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Irrational in the Extreme

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If you have 200 ounces of gold coins, Jim Sinclair is giving away $500.

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Recently, Jim Sinclair - the noted metals analyst and long time bull - made an extraordinary offer on his site:

"Anyone buying on a scale down with a limit up to 200 one ounce gold coins (approximately $126,000 USD) starting from this evening's gold August 21st., I am offering a FREE PUT at your average in price for the balance of 2006, starting from the last trading day of September 2006. This is for 10% of your intended position for each ten dollar drop, should it occur, evenly spread between now and the last day of September."


He included various rules in the offer (including that purchases must be on a cash basis), but otherwise stated that his purpose for this noble act was "...to give you the conviction I have in the gold price."

Our analysis places a theoretical value of this particular put with the attendant conditions at approximately $2.50 per ounce and if you maxed out his offer with 200 ounces, you would receive an option worth about $500.

So Jim Sinclair is offering anyone with 200 ounces of gold coins a free $500.

Why, exactly, would he do that?

"...to give you the conviction I have in the gold price."

Dan Kahneman (of the 2002 Nobel prize in economics) and Amos Tversky (his collaborator who died in 1996) first identified an irrational bias called the availability heuristic, which posits that people base their prediction of an outcome on the vividness and emotional impact of the prediction rather than on actual probability.

Jim Sinclair is giving away $500 (in value) because he is suffering from the availability heuristic; he is so 'wed' to the idea that gold cannot go down (and is thus by definition herding - gold is up nearly 50% in the last year) that in order to affirm his belief (and make no mistake this is a belief because simple probability assessment would rule out a 100% chance of gold not going down), he is, literally, giving money away to reaffirm it publicly.

However smart Jim Sinclair may be about the supply and demand dynamics of the gold business, his free put offer is wholly, egregiously irrational.

If you have 200 ounces of gold coins, Jim Sinclair is giving away $500.

I encourage you to take it.

No positions in stocks mentioned.

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