sinclair on why gold shares have fallen & why they

  1. 9,081 Posts.
    By James Sinclair, Chairman
    Tan Range Exploration
    www.TanRange.com
    January 27, 2003

    As the short interest in gold shares started to increase, it was
    easy to excuse the phenomenon as a product of what occurs
    in markets when active listed options exist. However, that
    excuse for the short position now defies logic because the
    short side of the gold shares exceeds the open interest for the
    appropriate options that would apply.

    Are you totally perplexed by the action of gold, which is robust,
    and the action of the shares, which is debilitated? Have you
    noticed that when gold strengthens, the shares hit a brick wall?

    Yes, I know you have, but have you seen the timing of that
    strange and contradictory occurrence?

    The answer to what is going on is shouting at you if you have
    the ability to see the charts in real time on a one-minute bar
    overlaid as shares over gold. You will see that as gold is being
    purchased, the shares are being shorted.

    Major ratio traders (those who develop mathematical
    relationships determined by back-testing to balance potential
    loss and gain on either leg, which is subsequently adjusted to
    their bullish or bearish desires) and hedge funds are the
    source of the gold share short, being long gold and short the
    shares.

    In truth, I cannot blame them where the gold producer hedgers
    are concerned, but it seems they may have gone bonkers with
    this spread and simply shorted all listed gold-producing
    companies with 100,000 ounces per year and up. It also looks
    to me as if there might be a little hanky-panky going on, since
    the short of certain shares seems to exceed the number of
    shares reasonably available to borrow.

    A requirement of a short sale is delivery of shares. These shares
    are obtained by borrowing. Every major brokerage concern has
    a loan clerk for this purpose. Only shares on margin are
    automatically available for lending. Fully paid shares require
    the permission of the lender to make them available to the short
    seller.

    I have given you one lesson on Felony 101: explaining how
    it is likely that Enron was the largest money laundry ever. I will
    also give you a felony lesson on how to short-sell a listed stock
    without an up-tick: Back the sale through Canada or elsewhere
    over-the-counter where delivery laws are different.

    This is a key reason why some stocks face inexplicable bear
    raids on NASDAQ.

    Now please do not be tempted to employ these illicit strategies.
    They are explained only so you will understand market phenomena.

    In my opinion the culprits in the shorting of gold stocks now are
    hedge funds and hedge operators long gold and short the shares.
    The interesting point is that these funds plan to sell gold between
    $372 and $386 into the Iraq invasion with a plan to cover the short
    gold stock on a gold bullion price pullback after the invasion.

    What have the hedge funds gotten wrong?

    Why are these hedge operators going to be hurt financially on
    this play?

    First and foremost, they have the wrong price at which gold will
    likely top in the short term as we begin the transition between
    Wave 1 and Wave 2 of this long-term bull market in gold. I believe
    I know the right gold price number but am not eager to put it in
    print so the hedge funds can hurt the gold community they are
    already taking advantage of.

    For those who wish to know the gold price that maximizes this
    leg and who are not already on my e-mailing list, please go to
    www.tanrange.com and register. That way you will go on my
    private list and save my staff a great deal of work and potential
    error in your e-mail address. I will have the list carefully
    reviewed.

    I will soon e-mail you an attempt to do the impossible: That is,
    outlining the future of gold in terms of time and price. You will
    have to bear with me, knowing, as I do, the impossibility of such
    a task. I will present it under two different conditions. However,
    we will constantly monitor progress, as the ability to predict the
    gold price, from point to point, is doable, or at least it has been
    so far in my career.

    The Hedge Fund Errors

    1) The hedgers and hedge funds are going to exit the futures
    on gold at the wrong price, thereby leaving themselves increasingly
    exposed to the debits developing on their gold share positions.

    2) The hedgers and hedge funds have shorted the gold shares too
    hard in light of the relatively small floating share supply. In some
    cases, as I see it, the entire float on certain issues may well be
    shorted.

    3) The hedgers and hedge funds are not familiar with the tenacious
    nature of the gold share investor vs. the gold share trader and
    therefore will not get the volume of selling they are hoping for.

    Conclusion

    As gold approaches the $381 to $386, shares will start to firm and
    gold's momentum will slow slightly. This will be due to the operations
    of the hedgers and hedge funds getting ready to rake in their expected
    profits. However, as gold trades into the middle $390s you will see
    the gold shares start to move ahead of gold momentum-wise, as some
    of the faster and smarter hedgers will see an abyss of losses opening
    in front of them. As gold passes $400, which will be to almost
    everyone's surprise, the hedgers will panic and gold shares will go
    ballistic.

    These gold share shorts, in certain instances, are simply too large
    and therefore cannot be covered under any circumstances I can
    envision. As with the mountain of derivatives, the hedgers have gone
    wild in this shorting of the smallest capitalization that can be
    found in any publicly traded industry, the gold mining industry.

    What "fundamental factor" have the hedgers and hedge funds forgotten
    that will bury them in their gold share shorts well after the Iraq
    invasion is history?

    The mistake made by these greedy hedgers and hedge funds is the
    definition of the United States going it alone. I mean that one will
    share the cost of the operation with the United States and, more
    importantly, no one will share the cost of the reconstruction of
    Iraq.

    I gave you a must-read in the current issue of Foreign Affairs.
    Basically a mouthpiece of the sitting administration, this journal
    tends to reflect foreign policy trends well. Read that way, and not
    critically, it can be a useful tool in understanding the impact of
    international politics on markets.

    I have already told you that since Lawrence of Arabia, the mistake
    made by the West in the Middle East has been to fight battles and
    then, as recently as the first invasion of Iraq, leave the results in
    the hands of despots, international criminals, and our sworn
    enemies. As a result, the Middle East only gets worse for its
    inhabitants.

    This new invasion will be followed by a rebuilding of Iraq, as
    President Bush will not stop the fight unless Saddam Hussein and
    Osama bin Laden are history or, more likely, occupying the same hut
    somewhere in Mongolia.

    The cost of this invasion, assuming a short war and the rebuilding,
    is well more than a trillion dollars. That will be paid for by
    expansion of the monetary aggregates. As a result of "going it
    alone," the United States, which will bear at least 90 percent of
    this cost, will gain from the business demand but lose on the impact
    on the dollar.

    The dollar is building multiple head and shoulders patterns, as did
    Enron and General Electric, with a dollar downside maximum
    potential well under the low I already have suggested to you: 72
    on the USDX. This insures that gold will find its way back into
    the monetary system to prevent the multiple head and shoulder
    potential for the dollar from becoming real in market prices.

    In the final analysis, the war against Iraq will help business
    activity and hurt the dollar. Gold will rise to a level not expected
    by the hedgers and hedge funds, and will nail them.

    Recommendations to the gold share community:

    1) Do not let these hedgers spook you out of your shares now.
    They certainly are trying as of this evening's close. Look at the
    fight on Royal Gold as it tried to make new highs today. Who do they
    think they are kidding? Not an old pro like me.

    2) Get ready for gold shares to improve their performance quite soon.

    3) All of you who have fully paid for your shares should take
    delivery immediately, and do not take no for an answer. Most Internet-
    based brokers have never had a client ask for delivery of his
    securities, and some such brokers have actually said they are
    uncertain of the mechanism for making delivery.

    4) To you who are on margin long gold shares, shame on you. But
    the instant you make a sale and as a result eliminate your debit,
    order delivery of your shares and do not take no for an answer.

    5) Go to www.TanRange.com and register. I will email you the best
    guidance I can. Please remember that I am a seasoned trader and
    major market risk taker but not a seer.

    -END-
 
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