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Gold is now consolidating its back-to-back new record highs that it made in May and June.   Gold is building a strong base and the short, intermediate and long-term indicators are very bullish.  Gold is setting its sights on $1,350.  However, it won’t be a straight line up. There will be zigs and zags higher. Important support lies at $1,212 followed by $1,149 but I think the odds of testing these lows are remote.

Let’s get a loan

One of the topics that I’ve covered is that M-3 is collapsing because the banks are parking their funds in Treasuries instead of making loans.  But there is a difference between making an “abstract” statement like that, and actually going out and applying for a loan.

Since I started Miles Franklin, 20 years ago, I have never taken out a business loan and other than the mortgage on our house, haven’t taken out a personal loan either.  Recently, I needed some extra cash and considered selling some of my mining shares or precious metals to raise the funds.  I decided that it was a foolish way to raise the cash, since I expect the price of these assets to rise dramatically in the next 12 months, so I paid my banker a visit.  I am a highly qualified applicant.  My company runs around $100 million a year through the bank, and I have been a customer there, with both personal and business accounts, for the past six years.  My credit is unblemished.  My net worth and salary are well beyond what is necessary for the size of the loan, plus, I have lots of collateral to cover the loan.

I sat down with the President of the bank, who I know personally.  He worked directly with me six years ago when I took out a $450,000 pre-construction loan on the house Susan and I were building.  We had a friendly conversation, I gave him all of the paper work that I had filled out in advance, including my last two years tax returns, both personal and corporate, and I even offered to give him, on the spot, his choice of stock certificates or physical gold to fully cover the amount of the loan I was asking for.

Naive me, I actually expected to walk out of the bank with the loan.  Not so – he told me it would take two days to go over the paperwork and they would get back to me.  That was last Monday.  On Friday, I still had not heard back from the bank so I called and found out that the request had to go through their Loan Committee, which caused the delay, and that they would give me the loan and would accept my collateral as follows:  twice the value of the loan if it was in gold coins; if I used my stock certificates of gold and silver mining companies they would value them at 33 cents on the dollar.

I am one of the banks top rated customers, yet I felt like I had to beg for a rather small loan and then, had to put up solid collateral worth two to three times the amount of money that I was asking for.  It seems the only way to get a loan these days is to prove that you don’t need it, and I really don’t – except it would be foolish to sell gold for $1,300 today knowing full well it will be worth $2,000 a year from now.

Friday night, we had dinner with some friends.  I told my tale to one of them and he said he had experienced the same thing at his bank recently too.  He is worth tens of millions of dollars and has been doing business with his bank for decades.  He is always borrowing money from his bank to purchase expensive “collectables,” and always repays his loans.  He was as surprised as I was at the difficulty he experienced in raising money.

Now I understand why bank lending has pretty much ground to a halt, at least for the consumer and the small businessman.  I see why M-3 is collapsing.  The broad money supply (M-3) expands or contracts based on the willingness of banks to make loans.  That’s what fractional reserve banking is all about.  A shrinking M-3 leads to a shrinking economy!  If this does not reverse itself, Great Depression 2, here we come.  If the Mogambo Guru were writing about this he would no doubt say “we’re freaking doomed!”

Going For Gold

In the Business Section of the Sunday edition of the Minneapolis Star Tribune, there was a long article titled “Going for Gold.”  I was interested to see what the writer, Kara McGuire had to say.  It started out as follows:  “Mark Pearson wishes he had a buck for every time he heard a commercial touting gold these days.  But if he did, he certainly wouldn’t buy bullion.  ‘Are there better investments than gold?  Absolutely,’ Pearson, founder and chief investment officer of Anchor Capital Management said.” She then quoted Harry Milling, Morningstar.com mutual fund analyst, who said “If there’s one silver bullet, you can bet your bottom dollar that that silver bullet is going to be overpriced.” Milling continued, “You have the ‘smart money’ that gets in and you have the froth after that.”

Kara McGuire stressed that you should “Ask yourself why you’re buying the precious metal before pulling the trigger.” Unfortunately her choice of “experts” and information never answered the question in any meaningful way.  It was a typical white-wash media article on gold, the very kind of article that keeps John Q Public on the sidelines.  I couldn’t help myself, I sent her an email.

Dear Ms. McGuire,

My wife said David, look at this, there is an article on gold in today’s paper.  That in itself is rather uncommon, in spite of the fact that gold has outperformed ALL other financial assets for the past 10 years.  I put down the sports page and moved to the Going For Gold article.

I want to compliment you on the first third of the article.  The graph was great!  Well done.  But that was the highlight of the article.

You start off on the right foot.  Your opening is “Ask yourself why you’re buying the precious metal before pulling the trigger.”  Then you proceed to quote three sources who give you reasons why not to buy gold, or at best, steer the reader into “paper” gold such as the ETFs or mining shares.

Nowhere in the article was it even mentioned that gold is “money” and not a commodity like copper or lead.

I always thought that good reporting was supposed to be balanced.  This article is anything but balanced.  The sources you chose to quote are anything but “gold experts.”  Yes, there are gold experts – people like John Embry of Sprott Asset Management, Richard Russell or Jim Sinclair, the most highly respected voice on gold in the ’70s or even John Paulson, the king of the hedge fund managers, who personally has invested billions of dollars of his own money in gold.

Richard Russell recently wrote, During the last ten years the Dow has lost value while gold has more than tripled, both in dollars. I think that comparison is telling us something. Sophisticated investment money looks for safety first. The stock market is not seen as a safe-haven. But gold, which pays no dividends or interest, is seen as the ultimate safe haven. Why? Gold is beholden to no government or central bank. Gold cannot be devalued nor can it be destroyed by government-sponsored inflation or government edict.

The most “basic” reason for the bull market in gold is that globally, smart money is moving out of “fiat” paper currency and into the premiere, time-tested form of money, gold.  Gold is at an all-time high in virtually every major currency including the Euro, British Pound, Swiss Franc and Japanese Yen.  The bull market is NOT confined to the Dollar.

Gold is up 400 percent in the past ten years and is up $300 an ounce in the past twelve months.  Why all the interest in gold?  Because the Federal Reserve is expanding our money supply at a rate that defies all logic.  The Dollar is being watered down and is losing value rapidly.  The Dollar today, is worth less than three cents of its 1913 value!  If you can look at the chart below, which shows the Fed has expanded the Adjusted Monetary Base by nearly $1.2 trillion in less than 18 months, and still not understand why smart money is moving into gold then there is little hope that I can open your eyes to what is really happening.

The next chart answers the question, left unanswered in your article, as to whether or not gold is in a bubble.  The following chart clearly answers that question.  If you want to see what a bubble looks like, take a look at the US 30-year bond!

Adjusted for inflation, gold should be selling for more than $2,300 an ounce to equal its 1980 peak.  That is using the current and understated CPI.  Using the CPI in use at the time of the last peak, gold would have to pass $7,000 an ounce to hit the previous inflation-adjusted high.  Bubble?   Only to people who don’t do their research.

If you are interested in real research on gold, I am attaching a link for you to the Erste Group. They are a highly respected Austrian Bank. http://www.gata.org/files/ErsteGroupGoldReport-06-2010.pdf
I have been in the precious metals industry for 27 years.  My firm does over $100 million a year in sales.  I have written numerous articles on gold and the economy and have appeared on the radio and at financial seminars throughout the world since the mid ’80s.  There is a gold story to be told, but not the one you presented.