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Ian Gordon: Ignore the Illusion of Spring
Source: Interviewed by Karen Roche, Publisher, The Gold Report (2/22/10)
Never mind that fruit trees are blossoming all over the Northern Hemisphere. A whopper of a winter in the Kondratieff cycle is far from over. In this exclusive interview with The Gold Report, the Longwave Group's Ian Gordon delves into the dreary outlook, brightened only by gleaming opportunities in precious metals equities.
Ian Gordon: The basis of the Longwave Principle is the Kondratieff Cycle. Russian economist Nikolai Kondratieff developed his thesis on this in the 1920s. The cycle lasts approximately 50 to 60 years. I call it a lifetime cycle, because we live only one cycle in a meaningful way. For that reason, it is also very difficult for anyone to recognize where we are in the cycle because we haven't lived in that period before.
For example, we are now in the depression stage, but no one really refers to it that way. I do believe we are in depression because the real number on U.S. unemployment is somewhere around 17%. That to me is a depression.
TGR: You call this period the Winter.
IG: I've broken the cycle into the four seasons, and others have done the same—with Spring being the birth and rebirth of the economy, Summer being the time when the economy reaches its fruition, Autumn being the feel-good period. Kondratieff called Autumn the plateau period because it's when the economy levels out and it's also the season—always—of massive speculation in stocks, bonds and real estate.
There are indications of each season changing, and you have to know where you are in a cycle to be able to predict where you're going. At the Longwave Group, we've been able to demonstrate with a lot of comfort where we are in each of the seasons, when we change seasons and so on.
TGR: And the debt created in the previous period, Autumn, led to this depression stage?
IG: Debt is a major part of it. Speculation is also a contributing factor. We went into Autumn between 1980 and 1982 and similarly between 1920 and 1921. Four events anticipated each of those Autumns. One was a peak in interest rates, second was a peak in prices, third was a bear market in stocks and fourth was a recession.
And then you go into this massive speculation in stocks, bonds and real estate in the Autumn because once the Federal Reserve takes interest rates quite dramatically down from the peak, money floods into the banks. It's also the season when you get the biggest build-up in debt. Any debt chart in the United States, for instance, shows that the debt really starts to take off at the beginning of Autumn.
When the big speculative bull market ends, it indicates that we're going into Winter. And Winter is when all the huge debt that's been built into the economy is wrung out, through either payback or—in most cases—bankruptcy. Creditors and debtors alike suffer very, very much during the Winter period. It causes a crisis in the banking system because banks are the biggest creditors. If you look at the last Winter after the 1929 stock market peak, 10,000 U.S. banks failed by 1933. In fact, when Roosevelt became president, he closed all banks for 10 days and sent in examiners. Banks deemed to be okay were allowed to reopen, and basically the doors stayed closed on the rest.
So, we're now in the Winter. I've argued the real peak in the stock market occurred in 2000; that was certainly the speculative peak on the NASDAQ. At that time, too, consumer confidence peaked. Alan Greenspan decided he didn't like Winter and to save the American economy from a depression, he cut interest rates from 6% to 1%, and pushed enormous amounts of money back into the banking system to try to refloat the economy. He did that to some extent, but in effect, he really built up the debt level to absolutely unmanageable proportions and particularly in the housing market, which resulted in this huge speculative phase in real estate.
That housing market bubble burst, and it has a lot further to go on the downside. The stock bear market that began after the NASDAQ peak—and it has never gotten anywhere close to that level since—began for the Dow in October 2007.
TGR: If we infer that each season lasts about 15 years, give or take five, we're pretty much halfway through Winter now. Is that right?
IG: I don't think we are. This is the first Kondratieff Winter in which the entire world has been subjected to a fiat system. It's so much easier through the printing process to try to stave off the bad days. As I've said, Greenspan made it appear that Winter hadn't started by printing all this money. And we did have a bear market. The Dow dropped—what?—35%, and the NASDAQ dropped almost 80% into 2002.
TGR: You indicated that the major thing that happens during Winter is debt gets taken out, either through bankruptcy or payback. Where does hyperinflation fit in that picture?
IG: I am very much a deflationist. Taking the debt out of the system is in itself a deflation process. You can see it in falling housing prices. As debt comes out of the housing and mortgage markets, it deflates prices. We're going to see the same in stock prices. Wealth is being reduced considerably, and that is deflationary.
A lot of people who argue for inflation say that all the money being printed eventually has to go through the banks back into the economy. But it's like being on a treadmill. You running as fast as the treadmill goes, but you don't get anywhere. The Federal Reserve is printing copious amounts of money trying to re-start the economy. Unfortunately, the rate of debt being taken out of the system eventually will overwhelm their ability to do that.
TGR: Your Winter Warnings indicates that as we move through this collapse, China will become a scapegoat in terms of other governments implementing policies that will harm Chinese exports. If the Chinese GDP is growing and they're already becoming less reliant on exports, could they have a milder Winter than Europe and the U.S.?
IG: I think perhaps the Chinese Winter will be the worst of all, and again we have a parallel. China is the U.S. of the '20s. The U.S. came out of World War I as the world's largest creditor nation, with a major significant growth in its industrial prowess—all of which China is today. At that time, the U.S. government was paying down debt, and it wasn't that significant anyway. And now, the Chinese government doesn't have much debt; either. But in the U.S., corporations and consumers of the "Roaring '20s" built up huge amounts of debt. You see parallels in the housing market in the '20s to what we see today in China. A lot of suburbs were developed because people had automobile or railway access to the suburbs. At the same time, we had a major development of skyscrapers in city centers, monstrous buildings carrying monstrous debt.
China is in that kind of process. What happens when you get so wealthy, you're exporting so much, particularly to the United States, the Chinese government takes the U.S. dollars and credits the bank with renminbi. The bank has all this money on hand. So a local businessman goes to the bank and says, "I want to build a factory and build toys for Toys 'R' Us in the United States." The banker says, "Fine." He has all this money; he makes the loan; the borrower goes and builds his factory. Somewhere across town, someone else goes to another bank and does the same, and again and again with different borrowers and lenders. It's the mal-investment that occurs when you have so much money floating in the system.
TGR: And then what?
IG: Eventually, the United States, the biggest importer of Chinese products, cannot continue buying at that level. Despite the pace of growth in China's economy, it still takes probably at least 50 years, maybe more, to develop a middle class. Those are the people who have the wherewithal to spend. So, it's going to take China a long, long time; it's still very much an agrarian economy.
For these reasons, I think China's banking system will go the way the U.S. banking system did in the '30s, and the whole economy will go into a collapse. But out of it, she will rise as did the U.S. as the greatest economic, financial and political power. She will be the world leader.
TGR: You went into gold early on, back in 2000, but you've also said that cash is one of the best investments. What makes cash a good investment during the Winter period?
IG: Because it's deflationary. The value of everything your cash can purchase is going down, so you can buy more. For instance, when we were renting a house in Phoenix, we were told you can buy 4,500-square-foot homes here for $150,000. You can't even build them for that kind of money today. If you have $1 million in cash now, it might buy you one really nice home where I live in White Rock, BC, but in four or five years' time, it might buy you five of them. We're seeing that in all sorts of things; even automobiles are getting cheaper.
TGR: Why wouldn't U.S. investors have all their money in gold? And when they need to pay bills, they convert it into cash? That's assuming that gold ultimately will retain its value, whereas all fiat currencies are going to come down.
IG: I don't know that all currencies are going to come down relative to each other. For years I said the Euro was a cobbled political currency that would never survive a Kondratieff Winter. And we're starting to see that's likely to happen. Everybody is trying to pick the winner. Right now they're picking the U.S. dollar. Before they were picking the Euro. Except maybe the renminbi, all the currencies are vulnerable. Definitely the yen is very vulnerable because the ratio of debt to GDP in Japan is so massive already.
TGR: So if the currencies are all vulnerable, should we put all of our cash into gold and basically liquidate it for cash when we need it?
IG: One problem with that is we don't know how the government will respond to those who own gold. It's dangerous to put all of your eggs in one basket. You'd be trusting the politicians not to do what Roosevelt did in 1933. After he confiscated gold, Americans kind of got around it by investing in gold companies. They were very profitable, and all the money, all capital ultimately flowed to gold because it was the only thing people trusted. It was going to gold because that's where people wanted to be.
That led to a major number of discoveries made, including, in Canada, all along the Abitibi Greenstone Belt and in British Columbia. They couldn't have been made without money. By 1940, according to the U.S. Bureau of Mines; 9,000 gold mines were operating in the United States. Of course, those were the ones that people reported. People panning gold up in Alaska didn't tell anybody that they were an operating mine. They were just hoarding the gold.
TGR: So, it's a combination of owning gold and gold stocks. Or should we say precious metals—we'll expand it out to silver. Should our portfolios consider other elements?
IG: As for silver, it didn't really work as a monetary instrument in the early 1930s. Although at that time U.S. coinage from the dollar to the dime was minted in silver, so there was certainly hoarding of silver coinage during the last depression. During this depression silver may well take on a monetary role, since the price of gold might take that metal out of reach of many people. I think only the precious metals work—again because of the stock market debacle that I see occurring. We know that investing in precious metals worked in the '30s. People were pushing their money into gold stocks because they wanted to be in gold in any shape or form.
TGR: Because you're suggesting that all gold companies will increase in value during this timeframe, should the average investor be concerned about which specific gold companies to invest in?
IG: Certainly the producing companies will go up with the rising price of gold. Don't forget in the early '30s the gold price was fixed at $20.67 and it wasn't raised to $35 until 1934. But even so, people were investing in the gold companies, both explorers and big producers such as Homestake.
Today, I tend to put my money into the juniors because that's where I see the leverage to a rising gold price. But you've got to be very, very selective and very cautious. You have to evaluate management of these companies. In Canada, particularly in Vancouver where most of the junior precious metals companies are situated, we're living with these people. It's very tough in the United States, where you have to rely much more on what others tell you. Fortunately, a lot of very reputable newsletter writers and so on are trying to do a good job in their recommendations.
TGR: What's your strategy for finding good junior prospects?
IG: I try to find companies that will make me 10 times my money in two years. I'm not going to say that happens every time, but it has happened fairly frequently. We've had a number of 10-baggers. A few of those that give you 10 times your money can make up for a fair number that are wrong.
TGR: Where do you hunt?
IG: I look at companies that others are ignoring or have lost interest in because people feel they haven't accomplished much. I also look at companies where I really like the management—managers who are truly committed to their shareholders and not themselves. And through the years, when I invest in a company, I tend to stay in it if I can see a double in 10 months.
In 2002, I bought a company, Nevsun (TSX:NSU; NYSE.A: NSU), in a financing, at 60 cents. Within 18 months, it had gone to $9.50. I sold it at about $6.50 or $7, though, because I couldn't see it doubling within 10 months. But I did get 10 times my money.
TGR: Could you share any examples that are interesting as we look into the future?
IG: I've basically been with Timmins Gold Corp. (TSX.V:TMM) since they were doing the seed financing. They're just putting a mine into operation in Mexico, where they're going to produce between 80,000 and 100,000 ounces at just over $400 an ounce. Right now they have only about 600,000 ounces there, so it's a mine life of only about five years. However, the exploration potential there is quite significant, and I really can see that mine operating probably three times longer.
In addition, Timmins Gold also has some other excellent potential exploration properties in Mexico. So I like this company a lot; I like the management a lot. A very good Mexican contingent, including the president, gives them a lot of help strategically in the country.
TGR: Any others?
IG: There's a little company, Golden Goliath Resources Ltd. (TSX.V:GNG), that's been out of favor for a long time that I really like, and feel could do really well for investors. I did the IPO for this company in 2000. We had committed to raising $3.5 million at 50 cents based on a group of properties in the Uruachic Mining District in Chihuahua, Mexico. It was a real struggle for me. If you can believe, no one had an interest in gold stocks in 2000. Then Agnico-Eagle Mines (TSX:AEM) became an investor, and as a result we were actually able to raise the IPO from $3.5 million to $4.5 million. That was one of the things that I felt very proud about.
TGR: Are they making good progress on their properties now?
IG: The last two years they've been concentrating on a property called Los Bolas. With the help of Marc Legault, Agnico-Eagle's chief exploration officer, who is also a director of Golden Goliath, they're starting to put together a really good base, more silver than gold. According to an independent report, based on exploration to date that deposit could contain better than 100 million ounces of silver. The deposit is open at depth and in both directions and could grow substantially. And they have now discovered a new area with gold mineralization on Los Bolas, the Filo de Oro zone.
TGR: So Agnico-Eagle remains involved?
IG: Yes. Agnico Eagle holds about 10%. I like the fact that Agnico-Eagle is involved in a hands-on basis. They see it as a really important because Urihuacic is not that far from Penas Altos, the Agnico-Eagle mine that is either in production or shortly going into production. Golden Goliath's biggest shareholder is Sprott Asset Management, which holds 18.4%.
TGR: Any more companies you could tell us about?
IG: I think Underworld Resources Ltd. (TSX.V:UW), in the Yukon not far from Dawson City, has 43-101 resource of a million-plus ounces already. I like the management. I think this company's going to certainly grow its already significant gold discovery.
Another company I like is a smaller one, which may catch people by surprise because they won't recognize it. That's Lincoln Mining Corporation (TSX.V:LMG), which has properties in Nevada, California and Mexico. They are permitting for putting a small mine into production on one of their Nevada projects, where they have about a half-million ounces. The property in California is an old past-producing mine. They also have a great property in Mexico called La Bufa, which is surrounded by Gammon Gold Inc. (NYSE:GRS; TSX:GAM). In fact, Gammon has a property right in the middle of La Bufa, and then Gammon Gold staked all around Lincoln's property.
Barkerville Gold Mines Ltd. (TSX.V:BGM) is an interesting story because it's an old discovery, an historic little gold mining town in British Columbia. This company, which used to be called International Wayside, has 60 kilometers of land holdings close to Barkerville, and I think there were up to eight producing mines on its properties. Three of those mines were discovered—here we go again—in the 1930s, during the last Kondratieff Winter. It's just going back into production, small-scale production, 50,000 ounces of gold a year. But it has tremendous upside exploration potential. That's another pretty exciting one.
One more that I'd like to discuss—African Queen Mines (TSX.V:AQ). The company has a property in Mozambique, which is highly prospective. It has returned great metal values in chip samples along the 12 km belt. African Queen has also acquired the right to earn in on a Newmont property called Noyem, which is situated along the Ashanti Gold Belt in Ghana. There is already a gold resource on the property.
I think that it is important that your readers do their own due diligence on these companies. They are very speculative and may not be suitable investments for everyone. They should consult with their investment advisor before making any investment decision.
TGR: In 2008, we saw junior gold stocks, all gold stocks, go down. Fund managers were selling anything they could because they needed cash. You're predicting another major financial collapse in the U.S. Why will it be different this time?
IG: I think the run to gold will become very extreme this time around, but in many cases these gold stocks today haven't recovered from their highs of early 2008 anyway. If you look back on the past Winter, when the Dow lost 48% of its value between September and November of 1929, Homestake crashed. But in subsequent downs, Homestake went up. I feel that will happen again.
TGR: What would you do?
IG: Let me put it this way. I have almost 100% of my investment money in these kinds of stocks. I don't really have much cash sitting in my investment accounts.
TGR: How long do you think the Winter is going to continue? And when do you guesstimate this next crash will hit? When was the next rally in the last Winter?
IG: The stock market recovered 50% of its losses in a rally into April of 1930. That's very similar to the rally we went through from March 2009 to mid-January this year. Now, we're on the downturn again in the market, and I am predicting that this one will take us down to somewhere about 5250 on the Dow either this year or early next year. And then we'll get another rally. Hope springs eternal.
But then I think the whole stock market bottom will be reached in 2012. The only reason I am picking 2012 is I am a huge fan of a great cycles guy who died in 1955, called W. D. Gann.
TGR: Oh, yes.
IG: He did a lot on anniversaries and so on, and 2012 happens to be the 30th anniversary of the 1982 bottom, which was the beginning of the big speculative Autumn bull market. And it's the 10-year anniversary of the first bottom, in 2002. The market peaked in 2000 and dropped in 2002. It's also the 80th anniversary of the 1932 Winter bear market bottom, after the Dow had dropped 90% from its 1929 high.
That's why I wrote a piece on my website called "This is It" in 2007, and one of the things that convinced me was when I saw those Bears Stearns funds sort of going bankrupt in July 2007. That was the 20-year anniversary of the '87 crash, the 100-year anniversary of a big market crash back in 1907, the 150th anniversary of a big 1857 crash. All these Gann kinds of numbers came in at the same time in 2007. That was so compelling that I was absolutely convinced that 2007 was the end. And that's proved to be correct.
TGR: So you're saying the market is going to be drop by half this year.
IG: Yep. I think we're going to have a crash in stock prices this year. But I am staying long in my gold stocks.
TGR: Will this Winter end in 2012 then?
IG: No, it's just the bear market bottom. Remember the bear market bottomed in 1932. But the Great Depression didn't really end until World War II. The Winter continued even though the bear market had bottomed.
A globally renowned economic forecaster, author and speaker, Ian Gordon is founder of the Longwave Group, comprising two companies—Longwave Analytics and Longwave Strategies. The former specializes in Ian's ongoing study and analysis of the Longwave Principle originally expounded by Nikolai Kondratieff. And with Longwave Strategies, Ian—who believes that the precious metals sector will continue to provide very secure investment options—assists select precious metal companies in financings. Eric Sprott, Chairman, CEO and Portfolio Manager at Sprott Asset Management, describes Ian as "a rare breed in the investment advisor arena." He notes that Ian's forecasts "have taken on a life force of their own and if you care to listen Ian will tell you how it will all end."
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1) Karen Roche of The Gold Report conducted this interview. She personally and/or her family own none of the companies mentioned in this interview. 2) The following companies mentioned in the interview are sponsors of The Energy Report or The Gold Report: Nevsun and Timmins Gold Corp. 3) Ian Gordon — I or my family own shares in all the companies I have mentioned in this interview. I and my family are not receiving any compensation from the companies.