18 Reasons Why Gold and silver will Double in Value in the next 3 years

By: Jim Sinclair and Mike Pennington

The real rate of interest has been near zero since Oct 2001 The Consumer Price Index is ridiculously low in the true measure of consumer price inflation. Given the paltry yields offered by short-term TBills, gold and silver will continue to receive a lift for some time into the future.

The rise in foreign holdings of US assets increases our vulnerability to foreign abandonment The accumulation by foreign entities, principally central banks, has gone parabolic in the last couple of years until recently. In the last couple of months, Asians have noticeably withdrawn their demand for our securities. This could portend trouble ahead, and a strong motivation to own gold. One should be careful to note that dishoarding of their positions would be inflationary to prices in Asia, while deflationary to prices in the USA. A liquidity flood would take place in Asia, but an economic drag of huge proportions would take place in the USA.

The money supply increased over 70% since Jan 2001, close to 100% rise since 1991 The money supply continues to rise steadily. The majority of new money seems to go toward consumer debt and insurance against higher interest rates. This is bullish for precious metals.

A return to federal deficits from recession and wartime economy, security spending An economic recovery usually brings about a gradual removal of red ink to the federal balance sheet. Not this time. Well, the claim of recovery has sounded less than honest, if not totally fallacious, even politically expedient. To me, it is ludicrous and fraudulent. Federal deficits have remained quite steady, in the $400 billion range for the last three years. The Iraqi War has resulted in $70 to $100 billion costs last year, and about the same this year, with no end in sight. Whenever the federal budget is cited, one should be certain to mention that the Social Security Trust Fund is routinely pilfered to pay for today’s federal bills, even as future bills escalate. Coming years will see more dreadful deficits from additional commitments like the Medicare Prescription Drug bill, which will add roughly $550 billion over three years to the deficit. In the next few years, talk will emerge of eventual and inevitable US Treasury default.

With rising world tension, desire for safer safe haven, the geopolitical threat to peace In the last several years, Iraq became a passionate theatre for conflict. Open season was declared on oil pipelines. The Middle East is a powder keg. Geopolitical peace is nowhere to be seen, except in South America and Australia. When war breaks out, the precious metals explode upward.

Glass-Steagal Law repeal now heightens risk of financial cluster failure in progress The law was instituted immediately after the Great Depression in order to protect from systemic ripple effect damage, extending from banks to brokerage houses to insurance companies. Now all three are vulnerably linked. The topic receives little if any attention. Giant financial conglomerates like Citigroup and JPMorgan possess dangerously large and unregulated derivative books. Each owns a major brokerage arm subsidiary. Citi owns a major insurance firm. Following the World Trade Center attack, insurance companies have been under enormous strain. As a group, they publicly state justification for rising insurance premiums to be increased risk of attack and disruption. If the truth be told, it is more due to severe drops in their income from fixed income investments, since Treasury yields are pathetically low. Brokerage houses are the tail on this dog. The two critical pieces are banking (loaded by derivative risk) and insurance (strained by low yield income and continued terrorist risk). If one arm falls, the others are dragged down.

The world perception of American institutionalized dishonesty A new wrinkle to US lack of pursuit for truth came in February 2003, as the US put forth questionable arguments and documents to justify Weapons of Mass Destruction existence in Iraq. The current administration alienated European leaders and NATO. We parted ways with a stodgy inactive United Nations, which had its own massive fraud controversy with Iraq’s Food For Oil Program. In the last 20 months, US prestige has fallen more due to the ongoing war, its narrow coalition of support, and regular pipeline attacks. At the time of the last article, our prestige was under assault by a string of fraud cases, led by Enron and WorldCom and mutual fund controversies. The stock bust in 2000 had its aftermath.

The likelihood of systemic banking shock waves from debt collapse and derivative chain reaction Derivative books have continued to grow. Exact measurement is impossible. It would not be surprising to learn that in 20 months, the notional value of US-held derivative might have increased by 20% or more. During this time span, two bond revolts occurred, one in July 2003 (led by Fanny Mae convexity), another in March 2004 (led by a false start in jobs growth). Since bonds comprise at least 75% of derivative portfolios, they should be closely watched to signal trouble in the highly leverage arena of derivative trading. Low rates are kept low, in part by leveraged contracts to protect the entire financial system.

The reduction of the US Dollar usage as both a store of value and as a banking reserve asset. Several developments have undermined the USDollar as primary store of value in hard asset reserves. The euro has risen 60% in the last three years. The Canadian dollar is almost even par with our dollar and it will probably exceed it soon. The European and Middle East (OPEC and Arabs) have turned increasingly to diversification. Asians and Russians have also publicly announced a diversified intention, which includes gold. Islamic nations have begun to tinker with bilateral commerce settlement in Gold Dinars. China recently opened its first Gold Exchange. The winds are blowing away from the USDollar as the primary reserve currency.

The sharp increase of savings across Asia in the form of gold The Chinese opened a Shanghai Gold Exchange which marks a critical event. Rumors run rampant on a constant basis that China is accumulating gold for a future bank system foundation. Promoting gold for citizen savings only reinforces the direction seen as coming. Rumors even include China eventually backing their yuan currency with gold. Those who spread such stories should beware that a quantum jump in their currency exchange rate would cause two immediate effects. Their export business would be harmed badly. A rise versus the US$ but more stable exchange rate with the euro would preserve export potential to the European Union. Their import cost for raw materials and energy supplies would also drop in price. At some point, when their middle class grows even more, such a compromise might be welcomed.

The Islamic world is planning gold-centric internationalcommerce, distancing itself from the USDollar. The Gold Dinar is openly discussed in the Islamic world. Now even Iran and Indonesia have followed through with stated plans to settle on trade with gold. Other bilateral agreements are either hatched or in the works. Some Arab nations are deeply in debt, such as Saudi Arabia (the #1 nation in per capita debt). Other Islamic nations and Arab emirates continue to sock away large surpluses annually. The Middle East continues to see strong gold demand. Whether a more formal gold-backed system of commercial settlement occurs among Islamic nations, in defiance of western standards, we will see.

The Bank for International Settlements has targeted the US dollar for a corrective decline Leaked internal reports indicated a desire to weaken, if not bring down, the Soviet Union back in the 1980 decade. They were seen by the BIS as a threat to world security. In the 1990 decade, similar reports indicated a desire to remove the unstable dynamic to the world economy owing to the uncontrollable growth in USDollar creation and its excessive appreciation. This is a shady organization, not corrupt, but rather secretive. The BIS serves as the central bank for all major central banks. They have tremendously powerful means to effect change, by restricting credit flow and managing large leveraged portfolios. It is reported that they would like to see a hard asset like gold more involved in the world monetary system. Little can be verified. So take this assessment as conjecture.

The reversal of miner hedges, end of gold leasing, and reducing supply. In the last couple of years, total gold miner hedge book forward contracts are reported to have declined by between 60% and 70%. Their contract buybacks continue, which might provide an ironic support to the gold price, offsetting the gold cartel assaults. As for gold leasing, it has not ended by all accounts; lease rates continue to be tiny. Skirmishes continue with members of the European Union. While small nations like Netherlands (I believe) expressed lost interest in gold sales, Germany and Switzerland continue the practice of gold dumping. It is unclear how much gold remains in Fort Knox. Actually, what remains of our national gold treasure is reportedly guarded at West Point.

The dismantled mining supply apparatus, from systemic price below production. It still takes a long time to bring a revived mine into production. Fifteen years of neglect did not completely end in 2002, when gold reversed in price. In the last 20 months, numerous little gold companies, and many larger companies have opened shuttered mines. Many properties have made early steps toward returning to production, bringing permits up to date, hiring operators, obtaining funds, and completing environmental impact studies where required. A shortage of operators and equipment is reported in the fieldin Canada.

A paradox: high gold price leads to higher demand, and high price leads to lower supply This statement is hard to prove. Demand was nearly non-existent for gold at the autumn 2001 low. Demand is growing nowadays. Gold fever has come and gone, sure to return. In the last cycle, people were lined up around street corners in 1980 to purchase gold coins at the peak price. Expect the same this time, over several rounds of price jumps. Paradoxically, as the gold price rises, cash is taken out of gold miner operations to pay down forward contracts before they burn acidic holes in balance sheets. Gold reserves have not markedly increased in the last 20 months from new discovery. In fact, new deposits seem in most cases to be of low grade, with between 5 and 30 grams per ore ton. Despite a $240 rise off the gold low price, no acceleration in supply brought to market has occurred. My claim is that both demand and supply for gold are inelastic.

The accelerating worldwide currency turbulence The number of days with over 100 basis point currency moves in the euro and yen are a commonly used measure of instability. Exact data is not at my disposal. To the currency observer in FOREX activity, it seems clear that the number of days with big moves described has steadily risen. Hardly a month passes without several days with 100-bpt movements. Last autumn, following the Qatar G-8 Meeting, currencies started flying, as ministers gave vague signals of consensus desire to see the US$ much lower. Currency volatility is much worse than in the recent past. They signal greater monetary earthquakes dead ahead, in much the same manner as smaller and more frequent tremors among the earth’s tectonic plates.

The rising costs from entire energy complex (crude oil, natural gas, heating oil, gasoline) Crude oil has risen over 100% in the last 3 years. Attacks on pipelines, an unstable Saudi Arabia, labor disputes in other producing nations, legal warfare in Russia, all these stress the energy complex on the delivery side of the equation. Reports from energy experts concerning Arab lack of excess capacity contribute to the speculative interest. China’s use of energy will continue to rise over the next decade as supply dwindles.

The commodity trend reversal has begun, the beginning of a new long-term trend Since November 2002, copper has exploded in price, steel prices have tripled in certain products, lumber has doubled, and cement has risen 40%. More importantly, cement has gone critical with outright shortages, only to stall some large construction projects. Grains and soybeans are up more in the past year than in decades. Yes, a commodity trend reversal has not only begun, marking a new age of shortage. The long-term trend has become firmly established. Shortages are so acute, owing to China’s development. The focus is likely to be on construction materials and food supplies. The gold versus USTNote has begun to signal a trend reversal as well, away from paper-based securities and toward hard asset investments.

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