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Golden oldie
Bernard Condon, 12.10.01

Having called the top of the gold market 22 years ago, a goldbug now thinks that he has found the bottom.

In 1977 James Sinclair boldly predicted that gold would rise from $150 per troy ounce to $900. Gold never reached that mark, but it came close on Jan. 21, 1980, peaking at $887.50. The next day, says Sinclair, he unloaded his entire gold position, personally netting $15 million. Pointing to the U.S. Federal Reserve's efforts to fight inflation, Sinclair then predicted at an annual gold conference that the metal would languish for the next 15 years. It did. On Friday, Jan. 20, 1995, it closed at $383.85.

So this is a guy to listen to. He's bullish again. Why? Because he believes, despite the whiff of deflation in the October producer price index, that the U.S. is headed for mild inflation. He thinks that the dollar is due for a fall. He is also impressed that mining companies, which routinely sell unmined metal forward at fixed prices to protect themselves against further price drops, have recently pulled back from placing these hedges, a move that should prompt gold prices to rise. If they do, Sinclair expects a squeeze on gold speculators, who have $36 billion in short positions. Sinclair figures that the shorts will cover their positions soon after gold hits $305, a move that could force the price to $350, even $430.

Persuaded? On the New York Mercantile Exchange you can buy an option to purchase 100 ounces of gold in six months with a strike price set at a slight premium to today's price. An option exercisable at $300 will cost you $9 an ounce. If gold hits $350 you pocket $4,100 in profits.

Sinclair is not buying just futures and options. Since 1996 he has invested $11 million to develop 5,600 square kilometers of barren land in central Tanzania that he's convinced hold vast gold deposits. Drilling on the property is still in the early stages, but Barrick Gold is already pulling metal from an adjacent site whose proven and probable reserves have nearly tripled to 10 million ounces in the past two and a half years.

It's a gamble not many investors would make, but Sinclair has always stood apart from the crowd. On the walls of his office hang six photographs of Shri Sathya Sai Baba, a guru in India whom Sinclair visits several times a year. Sinclair's love of carrot juice recently turned into a 25-kilo-a-week habit that was brought to a halt only when his doctor grew alarmed at the orange tint to his skin. A loner, Sinclair paid $3 million in 1983 to turn a 19th-century barn into a reception hall for his house but has held only three parties there.

After his 1970s career as a goldbug, Sinclair retreated to his Connecticut estate, where he played with his helicopters, show ponies and collection of Ferraris. He didn't stay idle long. He built cable systems at Cross Country Cable, a company he started with two friends, then made millions selling some of them to John Malone's TCI.

"Jimmy is different," says his onetime cable partner Vincent Tese, the former New York State banking commissioner and now a Bear Stearns director. "But in the trading business people don't care if you're purple, just as long as you're making money."

In 1989 Sinclair got back into metals after buying a small stake in a Vancouver, Canada, mining company called Sutton Resources. During a trip to Tanzania for the company that year to check out a potential nickel site, Sinclair became intrigued by a 140-square-kilometer patch of land called Bulyanhulu. It was studded with greenstones, volcanic rocks marked by long seams that are often rich in minerals. Some greenstone mines, such as those in Canada's Kirkland Lake Camp, have been yielding gold for a century and do so now at the relatively low cost of $200 an ounce.

"The opportunity stared at me as it did with cable and gold," he says. "The only way to make big money is to have the courage to put your eggs in one basket."

Sinclair helped Sutton buy rights to mine Bulyanhulu, then lobbied for it to do the same in adjacent lands. Sutton balked and eventually sold Bulyanhulu to Barrick. Sinclair decided to go it alone.

By the summer of 1999 he had invested $4 million in the lands near Bulyanhulu. He faced a sickening prospect. Gold had just hit a 21-year low of $246. Bears were predicting $150 soon, a price that could wipe out the profits from even the most efficient of Tanzania's mines.

"I felt a pit in my stomach, like hunger," Sinclair recalls. "When I was a young trader, I used to think that I was invincible. Now I feel the risk."

Simple logic mitigated his fears. It costs most companies $250 (including back-office support) to extract an ounce of gold. With gold trading below cost, it made no sense for mining companies to hedge against further price reductions. Recognizing that such hedges meant that an important force pulling gold down would soon disappear, he reasoned that the bottom was near.

Over the next nine months Sinclair spent $1.5 million on tests that measured magnetic pull to help locate seams in his greenstone. Soon after the tests ended, in February 2000, news broke that some big mining companies had indeed stopped placing new hedges. Sinclair reached into his pocket for $5 million to buy more mining rights in surrounding lands. Barrick expects that the $199 an ounce it is paying to mine gold at Bulyanhulu will drop to $130 over the next three years.

Sinclair hopes to sell his operation to a big mining company soon. To do that he'll need to prove that his gold can be as richly mined as it is in Bulyanhulu. And pray that bullion doesn't plummet again.

Sinclair's bullishness is catching on. One well-regarded bear, Andrew Smith of Mitsui, surprised the markets in September by announcing that he expects the metal to go to $340.