$1 Million From 5 Months in Gold
In April 2008, legendary gold investor Jim Sinclair made a $1 million bet that gold would exceed $1650 by January 14th 2011. At the time, Sinclair had stated that he believed his bet was conservative and that gold would probably be much higher. However, with gold hovering near $1200 the market is betting against him and there are only 5 months remaining. Intrade, a predictive betting market, currently has the odds of gold exceeding 1550 by the end of 2010 at 5 percent. This implies that anyone willing to take Sinclair's bet today from the long side is unlikely to win - but also that the payoff would be enormous if payouts were based on the perceived odds using call options.
A $450 increase in gold would be an increase of 37.5 percent, a rate of $90/month or roughly $4 per trading day for 5 months. On an annual basis, this would be near a 100 percent return. Perhaps there is something that Sinclair knows and others don't.
Projecting an exponential moving average, gold would be around $1300 by January. However, gold tends to have larger seasonal moves during the August to January timeframe. Comparing the change from August lows to January highs over the last 10 years, gold rose by an average of 20 percent. Using this average, gold would be roughly $1440 by January. This isn't enough to win the bet, but few investors would be disappointed with such a move. Once in the last 10 years, the 37.5 percent increase was exceeded. From August 2007 to January 2008, gold rose by 40 percent from $657 to $924. The second largest move was between August 2005 and January 2006 when gold rose by 32 percent from $431 to $569.
Given the above data, the odds of gold topping $1650 by January still seem low - perhaps near 20-25 percent. However, Sinclair may be factoring in the likely hood of an event that could launch gold higher. If any of the events below occur, gold could easily top $1650:
War/and or Oil Crisis - Increased tensions in various strategic locations throughout the world could cut off the supply of oil to the US. Potential locations include Iran, Iraq, Pakistan, Venezuela, and Russia.
Major Currency Devaluation - This could be either the US dollar, Euro, or Yen. It could happen over night or over a weekend. Gold would likely gap much higher on such news, just as when it was revalued in 1933 from $20 to $35 an ounce overnight.
Quantitative Easing 2.0 - The Federal Reserve could initiate another round of financial asset purchases. This would not have the same effect as the first round. Equity markets would likely see little gain; however precious metals would be given a stronger dose of buying.
While it is difficult to estimate the odds of these events, they are more likely than most perceive. Perhaps Sinclair will win his $1 million after all. However, if he proves to be wrong on his bet then investors should be grateful that they have more time to buy gold on dips.
A $450 increase in gold would be an increase of 37.5 percent, a rate of $90/month or roughly $4 per trading day for 5 months. On an annual basis, this would be near a 100 percent return. Perhaps there is something that Sinclair knows and others don't.
Projecting an exponential moving average, gold would be around $1300 by January. However, gold tends to have larger seasonal moves during the August to January timeframe. Comparing the change from August lows to January highs over the last 10 years, gold rose by an average of 20 percent. Using this average, gold would be roughly $1440 by January. This isn't enough to win the bet, but few investors would be disappointed with such a move. Once in the last 10 years, the 37.5 percent increase was exceeded. From August 2007 to January 2008, gold rose by 40 percent from $657 to $924. The second largest move was between August 2005 and January 2006 when gold rose by 32 percent from $431 to $569.
Given the above data, the odds of gold topping $1650 by January still seem low - perhaps near 20-25 percent. However, Sinclair may be factoring in the likely hood of an event that could launch gold higher. If any of the events below occur, gold could easily top $1650:
War/and or Oil Crisis - Increased tensions in various strategic locations throughout the world could cut off the supply of oil to the US. Potential locations include Iran, Iraq, Pakistan, Venezuela, and Russia.
Major Currency Devaluation - This could be either the US dollar, Euro, or Yen. It could happen over night or over a weekend. Gold would likely gap much higher on such news, just as when it was revalued in 1933 from $20 to $35 an ounce overnight.
Quantitative Easing 2.0 - The Federal Reserve could initiate another round of financial asset purchases. This would not have the same effect as the first round. Equity markets would likely see little gain; however precious metals would be given a stronger dose of buying.
While it is difficult to estimate the odds of these events, they are more likely than most perceive. Perhaps Sinclair will win his $1 million after all. However, if he proves to be wrong on his bet then investors should be grateful that they have more time to buy gold on dips.