by James Sinclair

In order to comprehend how gold will be utilized to reverse the present economic down spiral, we need to build our foundation of reasoning with several fundamental concepts.

To understand the key ingredient in this presentation, the dollar, you need to think of it 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 as 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 for the USA. The level of the discount rate is the dividend rate of the common shares of the USA.

We can track the establishment of the Instant Gratification Economy in the early '70s to its 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%. 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. That cover is a value number that can increase by obtaining more ounces or a higher quotation when valuing the gold at market, rather than the absurd $41 that is used now.

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. Items that control act as alarms. Gold was a control and an alarm that rang through its price. 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 of an alarm system. 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" now in the throws of its own demise. That is why the markets have become pure casinos in which a crisis-a-day sounds no alarm.

An interesting question one might ask 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 terms in order to grease the wheels of the economy and equity markets, facilitating the incumbent's re-election?

Gold has one primary role in its relation to a currency. That role is not convertibility. Convertibility deals with gold's role to control Trade Balances. The source of the problem is not trade balances. It is the freedom to create violent changes in the supply of money. Gold has only one monetary function; it acts as a control. 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.

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 is US equities has been blamed in part on the Imperialistic Attitude of CEOs acting, in some cases, above and beyond 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 generate towards a solution that includes the utilization of legislated enforced ethics, especially if the means are already legislated and in the system.


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, to affect 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 intervened 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 circumstance, real progress may occur in their lives. Similarly, to reverse a downward economic spiral of today's proportion, great intervention is necessary to effect a long-term recovery.

The most serious potential economic problem is the least understood of all situations today. That problem is the $72 trillion dollars worth at notional value for worldwide derivatives that exist on the books of commercial banks. 69.4% of all that unfunded specific performance paper is on the books of US financial institutions and 35% of it belongs to JPM. Those who believe that this is not a problem, because more derivatives can be written to adjust to circumstances, also have to believe that this mountain of unfunded specific performance contracts will never be asked to perform by anyone. The foundation of this assumption is that there will never be any counterparty risk. This is because when a counterparty risk occurs, derivative traders are no longer in charge, attorneys and accountants take over. When the accountants and attorneys arrive, specific performance will be required, and down comes the unfunded pile of sewage paper. The long-term destructive potential of such an occurrence is unthinkable. Nobody who is sane can take any comfort in such a development of this proportion.

Who says that the US dollar, once it closes below 104 on the USDX index, cannot at some time in its 21-month future window of Bear possibilities put on a NASDAQ-type decline? We live in a Casino Market world affecting all markets, played by sources 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 expects the US dollar to do 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 derivative, the dollar will have to be rescued long-term by some act to resuscitate faith in that paper asset, the US Dollar.

The Present Economic Spiral, which will cause a significant rise in the gold price and a significant further drop in the US dollar, 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, as it arrives at 5% of US Gross Domestic Product, produces significant currency adjustments in the US dollar.
A lower US Dollar in Forex Market
As a result of a new decline in the dollar below the first low of 104 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 instruments producing the 5th Element of a Long-term Bull Market in Gold by creating the most unexpected Long Term Bear market in US Treasury instrument 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.

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.

I see no solution on the horizon that can reverse the course of the long-term down spiral in the US economy, therefore I must conclude that at some point before June of 2004 and possibly much sooner, the US dollar will take a most unexpected decline in value. This will be seen internationally as a loss of confidence in the common shares of the United State and the ability and ethics of its corporate managers, specifically the sitting administration and the Federal Reserve System.

To reinstitute faith in the US dollar, which is now in a decline similar to the common shares of a tech company, there will be a move toward a Legislated Enforced Ethics in the same manner as was utilized for US corporate common shares recently. These ethics already exist as procedural law governing the USD Treasury tools. The name of it is the Gold Cover Clause. The percentage will be raised from Zero, as it now stands, to whatever is required to show a guaranteed ethical control over the free creation of too many dollars, the root cause of today's problems. It is the case of "too many dollars" that is at the heart of all the problems and is the death rattle of the Instant Gratification Economy in existence from Nixon's administration to the present.

If the Gold Cover Clause is revitalized before gold trades above $529, or before a significant shaking of the $72 trillion dollar mountain of unfunded specific performance contracts known as derivatives by the surprise of increasing interest rates, then severe long-term damage to the system will not occur. The down spiral will be reversed and a new general equities market will take birth. Economies worldwide will recover. The incentive for central banks to see gold lower will be extinguished. Gold will trade above and below the price at which the Gold Cover Clause is revitalized probably by $50, determined by economic condition. We will not have a return to the recent past in a market sense, but rather an economic environment will exist where growth has to be earned by good management because monetary aggregates will not rise and fall like they have since Nixon gave birth to the deification of paper.

A Warning
If gold trades above $529, without a meaningful intervention that cures the down spiral, then technically gold is destined to play its role as the final market solution to balance the balance sheet of the USA by trading at $1459 to $1700. This will only occur if there is a meltdown in the derivative market with attendant, unthinkable economic implications. The reason gold will perform like that will be the short cover of massive proportions resulting from the unfunded, specific obligation contracts, called gold derivatives melting down. Once that short cover is completed, who will pay those prices for gold? No one. Gold will decline from those levels with a vengeance only witnessed in its rise.

Investing in Precious Metals

Many Investment advisors recommend precious metals as part of a properly diversified portfolio to provide capital appreciation, liquidity, and a hedge against conventional paper assets. Because precious metals are counter-cyclical to paper assets, a diversification into gold, silver, and platinum can therefore reduce the total risk of your overall portfolio and preserve your wealth. History supports the premise that investment in precious metals is the best protection against uncertainties in the future.

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