The Hera Research Newsletter (HRN) is pleased to
present an in-depth interview with Jim Sinclair, Chairman and CEO of
Tanzanian Royalty Exploration and founder of Jim Sinclair’s MineSet, which hosts his gold commentary as a free
service to the gold investment community.
Jim Sinclair is primarily a precious
metals specialist and a commodities and foreign currency trader. He
founded the Sinclair Group of Companies in 1977, which offered full brokerage
services in stocks, bonds, and other investment vehicles. The
companies, which operated branches in New York, Kansas City, Toronto, Chicago,
London and Geneva, were sold in 1983.
From 1981 to 1984, Mr. Sinclair served
as a Precious Metals Advisor to Hunt Oil and the Hunt family for the
liquidation of their silver position as a prerequisite for the $1 billion
loan arranged by the Chairman of the Federal Reserve, Paul Volcker.
He was also a General Partner and Member
of the Executive Committee of two New York Stock Exchange firms and President
of Sinclair Global Clearing Corporation (a commodity clearing firm) and
Global Arbitrage (a derivative dealer in metals and currencies).
In April 2002, shareholders of Tanzanian
Royalty Exploration (formerly Tan Range Exploration) approved the acquisition
of a Sinclair managed private company, Tanzania American International, and
its exploration assets in Tanzania. Subsequently, Mr. Sinclair became
Chairman of Tanzanian Royalty and now leads its efforts to become a gold
royalty and development company.
He has authored three books and numerous
magazine articles dealing with a variety of investment subjects, including
precious metals, trading strategies and geopolitical events and their
relationship to world economics and the markets. He is a frequent and
popular commentator on financial and market related issues in various news
publications and has been profiled in the New York Times.
In January 2003 Mr. Sinclair launched,
Jim Sinclair’s MineSet, which now hosts his
gold commentary and is intended as a free service to the gold community.
Hera Research Newsletter (HRN): Thank you
for speaking with us today. You are one of very few people who have
tried to warn investors about OTC derivatives. Why are OTC derivatives
a problem in your opinion?
Jim Sinclair: Over the
counter (OTC) derivatives are the reason we are going through what we are
going through now. An OTC derivative is a kind of wager on what
something will do. Up until 2009, most of these wagers had very little,
if any, money behind them and, if the direction you bet on didn’t come
to fruition, the amount of leverage resulted in extraordinary losses.
There was a major rollover in derivatives tied to real estate in 2008,
as well as in other types, such as those tied to sub-prime auto loans.
HRN: Did OTC
derivatives destabilize the financial system in 2008?
Jim Sinclair: Absolutely.
HRN: Don’t
financial institutions use risk cancellation models to hedge risks using OTC
derivatives?
Jim Sinclair: Before the
failure of Lehman Brothers, OTC derivatives losses would have almost netted
out to zero. You can consider derivatives like a string in a circle
with various knots representing all the derivatives transactions. When
Lehman went broke, the string broke. When Lehman couldn’t meet
its obligations on derivatives, they could no longer be netted out to
zero. That’s why the banks went down, and that’s why you
had the government bailouts and quantitative easing (QE).
HRN: OTC
derivatives are the real reason for the bank bailouts?
Jim Sinclair: That is a
fact which can in no way be argued away.
HRN: Hasn’t
the problem been cleaned up by the Dodd–Frank Wall Street Reform and
Consumer Protection Act?
Jim Sinclair: The pile of
OTC derivatives is over $1 quadrillion. After 2008, the International
Monetary Fund (IMF) adopted a new method of valuing them called value to
maturity. Value to maturity assumes all of them will function, which is
a cartoon. The derivatives pile hasn’t contracted.
Basically, it has expanded, but value to maturity reduced the notional value
from over $1 quadrillion to under $700 trillion. The amount outstanding
is the same as it was in the first place.
The flavor of the present moment is
credit default swaps against the solvency, or lack thereof, of sovereign
nations. New derivatives have some margin behind them, but they only
work if they are not called upon. If a nation’s debt was in fact
to default, it would happen very quickly without a great deal of run up
before. Most people would expect a rescue to be coming.
Let’s say a rescue didn’t come, those credit default swaps would
simply not be able to function and down again would come the banking system.
HRN: Are you
saying that the financial system is less stable today than it was in 2008?
Jim Sinclair: It appears
more stable but that’s only an appearance. The entire equity
rally took place almost to the day from when the Financial Accounting
Standards Board (FASB) relaxed the mark to market rule. It allowed
financial institutions to make up whatever value they wanted for their
worthless pieces of paper. If they used the real values, the banks
would have come down.
HRN: Wasn’t
the FASB change a temporary measure to halt the decline in mortgage-backed
securities?
Jim Sinclair: It
wasn’t just mortgage-backed securities. It was all the paper on
bank balance sheets. The balance sheets of banks appear to be in good
shape but they’re not. In fact, they will need a lot more funds.
HRN: Then the
financial system is still vulnerable?
Jim Sinclair:
They’ve kicked the can down the road. The purpose of QE, in other
words the printing of money, is to maintain some degree of integrity in the
financial system. Bear in mind that the grease for the wheels of equity
markets is liquidity, meaning that if you create a lot of money, it goes into
the hands of banking institutions and international investment houses.
So, the equity out of thin air market has been sustained by QE.
HRN: What can the
government do to prevent another crisis?
Jim Sinclair: You can
assume that what’s been done already will be done again. There
are no other tools in a practical sense. The idea that there
won’t be a continuation of QE is nonsense.
HRN: Can the
government bail out the banks again?
Jim Sinclair: The central
banks will buy the government debt. That’s called quantitative
easing.
HRN:
Doesn’t QE undermine the dollar?
Jim Sinclair: The dollar
is an exercise in psychology. It’s a piece of paper with a
promise to pay but there’s nothing in which it can be paid.
It’s legal settlement for debt but there’s nothing that
it’s convertible into. To maintain confidence, it’s
necessary to maintain the stature of a currency. In an arithmetic
sense, if you go into a market to sell a supply of apples, and if
you’re the only seller, you can get a nice price. If more
sellers, meaning more apples, come into the market, there goes the price of
apples. QE creates more dollars, which increases the supply.
HRN: If the
dollar is loosing value because of QE, what about
the Euro?
Jim Sinclair: If you look
at the dollar or the Euro or the Yen, or even the Swiss franc, it’s a
race to the bottom amongst all currencies. All countries everywhere are
creating more paper every day. It’s a relative valuation, rather
than a valuation based on an objective reference. What happens in the
European Union immediately affects the dollar.
HRN: You mean the
sovereign debt crisis?
Jim Sinclair:
There’s too much focus on the Euro countries. There’s no
difference between the economic union of Europe and the union of the states
in the United States. The states of Europe have been revealed to be
insolvent. How about the states of the United States? Out of New
York, Illinois, California, etc., how many are solvent? The focus of
the media has been on the Euro. The U.S. should stand in front of a
mirror. The states of the economic union of America are in no better
shape.
HRN: The news
media is ignoring the U.S. sovereign debt crisis?
Jim Sinclair: In George
Orwell’s Nineteen Eighty-Four, there were loud speakers constantly
teaching the people what Big Brother wanted. The loudspeakers today are
financial television. How much attention has financial TV put on the
insolvency of U.S. states? It’s been mentioned, but not like the
solvency problems of Portugal, Greece, Spain and Ireland, which have gotten
hours, days, weeks and months of constant coverage. The solvency of New
York, Illinois and California has been brought up but fleetingly at best.
HRN: So, the
solvency problems of U.S. states are like an elephant in the room that no one
is talking about?
Jim Sinclair: How can you
say that the Euro is a disaster based on the financial condition of the
states of the economic union of Europe, when the states of the economic union
of the United States are in equally bad shape and in some cases worse?
There’s no difference. If you want to analyze the Euro based on
the weakness of its member states, how can the dollar be strong when the
states of the United States are as weak or weaker?
HRN: So, the Euro
could rise against the U.S. dollar, despite the European sovereign debt
crisis?
Jim Sinclair: Sure it
can. The question is, can the dollar go lower? The Euro could go
to $1.50 or higher.
HRN: But the U.S.
dollar is the world reserve currency. Doesn’t that guarantee its
value?
Jim Sinclair: Only by
default. It remains so because central banks own dollars. If
central banks could exchange them for gold or other currencies without a
major dislocation, they would.
HRN: Then, as a
practical matter, central banks can’t get out of the dollar?
Jim Sinclair: The only one
that’s gotten out of it is China. They’ve made deals all
around the world for metals, materials, energy and manufacturing. If
you add it all up, China is no more stuck in the dollar than the man in the
moon.
HRN:
Doesn’t the U.S. maintain a strong dollar policy?
Jim Sinclair: The strong
dollar policy has only been a moderate, long-term downtrend that continues
lower.
HRN: Don’t
central banks manage currency exchange rates to prevent disruptive changes,
like the recent Japanese Yen intervention?
Jim Sinclair: In the
Japanese yen intervention, the central banks intervened but how long can they
intervene? They have to create money to intervene, which comes back to
QE.
HRN: Do you mean
the overall affect of currency interventions is to
create new money?
Jim Sinclair: Anything
that happens around the world, for instance, the Bank of Japan’s
response to the horrible disaster in Japan, was to go straight to QE.
Money is being created everywhere without any discipline but the problems of
financial institutions remain because they have make-believe balance sheets
with improper values for their OTC derivatives.
HRN:
Doesn’t the suspension of the FASB mark to market rule buy time for
banks to repair their balance sheets?
Jim Sinclair: There are
five million homes for sale in the United States if you include the
off-market shadow inventory, which is a real inventory. There’s
no repair coming in the real estate market, therefore, there’s no
repair coming in the OTC derivatives based on that. That means there’s
no repair coming in the underlying paper that the banks now value at much
higher levels than they could possibly sell them for, if they could sell them
at all.
HRN: Will bank
balance sheets eventually get better?
Jim Sinclair: As long as
confidence remains in place, which depends on the equity market and that
comes back to QE.
HRN: Are you
saying that the U.S. stock market rally is driven by QE?
Jim Sinclair:
There’s an inability to stop QE without the whole house of cards coming
down on itself. There’s no other choice. It’s the
only tool left. The Federal Reserve can’t take a hawkish position
on monetary policy and interest rates without this whole thing rolling
over. They can talk about it constantly and might have more back door
QE than front door QE.
HRN: If QE doesn’t
stop soon, what will happen?
Jim Sinclair: The end game
is a virtual reserve currency linked to gold. It will be based on an
average of major currencies, which will slow down the movement in the
index. The International Monetary Fund (IMF) is moving in that
direction with Special Drawing Rights (SDRs). The dollar will be just
another currency. The dollar’s not going to zero. It could loose a significant part of its buying power, which it
already has and could again.
HRN: How would a
virtual currency work?
Jim Sinclair: There would
have to be a broad measure of the money supply, such as M3 used to be for the
U.S. dollar, but on an international basis. The price of gold would be
related to that measure. Central banks would have to value their gold according
to their contribution to or extraction of international liquidity, so the
price of gold would rise or fall on its own.
HRN:
Wouldn’t that be a gold standard?
Jim Sinclair:
There’ll never be a return to a gold standard in my opinion. The
end of all hyperinflations has been a commodity currency. That’s
exactly what happened in Germany, for example. Gold has the capacity to
give confidence to people if there’s some relationship between the
currency and gold. The virtual currency will be linked to gold but not
convertible into gold.
HRN: So, a gold
component will restore confidence?
Jim Sinclair: The answer
is a commodity currency. That’s what happened every time there
was this type of situation in monetary history. The rentenmark,
which ended the German hyperinflation in 1923, was supposedly backed by all
the real estate in Germany, but the government didn’t own that real
estate. The point is that it wasn’t true. There was no
great commodity backing for the rentenmark, but it
was enough. It was a period when people were searching for anything to
restore confidence in the currency.
HRN: Do you
expect high inflation in U.S. dollar terms?
Jim Sinclair: The deed is
done. Inflation is a pregnancy. The conception has already taken
place. There’s a delayed effect but if you do the crime, you do
the time. The Federal Reserve could stop QE tomorrow and it
wouldn’t stop what’s going to happen because of what
they’ve already done.
HRN: Won’t
inflation reduce the real value of debt and help to repair bank balance
sheets?
Jim Sinclair: Inflation is
the way debt will be taken care of. The value of the currency will be
so reduced as to reduce the debt load. It will also change the
political scene. Whoever has power going into this will not have power
coming out of it.
HRN: In other
words, inflation is politically destabilizing?
Jim Sinclair: People
really haven’t seen the big picture. Currency induced cost push
inflation is already here. Look at what’s going on right now in
the Middle East. We are moving from order to lack of order.
HRN: Would you
say that inflation in food prices is indirectly driving oil prices higher?
Jim Sinclair: Oil goes
right through from fertilizers to farm equipment to transportation and to
food prices. The price of food is going to go even higher than we are
seeing this year. The price of oil is headed decidedly higher.
Peak Oil was a concept of the future. Now it’s a concept of
now. A car getting 25 miles per gallon will probably be too expensive
for the average person to drive.
HRN: How will
high oil prices affect the prices of other things?
Jim Sinclair: There will
be dislocation in the means of delivery of products. There may be
shortages of goods, not because there are no available goods but because the
means of distribution breaks down. It’s not that there
won’t be corn or wheat, but the fuel needed to deliver it will be too
expensive and people who work in transportation will demand higher pay so
they can live. That’s where hyperinflation comes in.
HRN: And money to
maintain the distribution of goods will be printed out of thin air?
Jim Sinclair: Every nation
that has ever done this has turned into a banana republic. People can
live in banana republics but there will be few
wealthy people. There will be a few super wealthy people and an
enormous amount of poverty. You can see it across the border in
Nogales, Mexico, where people continue to live in extreme poverty.
HRN: America is
becoming like Mexico?
Jim Sinclair: The standard
of living is going much lower. People have to realize that the damage
is already done. It’s not a question of whether the U.S. can be
pushed over the edge. We are over the edge. We are watching the
consequences play out now.
HRN: What can
people do to protect their wealth from inflation?
Jim Sinclair: People have
to try to maintain their buying power. Each person can become their own
central bank and, to the best of their abilities, focus on the assets that
benefit from the disorder that’s taking place and that will continue to
take place.
HRN: Do you mean
buying precious metals or commodities?
Jim Sinclair: I’ve
spoken to people who, over the last ten years, have had this
perspective. They have done very well. Even doing it now could
protect your wealth.
HRN: What about
gold? Do you see gold as a currency that can’t be debased?
Jim Sinclair: What is real
money? Gold is a currency that has no liability attached to it.
It’s a measure of value and a store of wealth that’s universally
acceptable.
HRN: So, gold is
an alternative to dollars or Euros?
Jim Sinclair: Physical gold
is the answer. An individual who holds gold will have more time and
ability to function.
HRN: How much
higher do you think the price of gold could go?
Jim Sinclair: What’s
the exchange rate of a currency with no liability attached to it? Gold
is going much higher. We could see shocking gold prices, maybe Alf
Fields’ target of $10,000 per ounce or Martin Armstrong’s target
of $12,000 per ounce. I think that my price target of $1,650 per ounce
gold is going to be so low it will be considered silly.
HRN: Thank you
for your time today.
Jim Sinclair: It was my
pleasure.
After Words
Nicknamed “Mr. Gold” for his
incredible timing of the gold market in the 1970’s, when he called the
top of the market in 1980 to the day, Jim Sinclair, is a legendary precious
metals, commodities and currency trader. Mr. Sinclair was influenced by
his father, Bert Seligman, who was the business partner of Jesse Livermore, “The
Great Bear of Wall Street” famous for short selling in the stock market
crashes of 1907 and 1929. Currently Chairman, President and CEO of
Tanzanian Royalty Exploration Corporation, part of Mr. Sinclair’s
strategy to protect his interests from the effects of currency debasement, is
to acquire as much gold in the ground as possible without rushing to
production because, he believes, the price of gold will go much higher.
Mr. Sinclair’s famous 2001 gold price target of $1,650 per ounce in 2011—a
prediction ten years into the future—fell within 22% of the gold price
in January 2011 after a phenomenal 511% increase over a ten year period, from
an average price of $265.49 in January 2001 to an average price of $1,356.40
in January 2011 (London p.m. Fix)—one of the most astonishing calls in
the history of precious metals trading. As a commentator on precious
metals, commodities and currencies, investors ignore Jim Sinclair at their
peril.
Ron Hera
Hera Research
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