QE3 “Coming back on in Spades,” says Jim Sinclair

Bullion expert Jim Sinclair has no doubt that Bernanke and Fed will come in with QE3.  Languishing stocks, downgrading GDP projections, and record wide credit spreads in Europe evolved from investor expectations that the ECB and the Fed are done printing money, said Sinclair.

The former adviser to the billionaire Hunt brothers of Texas said the Fed has no choice but to embark on QE3, or whatever it will be called when an announcement is finally made.  In the meantime, investors taking the Fed at its word could find themselves in a whipsaw trade.

“You’ve got to continue what you’ve been doing,” warned Sinclair.  “The slightest indication that you wouldn’t continue has brought this crisis on.  But you see QE is the kind of thing that puts some sort of balm on the sore of fear.  Whether they call it QE or not, it’s coming back on in spades.”

As the Fed’s so-called QE2 comes to an end on June 30, investors have voted no confidence in Bernanke’s plan to end the easy money policies instituted in April 2009.  After peaking at a high of 12,876 on May 2, the Dow shed nearly 1,000 points in anticipation of a shut down of cash flowing through its 18-primary dealer network.

Beyond the monetary realities confronting the Fed, Sinclair is betting that the presidential election cycle adds to his conviction of a Fed reflation announcement this summer.  The bond king, Bill Gross of PIMCO, agrees, and suggested on his Twitter account that Bernanke is likely to plant a hint of a QE3 plan in August during the Fed’s annual symposium in Jackson Hole, Wyoming.

“Next Jackson Hole in August will likely hint at QE3/interest rate caps,” Gross tweeted.

The timing of an announcement (or hint) in August would line up nicely to a September kickoff to the 2012 presidential race.  And after a CNN poll released Jun. 8, indicating that the electorate is losing confidence in the Obama recovery, a nervous White House will sure be pressuring the Fed to do something to keep the house of cards up a little longer.

From CNN:

“CNN Poll: Obama approval rating drops as fears of depression rise”

“President Barack Obama’s overall approval rating has dropped below 50% as a growing number of Americans worry that the U.S. is likely to slip into another Great Depression within the next 12 months,” according to CNN.

Confidence in the nation’s leaders to solve the financial crisis is paramount to the Fed’s goal of debasing the U.S. dollar in an orderly manner.  Without the confidence that the Fed will continue supporting asset prices (stocks), the economy and the dollar move into what George Soros calls the “Act II” of the global financial crisis.  No official (either governmental or quasi-governmental) wants to end up at the helm when the system collapses.

“If people lose confidence, it isn’t the country that suffers, it’s the currency of the country that suffers,” Sinclair explains.  “This whole thing is put together with mirrors, smoke and spit.  You can’t afford to have any kind of financial crisis or all of the old wounds will open up and hemorrhage because of the investment that’s already been made, you’re stuck in a bad investment, the dollar.  All currencies are going into oblivion and that’s why they (investors) are buying gold.”

With the crisis in Europe and the looming problems in the United States coming to a head all over again, Sinclair told Eric King of King World News earlier in the week, “You’re out of your mind if you sell gold assets now.”

George Soros dumps his Gold— was it too early?

Soros has sold his gold.

Anytime a famous billionaire investor makes a significant position move in his clients’ portfolio the tag-along investors sifting through SEC form 13-Fs for clues to the thinking of the rock stars of finance will know about it—though with a time lag, as the required filings are submitted quarterly.

The latest musings among financial writers and investors have focused on the disagreement between Soros and another bigger rock star, John Paulson, regarding the outlook for the monetary metal—gold.  Soros is out, and Paulson is apparently holding for the big move.

So who’s right?

Arguments for the end of the decade-long gold rally generally fall into four theses, a combination of the four, or all of them.

1) The Fed is done with so-called “quantitative easing.”

So Bernanke implies—for now.

Unless Fed chairman Bernanke can find a buyer of a trillion dollars of U.S. Treasuries each year, or is willing to face derailing a U.S. economy on the brink of another full blown Depression brought on by more than $2 trillion deficits, which will then include soaring interest payments of more than $100 billion for each 1% rise in rates—then Bernanke is bluffing, again!

Bond king, Bill Gross, asked the question of many investors in his PIMCO March Outlook letter:

“Who will buy Treasuries when the Fed doesn’t?” Gross asked rhetorically.  If the Fed has been buying up to 70% of new issuance by Treasury, who will takeover the massive buying?

So the Morton’s Fork Bernanke faces is to either continue debasing the dollar to “grow” into the unserviceable U.S. debt levels, or face a collapse of the U.S. Treasury market as higher yields blow out an already blown out federal budget deficit, creating a negative feedback loop.

That Morton’s Fork favors gold.  Gold is primarily an alternative to the debasement of fiat paper money AND a place to park capital during times of uncertainty or a deflationary collapse.

2) Inflation is low and will remain low

Does anyone but the Fed chairman and his groupies believe inflation has been low?  That’s one of the big lies from the Fed.  (See Shadowstats.com)

“To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then when it becomes necessary again, to draw it back from oblivion for just so long as it is needed. …”

George Orwell, 1984

3) In the end, the U.S. dollar will eventually become stronger than the euro

That may be true.  But does it matter if the euro falls faster than the U.S. dollar on its way to the “currency graveyard” as James Turk of Goldmoney has said?  Both central banks are debasing their respective currencies.  In fact, the world’s top two currencies have been devaluing against all widely-traded commodities, (except natural gas) what appears to be, in a coordinated manner.

And Bernanke’s suggestion, which he made in his speech in Atlanta yesterday, that soaring commodities prices have little to do with Fed policy of a dollar devaluation rings, at best, conveniently incomplete and hollow, and at worst, another lie—through omission by the Fed chairman of widely-know correlations documented between a currency’s purchasing power against a basket of commodities over time.

4) Everyone’s in gold.  It’s a bubble.

That’s probably the weakest argument of all.

Marc Faber, editor and publisher of the Gloom Boom Doom Report, was asked by CNBC’s Joe Kernen in April if he thought there was any truth to the gold bubble thesis.

“If it [gold] were a bubble, a lot of people would have gold.  The whole world would be trading gold 24 hours a day,” said Faber. “But I don’t think it’s really a bubble. I think gold is maybe cheaper today than it was in 1999, when it was $252.”

Faber also said he routinely assesses sentiment among investors regarding gold at his speaking engagements.  Usually, he counts less than five percent of the audience who raise their hands in favor of gold as an investment. Sometimes he sees no hands raised, he said.

“And my daughter, she lives in Germany. She walks by a shop when she goes home from work. She said people are lining up to sell gold—the jewelry. So, I don’t think that it’s a gold bubble,” Faber added.

Following Soros’ investment themes may be better than most fund managers of his size.  But investors should remember that another investor legend, who may be more well-know—and liked, Warren Buffett, sold his monstrous stake in silver at approximately $8 per ounce.

Unless Soros is waiting for a big drop in the price of gold (or is pondering buying physical metal, instead), he’s most likely far too early in calling for a long-term top in the gold price.

Wasn’t he who said in June 2010, “We’ve have entered act II” of the crisis, referring to Greece’s sovereign debt problems and the potential flight out of the euro experiment.  When did that crisis get resolved?  And how does the U.S. (indeed, the world) come out smelling like a rose if the euro collapses while U.S. and untold other foreign banks, who are joined at the hip with European sovereigns and banks, become insolvent?

If this doesn’t get you to buy Gold . . .

Not much will.

While the bullish case for buying gold bullion as a store of wealth primarily centers on financial protection from central bankers’ dirty deeds of the West, as well as the gold accumulation by central bankers of the East, little is mentioned of the Indian retail market and how this market will play a major factor in keeping gold supplies tight for many years to come.

Instead, China’s burgeoning “middle class” has been the talking point for make the case for everything going up—as with the “peak everything” theory—from oil consumption, base metals, food, John Deere tractors, pharmaceuticals to hair gel.

Gold demand for China is, you guessed it, going to go up, too, and not just from China’s central bank accumulating as much as it can before the world’s major reserve currencies no longer serve as reserves, but from the buying power of China’s emerging middle class too.

India, however, is another market—the market of many individuals, which comprise the big buyer, which is poised to grow by mind-bending numbers of tens of millions during this decade.  India’s 1.1 billion population is going middle class, just as everyone knows China’s 1.3 billion population is.

But Indian culture (Asian culture, in general) stands apart from other cultures in that gold is synonymous with wealth.  Indians have never heard of Maynard Keynes and his “barbarous relic” propaganda and economic theories which center on the premise that politicians are uniquely qualified to manage a people’s currency.  Indians know better.

“The rise of India as an economic power will continue to have gold at its heart. India already occupies a unique position in the world gold market, and as private wealth in India surges over the next ten years, so will Indian demand for gold,” World Gold Council (WGC) managing director for India and the Middle East, Ajay Mitra said in Mumbai in late March.

While stockholders of the West saw their holding swoon in 2008, India was buying gold on the big dip, importing between 700 metric tons and 800 metric tons of the precious metal in 2008, or approximately 30% of total global demand.  Two years later, in 2010, India imported 963 tons.  And according to Albanian Minerals president and CEO Sahit Muja, India is expected to break the 1,000 ton mark.

At that rate, approximately 10% increases per year, the World Gold Council’s recent estimate of India’s gold imports reaching 1,200 tons by 2020 appears to be an easy slam dunk. If India remains in its present trajectory, gold imports into India will reach 2,240 tons by 2020.

If India leveled off to the expected 1,000 tons this year, that amount is more than three times the UK’s 310.3 tons of total gold reserves held by the Bank of England, and is on par with China’s officially stated gold reserves of 1,054 tons, according to the World Gold Council’s 2010 statistics.  In fact, in any one year, India’s gold imports would rank it somewhere between sixth and eighth, globally, in total banking reserves.

Since 1997, India’s GDP growth has averaged more than 7% per year, according to the World Bank, and correlated strongly with India’s gold imports during that 13-year period.  And according to the World Gold Council, the strong upward trend is expected to continue.

“We predict that the new demand for gold will be driven by rapid GDP growth, urbanisation, the emergence of a strong middle class and a sustained and potentially rising savings rate of 30%-40% of income,” WGC’s Mitra said.

And according to Marcus Grubb, managing director at the WGC, the emerging middle class buyers of gold will number in the tens of millions by the close of this decade.

He told MineWeb in mid-May, “With the building of infrastructure, with the increased urbanisation of populations – in India you are probably going to see another 100 million Indians move into urban conurbations in the next ten years, you are going to see the middle class go from 15 million to possibly as many as 90 million by income bracket in 10 years. Indian households will probably be 4 to 5 times wealthier than they are today in ten years time.”

So as gold bugs ponder whether the International Monetary Fund (which reports holding 2,827 tons of gold as of the close of 2010) will make another surprise announcement of its intentions to dis-hoard a measly 100 tons of gold in its  alleged attempt to shake some longs out of their gold holdings, remember that India presently needs that nearly each month just to satisfy its population’s demand for the precious metal.

And considering gold supplies have been declining, falling 4.4% in the first quarter of 2011, year-over-year, to 872.2 metric tons, according to the WGC, with future supplies expected to struggle from declining all through this decade, how will demand from India, alone, be met with available mining and recycled gold supplies in the coming years?

As gold prices rise amid growing demand and tight supplies, wouldn’t high prices, at some point, kill demand?  One would think so.

But in Indian culture, “gold will remain auspicious given its connection with tradition, whether religious or attitudinal, will remain powerful,” said Mitra.

He added that Indians lean toward being risk averse, and religiously view gold as a traditional means of wealth preservation, which inspires security and stability to the people of India.  It has been so for thousands of years.

“Therefore, the view that Indian demand for gold will be driven by the concept of enduring value, not price,” he said.