Jim Sinclair: Gold to Exceed $12,500 to balance US Debt

The following analysis is interesting in that essentially says the unhedged debt that we owe to the world must be repaid. His assumption is that the world is essentially 90% unhedged to the our debt, with China being the exception. Jim says the Chinese are hedged at 50%. This explains some of the math below. 

Of course this analysis says nothing of the debt we owe to ourselves. That can be simply defaulted on and nobody else from outside of the US could actually give a shit. However, simply defaulting on our internal debt obligations carries a severe political penalty and has certain negative ramifications for maintaining social order. I believe much of this debt will be papered over also and will need an associated lift in the gold price to properly balance our money to gold as a reserve asset. See FOFOA and Freegold.

So, $12,500 is an excellent start. Here is the analysis from Jim Sinclair and JSMineset:

June 7, 2011, at 2:10 pm
by Jim Sinclair

Dear CIGAs,

My interview with Erik King of King World News is I believe the most important this year.

Please listen to it as it examines the improbably end of QE.

Jim Sinclair – Gold to Exceed $12,500 to Balance US Debt

With continued volatility in gold and silver, today King World News interviewed the legendary Jim Sinclair to get his take on the markets.  Sinclair surprised KWN by discussing a price target for gold that to some would seem unimaginable.  When asked about trading for gold this summer Sinclair stated, “I think most of your analysis of secular trends will look and say no, no, summer time doldrums nothing happens.  Well we could have something very significant happen and for a very clear reason.  It’s becoming obvious even to our talking heads that this great recovery which we’ve questioned for a considerable period of time is in fact more in people’s minds than in reality.  The economy is turning down again and turning down hard, there’s no question about that.”

Sinclair continues:

“Quantitive easing is the only tool that the Fed has had available to them.  The Fed has pumped in trillions of dollars and the result of that pump-priming in the monetary sense has been only at best a modest recovery, and certainly making trillionaires out of some bankers, billionaires out of many of them.

We’ve come to a point now where if QE were to be stopped, you would see an implosion in the general equity markets…And yes gold would go down, the market would go down hard.  The dollar would go up slightly to begin, but then fall back down again as the management of the economy was seen to have been ineffective and inefficient.

Gold would then start moving back up again and I think if QE was to cease, the recovery on gold from a modest reaction would be multiples upon multiples of that reaction and would lead the way to Harry’s $2,400, to Alf’s $3,000 to $6,000.

You can’t stop quantitive easing.  If you stop quantitive easing the stock market will return to its recent low or lower.  That alone by its impact on decision making will cause an economic implosion.  We’re tied into this monetary stimulation, there is no way out of monetary stimulation.  If there was any attempt to get out of monetary stimulation it would cause an economic accident which would require central banks to go right back where they were.  That would be again, loss of control…


June 7, 2011, at 1:28 pm
by Jim Sinclair

Dear Jim,

The following is an analysis of your Mathematics of Gold. The analysis was conducted by our summer intern and we thought it may be of interest to your readers.

Kind Regards
Isaac Matzner

Research Coordinator
Auerbach Grayson & Company
25 West 45th Street
New York, NY 10036 USA
Tel. 1-212-453-3549
Fax. 1-212-557-9066

Case: The Mathematics of Gold

International US dollar debt: $4.4792 trillion (approximately 32% of total US debt of $14.32 trillion)

Portion of international US dollar debt held by China: $1.1449 trillion

90% of total US international debt less portion held by China = 0.90 * ($4.4792 trillion – $1.1449 trillion) = $3.00087 trillion (A)

50% of international US dollar debt held by China = 0.50 * $1.1449 trillion = $0.57245 trillion (B)

Total foreign currency reserves held by People’s Bank of China (Central Bank): $3.045 trillion

Therefore, A + B = $3.57332 trillion (C)

Total US holdings of gold = 8,133.5 tonnes = 8,133.5 * 35,273.9619 = 286.900770 million ounces (D)

Therefore, C/D = $12,454.8986 per ounce ~ $12,455 per ounce

Balance of Payments is an account of financial flows between a country and the rest of the world. It consists of the Current account and the Capital account. Current account consists of the trading account (exports minus imports of good and services), income account (factor payments from abroad minus factor payments to abroad) and the transfer payments account (foreign aid received minus foreign aid disbursed). Capital account, which is in surplus on account of increasing foreign investments in US treasury securities and in deficit for increased US investments in foreign securities and reserves. A surplus in the current account should always be balanced by a deficit in the capital account and vice-versa. That is, the balance of payments must always balance.

Suppose the balance of payments account does not balance. Then there are two options to balance BOP, first, the Central Bank of the country (in this case US Federal Reserve) should increase/reduce its reserves, that is the Central Bank’s holdings of foreign currencies and gold to bring BOP to balance. Second, if the Central Bank cannot increase/decrease its reserves or has decided against changing its existing reserve holdings, then the exchange rate of the country’s currency will be decided by the market and the government will not have any control over its currency.

Now, US has a current account deficit and the BOP is balanced by capital account surplus. If the BOP was not in balance and if US wanted to keep the existing exchange rates fixed, assuming it had a BOP deficit (international debt we calculated above), then it would either have to sell foreign exchange reserves or appropriate amount of gold to the tune of $12,455 per ounce. Thus, to balance the US government balance sheet, its holdings of gold should be valued at $12,455 per ounce.

Present market value of gold = $1,528.80 per troy ounce = $1,528.80 / 1.09714286 per ounce = $1,393.44 per ounce. This means that gold is heavily undervalued at it existing market price. Thus the price of gold has to be raised 8.94 times ($12,455/$1,393.44) ~ 9 times to the present price of gold for US balance sheet to balance.


1. Link: http://en.wikipedia.org/wiki/United_States_public_debt

2. Link: http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt

3. Link: http://en.wikipedia.org/wiki/Foreign_exchange_reserves

4. Link: http://en.wikipedia.org/wiki/Gold_reserve

5. Link: http://finance.yahoo.com/

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