In 1977 James Sinclair boldly predicted that gold would rise from $150 per troy ounce to $900.These introductory lines from a Forbes article titled theGold never reached that mark, but it came close on Jan. 21, 1980, peaking at $887.50. The next day, says Sinclair, he unloaded his entire gold position, personally netting $15 million. Pointing to the Federal Reserve's efforts to fight inflation, Sinclair then predicted at an annual gold conference that the metal would languish for the next 15 years.
Golden Oldiefrom 2001 describe how Jim Sinclair, the famous
gold guruand proprietor of the web blog on gold and economics, JSMineset, sold his entire gold position on January 21, 1980, at a then all-time high of over $800 an ounce, pocketing a profit of $15 million (CPI-adjusted approximately $40 million in 2009). People who read Sinclair's blog and listen to the interviews he gives know that he himself helped create this price top by selling his entire gold position after the price had reached $850 per ounce in the London PM Gold Fixing (and after it had reached an intraday high of $887.50) on that day. The next morning, after Sinclair had sold out, the London AM Fixing priced gold at $763 an ounce. A price of over $800 would not be seen again until November 11, 2007.
How could Sinclair call this top, a price level gold would not see for another 28 years, with such precision and confidence? On the radio show Financial Sense Newshour, Sinclair himself said in 2002 that
[...] although you would like to claim to be a genius, I personally think I just got sober one day before everyone else. But for the grace of God, I might also have gotten myself caught.However, there is more to it: Sinclair had a model. While Sinclair himself has not been very outspoken about the model he used back then, some hints can be found on his blog. To get started, let us first review what Time magazine wrote about the historic gold spike on January 28, 1980:
The immediate beneficiaries of the gold surge are some governments, particularly the U.S., which holds about 8,600 tons of the metal, by far the largest hoard on earth. Last week it was worth some $220 billion, or more than enough to cover the estimated $160 billion in total U.S. dollars held as official reserves by foreign central banks. Technically the U.S. could offer to buy back all those dollars in exchange for gold. Observes a top Zurich banker: "The U.S. Treasury is once again solvent, thanks to the high price of gold."The above is the essence of Sinclair's gold model, as far as we can conclude from his writings. On March 4, 2009, he wrote a blog entry called Gold’s Role During Periods Of Monetary Stress, where he explains the following:
Gold’s job is, and will always attempt to during periods of monetary stress, balance the INTERNATIONAL Balance Sheet of the USA.Sinclair's blog entry was a response to a reader who had written to him:Putting the Numbers Into The Equation:
$3,125,000,000,000 / 260,272,000 ounces of gold = $12,006.67 per ounce of gold.
In the past, I believe you have said that the price of gold could reach a level whereby in dollar terms this equation will hold:So, there it is, the formula and rationale behind Jim Sinclair's gold model. At Approximity we have calculated Sinclair's External Debt Equilibrium Price for the last 40 years. The charts below show the ingredients of the model in the first row, while the second row shows the equilibrium price itself, as well as the ratio of actual market price to equilibrium price, which could be seen as a measure of how expensive gold is in relative terms.Oz’s of Gold Held by US x $ Price of Gold = External Debt
[...] we find:
Federal Debt held by Foreign Investors = $3,125,000,000,000 (as of 12/31/08)
Official US Gold holdings = 8,133.5 tonnes (or 260,272,000 oz’s)
As the bottom right chart illustrates, within the rationale of Sinclair's model, gold is at the time of writing (October 23, 2009) twenty-two times cheaper than it was in January 21, 1980, when Sinclair sold out. No surprise then that he advises to buy and hold gold.
It has possibly not escaped the reader that Sinclair's prediction of $900 in 1977, as well as his sell-out just below this price was not entirely consistent with the model price at the time he sold his stash. The equilibrium price according to Sinclair's model on January 21, 1980, was around $470 per ounce, while Sinclair sold at a premium of 80% over this level. So, what had happened? In the earlier cited blog entry he explains:
The mathematics behind the $900 number came from the following equation plus reasonable trend estimates on the number going into the future.Sinclair's prediction had almost been overtaken by the reality of the market price by the time he decided to sell, while the actual model price had stayed behind. This can be explained by the left chart in log-format below, that clearly shows that the rate of increase in Federal external debt substantially fell (in fact: went to zero) around or shortly after Sinclair's 1977 prediction. Similarly, the Federal External Debt Equilibrium Gold Price levelled out, and only reached Sinclair's $900 target towards the middle of the decade (right chart below).
The United States' financial soberness of the early 1980s had finished the gold bull. Besides the levelling off in Federal external debt, interest rates were driven up to squeeze inflation out of the financial system. In Sinclair's own words:
What I saw back there can be really encapsulated in one name: Volcker. His intentions and activities within the economic system then was to drive interest rates as high as 14% on 10-year money. It was a clear indication of his willingness to do what he saw necessary to fight the then in-place inflationary trend.
A further inconsistency that the reader might have spotted is the previously cited model price of $12,000/oz, or the present
model price (October 23, 2009) of $12,941/oz, while Sinclair recently mentioned a price of $17,000/oz at the CIGA
-meeting in
Toronto that he had organised for his fellowship (CIGA
is Sinclair-speak and stands for Comrades In Golden Arms
).
We would guess that his figure of $17,000 stems from an extrapolation of the recent Federal external debt trend to possibly a
time horizon around 2012, a year that Sinclair views as an interval of convergence of several financial and economic cycles.
It is beyond the scope of this brief essay to explore the deeper meaning and appropriateness of the Federal External Debt Equilibrium Price. At Approximity, we see Sinclair's model as one of several rational price models to evaluate gold. Sinclair's model has a track record, as can be seen by the fact that at least during the years from 1970 to 1980, the market price got very close to (or outperformed) the model price on at least four different occasions.
From the viewpoint of Sinclair's model, gold is very cheap today.
-- The Approximity Gold Team (October 23, 2009) --
On the APPROXIMITY Gold Charts pages you can find regularly updated versions of the charts in this article, and much more.
Note: James E. Sinclair (abbreviated as Jim Sinclair
) of JSMineset
has not endorsed this article, nor has he approved any
of its contents in any way. He has also not done the opposite, as far as we know. Any references made to Jim Sinclair, in relation to the
discussed models or in other contexts, stem from his public writings on JSMineset or other public media files about him. Jim Sinclair has
not been consulted on any of the contents presented on these pages.
Disclaimer: These webpages reflect the personal views and opinions of some people working for Approximity. They are not intended to be investment advice or financial advice to any person or institution. While provided information is believed to be correct, correctness cannot be guaranteed. Furthermore, information might be subject to change without notice or become outdated. Approximity does not accept any responsibility for any (direct or indirect) investment decisions arising from the use of the information on these webpages. The responsibility for contents and information on external webpages lies completely with the respective authors. External links might be subject to changes or outdating without notice on Approximity's webpages.