Oct 2, 2007

Jim Sinclair: Prayers Are All That Keep The OTC Firestorm From Exploding Into The Limelight

Dear CIGAs,

There still is a firestorm out there and as long as it can be kept behind the curtain of public view the longer the timeline the central bankers have to pray it will go away. The problem is the gigantic mountain of credit and default derivatives. What is incredible is the total size of the derivative mountain wherein notional value becomes real value when these derivatives are called upon to perform and performance is nowhere to be found. No wonder the major improvement in the commercial paper and CDO markets is widening of spreads which basically means not much at all. A stock drops from $100 to $5. The market is a $5 bid offered at $6. The market now becomes a $4 bid offered at $8. That improvement is basically nothing.

With housing dragging at the US economy, central banks must do everything possible to keep equities from unraveling. The level of the equity indices are all that is left of the “Wealth Effect.” That means finding an accelerant for equities lies in the pouring of more gas on the fire of international liquidity. This is a global phenomenon and not a situation limited to the unwinding of the many Greenspan bubbles of the past few years.

At the center of the Earth there is a molten ball of magma that always seeks fissures through which to escape. When it escapes it blows the hell out of everything. It is then witnessed as an erupting volcano. This is what we are dealing with here. The molten ball is an unimaginable heap of unfinanced, non transparent, unregulated paper called over the counter derivatives. The fissures you have been seeing are the CDOs, mortgages (forget the spin title subprime), brokerage house tittering even among the halls of Wall Street Ivy, the collapse of so many so called but clearly not hedged hedge funds, the demise of major real estate lending banks and rollovers called takeovers of Internet financial entities. As long as you do not recognize these are united in the magma of over the counter derivatives and it all can be blamed on the peskiest bad mortgages made to under financed people, the longer the central bankers can pray for a miracle. Prayers is a great tool, but not for those who know what they were doing. The shock of Greenspan’s book, which I believe discredits him, is that he always knew the destruction that his acts would visit upon the world. Of all the disgusting things, the worst as I see it is his persisting support of no regulation for over the counter derivative and his pronouncements that these weapons of massive financial destruction act to spread the risk from the few to the many. What happened is over the counter derivative spread the risk from the few to the fewer who proliferated the world with offsetting paper and sucked the money out.

Simply stated we all have been killed in some degree, but 99.9% of the people have no idea it has happened.

Just as Heinz will argue articulately that there is no derivative risk to the junior and the major gold entities from short of gold derivatives, the question is will the major deliver the 30% (or whatever the percentage the junior holds) junior’s gold at $1650 while delivering their own 70% at $325? All my efforts in major mining trade publications from 1999 to 2003 pleading with the industry not to continue hedging with crap paper called over the counter derivatives were laughed at. The world at large has no idea what a meltdown in derivatives means.

I can keep giving you the numbers where gold will go to and where it will find support, calling them major and minor Angels such as at $751 followed by another minor Angel at $782, but all that serves to do is encourage you to trade and to give the opposition a target to shot at. You want it so I will continue.

The real matter is ARE WE IN THE MELTDOWN AND IS THIS IT? My answer is yes and yes. Did I not send everyone who signed up for our free email list a note saying that a couple of weeks ago?

What has changed? Absolutely nothing except the central bankers are doing everything in their power to hold the curtain shut so you cannot see what is really causing havoc with financial institutions.

Assuming I am correct, then why seek to sell the top of a small move when for all we know in terms of gold, this is it! You may recall I told you that when gold closed 3% above $529.40 it had moved into a runaway and trading should cease. Who listened out there? A few yes, but not many.

The only selling I would do in base or precious metals is if there was a distinct need for cash for a good and necessary purpose.

The last time gold passed a clutch point, a point where the clutch of price is depressed and a higher gear is selected, gold ran $400 in a little over a month. Could you handle that if you sold and before you could inhale gold was in the four figures? Well, that is the very risk you face. Those legal and illegal shorts think they have it knocked but it is upside their heads that is going to be knocked.

This volcano is smoking and the short is like the man who would not move from Spirit Lake when Mt. Saint Helen was rumbling and smoking. Now there is no more Spirit Lake and no more man standing beside it.

Smoke is spewing from the fissures. The molten magma of OTC derivatives is seeking an escape hatch which to blow out and you do not yet really believe it. Just like Heinz and the greats of the Gold producing industry shorting gold hedgers from 1991 to present, you are still trying to trade your insurance away and away it will certainly go.

Stop selling even the 1/3 unless you have a distinct need for the funds for a good purpose for their use.

What has been feared since 1968 has now occurred at orders of magnitude more than even this day is imaginable. Monty has said this could end in tears, and it will for the gold greedy hot shots that want every move gold will make.

Stay away from all credit. Hold gold and whatever currency you feel will decline the least against gold which means rise the most against the dollar. There really is little else you can do as the smell of sulfur is in the air.

It is quite interesting to see today’s article from the British Press on the new preference of those who have experienced a bank run, which is not for paper again in the hands of a financial institution, but rather for gold. I will wager that the gold is being taken delivery of. There will be bank runs here. That you can count on. First the little banks, the Internet financial organizations, the brokers and finally a massive addition of liquidity to protect their own, the international investment houses and major international banks. Yes it is that bad, only hidden from the sight of the many.

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