Up Is Down and Down Is Up

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October 2009                                            Written by David Schectman                                         Issue 7

                                                                                                          In This Issue
 Up Is Down and Down Is Up                                                                                Inflate or Die                  .................2

                                                                                                          The Dow : Gold Ratio . . . . . . 4
 This report was written to explain why you must own gold now. After
 studying the gold market for 35 years, I can state with certainty, the                                   How Much Gold
                                                 reasons to own gold                                      Is Enough? . . . . . . . . . . . . . . . . . . . . . 5
                                                have never been this                                      Common Arguments,
                                                strong. Simply stated,                                    Myths, and Points of
                                                you can no longer afford                                  Criticism About Gold                             .....5
                                               to be without this type
                                                                                                          Gold is Money . . . . . . . . . . . . . . . . 6
                                               of financial insurance.           David Schectman
                                                Do you have fire                                          How can I buy gold?
                                               insurance, car insurance, health insurance and             Should I buy coins
                                               life insurance? Of course you do. You can’t                or bars? . . . . . . . . . . . . . . . . . . . . . . . . . 7
 afford the risk of not having                                                                            Gold IRAs                 .....................7
 insurance. But do you have
 portfolio insurance? Do you have
 insurance to cover your losses as
 the dollar loses value? Yes, the
 dollar has been losing value since
 2001 and many of you are                                                                                 Gold Nuggets
 probably not even aware of it. You
 still have time to protect your                                                                          “Historically, bonds have
 portfolio. What will it be, all                                                                           always turned out to be
 dollars or some gold backing?                                                                             ‘certificates of guaranteed
 The dollar peaked around 127                                                                              confiscation.’ ”
 seven years ago (as measured by
 the US Dollar Index which is computed using 6 currencies, including the euro and the yen).                                —Ludwig von Mises
 It is currently 76 and falling. The dollar lost 37% of its USDX value in the last 7 years. It will
 likely test 72 in short order. Below 72 there is no support, no bottom. Once 72 is breached,             “Gold is NOT going to ONLY
 and it will be, then it’s down to 62, 52 and even lower. The dollars status as the reserve                $1650. Gold is going to
 currency of the world is coming to an end. There is a growing movement, led by China,                     exceed $1650 by orders of
 Russia, Brazil and strong factions in Europe to replace the dollar as the world’s reserve                 magnitude for reasons
 currency, a position it has maintained since the end of WWII.                                             that are simply shocking.”
                                                                                                                                        —Jim Sinclair
                                                                                 Continued on next page
    Cover Story from page 1                                       to 1971) there was a limit to how many dollars could be
                                                                  created by the government. Without a gold standard, or
    How will a falling dollar affect your portfolio?
                                                                  an “anchor” to the dollar, the government was free to
    Commodities are priced — or denominated in dollars.
                                                                  print as many dollars as it desired. And, as is always the
    When the dollar falls, commodities rise. Oil costs more.
                                                                  case, the more money that is created, the less its value.
    Lumber, copper, tin, cotton — the basis of virtually
    everything that we consume and import will rise in            Inflate or die
    price in lock-step with the falling dollar.
                                                                             Since the crash of 2008, the economy, the real
                                                                             estate market and the stock market have been
                                                                             perilously close to falling off the edge of a
                                                                             cliff. Some would say that it has already
                                                                             happened. The Obama administration and
                                                                             the Bernanke-led Fed have publicly stated
                                                                             that they stand ready to create as much
                                                                             money as it takes to prop up the economy
                                                                             and the markets. And sure enough, they are
                                                                             doing it at a frightening pace. Will they be
                                                                             successful? Let’s hope so, but in any case, the
                                                                             result will be a massive creation of new
                                                                             money and the inflation that accompanies it,
                                                                             and of course the continued collapse of the
                                                                             Please understand that in spite of what you
                                                                             may read or hear from Wall Street or Bubble
                                                                             Vision (CNBC, Bloomberg, etc.), an
                                                                             explosion in the money supply and a fall of
                                                                             the dollar is imminent! And that goes for the
    Another way to express the fall of the dollar is to look at
                                                                             Fed as well. Alan Blinder — former Vice
    the loss in the dollar’s purchasing power since the US
                                                                             Chairman of the Federal Reserve — appeared
    went off the “gold standard” in the fall of 1971.
                                                                             on PBS television in the 1990’s and uttered,
                                                                             “The last duty of a central banker is to tell the
                                                                             public the truth.”
                                                                             You will either be positioned to take
                                                                             advantage of the dollar’s fall or you will
                                                                             become its victim.
                                                                             There is nothing that will offer you better
                                                                             protection than physical gold. Gold is rising
                                                                             against every major currency in the world.
                                                                             Here are two charts showing the rise of gold
                                                                             in dollars and euros. Jim Sinclair, in my
                                                                             opinion, the finest gold analyst on the planet,
                                                                             guarantees that gold will top $1,650 by
                                                                             January 2011 and expects to see gold reach at
                                                                             least $3,000 to $5,000 in the next few years. A
                                                                             sure way to lose your money is to bet against
                                                                             Sinclair. Citigroup is calling for gold to rise
                                                                             above $2,000.
                                                                  On the 5-year weekly chart for gold we can see that
    It should come as no surprise that the loss in purchasing     everything is now in place for a MAJOR RALLY in gold
    power paralleled an explosion in our money supply. It         to commence. It has managed to hold the high ground
    should also come as no surprise that the increase in our      for weeks following its upside breakout from a triangle,
    money supply occurred after Nixon took us off of the          and is repeatedly pushing at the resistance approaching
    gold standard. When the dollar was backed by gold (prior      its highs. Yesterday's action was strongly bullish. With all

moving averages in bullish
To conclude, gold is in position to
embark on a major uptrend here
that is expected to result in a
30%–60% gain in the space of
about 6 months. Silver should
make spectacular gains during the
same period .
Gold is one of the only investment
assets to survive the global asset
crash of the last several years. It is
also one of just a small handful of
investment assets that is still worth
more now than it was in 1999.
The strongest markets are in the
gold and metals sectors. Most
important, it’s not too late to add
gold to your portfolio.
Over the last ten years, gold has
destroyed virtually every asset class
on the planet as you can see from
the graph on the next page
(“Precious Metals vs. Major
Investment Indices”).
The new growth engine for the
economy is government spending.
We are in the early stages of a
global government spending spree
of unprecedented proportions
which, coupled with zero percent
interest and extraordinary money
supply growth, will be hugely
inflationary. Financial assets will
continue to lose purchasing power
in this kind of environment, but
gold and precious metals will hold
theirs because they are a proven
hedge against an investor’s two
worst enemies — inflation and
economic turmoil.
In recent years, the US money sup-
ply has been growing at an alarm-
ing rate. In 2008, despite a slow-
down in lending and credit, money
supply still grew dramatically with
M3 (the broadest measure of
money supply) increasing at about
11%. In 2009 the money supply is
still growing at approximately 9%
                      Continued on page 4

    CONTINUED from page 3   on an annualized basis. Over the
                            long term, M3 increases have been
                            the best leading indicators of
                            future increases in the price of
                            goods and services.
                            Precious metals have successfully
                            preserved wealth for thousands of
                            years because, unlike stocks and
                            bonds and paper currencies, they
                            are not someone else’s promise of
                            performance and they are not
                            someone else’s liability. Massive
                            credit expansion has put US debt
                            at over $11 trillion, but if the $60
                            trillion in unfunded pension
                            liabilities and Medicare obligations
                            that the US owes its citizens, actual
                            debt is approaching a staggering
                            500 percent of GDP.
                            America’s spiraling debt crisis is
                            leading many experts to consider
                            the previously unthinkable: that
                            the US might become the next
                            Argentina, which famously
                            defaulted on its debt ten years ago.

                            The Dow:Gold Ratio
                            In 1999 it took 40.6 ounces of gold
                            to “buy” the Dow (11,497 divided
                            by the gold price of $283.22).
                            Currently, with the Dow at 9,685
                            and gold at $1043 it takes 9.3
                            ounces of gold to buy the Dow.
                            Clearly, gold has trounced stocks
                            in this decade! Gold has
                            outperformed the Dow by a factor
                            of 4.5 times! What is even more
                            important for you to understand is
                            that this is a long-term trend. In
                            the past, it has taken as little as 1
                            ounce of gold to buy the Dow.
                            In 1933, when gold traded at $35
                            an ounce, the Dow bottomed out
                            at 50. On January 21, 1980 gold
                            peaked at $850 and the Dow
                            closed at 870. According to
                            investment guru, Jim Rogers,
                            “Gold is going to be much higher
                            over the course of the bull market,
                            in a decade or however long it
                            lasts.” Rogers, who in the past has
                            criticized the Federal Reserve for
                            being lax on inflation, considers

gold the ultimate safe haven in times of financial stress.       It could do this in a number of ways. For example, gold
John Hathaway, who manages $1 billion at the Tocqueville         could shoot to $1,500 while the Dow moves down to
Fund, sees gold soaring for several reasons, including ris-      9,000. Or, gold could move to $2,000 while the Dow
ing inflation and the rather interesting fact that in two pre-   shot up to 12,000 as inflationary pressures saw money
vious instances the price of an ounce of gold and the level      chase equity prices higher. In the event of a deflationary
of the Dow Jones industrial average have come close to           paper equity collapse, the Dow could drop to 6,000
converging. Tocqueville sees something similar happening,        while gold hovered around $1,000.
with gold rocketing to $5,000 or $10,000 an ounce (the           Regardless, the point is that the TREND in the ratio is
Dow is now at about 9685).                                       decidedly DOWN and no amount of monetary-official
The following graph is crystal clear. Stocks are FALLING         chicanery and spin by feckless political leaders can do
against gold. Which asset do you own, gold or blue chip          anything to alter that sobering reality. This is the hard
stocks? Which do you really think you should own,                reality that the debauchery of the US Dollar has wrought
going forward? The answer really is obvious if you are           and the future that the carry trade has in store for the US.
interested in preserving your wealth. The day will come
                                                                 How much gold is enough?
when your money manager or stockbroker finally tells
you to buy gold or silver but when it finally happens it         In 2005 Ibbotson Associates prepared a report that
will cost you a great deal more to make the purchase.            investigated the role of gold, silver and platinum as a
                                                                                          strategic asset and inflation hedge
                                                                                          in a portfolio. Their research
                                                                                          covered a 29-year period and the
                                                                                          results were as follows: “Investors
                                                                                          can potentially improve the
                                                                                          reward-to-risk ratio in
                                                                                          conservative, moderate and
                                                                                          aggressive asset allocations by
                                                                                          including precious metals with
                                                                                          allocations of 7.1%, 12.5% and
                                                                                          15.7% respectively. These results
                                                                                          suggest that including precious
                                                                                          metals in an asset allocation
                                                                                          could increase expected returns
                                                                                          and reduce portfolio risk.”
                                                                                          It’s time to preserve your
                                                                                          portfolio’s purchasing power.
                                                                                          Miles Franklin suggests a
                                                                                          minimum 10% allocation in
                                                                                          precious metals in a bull market,
                                                                                          but a much larger allocation of
                                                                                          20% or more is suggested for
                                                                                          protection in a secular bear
The last three major stock market bubbles ended with             market. If you have not already done so, now is the time
the Dow:Gold ratio above 18:1, while the last two major          to rethink your investment strategy and preserve your
bear markets (1932 and 1980) ended with the ratio near           hard-earned wealth. Physical bullion will keep its value
1:1 At the height of the equities bull market in 1999, the       regardless of whether the economy is headed for
Dow:Gold ratio peaked at over 40:1. But now the                  inflation, deflation or hyperinflation.
current ratio is below 10:1 and falling. It is certainly not
                                                                 The most common arguments, myths,
too late to increase your allocation to gold and precious
metals.                                                          and points of criticism about gold
                                                                 Myth #1: Gold is (too) expensive.
If this ratio falls through the level of 9 once again, it will
continue to decline back to levels seen during the decade        One might as well say that it is not the price of gold that
of the ‘80s with the ratio reverting back to its affinity to     rises, but the value of the respective paper currency that
move between 3 and 6.                                            falls. Gold preserves purchasing power and in fact even

    CONTINUED from page 5                                           In 1977 Roy Jastram published a study of gold titled
                                                                   The Golden Constant. He devised a way to measure the
    increases it gradually. The inflation-adjusted all-time
                                                                   purchasing power of gold since 1560. He then analyzed
    high of one ounce of gold is currently $2358. Gold would
                                                                   the behavior of that purchasing power in periods of
    have to rise to $2358 to equal its inflation–adjusted high
                                                                   inflation and deflation; and assessed the extent to which
    reached in 1980. Gold would have to increase 227% to
                                                                   gold served as a hedge during inflationary periods and a
    reach its 1980 high. Only then could one claim that gold
                                                                   conservator of purchasing power during deflationary
    was high. Oil has recently passed its real highs of the
                                                                   periods. He concluded that gold actually performed
    1980s for the first time. We expect a similar scenario
                                                                   better in periods of deflation than in periods of
    for gold.
    [Adjusted for Inflation, Gold is nowhere near its all time
                                                                   Myth #5: Gold does not have the relevance that it used
    peak — in real terms, it’s only about half its prior highs]
                                                                   to in today’s modern society
                                                                   If this were the case, the central banks would have
                                                                   already sold their gold holdings. The central banks are
                                                                   no longer selling their gold and in fact are starting to
                                                                   buy gold (China, Russia, etc.).
                                                                   Myth #7: Gold is only a crisis investment.
                                                                   Not true at all. A comparison of gold with equities puts
                                                                   this statement into perspective. It took the Dow Jones
                                                                   Index until 1954 to pass the previous highs of 1929. The
                                                                   Nikkei is still 75% off from its all-time high in 1989. The
                                                                   Dow Jones has achieved a cumulated performance of
                                                                   1,400% since 1971. In the same period, gold has
                                                                   increased by a factor of 2,970%. In addition, many
                                                                   studies have shown that gold as part of your portfolio
                                                                   reduces overall risk and improves performance. The
    Myth #2: Gold is of no interest to euro investors.             Swiss bankers have always recommended at least 5% to
    The average increase in gold, per year since 1971 has          10% in gold at ALL times.
    been: US Dollars 10.8%. Euro 9.5%. British Pounds
    6.5%. Gold has increased an average of 14.07% against          Gold is money
    all of the major USDX currencies — US Dollar,                  We have often talked about gold’s role in the monetary
    Australian Dollar, Canadian Dollar, Euro, Indian Rupee,        system. For many years it was tossed aside as a barbaric
    Swiss Franc and British Pound. Gold is outperforming           relic and the thinking was that it was old fashioned. Nixon
    virtually all other investments in every major country.        reinforced this in the 1970s when he closed the gold
                                                                   window by taking the US dollar off the gold standard. An
    Myth #3: Gold does not pay interest.
                                                                   energetic economy then became most important.
    Yes, it’s true, but gold overcompensates the lack of
                                                                   But in spite of the generally strong US economy and the
    interest payments by preserving its value and purchasing
                                                                   growing global economies since the 1970s, the dollar has
    power. The US Dollar has lost over 97% of its
                                                                   been weakening. Gold has been moving up quietly this
    purchasing power since the creation of the Federal
                                                                   decade and your average person or investor is still
    Reserve in 1913 but gold has increased by a factor of 50
                                                                   essentially unaware of its strength, but that will likely
    during the same period. The dollar has lost over 80% of
                                                                   soon change.
    its purchasing power since 1971. Gold has increased
    nearly 30-fold in the same time frame.                         Iran announced late last month that its foreign currency
                                                                   reserves would henceforth be held in euros rather than
    Myth #4: In periods of deflation, gold is a bad
                                                                   dollars. Since gold is denominated in dollars, as the
                                                                   dollar falls, gold rises inversely. Therefore, a falling dollar
    In periods of deflation, cash outperforms all other asset      is countered by a rise in the price of gold.
    classes. This should also apply to gold. In an environment
                                                                   The world trusts central bank-created fiat money less
    of expansive central bank policy, like now, gold is surely a
                                                                   and less. There is only one currency that is outside the
    currency of the highest quality and should therefore
                                                                   system and that stands on its own via its intrinsic value.
    outperform the market. And it has, since 2001.
                                                                   That currency is gold.

How can I buy gold?                                           Miles Franklin main                                     1-800-822-8080
Should I buy coins or bars?                                   Andrew Schectman                                            1-800-255-1129
You can purchase gold in either bars or coins. One  
ounce (of .999 fine gold) coins are the norm and are          Joel Kravitz                                                1-877-375-1365
minted in the US, Canada, Austria, China and South  
Africa. The one ounce American Eagle is the most              Bob Sichel                                                  1-800-814-3224
popular coin in the US. Bars are also available in one
ounce, ten ounce versions, and ten and one hundred            Michael Spector                                             1-800-963-3177
gram versions. Since the price of gold is quoted “per
ounce” the most popular way to buy gold is in one             Derek Winebarger                                            1-866-476-0013
ounce bars or coins. It makes no difference what the
shape is — bar or round, and it makes no difference           Shane Spector                                               1-888-347-7137
whose portrait is on the face of the coin. An ounce is an
ounce is an ounce. Some forms are a bit less expensive        Jason Cohen                                                 1-877-242-2788
when you purchase, but they will bring less when you
sell. The main thing is to accumulate as many ounces as       Walter Patrick                                              1-877-867-7293
you can and worry not about the shape, design or    
country of origin.
                                                              FOR CLIENTS OF
At Miles Franklin, prices are locked in on a verbal order
                                                              Harold Rosen                                                1-800-500-7547
(much like a stock with your broker) and product is 
shipped after your funds have cleared the bank. The
                                                              Jim Ehmke                                                   1-866-805-9115
process is the same when you decide to sell. A firm price
is quoted and funds are sent to you as soon as we receive
                                                              David Upham (resides in Washington)                         1-888-447-7296
your gold. Actually, it is an easier and faster sale than a
stock, which requires a longer clearing period before
your funds are sent to you. Call us at 1-800-822-8080.        Drew Mason                                                     610-326-2000
Gold IRAs                                                     Ross Kiefer                                                    800-822-8080
We can also set you up with an IRA or a Roth IRA in
precious metals. You can own gold, silver or platinum in      Jackie Dahl, Office Manager                                 1-800-822-8080
your precious metals IRA. The best part is that you can
take distributions in the PHYSICAL metals, or cash,           Zhanna Schectman, Webmaster
whichever you wish. We strongly recommend that you  
utilize this form of gold ownership. Call us at 1-800-822-
8080 for information.                                         Readers are advised that the material contained herein is solely for information
                                                              purposes. The author/publisher of this letter is not a qualified financial advisor
                                                              and is not acting as such in this publication. The Miles Franklin Report is not a
Who is Miles Franklin?                                        registered financial advisory. Subscribers should not view this publication as
                                                              offering personalized legal, tax, accounting, or investment-related advice. All fore-
Miles Franklin has been in business since 1990. We are        casts and recommendations are based on opinion. Markets change direction
highly respected with a “solid gold” reputation. We           with consensus beliefs, which may change at any time and without notice. The
                                                              author/publisher of this publication has taken every precaution to provide the
deliver more than $100 million in gold, silver and            most accurate information possible. The information and data were obtained
platinum each year. We have been recommended by               from sources believed to be reliable, but because the information and data
                                                              source are beyond the author’s control, no representation or guarantee is made
many of the industry’s leading financial newsletter           that it is complete or accurate. The reader accepts information on the condition
writers including David Morgan, Bill Murphy, Robert           that errors or omissions shall not be made the basis for any claim, demand or
                                                              cause for action. Past results are not necessarily indicative of future results. Any
Prechter, Richard Maybury and Bill Fleckenstein. We are       statements non-factual in nature constitute only current opinions, which are sub-
a service and education oriented firm and are very            ject to change. The owner, editor, writer and publisher and their associates are
                                                              not responsible for errors or omissions. The author/publisher may or may not
competitive in our pricing.                                   have a position in the securities and/or options relating thereto, and may make
                                                              purchases and/or sales of these securities relating thereto from time to time in
                                                              the open market or otherwise. Authors of articles or special reports contained
                                                              herein may have been compensated for their services in preparing such articles.
                                                              Miles Franklin and/or its principals do not receive compensation and/or stock
                                                              options for information presented on mining shares. Nothing contained herein
                                                              constitutes a representation by the publisher, nor a solicitation for the purchase
                                                              or sale of securities and therefore information, nor opinions expressed, shall be
                                                              construed as a solicitation to buy or sell any stock mentioned herein. Investors
                                                              are advised to obtain the advice of a qualified financial and investment advisor
                                                              before entering any financial transaction.

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