Sovereign bear raids, OTC tsunamis, collapsing currencies and gold

jim_sinclairWe have been following the commentaries of Jim Sinclair very closely in recent weeks. Jim is primarily a precious metals specialist and commodities and FX trader, and currently runs the financial and economics commentary website http://jsmineset.com/. This website is an oasis of daily incisive commentary on important economics developments worldwide. Jim has been absolutely spot on with his calls in recent years, more recently he called the intermediate top in the gold price of $1224/oz well before it topped at $1226/oz on 3 Dec 2009.

Jim is a pedigreed trader. His father was Bert Seligman, the partner of  arguably the best trader of all time, Jesse Livermore. He worked for the two of them for many years.

Jim was interviewed on King World News on Monday Feb 15 and the thoughts he shared are simply brilliant. If your worldview depends on a lower gold price, you should really review this interview. It can be found here.

Human Action strongly agrees with Sinclair’s views, and we share some of his main thoughts with you below.

The demise of the ‘floating exchange rate system’ is upon us. The world is rapidly moving toward a new monetary order. We can only wait and see what exact shape it’ll take, but it looks like we’ll see a global central bank – a central bank for central bankers – afforded with a new reserve currency that it can print to be a lender of last resort to lenders of last resort. Our best guess is that the IMF will be that institution. The problems have been papered over for now and will need a much stronger and more concerted coordination effort from global central banks once the cracks burst open again.

It’ll most likely mainly be a new monetary order for the West – it’s unlikely that emerging economies like China, Russia and India will buy into this monetary system. Many of these EMs are encouraging the use of their own currencies in settlement for bilateral trade - a contingency plan to avoid a domino effect of a hyperinflating reserve currency disrupting their international trade prospects.

What else could be on the agenda at top secret central banker’s meetings such as those held recently in Australia and USA? These central bankers are not patting themselves on the back, for we assure you, that would be done on CNN and CNBC. The problems with the world financial system have been made worse, not better. Financial weapons of mass destruction such as OTC credit default swaps have been left to grow in notional size, unhampered. They are a primary way for speculators to pocket immense profits by attacking a country’s national debt. These instruments wiped out AIG and Lehman Brothers in 2008, and we expect they will bankrupt sovereign states – just as is happening to Greece today. As in nature, weaker states such as Iceland were the first to be picked off the bunch. Father Trichet cut his Oz meeting short to rush home and witness the second get grazed by the CDS predators. Think we’re being dramatic with the word “predators”? Consider this: Goldman Sachs arranged currency swaps for the Greek government to help it mask growing deficits, but then with this knowledge promptly shorted Greek debt. By our book this passes as predatory, but hey, who’s gonna wrap Goldman on the knuckles – for according to their CEO they’re doing “God’s work”?

As we’ve documented before, the US faces an even worse fiscal reality than the EU. The problems being created for the eurozone and ECB from an attack on a tiny member nation’s debt are certain to pale into insignificance when you realise the end-game is likely going to be an attack on US Treasuries. Even just a bear raid on Californian debt will provide some material fireworks. It will require global coordinated monetary intervention that will only be successfully carried out by a single authority. It doesn’t take a rocket scientist to figure that out.  The intensity of the credit crunch in 2008 was blamed by renowned economic commentators such as Nouriel Roubini on global coordinated fiscal and monetary intervention that was too slow and small in size. It is unlikely that the response will be too slow and small next time round.

Make sure you don’t miss this interview with Jim Sinclair.  You’ll regret it if you do.

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