SCHMIDT’S 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 the
Keynesian henchmen serving in the Obama Regime.

8,600 10%

8%
8,400
6%

4%
8,200

2%

8,000 0%
16.0209 8.0609 28.0909 18.0110

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

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.
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. China’s other advantage is that the government
seems 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.

Source: Federal Reserve Bank of Cleveland

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.
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 Wave
III does lie ahead.

2.0 $1,200
1.8
1.6 $1,100
1.4
1.2 $1,000
1.0
0.8 $900
0.6
0.4 $800
0.2
0.0 $700
4.0609 29.0709 22.0909 16.1109 12.0101 8.0310
$Gold Oscillator Buy
Do Not Buy

Source: www.valueviewgoldreport.com

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