Primary Gold Bull Market
The Real WHY They Are Trying to Prevent It
September 3, 2002
by James Sinclair & Harry Schultz
1. JP Morgan/Chase appears to be the main member by accident or by intention of the Gold Dealers short seller's club.
2. JPM (NYSE Symbol for JP Morgan/Chase) has received, in our opinion, from Central Banks, lease agreements, whereby they are able to receive physical bullion from the central bank paying now 3/4 of 1% per annum. JPM and/or their clients are free to use or sell this gold in any manner they want. JPM themselves or on behalf of their clients appear to have used it to sell violently at key technical points. $312.50 to $314.80 (today) -$315 & $329.50-$330, thereby depressing the gold price.
3. Recently, Moody's Credit Rating Service downgraded JP Morgan/Chase's credit rating. Following that, Standard & Poor's Credit Service downgraded JP Morgan/Chase's credit standing based on specific derivative positions.
4. The actual figure of derivative positions on the book of JP Morgan/Chase can be found registered at the office of the Controller of the US Currency. The Controller of the US Currency reports to the IMF which shares its data with the BIS.
5. Therefore, the positions carried by JP Morgan/Chase is public, but the public has no real idea on how to find it (or what it means).
6. The total of all derivatives on the books of JP Morgan/Chase on all underlying assets is $24 Trillion US dollars. Yes, 24 Trillion.
7. The size of the Gold Derivatives on JP Morgan/Chase's books is $46,000,000,000 - $60,000,000,000, depending on valuation methods. Yes, $46 to $60 Billion.
8. All gold derivative dealers use "Risk Control Software" to manage their gold positions. This program maintains the risk of the gold derivative to the dealer according to the risk percentage that is decided upon by the trading management at the inception of the transactions.
9. All the gold derivatives on the books of JP Morgan/Chase are short spreads. That means short of gold. If they were not short spreads, then JP Morgan/Chase would be extraordinarily pleased by the rise in the gold price and publicly bullish in their reports (which they are not).
10. The size of the total international position of short spread gold derivatives is US Dollars $300,000,000,000 according to IMF and BIS reports. If you convert $300,000,000,000 into ounces of gold at the present gold price, it equates to 900,000,000 ounces.
11. As gold hit $305, it triggered the logic of the "Risk Control Programs" to buy gold to maintain the risk exposure of the gold derivative short spreads for the gold dealers cabal/cartel of which J.P. Morgan/Chase is, in our opinion, a major player, if not the main player. As gold, with the help of the cartel, dropped from the high $320s, "Risk Control Programs" triggered selling of gold for the same reason. At $302-$305 "Risk control Programs" returned to neutral. Now you can understand the action of the gold market clearly.
12. If Gold closes above $330, the "Risk Control Programs" will start to demand that for each ounce of gold sold short in the short gold spreads, the dealers must own long approximately .623 ounces of gold.
13. At a close at/or above $354, the gold dealers cabal/cartel's "Risk Control Programs" will call for approximately .986 ounces of gold long for each ounce short on the gold derivative short spreads.
14. .986 ounces is practically one to one - one ounce short to one ounce long required to maintain solvency by "Risk Control Programs" at $354 gold.
15. If you equate the demand to the number of ounces of gold that would be created by a close at or above $354 by the "Risk Control Program" used by all commercial banks, gold banks and gold dealers in the gold derivative business, the number comes out to slightly above 886,325,000 ounces of gold. That number exceeds all the gold that all the central banks on the planet have in their possession including all the gold they have leased and not accounted for. Therefore, at $354, gold will have to go ballistic in price &/or the greatest bankruptcy in history will occur for the gold derivative dealers.
16. It is not the gold derivative position that worries the major investment banks that are the parents of the subsidiaries which are the exposed gold dealers. It is not the $46 billion to $60 billion in gold derivatives on the books of JP Morgan/Chase that worries them. It is the effect of an explosion in the gold derivatives on the balance of the US Dollar 23.7 Trillion in other derivatives on the books of JP Morgan that worries JP Morgan/Chase, IMO.
17. This is why JP Morgan/Chase and their other gold dealer cartel members are stopping gold at $312.50 to $314.80 today (as this is written) with the help, IMO, of central banks.
18. Such a manipulation to prevent the gold market from rising above $354 will fail because history tells us that no manipulation ever attempted has stopped a primary, fundamentally-driven bull or bear market in anything.
19. The two greatest traders that ever lived, (both expired), Bertram J. Seligman and Jesse Livermore taught that a successful manipulation must always be in the direction that the market wants to take -- fundamentally and technically. Any other manipulation not only fails, a manipulation against the fundamental and technical desire of a market will also create a coiled market that goes further in the direction of its intention than it would have gone in the first place. Therefore, the result of the attempt by the gold cartel to hold the market down will be to propel it higher than it would have gone earlier.
20. To complicate the problem, most gold derivatives outstanding today are as follows:
Non-transparent.
Unregulated.
Unlisted.
Not clearinghouse funded.
Not market priced.
Generally non-transferable as many are specific performance contractual obligations.
Without standard so that closing can't be made at will.
Totally dependent on the balance sheet of the granting entity.
Granting gold bank entities generally non-guaranteed as to trade debt, subsidiaries of international investment and commercial banks holding companies.
Now totaling $300,000,000 notional value internationally.
Approximately 89% of these transaction have been done with entities that have nothing to do with the mining industry as counter party to the gold bank derivative dealer.
Therefore, the gold market has come under continued selling by those entities (gold banks/gold dealers) who will suffer the most, assuming -- and we do -- that gold is in a Primary Fundamental Gold Market based on the "5 Fundamental Reasons" that sustain such an event.
The 5 Keys to a Long Term Bull Market in Gold on www.financialsense.com
A. The US Current Account must be in a deficit position and growing. Yes, this is a present condition and shows no fundamental signs of reversing for a significant time. This is the account that measures the amount of US dollars in the hands of non-US entities. It is usually invested primarily in US Federal Debt instruments.
B. An intact negative trend in the US Dollar overall must exist. It should have the characteristics of a bear market. This is in fact true for the US Dollar today. We have a classic long-term top called a Head & Shoulders formation, which was subsequently confirmed by price and volume action. Even dollar bulls now are looking only for the dollar to stabilize at lower levels. This criterion is in place for a long-term bull market in gold.
C. The general commodity market is showing in many ways, both fundamentally and technically, that it is in a base formation from which one can expect higher prices. We shall discuss the technical characteristics further to sustain that this ingredient has begun to support gold long term.
D. Trust in paper assets must be waning for gold to assume an investment role internationally. We see the recent decision against Andersen, the comments on GE & IBM accounting practices and Enron as examples of causative items, which have turned investors away from the absolute belief, in existence from 1980 until now, that paper assets were storehouses of value. We believe this ingredient is in favor of gold's long-term bull market.
E. The momentum in the appreciation of the bond market must be decelerating. We see this ingredient as becoming positive now to a long-term bull market in gold.
These five items, as they gain in strength, will further accelerate the underpinnings of a long-term market in gold. It was the forming of these constituents of a long-term bull market in gold that has given rise to the move of gold from $260 to $330.
Therefore, the Gold Cartel is in Harm's Way. A bankruptcy of the derivative dealers who represent, in part, 72 Trillion Dollars of derivative positions (called by Buffett - "Sewage") of the highest mountain of debt ever created on Earth is the reason why gold could go to $1450 -- $1700. When gold reached $887.50 in March of 1980, $900 was the price that would have balanced the balance sheet of the USA defined as the comparison between Federal asset gold and external debt obligations. If a derivative failure was to happen in the next 5 years, it would -- depending on when it happened -- produce a number between $1450 and $1700 on gold to balance the balance sheet of the US as described above.
About the authors...
James E. Sinclair is Chairman & CEO of Tan Range Exploration TNX on the Toronto Stock Exchange. He was Chairman of Sutton Resources from 1989 to 1995 when he personally funded that company into the development of the Bulyanhulu property before its sale to Barrick Gold.
Sinclair has written three books on commercial metals, precious metals and economics. Forbes December 10, 2001 article reviews his career in gold. Prior to 1989, Mr. Sinclair was the owner and operator of metals trading, commodity clearing and metals arbitrage group firm known as the Sinclair Group. He is considered a leader in the understanding of the economics and markets for gold.
Harry D. Schultz, KHC, KM, KCPR, KCSA, KCSS, is the highest paid investment consultant in the world at US$2,400/hour—US$3,400/hour on weekends (International Edition Guinness Book of Records 1981-2000.) Mr. Schultz is regularly quoted in books, articles, and interviews and by other newsletters (the "alternative press"). Arthur Hailey, a longtime personal friend and HSL subscriber, based his character Lewis Dorsey in the bestseller The Moneychangers, directly on Harry Schultz. Mr. Schultz has lived for extended periods in 18 nations, and shorter periods in many others. Knighted five times, Schultz is a man for all seasons and a true citizen of the world. He is one of the original founders of the entire investment newsletter business. Now in his 36th year of publishing HSL, Harry Schultz was a pioneer of the financial newsletter concept. He has written 23 books, most of them concerning financial and investment matters.
HSL, International Harry Schultz Letter, is the world's premier international investment, financial, economic, geopolitical, privacy, sociological and philosophical newsletter. HSL is now in its 36th year with subscribers in 90 nations. In addition to decades of money-making investment advice in all major world stock, bond, commodities, and currencies markets. Based in Switzerland, HSL is one of the few truly international investment newsletters.
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