David Morgan of The Morgan Report and Silver-Investor.com is the world's foremost expert on silver and precious metals and has been for decades. He is a guest and contributor to the Ellis Martin Report.
The Ellis Martin Report Interview with Jim Sinclair
February 6, 2012
TEMR: Join me know for a candid interview with America’s preeminent expert on precious metals, commodities and foreign currencies, Jim Sinclair. Mr. Sinclair is the President of sponsor, Tanzanian Royalty Exploration Corporation, trading on the Amex division of the New York Stock Exchange under the symbol TRX. Tanzanian Royalty focuses primarily on gold assets strategically located in the Lake Victoria Greenstone Belt of Tanzania, one of the most prolific gold producing regions in the world. The company acquired a 55% interest in the advanced stage Buckreef Gold Mine development project which could see commercial production in 2014. Previously to helming Tanzanian Royalty, Mr. Sinclair was the founder of the Sinclair Group of Companies which offered brokerage services in stocks, bonds, et cetera, operating in New York, Chicago, Kansas City, Toronto, London and Geneva. He was an advisor to Hunt Oil and the Hunt family from 1981 through 1984 for the liquidation of their silver position as a prerequisite for the $1 billion loan arranged by former Fed Chairman, Paul Volker. Mr. Sinclair was a general partner and member of the executive committee of two New York Stock Exchange firms and the President of a commodity clearing firm as well as Global Arbitrage, a derivative dealer in metals and currencies. And, we’re pleased to have him as a weekly guest on The Ellis Martin Report. What do you want to talk about today Jim?
Jim Sinclair: We have had key developments in terms of form of settlement nearing in terms of your Greece situation. That has impact on to what is its mechanism and what will that mechanism mean to the general markets as well as equities and the gold market. The announcement of the Chinese of their interest in being part of a euro plan and that demonstrating the IMFs both desire and intention to bring in outside funds in an ongoing supply of liquidity. We also have a great deal of opinions being given on the dollar versus the euro and the implications of some form of resolution even if that resolution eventually includes Greece leaving the European Union. So, there are many subjects that we could approach. I'll leave it to yourself Ellis.
TEMR: If Greece does leave the European Union it's something that perhaps the euro can withstand?
Jim Sinclair: You know, let's look at it and let's just think about it. What would the euro be without Greece? Would it be weaker or stronger? And, there really is an argument that all other things being even, and that's a big mouthful, but all other things being even that the euro would in fact be stronger without Greece because of the nature of the Greek population. I mean, when the Department of Finance goes on strike that's got to tell you something. It's not an easy problem to fix. So, there's a strong possibility that general opinion once again has it backwards Because general opinion would say, oh my goodness, if they're cut down to a 70% maybe no default and Greece voluntarily and in an orderly way exits the euro that's not so good because look it's taking away from what the currency unit is and it might start others thinking the same way. I think the real answer to that is that if today Greece was not part of the euro and liquidity had been injected into the system to overcome the impact of the final resolve of what Greek debt is worth be that 30% or zero the euro would be stronger not weaker. And, again that's something that should be given good consideration. But, the problem goes beyond Greece, I mean, if everything remained equal. It's very hard for us to accept that one nation in a union would get treatment as Greece has and that more strict requirements would be executed in let's say Spain, Portugal, Italy, et cetera. So, we're going to have a continuing drama. But, I think that the near-term resolve of that drama is a combination of liquidity, which is good for the general equities market and also good for gold. We've been on that subject over the last couple of weeks and it seems to be holding up to a degree. I mean, right now you have the dollar, as we said, is in an oversold condition but that there was significant supply between 80 and 82 on the USDX. And, the relationship generally would be, well, if the dollars' going to firm then gold should weaken. I think we're going to look at that in degrees. I think there might be less of a degree of that relationship rather than more. I think that's really being demonstrated now even though gold is technically negative on the short-term and the dollar has not yet really established a confirmed positive breakout from the recent decline. I think that the relationship is going to be a little less super glued than it was before. So, generally, I don't join in those that are very concerned about the equities market except for short reaction, general equities. And, as far as gold is concerned I think the real range will be $1,700.00 to $2,110.00. But, right now it's $1,650.00 to $1,764.00 where bull camp and the bear camp stand.
TEMR: Can we state or will you state that the rise in gold over the last 2-years has been tied in to the uncertainty with the euro and the dollar and Greece and Spain and Portugal? Or is there some supply and demand factor figured into that?
Jim Sinclair: You know, there is a given supply and demand factor. And, the amount of gold being produced has been on a steady decline. And, South Africa has its own unique problems that affect supply. Jewelry demand deals with a level of economic activity. But, you know, are we really talking about gold as a commodity or are we talking about it as a currency? I've never held the opinion that gold is a commodity. I've always seen it as a currency of, almost as a currency of the people or a currency of last resort. And, the demand that has existed for gold has a tremendous amount to do with every criteria you just mentioned because that's what's created the engine of liquidity. The collapse of Lehman was the advent of the inability to cure the Over the Counter derivative problem. Prior to the collapse of Lehman the Over the Counter derivative problem could've been cured the same way the savings and loan collapse was handled. All of those derivatives netted out to zero and you could've had a bad derivative bank. But, once Lehman broke the chain broke and they no longer netted out to zero. Bankruptcy existed. That was the beginning of the mass of injections of liquidity. But, each criteria that you mentioned is a criteria which has resulted in debt monetization nationally and globally. And, debt monetization nationally and globally is the unique nature that we're in. The Federal Reserve is in fact and has functioned and is functioning today as the lender of last resort to the entire Western world finances. Most recently in December the Fed announced a $500 billion plus swap line. Then of course we had the IMF come on with their rescue package to be built and expanded. And, two days ago we had confirmation from China that they were positively interested in joining the IMF in funding that rescue package. So, you really have a global debt monetization. It guarantees a level of liquidity with a higher probability of a higher increasing level of liquidity. And, liquidity is what drives our markets. Liquidity drives the market for IBM just as much as it drives the market for gold bullion. So, you have a rather strange set of circumstances where what's being done benefits what used to be two different camps but in truth really now is one.
TEMR: Well, if general equities are going to grow in value, this is gold and gold stocks is that growing in value also because it seems like something that might be profitable to invest in? Or are we still factoring in fiat currency devaluation?
Jim Sinclair:Let's discuss the two markets. The general equities market has great support from firms and institutions, investment funds and hedge funds that have naturally dealt in it. That really doesn't stop. When liquidity finds its way into national investment banks it's invested by these institutions and the items that they're most familiar with. Up to now the liquidity has been extremely positive for gold itself but not necessarily for gold shares. There's been a school out there that looks only at increasing expenses for mining and extracting gold and not necessarily the impact that higher prices of gold have especially on lower grade gold mines. There's some realization that needs to catch up in the gold shares that is in gold and is in the equities. So, you mentioned three things. Right now the gold shares are non-performing yet the gold price continues to rise. And, that's an equation that is illogical. In the 1970s the gold stocks were very late in coming on. In fact their best performance was after the top in gold in 1980. But, then there wasn't a short interest in these items. There wasn't hedge funds dealing as they have been primarily short of the stock, short of the gold stocks in significant ways. Again, based on an improper interpretation of the equation of rising costs without taking into consideration the impact of rising revenues. I think this time when the gold shares come on it will be an event that will be different from the 1979/1980 because you have the short interest that it will need to cover. So, it won't be hard to mistake when you see it. But, right now the gold and general equities are getting the major benefit of liquidity.
TEMR: I ask you this almost every interview. But, based on what you just said, and to those that are listening for the very first time to this program and us and you, and I find it hard to believe that there's anybody left that hasn't listened to us. But, from the point of profiting in the market, specifically gold stocks, what should we look for now?
Jim Sinclair: Value buys. In other words, the way you take a look for a value buy in a gold stock isn't too much different from the way you'd evaluate, you know, your house. You look at your house. You know what you've got in it and you might take a price off the top of your head. But, that price is just your price. It really doesn't mean anything. You need in the real estate market to know what sales have been made in your area. And, then you need to know sale prices have occurred for homes or property that is same or similar to yours to get a real price, so market price, not some figment of your imagination. It's not that much different in the gold shares. A solid way of looking is taking a look at the last transactions that have existed in acquisition. That's your wholesale market. And, generally those transactions equate to a certain amount of money per ounce paid to the company in the various categories of resources and reserves they have from drill proven into simply indicated. And, then you take a look at the company you're considering to invest in and you use the same price and arithmetic to determine what the value of your company would be in a similar transaction. That's a good starting point. So, what I think you see happening now is that certain professional money is looking at gold share investments. Not necessarily on the appreciation of gold but the price of the last transactions of that type of asset. So, that's the kind of thing that begins to give you a bottom when you have other than speculative interest come into a situation. And, you know, investment interest today in the world we live in, I mean, how long can people hold positions? The retail for everything has become speculative funds. And, their horizon of opportunity is today and tomorrow, very short and very short focus. So, I think I think I believe we'll see a change based on value buying. I think it would define how you determine that. It's not that hard. And, then I do think the timing is not too far off because you begin to see a change in any market (inaudible) widget making companies. Everybody doesn't like widgets but they're short but widget making companies. But then all of a sudden the widget makers get down to a point where their assets and their cash and their sales, you know, start to make sense. And, along comes the value buyer who's primarily on the long side and begins to give the short a little bit of competition. So, coming off the recent lows you look for a modest but distinct uptrend with increasing volume as indicative as new company, meaning new people, new investors into a situation based on value. And, I think there's many value buys around right now. And, I think you'll start to see that type of performance as a result of it.
TEMR: So, basically we're talking about companies in areas where transactions have happened and their share price, their market cap is considerably less than their neighbors and they have good management, interesting properties. And, these types of transactions are almost, they exist avoid whatever is happening in the price of gold right now.
Jim Sinclair: And, bear in mind that an ounce of gold anywhere is an ounce of gold everywhere. There was a time where we always thought an ounce of gold would be worth more money in Nevada then it might be in Europe, then it might be in Africa. Well, this global economy has had an impact on that. So much so that the permitting risks are so high in British Columbia, for instance, that if you wanted to make an argument that an ounce of gold was really worth less than ounce of gold. Now I don't agree with that. An ounce of gold anywhere is the same as an ounce of gold everywhere. So, when you look at the comparisons you're not looking at your neighbor. You're looking at the category of resources and reserves minable that they have. So, the only addition to what you said that I would say is when you're making this comparison it doesn't have to be between a mine in Ontario and one 2-miles away.
TEMR: So, we're really looking also at the cost of producing an ounce of gold.
Jim Sinclair: Absolutely. And, the cost of producing an ounce of gold is heavily dependent of what type of gold you're mining. Yes, the costs have risen. There's been significant inflation because there's been significant expansion in the mining area and also because the popularity of gold derivatives, gold producing companies were able to open projects that were not necessarily economic at the time. So, yes, the cost of production is a factor. But, it factors into what companies will pay each other for gold in the ground in the various categories. So, it's not another new (inaudible). The price of gold that has been paid yesterday between El Dorado and Eurogold is an indicative factor that takes into consideration the cost of extraction of that type of gold from that area. When I suggest to you that the way to look at it is the value of recent transactions, recent transactions take into consideration costs as well as revenue.
TEMR: Well, it's always an education having these conversations with you Jim. I've learned quite a bit just in the last few weeks. Let's talk about JSMineset and the education you provide for the general public.
Jim Sinclair: Well, I've done a couple of, I would say if you were to take the interview that we did introducing to the public The International Swaps and Derivatives Association and how it extremely important that group is and their committees are; suggesting actually that they have more power than any central bank on earth and the last 3 special emails I sent out. I write out every day. But, when something really special comes up that I want to call people's attention to then I have a service for free where people tell me to put them on the email list and then something very important gets brought to their attention. I'm going to suggest to you that from your interview and the last 3 items that we've done and every interview since, such as now, that that is an entire chapter that I think could constitute a very important text book that will give an understanding to the reader or to the listener who wants to know really why things are happening and what is the significance in terms of, let's say, power of an event as it will affect markets. What we use is we use markets as a blackboard. I'm a little bit of a frustrated professor. And, I enjoy doing it and I enjoy talking about it. And, I enjoy the fact that so far the readers of the site have done extremely well. I only pray that I'll be able to continue rendering that service through these very difficult unusual and unique markets we're going through. There's no charge for it.
TEMR: Well, that's a wonderful service that you're providing to the investing public and those that follow world news., Speaking of which, you referenced the ISDA interview that we did about 2-weeks ago. That seems to be just the beginning. That interview is getting some additional legs right now.
Jim Sinclair: I firmly believe that should be repeated. I think that plus the 3 special emails I sent out plus any interview to this point, including this that we're doing now, are part of one singular package that can be defined in a period of time. And, it's rare that within a period of about 6 or 7 days there were 3 special emails sent out. But, there are productive times in your life. I don't think that we can continue at that pace because there's no need to. We've covered all of the pertinent but unusual not discussed in the main street media. Power points that will have a tremendous effect not only on our investment life but our standard of living and what are future looks like. These are not just discussions of what to do in a market today, tomorrow or the next day. We're really trying to define what major changes are taking place internationally that have political, economic and social impact, really impact on the family. So, I really think that that interview is one that, you know, is worthwhile listening to again. I enjoy listening to it. Not to hear my voice but to go over the points and to be self-critical and to continue the analysis of that grouping of getting together really is one with the initiative, with its birth taking place in our last conversations.
TEMR: Well, there's a little bit of a fear factor that's built in due to a lack of knowledge and/or perhaps just a fear factor in general. I've got to say when I was going through that interview that we did a couple of weeks ago right after the 31st or on the 31st, the ISDA interview. There was a Los Angeles broadcast journalist that was listening to it as I was getting ready to post it. And, she turned to me and she said, and she just listened a few minutes in, should I be moving my money out of the bank right now?
Jim Sinclair: Well, the important thing to understand is there is a group of people who will determine whether or not a sovereign default occurred. Very few people have asked, you know, who's the referee here? I mean, if you don't pay, isn't that a default? The answer is no that is not necessarily a default. Secondly, we have to take into consideration, and she did too, that obviously this group of people coming from or having their bases in the companies which actually manufacture these things that is the credit default swaps, the insurance that's being granted against sovereign debt, but if the group is being made up of representatives of the insurance companies it's unlikely that they're going to declare it a default and cause themselves immediate, significant financial problems. However, that really is the kick of the can that is so big that it may be the kick of the can that goes down and hits a dead end sign. It has implications in liquidity. It has implications in really how far can you go declaring a non-default. If 70% of a debt vaporizes it's really hard to say with a straight face to say that that didn't default but that's what you can expect. What are you going to do next time? The great expectation of kicking a can is there's not going to be a next time. The reality is that if you don't fix the problem kicking the can guarantees you a next time. So, the answer is, should we take our money out of the bank? The proper answer is probably no. But, don't forget about it and give it good consideration over time because it will come a point where the answer is absolutely yes.
TEMR: So, the banks can continue to declare that or not declare a default. They can go into default amongst themselves and the lion that will rear its head at some point is that there'll be no money available to loan anybody.
Jim Sinclair: Believability is one thing. That's people's fate in the system. That's confidence. But, the point is, if you take out of the Greek debt now from its haircut to 50 now down to 30 you're removing from the banking system in evaluating that asset that percentage of the debt. In order to keep the bank viable making it able to pass a stress test let's say or simply being able to demonstrate a balance sheet which balances, you have to replace that money. And, that's where the liquidity goes. That's also why the liquidity has not really started a major economic recovery because the banks unwillingness or inability to use that liquidity to make general loans on. So, the liquidity goes into the banks and, sort of, dies there. That it's either used just for making a guaranteed return in the national debt market or simply replaces something that has been erased. And, that's minus one plus one equals zero. So, that's why all of this tremendous liquidity, all the $17 trillion plus dollars that have gone in since 2008 to the Western world financial system has not provided at this point in time significant recoveries in real estate and employment. It's, sort of, just holding things together. It's really not making it better but it's the nature of follow the money. I mean, be the detective. The money goes in and if it goes in to replace something that's out it's minus one plus one equals zero. Or the other side, why in the world should your local bank lend money to you to buy a house or to fund a small business if they can just go out and buy Treasury bills and make a guaranteed return.
TEMR: So, we're on our own.
Jim Sinclair: We're on our own. Main street and Wall Street are two distinctly different centers.
TEMR: And, we're not joined at the hip necessarily.
Jim Sinclair: We're not joined at the hip as we were in the great bull markets of the 1950s and 1960s.
TEMR: Well, Jim it's always a pleasure to speak with you. We've covered a lot of ground today. I hope to eventually assemble an encyclopedia of your knowledge based on the interviews.
Jim Sinclair: I really think we have something here that is solid and real and that needs to be understood. And, I've done my best to explain it. We'll keep working on it. But, it's not simply for making a buck. It's for what is our grandchildren's life going to look like.
TEMR: Thank you Jim.
Jim Sinclair: You're quite welcome.
TEMR: I’ve been talking with Jim Sinclair, President of Tanzanian Royalty Exploration Corporation, trading on The New York Stock Exchange under the symbol TRX. Listen to this segment again on the homepage of our website, ellismartinreport.com.
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2012 Ellis Martin Report
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