Aug 312015
 

In this interview, Jim Sinclair says that “we are going into unprecedented deflation, and it’s the reaction of central banks around the world to the concept of deflation that brings about hyperinflation” and the resulting increase in the gold price is therefore “a rally that is not meant to be sold. What is coming up in front of us is the Great Reset where currencies wear their gold like ladies wear a necklace, and the most beautiful necklace will be the strongest currency.”

I find this advice dangerous because many people reading it will go away thinking “OK, so in the next gold bull market I shouldn’t sell”. However, how will you know if the initial bull market is just a speculative bubble that will bust or the start of a hyperinflation?

Secondly, the “great reset” and “beautiful necklace” references are to countries going back to (some) version of a gold standard. Some gold standards involve free trade of gold, but the last one involved expropriation and making gold illegal to hold. If Jim is right and countries want the strongest currency, then that would imply they will want all their citizen’s gold, in which case you get expropriated at some pre-reset price.

The retort to my second point is what is the point of selling out for fiat money if that is being hyperinflated. I agree, but my answer is if you believe in the hyperinflation scenario and that gold is money, then logically you should be converting fiat prices into ounces of gold – now. The advantage of doing this is that if gold is just in a bubble, then the prices of other assets in ounces will be really low, indicating that those other hard assets are cheap and giving you a signal to sell your gold for other assets. Below are some charts of what assets priced in gold look like.

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This showed that 1980 and 2011 were exceptional gold bubbles.

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Stocks also shows the 1980 and 2011 bubbles. These are just two charts to give you the idea, but you should look across all assets in terms of ounces of gold to get a general picture of gold’s relative value. There is even a website dedicated to this, naturally called http://pricedingold.com/, which has charts of various things in terms of gold.

In a hyperinflation scenario, these charts will look like the one below of the LME base metals index in ounces of gold. Note how the price is a lot more stable for long periods, even though gold changed a lot during these 20 years.

lmeAu

If you see the price of gold going up but the price of a wide range of other assets priced in gold somewhat stable, then that is an indication that there is general inflationary force in the economy. If that is occurring when dollar prices are going up rapidly, then again, consider selling the “rally” but only for a switch into other assets, not fiat.

Over the past 15 years I have spoken to a number of wealthy Perth Mint Depository clients. They all made their money doing productive things, building businesses. A lot of them felt that gold was a dead asset, producing nothing, but they were buying it because they did not see much business opportunity and economic growth going forward and were sheltering their wealth in gold. However, they all had the strategy of keeping an eye on the value of productive assets and were waiting for when they were cheap and then they would sell their gold and buy those assets. They were not interested in selling out at the dollar price peak, their eye was on productive assets and their relative value and they told me they would rather sell out early and miss the peak to buy these assets cheap before other entrepreneurs bid them up.

If you ignore their advice and follow the “rally that is not meant to be sold” tip, I think you are really just treating gold like a pet rock, watching its nominal fiat price go ever higher and getting that nice psychological payback against the gold haters that “we was right”, while others around you are cashing out their gold insurance and buying real assets at bargain prices.