From the May 01, 2012 issue of Futures Magazine • Subscribe!

Jim Sinclair has something to say

Q&A

FM: How is owning a mining company different than just owning gold?

JS: Owning gold is the most conservative and least risky type of play. Owning gold is preferable to owning gold shares for a person who doesn’t seek leverage or risk. In the ‘80s I would be 25,000 contracts long if I [were] bullish. If I did that today I probably would be talking to you from the emergency room of the local hospital. I had 45 guys on the floor of the exchanges wearing my colors; I couldn’t possibly do that today.

Owning a clearing [member firm] is the riskiest business on earth because you don’t control your future; your future is controlled by the capability of your clients. I would rather dig for gold than run a clearing firm, and I did.

FM: In 2006 you put out an economic formula with some scary consequences, Can you explain it?

JS: The formula simply says that as business declines, it impacts government. It impacts government in terms of taxes received and the [affect] on government becomes a multiplier factor on the problem, because once the government becomes fiscally tight, [it] as a business begins to contract. The contracting business called government prevents a significant recovery [for] the general public and it is formula that feeds on itself until there is a point of intervention. When the intervention comes, be it a natural turn in economics or the civil conservation corps, you begin to have a significant turn in business. The fact that our recovery and our reaction to crisis has been to save the financial world but not to do much in terms of fiscal stimulation has resulted in bottom-bouncing rather than a significant economic recovery.

FM: The formula states rising interest rates will lead to geometric increases in U.S. debt to an eventual downward spiral “of unparalleled dimension.” 

JS: That occurs when you are not doing QE (quantitative easing). If you are not buying 62% of U.S. debt, which the Fed has done in the last 12 months, the cost of money would be astronomical. So you are forced into QE, that factors into gold.

FM: So they turned your theory around by intervention in interest rates?

JS: Artificial non-economic buying of government debt. If the Fed was not in the market doing what they are doing, rates would be wild. That is why some of the greatest names in the bond market have failed when they went bearish in bonds last year and they are more cautious this year. There are reasons to be bearish, but you can’t be bearish in light of QE. You don’t fight the government or fight the Fed. If you do that you stand in front of a locomotive, a locomotive [currently] dedicated to keep interest rates low.

FM: Is that a good thing?

JS: It is a necessary thing. Anybody who says that Bernanke or the U.S. Fed acted ineptly is not a practical person. They did what they had to do. If they had not performed as they did and as they are right now, circumstances would not be tolerable. They did what they had to do.

FM: Is it sustainable?

JS: No. Historically debt has to be paid and if you have financial difficulties, you can inflate your way out of it or deflate your way out of it. Historically inflating your way out of it has been the method chosen because of political prerogatives. The whole theory of kicking a can down the road is, economics will recover in order to heal the balance sheet problems, therefore making the methods used in monetary stimulation self-canceling.

Bernanke has done exactly what he had to do. If I was given the job of saving the financial industry in 2008 there was no other alternative. The whole thesis of that alternative is you do save business, and business turns. And because of the positive nature of the underlying business having turned, the liquidity can be drained practically without stopping the forward progression. That point hasn’t been reached. You are trying to play a symphony and if we [have] an economic recovery of significance, the symphony can be played. The reason gold is at a pause point is because there is an assumption that business activity is reaching a point that is take-off speed for recovery. That is the psychology of the marketplace. Gold is a reflection of that as a currency in competition with the U.S. dollar. Gold has a mind of its own, and it is to balance the international balance sheet of the United States or whatever the reserve currency is.

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