Jim Sinclair: Politically inspired market intervention may break the bank


Black Boxes and Dead Hedge Funds

By Jim Sinclair
Tuesday, October 3, 2006

The action in the marketplace speaks to bankruptcies among hedge funds that are not evident to the public or even to those professional traders I know.

Sure, those in gold and energy on margin beyond their capacity are being liquidated into the marketplace. But it is the hedge fund managers with their damn algorithms who have hit the fan hard -- and you can guess what is flying all over the place.

This may well be the watershed for black boxes, along with the 32-year-old wunderkinds who really believe that computer systems can trade markets. Their convictions have convinced billions of dollars to invest in them. When you read a year ago that state retirement funds were investing massive amounts into the hands of hot hedge fund operators, you had to know the game was all but over. These hotshots, lacking any personal risk, entered all derivative markets to get the largest bang for their bucks -- and bang is what they got.

There is a contradiction staring you right in the face in the marketplace and that is the six-month sideways chop of the U.S. dollar, which is happening with bankruptcy signs flashing all over the place.

I firmly believe that the “forces that be” who have conspired to keep the financial landscape pleasant -- primarily in the equities sector -- until the mid-term elections are over, never expected to bust wide open the hedge funds whose black boxes were screaming “opportunity” in the commodities markets.

Could crude oil have been leased from strategic stockpiles to trading houses? Might the House of Saud provided some help to a few close friends? Could that combination set off a series of events that has now created more financial trouble in the form of overkill to bring fuel prices down into early November?

I think so.

Reading energy price levels without looking behind the reasons for their dropping precipitously has resulted in the media conclusion that inflation is behind us. But the media forgets that inflation is by definition monetary ease and prices are the result of that easing.

The financial crisis today that’s being kept quite secret is the explosion pending for more than one hedge fund. Such a condition calls for liquefying the monetary system. Monetary ease is the inflation that precedes price inflation.

If you emotionally wish to discount me, then simply refer back to the stated concerns of no less than former Fed Chairman Paul Volcker who is generally in direct opposition to all the nitwits commentating on financial media today.

Since 2005 to even last week Volcker has been warning the market with the following comments:

"There are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. ...

"I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change. ..."

"We are skating on increasingly thin ice."

Volker predicts the that if the United States continues on its present course, the deficits and imbalances will increase and that at some time the confidence in the United States that supports the flow of foreign investment in the U.S. could fade.

The former Fed chairman has labeled these economic circumstances as the "hourglass" economy, one where the middle class is getting pinched  tighter and tighter and where those at the lowest end of the wage spectrum are earning less and less in real terms.

It is my suspicion that exactly what has impacted gold on the downside, which is the bankruptcy of more than one commodities hedge fund, comprises the circumstances that would push this politically expedient manipulative market action into a crisis.

In an attempt to paint a picture of calm by stressing strong economic growth, lack of inflation, and peace in the world for early November, they have broken the bank. The broader ramification is for much higher gold prices as the phoenix gets launched out of the ashcan.

The common stock of those that tried to paint this rosy November picture will drop precipitously. It is called the U.S. dollar. The evidence for this once again is the fact that the U.S. dollar has moved sideways even though markets have reached all-time highs. Something is rotten, my friends, and it is not in the state of Denmark.

If you are on margin, unfortunately you are cooked. There is no one so bearish on gold than liquidated bulls who bought on margin. But I have relentlessly warned you about margin.

For those who have no debt attached to their equity positions, please know that $1,650 is the price objective that just these kind of circumstance can create.

For those who are informed regarding their share investments and are comfortable with the company's management, prospects, and finances and have no debt associated with their positions, have no fear.

There is much more to what has occurred in the past few weeks than what is commonly understood. Bankruptcy markets are being shielded from view during liquidation. It is much more than simply one hedge fund. That you can take to the bank(ruptcy).

Have faith through understanding and do not allow yourself to be emotionally run out of fully paid, well-understood gold positions. The seeds of $1,650 are evident in today’s market action when it is understood.


Jim Sinclair is chairman and CEO of Tanzanian Royalty Exploration Corp. and proprietor of JSMineSet.com, an Internet site offering free market analysis to the gold community.

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