April 28, 2004
As Gold Crashes Sinclair Tells The Dealer ‘Hit Me’
By Brady Willett

Keeping it Simple

Precious metals were hammered (again) today. The reason the mainstream media gave for the decline – that investors were startled by a potential rate increase/slow down in the Chinese economy – is not entirely accurate.  Rather, the real reason gold has declined is because the COT data has been gearing for a shakeout for many months.  Quite frankly, that fears over a stronger dollar and/or a weakening Chinese economy helped kick off the most recent sell off in gold is irrelevant.

Why ‘irrelevant’?  A couple charts will suffice:


Speculative long interest, which has been near record highs for all of 2004, will undoubtedly post a decline in this weeks, or next weeks COT report. Suffice it to say, many latecomers to the gold party – or investors who perhaps bought gold as a hot investment instead of with a buy and hold approach – have been crushed by gold’s latest dive. 

As for commercial short interest, it reached an all-time high in the April 6 COT report, and has been slowly ticking lower ever since. Although it is not certain that commercial short interest will decline in the coming weeks (it will likely decline, however, when/as the shorts continue to cover), it is nonetheless becoming apparent that the shorts have won yet another battle. Yes, the verdict is still out on the war, but gold is trading at its lowest level since November 7 – the commercial shorts have padded their position since this time and are now able to unwind some trades for a profit.


As seems to be always the case, the shorts will unwind their positions (or buy back gold) as the speculators scramble to sell.  In short, that the Chinese economy may be slowing and/or the dollar is not diving isn’t the news worth watching near term – how quickly and how low commercial short interest declines is.

* Admittedly, the COT data is not always an accurate indicator of the near term direction of gold. However, lately the COT data is the only thing able to explain the sell off in gold...

Atop of Jim Sinclair’s ‘MineSet’ sit the words ‘Tomorrow’s Revelations -- Today’

Although gold is in the dumps and could remain below $400 an ounce until a new trend develops (the old trend being buy gold because the US dollar is weakening and inflation is around the corner), there still remains a few voices of dissent.  Most notably, Mr. Sinclair – a self professed ‘precious metals specialist’ – has been providing some of the most entertaining reading of the year.  Unable to accept the reality that is a pull back in gold, Mr. Sinclair is instead arguing passionately that he will be ‘right’.

I would not argue that Mr. Sinclair is wrong under his terms – gold could soon go to $480 an ounce for any number of reasons – but I will say that I think his opinions are not entirely objective. As anyone in Mr. Sinclair’s position knows, the COT shorts have always won – betting that they are going to lose is gamble. Moreover, accumulating out of the money gold calls could be suicide.

To follow Mr. Sinclair’s train of thought this week a few quotes will suffice:

On Monday:
“I will here and now stake my hard-earned 45-year reputation on my position that we are in the low price territory of gold prior to a move to and above $480…Here is my pledge. If I am wrong and gold is not in the low territory and isn't preparing to take out $430.30 on the upside in a move toward $480, I will close this web site down. I have huge responsibilities and infinitely more profitable (this is my brand of community service) opportunities elsewhere and doing both is a killing experience. If I do not know what I am talking about why in the world would I keep talking?

Gold is now trading at $396.60. Soon it will bolt to $409-$412 and start its military campaign to blast COT and $430.30 to smithereens.

So here it is. I am right or I am History! Whatever happens, it is of no concern to me but you are my concern and why I do this time-consuming and really thankless community service!”

On Tuesday:
“Somehow I really feel that www.jsmineset.com will be around for a long time. You know and I know that gold is going through 419.70 and 430.30 real soon. Maybe even in the lifetime of the June gold call strike $430.  There are many more reasons for gold to reach $480 and FAST. But I think that is enough to give the COMEX nerd-naked gold call writer lower back problems.”

Earlier Today:
You write’em and I buy’em is the catchphrase again today. This morning’s score certainly favors COT and Jim’s score at the moment is ZIP. But the day and the game is not over.

Oh yes, since I upped the ante today in the COMEX August Gold Calls strike $410, let’s up the wager in another fashion. I am adding a date now to my gold price of $480 or the web site is closed and I do not publish to the general public after that.

The latest date for gold to trade at $480 is August 15th, 2004 or COT wins.”

Mr. Sinclair offers a peculiar brand of ‘community service’. To be sure, if Mr. Sinclair is writing solely to inform the investor of his opinions on gold, as he claims, then why doesn’t he pledge to continue writing regardless of what the price of gold does?  Sinclair argues that “If I do not know what I am talking about why in the world would I keep talking?”  However, the truth seems more like ‘if I am not making money on gold why should I keep talking?” I am sure that being wrong now and then would not upset Sinclair’s readership base, but apparently he doesn’t think so.

As for the statement “I have huge responsibilities and infinitely more profitable opportunities elsewhere”, why doesn’t Mr. Sinclair offer any insight into how important his gold holdings are in his portfolio? After all, if gold represents only a small percentage of Sinclair’s portfolio shouldn’t he specifically point out to the gold community that he gambles on gold by purchasing calls and invests his money in pursuits not related to gold? 

Incidentally, I personally I own/contend that the investor should always keep roughly 10%-20% of their portfolio in hard gold/silver.  This isn’t a hard diversification rule. Rather, these percentages reflect the percentage of precious metals I have held in recent years (currently about 15%).  As for buying calls, informing anyone that I own risky derivatives would be the equivalent of telling investors I am leaving for Vegas with an attitude; it is pointless to base whether you are ‘right’ or ‘wrong’ on a long shot.

Are Mr. Sinclair’s ‘revelations’ only relevant when Mr. Sinclair is making money in the gold market?  Or is JSMineSet – which is just over 1-year old – an objective source of information produced by someone who is brave enough to admit they have been on the gold scene for decades?

Whatever the case may be, the Sinclair story is interesting. Moreover, the crash now taking place in many gold stocks is also interesting. After not daring to own gold stocks since 2002, I don’t want to speculate that any additions to the Wish List will be being made anytime soon (XAU – HUI), but there is always hope.

What I will say is that I do not agree with Mr. Sinclair’s attitude on investing.  ‘Community service’ or not, Mr. Sinclair’s site arrived last year and may unceremoniously disappear this year.  Maybe during the next gold run-up he will be back to tell us about all the money he made doing something other than owning gold?

“Life without risk to me is wasted. Security is an illusion. The only sin is to lack courage. The only virtue is to have it.  Courage does not mean being without fear. Courage means being afraid sometimes but acting anyway. You write'em and I buy'em!” JS

Isn’t the real illusion that Mr. Sinclair is something other than a gambler?

As gold rallied the commercials went more short and the speculators more long...as the latest crash in PM’s will attest to, keeping it simple can help you avoid large losses. In the coming weeks keep an eye on commercial short interest, and read Sinclair at your own risk (he is hitting on a 18).  Own gold if - like a spare tire in your trunk - you are fearful the US dollar will go flat (again). Be courageous and sell some of your precious metals the next time everyone is telling you to buy more/hold on...

An investment life with risk leads to losses.  The gold community may lose Sinclair later this year.

“The latest date for gold to trade at $480 is August 15th, 2004 or COT wins.”  JS


BWillett@fallstreet.com