Gold and Dollar Market Summary, July 18th, 2007

Author: Jim Sinclair

Dear CIGAs,

You simply must have gold.

As you can see from the mast head of JSMineset, gold is the standard because there simply isn’t much of it. Alchemy in real terms is nothing more than an entertaining joke distributed for a laugh from the people at www.GATA.org. As a realistic possibility alchemy has to be at the bottom of the barrel of disinformation.

The US dollar is in miserable condition even though the Exchange Stabilization Fund did show within that five minute window of opportunity we pointed out earlier this morning. Is that a coincidence? Probably.

All the King’s horses and all the King’s men cannot put the Humpty Dumpy Dollar back together again, but they sure are trying. The dollar is trading now at .8025 as the Exchange Stabilization Fund funded by the US Treasury who is in turn funded by the Fed is doing everything possible to get the buck back to .8031. The problem with the heroic attempt is you have to keep it there. Keeping it there means you have to clean out the offerings in the cash market not only now but repeatedly, which is simply not possible.

The only way to support the dollar is to sell the hell out of it then use OPM for support. The other means is to spread it in a huge way to operate the spread just as is done in the equity indices to support that. The rub in this tactic for the US dollar is that you would have to cream it to help it and that is contra-productive. So far no real effort has been made to play the market to support the dollar. That is what makes it quite hard to start now. For this reason I do not see the present effort to hold that line (.8030) as a successful strategy.

We live in a world without restraints, almost without ethics, hateful people almost everywhere and no standards at all. This is enough of a reason to own gold. It is limited in quantity and becomes a currency when the previous reserve currency fails. The demand for gold will without any doubt rise. The supply cannot rise in any meaningful way. Therefore the price of gold must rise. It is that simple.

US paper is in trouble as senior paper is US and worldwide bonds, not necessarily equities. The sub prime debt level is following economic law we spoke of before. That is any level of debt, be it the lowest, will impact all levels of debt, even the best.

This then begins to fill in the final pillar that sustains the generational bull market in gold.

This Pillar is taking form as the awful number $666 is breached. Maybe the number has something to do with the COT boys.

Bernanke Confirms the Formula:

Today the Chairman disappointed the almost empty chaired public hearing. He did not perform as a cheer leader of the Goldilocks economy, he was perfectly balanced. He was not a committed bull on the present business atmosphere as most commentators have been. He sees improvement, but nothing to write home about leaving open the potential for a fall off into 2008.

This factors into federal revenues as tax receipts will decline overall for this period as spending rises. That is forthcoming bad news for the US dollar via the steps in the Formula.

The Formula

Jim’s Formula:
September 1, 2006

1. First interest rates rise affecting the drivers of the US economy, housing, but before that auto production goes from bull to a bear markets.

2. This impacts many other industries and the jobs report. An economy is either rising at a rising rate or business activity is falling at an increasing rate. That is economic law 101. There is no such thing in any market as a Plateau of Prosperity or Cinderella - Goldilocks situations.

3. We have witnessed the Dow rise on economic news indicating deceleration of activity. This continues until major corporations announced poor earnings, making the Dow fall faster than it rose, moving it deeply into the red.

4. The formula economically is inherent in #2 which is lower economic activity equals lower profits.

5. Lower profits leads to lower Federal Tax revenues.

6. Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government.

7. The increased US Federal Budget deficit in the face of a US Trade Deficit increases the US Current Account Deficit.

8. The US Current Account Balance is the speedometer of the money exiting the US into world markets (deficit).

9. It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms.

10. If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall.

11. Assuming the US turns inside to finance all maturities, interest rates will rise with the long term rates moving fastest regardless of prevailing business conditions.

12. This will further contract business activity and start a downward spiral of unparalleled dimension because the size of US debt already issued is of unparalleled dimension.
Therefore as you get to #12 you are automatically right back at #1. This is an economic downward spiral.

I heard all this “slow business” as negative to gold talk in the 70s. It was totally wrong then. It will be exactly the same now.

Jim Sinclair’s Website