Gold at $1650/oz by this time next year? Peter Major gives his view.

ALEC HOGG: Before we pick up with that clip from Jim Sinclair, Peter Major from Cadiz Corporate Solutions is with us. Peter we'll talk to you a little later about the whole carry trade in the rand but, before be bring in Jim Sinclair's discussion, d'you know much about this guy? Have you followed his stuff over the years?

PETER MAJOR: No - Jim Sinclair I am pretty weak on, Alec. I think I've heard him a couple of times, and I've read one thing he wrote in the last year or so, so all the background you give me on the guy I'll appreciate.

ALEC HOGG: He is an American. He is quite advanced in years now. He comes from a  family that has traded gold for generations. But what was interesting, he told me in our conversation today, is that he lived in Tanzania for some years, and his children live here in South Africa. They live in Bryanston. So it's interesting to have that South African connection.
    Let's hear now what Jim thinks. I asked him, to kick off with: "Why have you been so interested in gold for so many years?"

"JIM SINCLAIR: I came from a European family - marriage was a little complicated, but my father was Bert Seligman, one of the great, great traders that existed in the street, and it was very much in our blood that gold was part and parcel of the monetary system, as reserves, pretty much the Austrian school.

ALEC HOGG: It's interesting, this, because young people find it hard to understand the allure of gold. Do you think it is a generational thing?

JIM SINCLAIR: Well, none of them had had any schooling in it. It's not part of a curriculum. It's been looked at as a barbaric relic for three generations. But I suggest to you that the gold market has brought a lot of attention on itself and, as the central banks are changing, so in fact are our major fund managers and therefore the younger generation is at least starting to look. Gold has performed as it always has, It's a ... currencies, so it's locked up to the dollar in the inverse. That was the beginning of a major 25-year rally in the US dollar and accordingly it was the beginning of the major bear market in gold. So gold did what it should do, and that is like itself to the dollar. When gold rises it's recognised as a currency, and when gold falls, even though it shouldn't be, it receives the label as a commodity.

ALEC HOGG: So there really is this direct relationship between how many dollars are being printed, how many are being put into circulation, and the gold price.

JIM SINCLAIR: It always has been, and I suggest it always will be.

ALEC HOGG: Since 2001 gold has been rising consistently. By your thesis, then, it's the contra to the US dollar.

JIM SINCLAIR: No only that. Yes, that is my thesis. Recently the statement out of our Federal Reserve that interest rates would remain extremely low until 2012 is really a go-ahead signal, a green light for gold to perform as it should in a currency until at least 2012.

ALEC HOGG: Jim, how far can it go - have you done any calculations on that?

JIM SINCLAIR: I've been very strong with one price, which is $1650, and I felt that that would come at the end of 2010, and the very early part of January 2011, although I am starting to feel that my estimate is probably low.

ALEC HOGG: Why is that?

JIM SINCLAIR: Because of the way that the foreign debt here is just about touching in the US$3 trillion, and because our economy is not responding as China has. We have very serious systemic problems which  have resulted in higher unemployment, and I can't buy onto a new normal economic recovery devoid of hiring people. And we are beginning to apply now fiscal stimulus in terms of the very classic road-building, schools, etc, and that has a habit of sucking inflation out of monetary expansion. So I do think we are going to see the currency inflows as an inflationary event, which is very hard for people to understand in an environment of very difficult conditions in the employment market, with the only booming business being Wall Street.

ALEC HOGG: Peter Major, you have spoken a lot about similar issues. To look at the gold price now at $1140/oz - he's talking $1650 and has been saying it for a while. Still a year before it peaks out at that level. Suddenly it doesn't look that far-fetched.

PETER MAJOR: Well, if you listen to Jim, I suppose $2000 doesn't sound far-fetched. But it still seems a bit far-fetched to me, Alec, and there's a lot of reasons I think that. I think the main one is that nothing goes up in isolation. Gold is a commodity, it's got a rarity value, there's increasing populations and there's increasing money supply, and it's decreasing reserves, for all of those work in its favour. That being said, the average price in real terms for 100 years, 200 years going back is maybe $600, and now it's trading at almost double that. You could say: should we have that quick an adjustment? I think it's an unsustainably quick adjustment, and I just think relative to other commodities it's now a bit pricey.

ALEC HOGG: And I guess from his perspective as well, he says it's the contra to the US dollar. They keep growing debt in America, and keep printing dollars and, the way that they have been doing, then Jim Sinclair would believe that the gold price would go up. Do you think that trend is going to change any time soon?

PETER MAJOR: Look, I think the immediate trend is going to change fairly quickly. The long-term trend will not change, because America has been printing money for about, well, over 200 years. I think it last reduced its debt to zero in about 1820. So ja, for about 90 years the US debt has been getting bigger and bigger, and they've been printing money - but gold has responded accordingly. It has gone from $20 to $35, to $200, to $800 - and now $1100.

ALEC HOGG: But that's not really fair, because up until the second World War sterling was the reserve currency. It's only since World War II that the dollar has really become that important in a global sense.

PETER MAJOR: Well, whether it's a reserve currency or not, the gold price has been going up in dollars to take account of a weakening dollar.

ALEC HOGG: Well, we are going to be talking to Peter Major in a  little while now about the whole thing called the carry trade. He'll be giving us some insights on that. But if you believe someone like Jim Sinclair and want some more information, the whole podcast, 12 minutes of it, is on the Moneyweb website.

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The SAfm Market Update with Moneyweb is broadcast on SAfm 104-107fm, weekdays at 18:00 to 18:30.

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