By Landon Thomas Jr.
IT’S a splendid spring day in Connecticut’s horse country and James E. Sinclair, perhaps the best-known gold speculator of his era, is sitting before his trading terminal, contemplating the upward thrust of gold on his trader’s chart.
The sun, bursting through the bay windows, catches the glint of gold that is everywhere in Mr. Sinclair’s home office: on the coins near his computer, on his chunky Rolex watch, on the rings on three of his fingers, on the cuff links on his monogrammed shirt, and — could it be? — a hint of it in his one working eye.
“I love gold, O.K.?” he said, his voice rising in excitement. “Gold has made me wealthy. It feels nice. It’s exchangeable. It’s money.”
On his television set, which is tuned to CNBC, news breaks of a terrorist attack in Egypt, the price of oil pushes higher and traders continue to sell the dollar, which is approaching a one-year low against the euro.
With gold trading at $683.80 an ounce, a 25-year high, it’s a good time to be a gold bug like Mr. Sinclair, especially if, like him, you own a gold exploration company (his is in Tanzania) and were a buyer when the metal sank as low as $250 an ounce in 2001. Now Wall Street, traditionally a laggard when it comes to making the investment case for gold, has jumped on Mr. Sinclair’s bandwagon.
Investment banks like J. P. Morgan and Goldman Sachs are putting out bullish research notes, retail investors are heavy buyers through exchange-traded funds and hedge funds; and the trading desks of investment banks have been piling into the market, especially in the last week.
For Mr. Sinclair, who rode the last bull market in gold to its peak, in 1980, the surging price of his beloved metal is sending out clear signals that take him back to the 1970’s, when inflation, a weak dollar and an oil spike driven by turmoil in the Middle East propelled gold to a high of $875 an ounce, or more than $1,800 in current dollars after adjusting for inflation. His ultimate price target now is not far from that: $1,650 an ounce, assuming that things become really bad.
“Gold is a barometer of the common stock of a country, and right now gold is sniffing out weakness in the management of the United States as a business,” said Mr. Sinclair, 65, a lifelong Republican who twice voted for President Bush. “Iran is becoming a nuclear power. The chairman of the Federal Reserve is on a puppet string controlled by the White House, and there is no such thing as a strong-dollar policy when the dollar is heading south.”
For more than two decades, the apocalyptic lament of Mr. Sinclair and other gold bugs has been largely dismissed as the United States has experienced — aside from a few hiccups — a 25-year bull market in a range of assets, from stocks and bonds to real estate and art.
Sustained by a continuing flood of liquidity, these assets have continued their mighty climb, even as crucial gauges of economic health in the United States — the budget and current account deficits — have continued to worsen. But now, with gold making a run for $700, dedicated gold investors are getting a wider hearing.
THEIR passion notwithstanding, gold bugs tend to be small-time investors. Gold’s recent surge has instead been underpinned by a rush of mainstream investors, including hedge funds, commodity-based mutual funds and exchange-traded funds.
For these investors, gold is less a way of life than it is hedge against inflation and a prudent measure of diversification during an increasingly worrisome time. The extent to which this new wave of capital remains invested in gold will determine if the recent spike is just another anomaly or the onset of the second coming of the great gold bull market that the true believers have been calling for since the price of gold crashed a quarter-century ago.
Of course, many investors say that given gold’s sharp recent climb, a correction would not be surprising. It’s another asset bubble, they say, the latest investment fad. But for Mr. Sinclair and a small clutch of other self-exiled Wall Streeters, the metal’s recent climb is just deserts for their unwavering, if not mystical, devotion to gold as an investment, an adornment, a means of exchange and, more than anything else, a moral bulwark in a corrupting sea of paper money, credit and what they see as insidious financial instruments.
Mr. Sinclair, who in the 1970’s ran his own trading firm, achieved his renown by selling 900,000 ounces of gold at an average price 0f $810 in early 1980. That was when the metal was capping a decade-long bull market that commenced in 1971, when President Richard M. Nixon severed once and for all the dollar’s link to gold.
In addition to selling his hoard, Mr. Sinclair sold his trading business, took his total net gain of $18 million and retreated here to the Connecticut countryside where he built his own private Shangri-La. It is indeed, as Mr. Sinclair likes to call it, “the house that gold built.”
On the outskirts of Sharon, a village at the foot of the Berkshires, the sprawling 38-acre estate includes an indoor swimming pool and pistol range, horse stables and a specially equipped garage that once housed his collection of racing cars. It’s a lot of property for a solitary man — his wife of 40 years died in a car crash in India two years ago. Now, he uses his Web site (jsmineset.com), books, DVD lectures and cartoons that he commissions to proselytize about the virtues of gold and the depredations of central bankers.
“This will be my last great ride,” he said of the current spike in gold prices. “Everybody loves to be right.”
In Spain, they call the obsession of some people to dig large holes in the ground to search for the elusive ounce of gold “mal de piedra,” or the sickness of rocks — one way, perhaps, to describe the condition that affects Mr. Sinclair and his coterie of gold investors.
With their missionary zeal and weakness for conspiracy theories, gold lovers can seem a touch afflicted. They also collect and pass around offbeat, brain-teasing findings. One is that the dollar has lost 98 percent of its value since 1913, when the Federal Reserve System was established. Another is an assertion by the American Institute for Economic Research, an obscure research outfit in Great Barrington, Mass., that since 1945, inflation has eroded $15.8 trillion from the savings accounts of United States citizens.
Both findings underscore their benchmark precept: that a currency not tied to gold becomes debased when central banks print money and governments spend freely. Perhaps Alan Greenspan, who before his run as chairman of the Federal Reserve was highly regarded in gold-bug circles, captured this point best. “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation,” he wrote in 1966, when he was an economic consultant. “Gold stands in the way of this insidious process.”
The great liquidity explosion that occurred under Mr. Greenspan has made him a turncoat in the eyes of the gold-bug crowd. But his successor, Ben S. Bernanke, or “Helicopter Ben” as they call him, inflames its passions all the more. To this group, Mr. Bernanke’s passing allusion — before he became Fed chairman — to a helicopter dropping money over a recession-bound economy confirmed its deepest fears that a monetary system not anchored by gold was essentially inflationary if not downright immoral.
All the same, most mainstream economists accept that a return to the gold standard and its restrictive covenants would be not only unfeasible but also deflationary. Gold bugs may cry, and be correct, about the creeping impact of inflation, but it is also true that the same climb in prices, aided by the great liquidity boom, has made some of them millionaires, as houses they bought for less than $100,000 in the 1960’s are now worth millions.
Like Mr. Sinclair, William J. Murphy III is also a Wall Street refugee. After a one-year stint in 1968 as a wide receiver for the New England Patriots, he began a career as a commodities trader, working for a number of firms, including Shearson and Drexel Burnham. Convinced that the price of gold was being suppressed by an unholy alliance between the central banks and major investment banks, he formed the Gold Anti-Trust Action Committee, known as GATA, that seeks to publicize facts and assertions that support his point, namely that the gold reserves in central banks are significantly overstated.
GATA for the most part is a one-man show — Mr. Murphy, dressed in his sweatsuit, perched in front of the computer in his home in suburban Dallas. With his excitable manner and his outré theories about gold, he is generally thought to exist on the outer fringe of the gold-bug movement.
Indeed, his central thesis — that Goldman Sachs and other banks have conspired to keep a cap on the price via short sales to back the government’s strong-dollar policy, especially while a former Goldman senior partner, Robert E. Rubin, was Treasury secretary in the late 1990’s — is far-fetched.
With the price of gold surging, Mr. Murphy is convinced that Goldman Sachs, J. P. Morgan and others are frantically buying now to cover for the gold they sold short over the years. Goldman Sachs and J. P. Morgan declined to comment about their gold trading positions or strategies.
“What a day,” Mr. Murphy said one day last week as gold broke through $670. Goldman Sachs and J. P. Morgan were big buyers that day on Comex, the division of the New York Mercantile Exchange where gold contracts trade. Sputtering at the joy of it all, Mr. Murphy could well have been a prospector hitting the Mother Lode. “These guys are short, and they are panicking to get out of their positions,” he said. “They are sweating bullets, and it couldn’t happen to a nicer bunch of guys.”
There is a kernel of truth to what Mr. Murphy says. Central banks have been aggressive sellers of gold, especially in the late 1990’s, when gold was touching record lows. But most economists say that there was no grand design involved, just a badly timed attempt to shift into higher-yielding assets like bonds.
As for investment banks, they are sellers and buyers of any given asset at any given time. But it is also true that they have hardly been enthusiastic advocates for gold as an investment, especially when the stock market was king. Even now, as they have issued positive reports about the metal, their price targets seem oddly out of sync with its relentless rise.
Goldman’s forecast for a year-end price is $625 an ounce; J. P. Morgan’s target, which is currently under review, is $560, and Morgan Stanley’s is $550.
Compared with Mr. Murphy and his boylike excitability, James Turk speaks with an assured gravity consistent with his background as a commercial banker at Chase Manhattan. But his views about gold as the ultimate store of value in a financial world on the verge of collapse are no less doctrinaire.
Indeed, Mr. Turk has established his own online payment system, GoldMoney.com, through which he and his fellow gold bugs may enjoy the thrill of buying goods and services via gold, not cash.
IN some ways, it is a symbolic exercise. While the payment system is supported by $100 million worth of gold, no merchants have agreed to take bullion as payment, although Mr. Turk hopes that day may come. More than anything else, the site demonstrates his disdain for the dollar and all other forms of paper money — a view that he often heard from his parents, who experienced the ravages of hyperinflation in Austria in the 1920’s.
“It’s not gold going up; it’s the dollar going down,” Mr. Turk said by phone from Australia, where he was speaking at an investment conference. Gold has held its value much better than the dollar against commodities like oil, he said.
With oil hitting new highs — it has hovered around $70 a barrel for weeks — Mr. Turk foresees a return to the 1970’s, when high inflation and a volatile Middle East drove gold to its peak. “If we get close to $850 this year, it’s most probable that we will see a four-digit gold price in 2007,” he said. Four-digit gold — an ounce of bullion selling for $1,000 or more — is the gold bugs’ equivalent of a visit from the Messiah.
But for the growing number of hedge funds that are piling into the commodity, gold is less a virtuous investment than it is a mercenary one.
China and India are buying more gold. Iran is becoming more bellicose in its stand toward the West. And, most important, liquidity is making a broad shift to commodities and out of stocks.
“Do I think that gold is God? No,” said Monty Guild, who runs Guild Investment Management, a hedge fund in Malibu, Calif. “I’m a gold opportunist. When it’s good, we like it; when it’s not, we stay away. Gold does well during wars, and we believe there will be more wars.”
And for those not in gold, or any other highflying commodity, for that matter, the feeling can be lonely. William H. Miller III, portfolio manager of the $19 billion Legg Mason Value Trust, which has beaten the Standard & Poor’s 500-stock index for 15 consecutive years, has no gold in the fund. His view is that inflationary expectations, if not prices themselves, remain quiescent, and that gold — like oil, emerging markets and small-cap stocks before it — has become the latest investment craze, propelled upward by a wave of hot money, a term for speculative short-term capital.
“Gold certainly looks extended from here,” said Mr. Miller, whose fund is currently trailing the S.& P. 500 for the year. “It’s easy to make money when you are trend-following,” he added. “But if you are worried that the end is near, the last thing I want is gold because of all the hot money.”
Source: NY Times