JIM SINCLAIR'S COMMENTS AUGUST 14, 2008

Posted On: Thursday, August 14, 2008, 7:20:00 PM EST More On the Federal Reserve Gold Certificate Ratio Author: Jim Sinclair Why will the effort to call any top in the gold price be a waste of time for the gold-ignorant gurus? Prior to being reduced to zero percent and then removal from the books, there was a direct link between the value of US Treasury gold held (a fixed price of gold then) as a percentage of the growth of the US money supply. As an example, when the cover was deemed to be 25% that meant that as the money supply expanded the value of gold had to be expanded by 25% as well. Because the price of gold was fixed, the gold cover clause, as this device was known, mandated an automatic change in the Federal Reserve Discount rate in order to depress the demand for funds in the US economic system. There is an argument that says as the dollar was becoming a primary reserve currency, and world trade was growing at record rates, the automatic changes in a monetary system were restraining the true wishes of the Administration and Federal Reserve. After the demise of the Bretton Woods Agreement, everything financial moved towards a floating system. The move away from fixed points towards a fully floating financial system was the process of removal of all financial ALARMS. No longer was there a currency parity rate that, when hitting the lower or upper bands, rang an ALARM. The concept of financial crisis no longer existed. The movement of any currency up or down - as the Euro recently did - would have been considered a financial crisis. We have just witnessed multiple central bank interventions that are accepted by the establishment?s international investment community as a dandy deed in the cover up of other serious systemic weaknesses. As a result, upper and lower bands have been considered and implemented. To benefit the plan, the lower limit of $1.49 will not be defended, yet in time the market will. $1.49 is only a point after which no great undertaking of intervention will be applied. Let the apples fall from the tree, if they please, as per today. There is no return to a FIXED anything, but there is a clear indication of a return to the relationship of floating financial alarms, a marriage between the thesis of Bretton Woods and the floating sins of our Financial Fathers. The Revitalized and Modernized Federal Reserve Gold Certificate Ratio will be tied to a broad measure of money supply, M3 or another new definition of liquidity. The gold that the US Treasury has held primarily at the New York Federal Reserve will be valued at market at the time of adoption of this mechanism. Please understand, that regardless of the arguments concerning the number of ounces the Federal reserve holds, since it will never be audited, accept what is said as correct. Now the floating increase or decrease in monetary aggregates will mandate a change in the value of the gold held by the US Treasury. The US Treasury will never have to buy or sell any gold because vehicles will be created that are immediately traded on exchanges that will speculate on the changes in the broad base monetary aggregate in terms of the gold price. That will serve the needs as the aggregates increase. This is in fact a public way to view the aggregate change by changing the value of another asset, which is a means of balancing the balance sheet of the USA as it was at the day of adoption. It is not convertibility. It floats and is not fixed. When the need is greatest it will be seen as an acceptable return to a form of disciplined central banks actions. It will be a reinstatement of an alarm mechanism but with parts that float. The market value of gold on that day will be a pendulum-starting point, not a fixed price. The broad measure of money supply on that day will be 100 on the liquidity index. Assuming the dollar is at .5200, the adoption of this mechanism could mark the low of the US dollar for this chapter of the financial history of the USA. There are other items that will have to fall into place if that is to be the dollar saver from a complete Weimar experience. But this is the major criterion for success. I assume it is January the 14th, 2011 and gold is trading at $1,650 or higher. Then I would assume the price of gold to trade $100 above and below the price of gold on that day according to changes in the liquidity index. If the USA would like to avoid the USD$ from a Weimar experience this is the key ingredient to preventing that. The US dollar is headed in the direction of the Weimar Experience in order to satisfy financial failures of significance. Some smaller entities will be rescued by Federal Money, exploding the US Federal Budget deficit and putting the weight of more newly created dollars on the inherently weak dollar. There is a 70% possibility that since central banks have moved to floating currency parities that the modernized and revitalized Federal Reserve Gold Certificate Ratio will follow under the pressure of future systemic and grave financial circumstances.