and a reply from sinclair

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    Dear Mr. Smith:

    I’ve held a professional respect for your opinions on gold for years but your recent statements in Mineweb strike me as a personally-motivated attack on the gold market and its participants which is simply not worthy of your position and authorship.

    I recognize that you derive your living by representing a firm that has acted as agent for significant commercial and producer-hedging interests.

    In early 2000 or thereabouts you presented a thoroughly professional analysis on gold as it broke out of its long bear phase at $248. At the time, I predicted the first major price objective at $354.50 and you gave a price objective for the bull phase of $350.

    Since then I surmise that you may have identified yourself with the $350 price in a professional and reputable manner. I say that because I can find no credible basis for your recent bearish position. As you may know, I derive the majority of my income from trading and investing in gold and gold shares and I firmly believe we are just entering a long term, generational gold bull market.

    As I understand it your bearish position on gold is based on the following concerns:

    1/ You are concerned that the gold market is being driven by “rampant speculation.” Shall I take that statement to mean that there is some special imprimatur that says your producers and commercial interest clients have a divine right to the gold market and that their positions are clearly more proper and correct than mainstream investors? That is certainly an elitist comment and to me suggests that people like Jim Sinclair, who historically has been the largest speculator in gold, has no right to participate in that market.

    There is simply no executive of any producer or commercial interest for whom you deal and hedge that has ever risked as much of his personal wealth exploring for gold as I have. That does not give me any more or any less right to express my interest in the price of gold by assuming any size position I wish at any time.

    Your statement that too many speculators are in the market fails to consider the simple observation that gold only rises when it moves from a commodity to a currency. And this only happens when currency-conscious traders and investors enter the gold market.

    The sentiment you are expressing suggests that speculators have no right to be in the gold market but your COT clients do. I believe you are totally wrong and are only moved by the fact that your clients are COT, your thinking is COT, and you are affronted that the gold market has been taken away from COT.

    2/ You believe that the option market’s growth represents the odd lotters and unwashed public. Well, Andy a good deal of it represents me! I am more experienced in trading gold than any other market participant right now- your revered self included. On that issue, I believe you are totally wrong and are only motivated by your COT affiliations.

    3/ You say that de-hedging has made this market and when it’s over the market will lose its floor. Mr. Smith, have you checked the quote on the US dollar recently or looked at the triple US deficit position of Current Account, Budget and Trade? Or do you simply say that gold has no relationship to macro-economic motivators. That’s like saying that gold should only move according to the motives of your clients. There are other factors in the gold market other than your clients. In fact, your hedging clients have been the major losers in this market and you well know it.

    4/ You suggest that de-hedging by producers must be replaced by investment demand for gold. Along with that, you question where the demand will come from while insisting that the huge option Call position and predominance of long positions in the futures market is bad.

    Has it ever occurred to you that from 1991 to 1999 everyone on earth selling gold found a buyer? Your clients were the predominant sellers and you never thought that someone out there had to be a buyer of all that gold. Did you ever once ask yourself “who is that trillionaire mad man?”

    5/ While admitting this gold market may well be a bull, you prefer to call it a Rogue Elephant. Exactly what point you are making escapes me unless you object to a bull market no matter what its namesake. The statement belies your dislike of the price of gold having the audacity to move above your maximum price objective of $350.

    6/ Mr. Smith, you know perfectly well that the least accurate forecasters of the gold market have always been the producers. The people who mine gold have never valued gold at anything more than their total cost of production. The only industry with less knowledge of the price of their primary product has historically been platinum producers. We used to trade platinum by taking the short side the minute producers felt the market fundamentals were strong enough to consider expansion plans.

    7/ You worry that whatever pleasure there is at $400, $450 or $500, will be outweighed by the pain that will occur in a subsequent bear market. That sounds like the perpetual equity bear who from 1981 to 2000 told everyone not to be in equities. That is absolute nonsense Mr. Smith because if that was to be believed, why would anyone be in the market at all with the notable exception of your clients who you feel rightly own the gold market.

    8/ You roll out the central banks as the sellers because somehow an increase in the value of their asset gold will make them want many more depreciating dollars. That was not the way it happened in the 70’s and it won’t happen now. Yes, the central banks sold but other buyers purchased everything they had for sale until all selling programs were cancelled. That bogeyman did not stop the bull then and will not stop it now.

    9/ You seem to equate the rise in base metal prices to gold in an attempt to discredit gold. However, this is only a repeat of market history. Apparently, you have never considered the five historical prerequisites for a long term bull market in gold, one of which is a positive market in general commodities. You can imply a non-supportive relationship between base metals and gold but you are totally wrong. There is a common and supportive relationship.

    10/ I assume there was no typo in your commentary when you attributed dollar strength to gold strength so I will simply let that go.

    11/ You consider that there is a lackluster inflow into gold and I would suggest that you haven’t seen anything in terms of inflow yet. Gold is only starting to move if you take into account the multi-year Tea Cup with Handle technical formation in gold and consider a clear break above that as the birth of what I feel is a generational bull market.

    For all of the numbered items above, I would reiterate my statement that “you are totally wrong and are only moved by the fact that your clients are COT, your thinking is COT, and you are affronted that the gold market has been taken away from COT.”

    In conclusion, you have covered yourself well because you clearly state that you believe gold is going up and you quote $400, $450 and $500 as potential points of appreciation.

    You feel those prices will be produced by speculators who have no right to create anything in the gold market that your clients, producers and commercials claim ownership to.

    Mr. Smith, your arguments are elitist nonsense not worthy of your fine reputation.





 
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