancy of any bull market. So why would you expect anything but this? Let's take these apparent contradictions one at a time.

We have talked Elliot Wave almost to death. Let me just say that I did not have a single person accept my offer of a $100,000 legally-binding wager that gold would trade above $400 in 2003 when we broke out of the Teacup. I actually expected to hear from Mr. Prechter, but was greeted only by total silence. Not one Elloit practitioner out there would lay down their funds on that wager. So I have to assume that they are all noise and furry without substance. I believe in myself. Wagering on that belief causes me no concern. We do it every time we take a position of merit and size, so why not accept a wager on a market outlook. The answer is probably because the Elliot followers do not trade and are only talk. Most of the time, those that advise others financially cannot trade their way out of a brown paper bag. I know most of them, and with the minor exception of Harry Schultz and Ira Harris (former partner and talking head on Bloomberg), you can take what I just said to the bank. I suspect this may be true in the great Elliot predictor of gold's demise at $360. The evidence certainly suggests it.

Unfortunately, the gold share traders appear like lemmings. If they aren't jumping off a cliff, they are bouncing off the walls for sport. They look at bullion and just say "no." They have been bears from $354.50 to the present. If they stay true to form they will turn violently bullish and just at the wrong time. True, there is precious little to select from in the gold and silver public companies that qualify as value in terms of ethics and being "shareholder friendly." True, it is hard to buy a significant position in a gold producer that is massively short of gold either by decision, by contract requirements of a non-recourse loan, or by having made the acquisition from hell. But among the mountain of strange fellows, there is value out there. I caution those that are declaring non-confirmation between the gold price and gold shares. Gold is fine, although gold shares/companies are typically a mountain of questionable entities run for the benefit of management.

Personally, I have built my own company because I do not know anything out there I am willing to own millions of shares of. Do you really? They are laying out huge shelf offerings. Some have changed their accounting rules to hide the economic results of derivative hedging from obvious view. Others are charging their derivative losses against individual projects but suggesting technical difficulties with the projects for the resulting bad performance. It is the derivative debit that is causing the decrease in the economics of the projects, not a mining cost factor as suggested. Another factor for the lethargy of the shares is the nature of the new gold trader. The new gold trader is simply opportunistic, with no understanding of gold, flirting with every market opinion, and given a poor selection of companies in an environment screaming for stockholder friendly transparency.

This is still the dumbest stock market rally in history. Reach 8220 on the low side and the equity market returns to the full bear market stance; and 8900 on the topside has been the reoccurring dream people have of an instant return to the equity bull market of the later 90s. Haven't you heard that the equity bull market of the late 90s was lead by the tech stocks, all of which created earnings by accounting magic, some of which were down right felonies? Before you can have that again, you have to have earnings. Earnings are not the result of cutting expenses, unless gross revenue is rising. So all of this makes this the dumbest rally in market history. Of course, the equity market is suffering from acid reflux. It was a bear market equity rally. What else do you expect?

Where are the derivative dealers that are supposed to be killed by gold above $354? Well, they are where they are supposed to be getting killed. Do you not know how to recognize a short squeeze in the making? Can't you see the fight at the close to keep the settlement price down so as to ease the margin calls on the shorts? I told you when the commercial interest makes a mistake, that it is one hell of a mistake. Do you think all those commercial shorts are happy tonight? Wait until next week! Do you think that when Enron knew they were in trouble they hung a sign out saying so? No, they waxed poetic about Enron shares as they sold their own shares. So why do you expect a major gold cartel member to announce they are being crucified? Just look at what the market did when it closed over $305 and over $354. So do not swagger around saying derivatives mean nothing. So far they have meant $371 today minus $305, which is $66 for the gold price. I gave you those two prices and explained what they meant and then the arguments started. Look at the result and stop arguing. The derivative dealers are in real trouble. Next week I will tell you why I believe those derivatives are the greatest exercise in self-delusion since the tulip craze

Please review last night's postings on www.financialsense.com and www.lemetropole.com plus www.tanrange.com dealing with the remonetization of gold. If the Fed does not do it and 10 Downing Street does not do it, our Islamic friends have promised to do it. Yes, we have Islamic friends believe it or not! I will not go through this again as it is line and verse waiting for your review. Those that asked me for direct emails by emailing www.tnxinvestor.com have received it. Gold is headed back into currency in the most unique of ways. You can take that one to the bank. That alone guarantees a bull market in gold - so stick that in your hat Elliot Wavers.

Now to the major question and that is War Premium. Let me answer you first with questions and then I will conclude with my definitive answer.

1/ When did Saddam Hussein become Bin Laden?

2/ What makes you believe that an attack on Iraq will stop terrorism?

3/ What makes you think that an attack on Iraq will be a cake walk to a speedy, positive conclusion without significant cost of life to those heroes, both men and women, who at the command of their supreme leader will faithfully, with valor and commitment, move directly into harms way?

4/ Have you seen the true to fact movie, "Black Hawk Down?" If not, please do.

5/ Did you read the article in the Economist concerning the true cost of a quick Iraq war and the needed transition of Iraq into the present century? How does more than a trillion dollars strike you?

6/ Have you read the last edition of the publication, Foreign Affairs so that you know that Iraq will have to be rebuilt from ground up if an invasion is to mean anything?

7/ Do you realize that every measure proposed for economic stimulation that is now in place, pending or promised is dollar negative?

So an invasion of Iraq is the end of the gold bull market. What are you smoking? The gold share traders are selling now ahead of an invasion to be out ahead of their fellow community members. The minute an invasion happens, sellers will arrive. Then gold will trade based on war reports just like all war markets. Remember, trading during the Korea Police Action and the Vietnam War. This is textbook in that as we win the equity markets rise and gold declines, but if we bog down the equity markets fall and gold rises. If it takes a long time, equities fall and gold rises. However, when it is over, it is not over. Terrorism could be increased and not decreased, as we may well not be focused on the true El Queda. Sure, if it is slam-dunk gold will decline but then it will rise again and reach levels I suspect you do not anticipate.

Now let me ask you one final question. When will you know that there is not going to be a war if Saddam Hussein fails to step down? Answer --- never.

Conclusion:

Gold's first target as given is $372. We got $371 today. Gold's next target is between $410 and $420. Keep in mind that unless changed for practical business reasons, the Elliot Wavers that have the gold share trader petrified screams uncle officially at $401. The Wavers will probably change the number because declaring "uncle" after terrifying the elder gold community members cannot be good for business.

Click on the following link to view the full editorial including associated charts: http://www.tanrange.com/s/ChairmansCorner.asp?ReportID=48057

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