Schmidt-GoldThoughts-23March2010

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SCHMIDTS GOLD THOUGHTS (23 March 2010):

A time existed when accepted thinking was that the Earth was flat. As it was not, that thinking made

for some difficulties. One matter made difficult by this wrong headed belief was navigation. How

does one get a ship from one location to another with the wrong map? Well, it was accomplished

by a set of rules twisted to enable successful navigation despite the wrong theory or framework.

A similar problem exists today, except that navigation is not successful. Our world continues to

operate with misguided belief that Keynesianism is a properly constructed economic framework for

policy making. Nations continue to attempt to navigate the economic waters, only to be dashed on

rocks due to a faulty map.Keynesianism is the flat earth theory of today.

Have the Greeks learned an important lesson? Such as: Beware of Keynesians bearing ideas. No one

else seems to have learned, but maybe the Greeks will show the way. Actually, we have little hope

for the rest of the world. The Keynesians continue to mislead the masses.For example, if the U.S.

would just borrow more than the $1.605 trillion dollars that it did this past year, prosperity would

be assumed. We all of know such thinking is nonsense. However, that is the wisdom of theKeynesian henchmen serving in the Obama Regime.

Part of the failure of modern Keynesianism is that collectively it does not understand money. It fails

to recognize the importance of money, how money is created, and the implications of money. Under

the Keynesian led Federal Reserve, the financial system has been ravaged. It may indeed be now

largely dysfunctional. One of the ramifications of that situation is the faltering money supply

growth portrayed in the above chart.

U.S. money supply growing at only about a 2% rate has some serious ramification. It means, first,

that if one strips out the debt financed spending of government, the U.S. economy is not growing.

8,000

8,200

8,400

8,600

0%

2%

4%

6%

8%

10%

16.0209 8.0609 28.0909 18.0110

US M-2, Left Y-T-Y %, Right Axis


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Lack of money supply growth stems from a lack of bank lending. Without bank lending any

economy, including the U.S., will have great difficulty expanding.

Lack of money supply growth has implications for the pricing environment. U.S. money supply

growth is non inflationary at the present time. Price pressures that might exist, such as in oil, stem

not from the withering U.S. economy, but from economic growth in China. China is not apparently

impeded by Keynesian economic thinking as of yet. Chinas other advantage is that the governmentseems to favor creating wealth rather than destroying wealth as is the case with the Obama Regime.

As apparent in the table below from the elves at the Federal Reserve Bank of Cleveland, the U.S.

pricing environment does not exhibit any meaningful inflation at present time.

With anemic money supply growth and a non inflationary environment domestically, little reason

exists for the U.S. dollar to depreciate. Rather, the U.S. dollar is becoming rarer on a relative

basis. That set of conditions actually suggests that the U.S. dollar should appreciate, as it has been

doing. This set of circumstances may change in the future, but that is the situation at the present.

Expectations of the U.S. dollar depreciating in the immediate future, ceteris paribus, are not

supported by the data.

In reflecting on all this, remember the incredible record of the Federal Reserve. Hamstrung by

Keynesian dogma, it has never got it right. When a batter strikes out every time, one must assume

that the batter will continue to do so. NOTE, we are going to assume that the massive negative

implications of the nationalization of the U.S. health care system by the Obama Regime will take

some time to unfold. The additional debt to be created by this action will increase the need for and

size of future debt monetization. Therefore, this event removes any doubt of the need for U.S.

Source: Federal Reserve Bank of Cleveland


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investors to own Gold in the long-term.

Flip side of U.S. dollar appreciating is a lethargic price for $Gold, in the short-term. Little reason

exists for $Gold to move materially higher immediately. As a Major Wave II is likely dominating,

an important bottom should occur by end of Summer. Risk is still to U.S.$970. Note that assuming

$Gold is currently in a Major Wave II is consistent with the monetary picture painted above. U.S.

dollar-based investors should be adding to their Gold holdings as prices move lower. Major WaveIII does lie ahead.

Investors not living in U.S. dollars may have a different view, given whatever their currency has been

doing. Currency values for years have not reflected the fundamentals, but rather the herd thinking

of the investment funds. At the present time, the highest risk situation is the Canadian dollar.

Canadian investors should be using over valued Loonie to aggressively buy Gold.Indian investors

should likewise be aggressively adding to Gold holdings. Rupee is over valued relative to Gold.

EU investors should be adding to Gold if the Euro price of Gold weakens. The latter two groups

should also be buying Geiger counters given their proximity to the soon to exist Iranian nuclear

arsenal, another gift from the Obama Regime.

GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a joyous mission to save

investors from the financial abyss of paper assets. He publishes The Value View Gold Report,

monthly, and Trading Thoughts, weekly. To receive these reports, go to

www.valueviewgoldreport.com

$700

$800

$900

$1,000

$1,100

$1,200

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

4.0609 29.0709 22.0909 16.1109 12.0101 8.0310

$Gold Oscillator Buy

Do Not Buy

Source: www.valueviewgoldreport.com

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Schmidt-GoldThoughts-23March2010