On February 16, 2013, Jim Sinclair wrote this.
QE to Infinity, followed by Gold balancing the balance sheets of the sovereign balance sheet disasters. Just as there is no tool other than QE to feign financial solvency, there is no tool to balance the balance sheet of the offending entities other than Gold. It is just that simple.Gold will trade at $3500 and higher. Your complaint then will be that I was much too conservative in my price objective. The saying used to be "As goes Motors, so goes the USA," which in their bankruptcy did prove true.
For 10 years, Jim Sinclair predicted that gold would go to $1650. It was a gutsy prediction, and it came true. Then it went to $1750. Then it went $1850. Then it went over $1900. Then gold started to fall in October of 2011. On July 4, 2012, he wrote:
Gold will go to and above $3500. This is the most important message I have sent you since 2001.There are very few of us dynamic thinkers that see everything as a trend constantly in motion. Anyone can be a static thinker, quoting recent economic figures or news headline (MSM), and coming up with a usually wrong opinion.
The change today is that the "Rig Is Up."
The Bank of England turning their backs on Barclays, the company who did their bidding, will be the event in time marking the trend change.
Many of us in our areas of activity will successfully fight the Riggers. The many complaints that so many of you kindly sent in to fight manipulation released the Kraken in me.
The Kraken is back in its cage where it belongs. The paper trail is there. The worm has turned. Even more importantly is that this fight in the $1540 gold price area was not for regaining the old high in gold. The six attempts to kill gold, supported by some gold writers looking for favors from the riggers was a now failed attempt to keep gold from trading above $3500.
The battle to stop gold has been lost.
The start, like all starts towards the old high and well above, should be slow with more unfolding drama. It will build on itself but gold will trade at and above $3500. I am now as certain of this as I was over ten years ago when I told you gold was headed for $1650. I knew that as fact and to me from $248 gold was trading at $1650.
My job now is to define gold's full valuation for you when it occurs. The timing is no less than one year from now to a maximum of three years from now. I believe I will be able to do that for you.
On July 3, 2012, gold was at $1617.50. On July 3, 2013, it was at $1250.
I have no objection to a forecast that gold will go to $3500. It might go to $4500. But if the Federal Reserve ever stops inflating, and continues in this position, gold could go to $500. It could go to $200.
If the Federal Reserve ever stops inflating, which means that it stops buying all government debt forever, and does not buy any other asset, the world will have a depression comparable to what we had in the 1930s. The entire modern economy rests on the assumption that the Federal Reserve will continue to inflate. This is taught by the Austrian theory of the business cycle. I have written on this: Chapter 4 of Mises on Money.
Sinclair believes that the Federal Reserve will continue to inflate. He believes in QE to infinity. In other words, he believes that the dollar will fall to zero value. He believes that the dollar will become comparable to the currency of Zimbabwe in 2008. I do not.
If the Federal Reserve were to pursue QE to infinity, it would lose all control over the economy. The dollar, as defined by the Federal Reserve System, would be worthless. Nobody would make decisions in terms of it. The Federal Reserve could not affect the business cycle, because the business cycle operates in terms of the dollar, and the dollar would be worthless. People would go to black market currencies. They might use gold coins. They might use silver coins. They might use some digital currency. But this much is true: if something is worth nothing, nothing is all it will buy. We don't get something for nothing. The best thing that you can do with currency that is worth nothing is to pay off an old debt that was denominated in the currency that is now worth nothing. For paying off debt, a worthless dollar is fine. It is not good for anything else.
No society can live under these conditions for very long. No central bank has any function in a society which has abandoned the currency of the central bank. The central bank could not pay its employees in anything that is worth anything. The central bank would simply shut down.
I have a theory. My theory is this: central bankers will not pursue a policy which will bankrupt central bankers. They will not pursue a policy which destroys their retirement portfolios. They will not pursue a policy in which their salaries are worthless.
Here is the reality of the Federal Reserve System. If the Federal Reserve ever stabilizes the monetary base, and it keeps that base stable, prices will fall the way they did in the early 1930s. Fractionally reserved banks will go under. There will be an implosion of the M1 money supply, because of the bankruptcy of the ten largest banks in the USA. These banks have 77% of the banking system's assets.
The Federal Reserve System has the power to pay its own employees, irrespective of what happens to the rest of the economy. In a situation in which there is mass deflation, employees of the Federal Reserve System will be in high cotton. They will have access to the one thing that everybody wants: dollars. They will have access to these dollars, because they are in control of the supply of these dollars. I guarantee you this: Federal Reserve employees will be paid on time, as promised. They will be paid in dollars, no matter how high the dollar goes in terms of purchasing power.
So, if the Federal Reserve is faced with two choices, QE to infinity vs. stabilized money, we can be sure that the Federal Reserve will stabilize money. To do anything else would be completely opposed to their self-interest as employees of the Federal Reserve System.
Anybody who says that the dollar is going to collapse in value -- i.e., we will get hyperinflation -- is saying, in no uncertain terms, that employees of the Federal Reserve System do not understand their own self-interest. Or else the person is saying that these economists do understand their own self-interest, but for the sake of short-term gains for members of Congress, they will fund the federal deficit to infinity, and will let the dollar fall to zero value. Then, they will create a new currency, having destroyed their own reputations, and the whole system will ramp up again. If that is what Mr. Sinclair thinks, then he needs to spell this out in a detailed article.
If the Federal Reserve ever does this, it will solve none of its problems. Hyperinflation for a few years does not reduce the unfunded liabilities of the Social Security System and the Medicare system. These liabilities will still face Congress after the period of hyperinflation ceases. So, why should the Federal Reserve destroy the currency? It does not solve the funding problems that the federal government is facing. It does not solve the problems that the commercial banking system is facing. Commercial banks are useless if all they can lend is money that is worthless. There were no commercial banks in Zimbabwe during the hyperinflation. There were no commercial banks in Hungary in 1946, either. Hyperinflation destroys commercial banks.
So, what should we expect? The same old policies, which have kept the central bankers in power for a century: stop, go, stop, go. Recession, then monetary base expansion. No depression. No hyperinflation. Business as usual. Bankers win. We lose.
Then comes the Great Default: the unofficial but inevitable bankruptcy of the U.S. government. It will likely be piecemeal default: one weak voting bloc at a time. Each sacrificial lamb will be slaughtered, one by one. "This is the last time. We've got it fixed."
Before I accept QE to infinity, I want to see a written scenario in which hyperinflation is shown to be good for employees of central banks. I want to see this spelled out in detail. I want to see why the pursuit of QE to infinity is in the self-interest of central bankers.
I am willing to consider the theory if the advocate says that Congress will nationalize the central bank, and force it to pursue QE to infinity. That is an argument from politics, not an argument from the logic of central banking. I have yet to see this argument from anyone who promotes hyperinflation as a likely scenario.
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