Gold today is trading as a currency and is therefore a currency. The price of Gold as a currency reflects the degree of weakness being demonstrated by the US dollar.

When the Gold price appreciated off it’s low of $253 in August, 1999 ($248 Cash Gold), exceeding the degree of appreciation of the strongest currency, Gold moved from a commodity which it had been for 23 years to a primary currency of popular choice, the people’s choice so to speak …

When Gold surpassed $529 plus 3%, the lack of action by the US government to re-establish the Federal Reserve Gold Certificate Ratio which is tied not to interest rate correction but to the rate of growth of monetary aggregates, together with policy changes focused on the triple deficits of Budget, Trade & Current Account.

A rising dollar increases the US Trade Deficit, hurting exports and acting as a brake on the US economy.

Thus, higher Gold means a lower US dollar since they are an inverse relationship and could be regarded as good for the US economy and lower Gold prices means a higher dollar which is in turn not favorable for US economic activity.

Mr. Sinclair, widely recognized as one of the foremost authorities in the world on gold, international currencies and the global economy. A man of the utmost integrity and who I have total respect for grown from the knowledge he has so freely shared over the last four to five years regarding the Gold and related markets and the variables which have influenced the nature of Gold at various times throughout its history. His knowledge far exceeds any other I have encountered in over 9 years of being involved in the Gold market either physically, the futures &/or gold shares.

Mr. Sinclair illustrates his formula which he presented to the world on September 1,2006 as follows …

1. First interest rates rise affecting the drivers of the US economy, housing, but before that auto production goes from bull to a bear markets.
2. This impacts many other industries and the jobs report. An economy is either rising at a rising rate or business activity is falling at an increasing rate. That is economic law 101. There is no such thing in any market as a Plateau of Prosperity or Cinderella - Goldilocks situations.
3. We have witnessed the Dow rise on economic news indicating deceleration of activity. This continues until major corporations announced poor earnings, making the Dow fall faster than it rose, moving it deeply into the red.
4. The formula economically is inherent in #2 which is lower economic activity equals lower profits.
5. Lower profits leads to lower Federal Tax revenues.
6. Lower Federal tax revenues in the face of increased Federal spending causes geometric, not arithmetic, rises in the US Federal Budget deficit. This is also true for cities & States as it is for the Federal government.
7. The increased US Federal Budget deficit in the face of a US Trade Deficit increases the US Current Account Deficit.
8. The US Current Account Balance is the speedometer of the money exiting the US into world markets (deficit).
9. It is this deficit that must be met by incoming investment in the US in any form. It could be anything from businesses, equities to Treasury instruments. We are already seeing a fall off in the situation of developing nations carrying the spending habits of industrial nations; a contradiction in terms.
10. If the investment by non US entities fails to meet the exiting dollars by all means, then the US must turn within to finance the shortfall.
11. Assuming the US turns inside to finance all maturities, interest rates will rise with the long term rates moving fastest regardless of prevailing business conditions.
12. This will further contract business activity and start a downward spiral of unparalleled dimension because the size of US debt already issued is of unparalleled dimension.

Therefore as you get to #12 you are automatically right back at #1. This is an economic downward spiral.

Mr. Sinclair concludes by saying:

“I heard all this “slow business” as negative to gold talk in the 70s. It was totally wrong then. It will be exactly the same now.”

I share this view and my aim in the future will be to monitor Gold and the related fundamentals, geopolitics and market movements as we enter some uncertain times … for so many!!!