sinclair - a 'should' read.

  1. dub
    33,892 Posts.
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    Firstly, I'm surprised nobody has mentioned/posted this article. I read it early am, and was going to but didn't copy it here.

    Some weeks ago I suggested, a la Sinclair, that the US$ could be considered as a share in the company "USA Inc". Sinclair raises that again here - in the second part of this article.

    I think it's a good read. You will think what you will.

    Here 'tis.


    Gold To Be Remonetized!
    First by the "Malaysian Dinar" June of 2003,
    the "US Dollar" will Follow June of 2004:
    The Gold Price Will Continue to Float

    by James E. Sinclair, Chairman Tan Range
    [email protected]
    January 23, 2003

    On December 23, 2002, I wrote an article for the gold community reviewing the presentations made by Chairman Greenspan and Bernanke, a Governor of the Federal Reserve. I concluded that gold will be remonetized for the dollar by a revitalized and modernized Federal Reserve Gold Certificate Ratio. In my opinion, this development is, without a doubt, final proof that this current bull market in gold is generational, not secular. When Chairman Greenspan referred to the period of time since Chairman Volcker took anti-inflationary action, late in 1979, by saying, “We have come full circle,” I believe he was referring to the entire scenario. That was during the Nixon administration when gold exited the dollar. Now gold will be used to revitalize both the economy and the dollar.

    It is obvious that every economic plan introduced by the Bush administration and by the current Federal Reserve is targeting June 2004 because the zero inflation strategy had overrun its course. June 2004 is when the Bush re-election campaign will make its push for the November elections. The tax program recently introduced is not an economic stimulation program designed for immediate impact. That is crystal clear. Programs, for immediate impact, must put money directly, in a timely manner, into the hands of those most prone to spend in the consumer area, funds with which to act. This plan has no such character. You must see the 18-month time line that the economic stimulation tax plan has for those that will fund the 2004 Bush Campaign.

    The goal out there is a recovery in general equities (June 2004) based on the impact of a tax program accompanied by a stronger dollar from, whatever level the dollar is then, sustaining the equity gain. In order not to let the economy fall too deeply into price deflation in 2003, the central bank will open the floodgates of liquidity, in all probability, accompanied by international central banks. The international central banks have promised last week to open their floodgates of money creation the day the US invades Iraq. A war at this time fits the Roosevelt model from the 1930s because it was the demand for war materials with the liquid monetary environment and then firm dollar that gave us the long-term economic growth experiences in the 40's and 50's.

    I recommend you review the recent edition of Foreign Affairs in which there are various interesting articles on the Iraq situation. Assuming this publication is somewhat of a spokesperson for present policy, you will see that this venture into Iraq also carries with it a determination not to return Iraq to the questionable rule of inferior people, which has been policy for the West. So, along with the cost of the Iraq war, there will be a continuing reconstruction of Iraq infrastructure to advance this nation into the present century and hopefully not make the mistake common to our policy since Lawrence of Arabia. This cost, financed by the expansion of monetary aggregates, is structured act as the fuel to stimulate industry and carry the economic activity to the point of June of 2004 and beyond. The Bush administration then would be re-elected. Please do not assume that I approve of this plan, but I am calling it as I see it.

    Gold will not be set in price as there is no way anything monetary can be fixed at this time nor is being fixed anything desirable in preference to a disciplined floating system. It is enough that you know what is planned and how it will occur. I disagree entirely with the author of the National Post article on the basis of Chairman Greenspan and Governor Bernanke’s statements, that the goal for gold is $350 and it will be fixed at that price. That simply will not and cannot happen in today’s floating world. Nor is there any intention to change the float to fix. The article did not approach the means by which gold would re-enter the system, but only said it would. Convertibility is out of the question in light of the profuse use of dollars as the primary international settlement mechanism. Gold is headed back into the system by a modernized and revitalized Federal Reserve Gold Certificate Ratio then tied to the expansion of M3 (the broad monetary aggregate figure). The value of Treasury gold on the day of enactment will be considered to be that value which is required to have that size M3. From that point forward, more gold or a higher price for gold will be required in order to expand the broad based monetary aggregate beyond a modest percentage. The Treasury could simply benefit from a higher price or could buy gold in the open market to effect a higher price should the need arise to expand beyond the present level in M3 beyond a predetermined expansion of 3% per year.

    Gold’s important role in a monetary system has never been convertibility. It has been control. This reinstitution of the Federal Reserve Gold Certificate Ratio, aka the “Gold Cover Clause,” whenever it is used, will serve the exact form that the legislated ethic gave rise to a 2000 point rally in the Dow Jones from an oversold condition. Since this gold/dollar strategy controls the prime reason for dollar weakness by disciplining the creation of M3 (above), I believe a 3% level per annum it is a legislated ethic. In a similar manner, extending powers of the SEC and other regulators, restricting accounting rules and making white-collar crime sentencing similar to other felony sentencing for corporate executives functioned as a legislated ethic. There is no question that the tool to make the dollar as good as gold for the first time since 1968 will stop the dollar decline whenever and at whatever point it is used. Take 76 on the USDX (dollar index) as the point to begin to watch for this. As far as fixing gold at $350, that is impossible functionally and will not occur. Rather I believe that whenever this new revitalized Federal Reserve Gold Certificate Ratio is revitalized in the dollar, gold will trade quietly $50 above and below the price of gold on that day.

    Now let us review.

    The Gold Cover Clause Reserve Ratio
    The Final Solution

    First: To understand the key ingredient in this presentation, the reinstatement of a modernized Gold Cover Clause, you must comprehend what in fact the dollar is. To understand this, I suggest that you need to think of the dollar in its essential role as the common share of the United States of America. Just as common shares of corporations fluctuate in the market place, so do currencies and the common shares of countries. Much like a quarterly or annual report, the reported Budget Deficit portrays the quality of economic management of this country. The Trade Surplus or Deficit is akin to the earnings report of the corporation, the USA. The level of the discount rate is the dividend rate of the common shares of the USA.

    Second: We can track the establishment of the Instant Gratification Economy in the late 60’s when it took birth in the Nixon Administration. That unfortunate birth took place with the reduction of the requirements of the Gold Cover Clause from 5% to 0%, an event that effectively sterilized its then function. The function of the Gold Cover is to assure that the size of the money supply does not exceed a given amount of gold cover using interest rate penalties.

    The sterilization of the Gold Cover Clause handed the control of the supply of money in the USA over to quasi-political special interest control. It was this act that gave birth to the paper economy of the USA, thereby founding the ensuing three-generation Instant Gratification Economy funded by the over-production of dollars, now, IMO, confirmed by Chairman Greenspan’s own words. Why has the present Chairman of the Federal Reserve System made this distinction so positive to the function of gold in a monetary system?

    Items that control can only act in today’s world as alarms. Gold was a control and an alarm that rang through its price. It will again. Currency parities were alarms in terms of market fluctuations to or away from parity rates. Nixon's sterilization of the Gold Cover Clause accelerated the world economy on a course to a condition devoid today of any alarm system, now. Today's body economic is much like the human body with the disease whereby the body loses its ability to feel pain, thus inadvertently placing itself in harm’s way. We now live in an "Alarmless Casino Society" within the "Instant Gratification Economy," that has now failed it proponents, now in the throes of its own demise. That is why the markets have become pure casinos in which a daily crisis sounds no alarm.

    An interesting question one might ask oneself is: What post-Nixon Governor of the Federal Reserve has failed to prime the money pump in the USA during the last two years of an incumbent president's term in order to grease the wheels of the economy and equity markets, facilitating the incumbent's re-election?

    Third: Gold has one primary role in its relation to a currency. That role is not convertibility. Convertibility dealt with gold's role in controlling Trade Balances. The source of the problem is not trade balances; it is the freedom to create violent changes in the supply of money with no alarm sounding. Gold has only one monetary function; it acts as a control thereby disciplining the creation of monetary aggregates. Gold could control the very item that stands at the foundation of today's nemesis, the errors in human judgment resulting in mismanagement of the money supply. It is a glaring contradiction for an economic society, built on the ability of free markets to effect economic distribution, to trust a group of 'quasi-political special interest people with titles' with the management of our economy via the expansion or contraction of the money supply, primarily. Communism and socialism are supposedly dead, the USA is in the process of paying a high price for it is a socialist principle to allow the titled few to manage the economy as has been the case since the reduction of the Gold Cover Clause to Zero.

    Fourth: To determine how a group of people with the ability to act will perform in a market crisis, we need only examine their reasoning and action in a previous situation. The recent extreme decline in US equities has been blamed in part on the Imperialistic Attitude of CEOs acting in some cases above and beyond the law. In order to attempt to create a return of confidence in the paper assets, the common shares of US corporations, new laws have been passed for mandating corporate management's ethical behavior. This is what is called a Legislated Enforced Ethic. Therefore, one can conclude that in an economic crisis, the minds of those empowered to act will gravitate towards a solution that includes the utilization of legislated enforced ethics, especially if the means are already legislated and in the system. This available ethic is the Federal Reserve gold Certificate Ratio aka the Gold Cover Clause.

    Fifth: Definition -- A spiral is a grouping of cause and effect that work to accelerate each other towards an event which then empowers the spiral itself. There exists a clear downward spiral of events; each affecting the other with no evidence that this cycle will end. A downward spiral in markets is not much different from a downward spiral in the human experience. In that sense, a downward spiral such as depression requires intervention in order to reverse it. Psychotropic drugs, as an intervention, are often prescribed in order to provide an intervening window that can prevent the depression down spiral from going to its predictable end. Should the patient grasp that opportunity provided by the intervention, taking a more positive look at their circumstances, real progress may occur in their lives. Similarly, to reverse a downward economic spiral of today's proportion, great intervention is necessary to affect a long-term recovery.

    Sixth: Who says that the US dollar, once it closes below 100 on the USDX index (which occurred today), cannot at some time in its 18-month future window of Bear possibilities put on a NASDAQ-type decline? We live in a Casino market world affecting all markets, played by tranches of money larger than that of the central bank individually or collectively. Nobody in the established investment community expected the NASDAQ to do what it did. Nobody in the established investment community expected the US dollar to do neither what it has done nor what it will do. The heart of the Down Spiral is the US Dollar. To stop the Down Spiral, should it get totally out of hand, before a collapse of the $72 trillion dollar mountain of sewage, unfunded, specific obligation paper, called derivatives, the dollar will have to be rescued long-term by some act to resuscitate faith in that paper asset, the US Dollar.

    Seventh: The Present Economic Spiral, which will cause a significant rise in the gold price above the high of today at $368.50 and a significant further drop in the US dollar (USDX at .9981), is:

    In the Environment of an expanding US Budget Deficit, we are experiencing an expanding US Trade Deficit, which impacts an expanding US Current Account Deficit which now at over 5% of US Gross Domestic Product produces significant currency adjustments in the US dollar.

    As a result of a new decline in the dollar below the psychological low of 100 as measured by the USDX index, non-US holders of US Government Securities will begin to reduce their purchases. The shift in momentum of purchasing reverses the previous up trend in this market, which will result in a surprise, increase in interest rates in the environment of weak business conditions internationally. This results in a further drop in general equities from any recovery level or from the present levels, as we have always seen that declining US equity prices are accompanied by further declines in the US Dollar. Therefore a further drop in the US Dollar occurs. And therefore, the down spiral marches on and on. This economic spiral will continue to push gold higher and the dollar lower. Each time it impacts upon itself, the factors in the Down Economic Spiral further impact the holders of US Treasury instrument, producing the 5th Element of a Long-Term Bull Market in Gold by creating the most unexpected Long-Term Bear Market in US Treasury instruments due cyclically and fundamentally, as explained above, to occur. Historically US interest rates are not made by the Federal Reserve. Rather, US interest rates are a product of the market level of US Treasury instruments. That is a key concept to keep in mind.

    Eighth: As part of the conditioning that has taken place during the experience of the three-generation "Instant Gratification Economy", the majority of market participants, even those akin to gold, believe that governments are more powerful than markets. This is a fallacy about to be proven wrong. Markets are the most powerful economic forces in a world awash in paper money. Markets force monetary policy, not the other way around. Markets are larger than the financial capacity of all central banks added together.

    In conclusion: The National Post article that caused so much stir today is old news. You read about it here before Christmas. The article is generally correct but makes, IMO, one significant omission and therefore comes to an incorrect assumption where the price of gold is concerned. Gold will not be fixed at all. Gold will not enter the system through convertibility, but rather will re-enter at the modernized and revitalized Federal Reserve Gold Certificate Ratio, aka the Gold Cover Clause, with a floating price of gold to mirror the then present conditions.

    I will publish a map of prices and times that I expect for those so interested. Email me if you wish this at [email protected]

    © 2003 James E. Sinclair



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