TICKERS: AEM, AUQ, GNG; GGTHF, K; KGC, LMG, MRO, RGUSFL, PHYS; PHY.U, TMM; TGD, SKK
Ian Gordon: A Cyclical Case for Gold Stocks
Source: Brian Sylvester of The Gold Report (7/30/10)
"We're not going into a double dip. We're going into a depression. I'm convinced of that," claims renowned Market Forecaster Ian Gordon. He is using a three-pronged strategy to limit the damage and even make money in the dark times ahead. You will learn why Gordon believes gold, and gold equities in particular, will perform when nothing else does in this exclusive interview with The Gold Report.
Ian Gordon: I think that I've actually embellished it quite a lot. I've done far more than I think Kondratieff ever envisioned. For instance, breaking the cycle into four seasons—I don't think that's original. But I think those season breaks are very appropriate.
Spring is the birth or rebirth of the economy. Summer is the time when the economy reaches fruition. Autumn is a period where everyone feels very good because it's always the season where you have the biggest bull market in stocks, bonds and real estate. Winter is the period when debt is washed out of the system so that it can start refreshed again in the spring. The cycle lasts a lifetime of about 60 or 70 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.
TGR: And that model says we are in the winter of that cycle.
IG: Yes, we're in winter. The indication of the season change from autumn to winter is the bull stock market peak. We say that peak was effectively reached in 2000, not 2007, because NASDAQ obtained the real speculative peak in the market in March 2000. When that peak is reached, as it was in September 1929, it signals the onset of winter and the deflation/ depression stage of the cycle. That whole winter period is really where debt is expunged from the economy and that process is extremely difficult for creditors and debtors alike. The last depression, for instance, following the 1929 stock market peak, brought the entire U.S. banking system to its knees. In fact, between 1929 and 1933 about 10,000 banks failed. That kind of process is bullish for gold because people move to gold as money of last resort. It's the money that they ultimately place their full trust in. They move away from paper as a monetary medium.
TGR: And this is what you believe will push gold to $4,000 an ounce?
IG: That's why we're saying $4,000 per ounce gold, but that's a number that we've been predicting for about two years. About eight years ago we were predicting $2,000. But we think the sort of calamity that we're anticipating here is going to make the rush to gold quite dramatic. We're not even sure $4,000 will be the high. It could be something significantly greater than that.
TGR: Could we see another 10,000 banks close?
IG: I think there are only 8,000 banks in the U.S., but you could see a significant number of the banks fail. We have a major debt crisis worldwide right now. Who are the biggest creditors? The creditors are the banks, so as debt comes out, many of those banks are going to be in dire straits. We haven't really seen what's been happening to the banking system with regards to commercial real estate. We've certainly seen what's happening with regards to consumer real estate. But on the commercial real estate side, the banks are shielding themselves from obviously very difficult times in that area.
TGR: In addition to $4,000 gold, you're predicting that the DJIA is going to fall to 1,000. It's about 10,500 now. That would have gold trading at four times the Dow Jones Industrial Average (the Dow). How would you respond to people who might ask, "Ian, have you gone mad?"
IG: Well, I think a lot of people think I am mad. But so far everything that we've anticipated through our understanding of this cycle has come to pass. We know how desperate the winter of the Kondratieff season is because that process of debt unwinding is very, very painful. In the last depression, 25% of the American work force was unemployed. You had a massive drop in GDP in the United States; the economy basically collapsed by 45%. If that were to happen today, you would go from a $14 trillion dollar economy to about an $8 trillion dollar economy. That means that things are desperate. Major institutions are going bankrupt. People are going bankrupt because they've taken on too much debt and it's pushing the banks into bankruptcy as well.
TGR: So we are going to see the first signs of this at an institutional level?
IG: I remember going to Japan to speak on the cycle about seven years ago. I was ferried around Tokyo by a man in this chauffeur-driven Jaguar. This gentleman was very interested in investing in gold. He was talking and pointing to these big skyscrapers and he said: "See this building? Owner bankrupt. Bank bankrupt." That was a big lesson for me. We're going to have the same kind of experience here in North America because the people who put those buildings up have borrowed heavily from the banks. They're going to go under and the banks are going to be in dire straits as a result of lending them all that money.
TGR: What's the timeframe for all of this?
IG: It's already happening. I mean the debt bubble is unwinding worldwide. I think the next leg down restarts in earnest when it becomes apparent that North America's not immune to the banking crisis. We've already had the initial banking crisis here in North America; the Brits have had their banking crisis, and so on. But I think the next leg down will be some big bank in trouble in the United States. Then people will start to panic and move to gold. With that, the stock market will come down quite dramatically because the economy won't be recovering. We're not going into a double dip. We're going into a depression. I'm convinced of that.
TGR: Is there enough gold to go around?
IG: We don't actually produce very much gold every year. We only produce about 80 million ounces from the mines. You've got a lot of people who are going to return to gold because that's the monetary medium that they really trust. Eighty million ounces a year isn't going to go a long way to satisfy the demand that I see happening.
TGR: But gold stocks went down along with everything else when we had the massive correction in 2008. If we get to $4,000 gold and a 1,000 DJIA, won't everything be pretty much wiped out?
IG: We know what happened to the gold stocks following the 1929 peak. In the initial October 1929 crash, the gold stocks crashed alongside the general stock market. We had a rally back into April 1930 and the gold stocks came back in that rally. Then after April 1930, it was almost straight down for the Dow, yet the gold stocks continued to rise. The price of gold was fixed until January 1934 at $20.67, yet the gold stocks continued to go up. For instance, Homestake Mining's price more than doubled between that drop in 1929 until early 1934, when the price of gold increased from $20 to $35 an ounce. So it doubled in the face of the Dow dropping quite dramatically. In fact, between 1929 and 1936, Homestake's price actually increased by six times its value. We see a similar thing happening this time. I mean at $4,000 gold, gold stocks are going to be worth a lot of money. Let's say they're producing gold at a cash cost of production of $500. At today's gold price per ounce they're making $600 or $650 an ounce in profit. If you go to $4,000, they're making $3,500.
TGR: But won't there be anarchy on the streets?IG: Well, I think there's going to be major civil unrest. You're starting to see a little bit of that manifesting itself in the form of these Tea Party groups that are in the United States. But when you start to see 25% unemployment and a Dow that's basically as worthless as it was in 1932, I think people are going to be pretty angry.
TGR: In your last conversation with The Gold Report, you talked about this happening perhaps as quickly as 2012.
IG: The reason I picked 2012 as a bottom is because I was using anniversary dates because I'm a huge fan of W.D. Gann and that's kind of the work that he would've done. There are lots of anniversaries associated with 2012. . .It's the 80-year anniversary in 2012 of the 1932 bottom when the Dow was at 41 points. And 1982 was the bear market bottom that saw the beginnings of the big autumn bull market. Also, you've got an anniversary in 2002 when we had our first bear market bottom from that 2000 peak. There are so many anniversaries around that that I picked 2012, which would mean that you'd have to have a massive collapse starting almost immediately.
IG: It is very difficult for people to comprehend this because, first of all, stocks have risen in value since the 1932 bottom when the Dow hit 41. Every time we've had a bear market, stocks have always recovered pretty well from that bear market and gone up to new highs. We've been conditioned to believe that stocks are a lifetime investment. We've demonstrated through our work they're actually not a lifetime investment. They work in the spring of the season because of the rebirth in the economy. They work in the autumn because of the speculative period spins in real estate. That's the massive bull market and it always occurs in the autumn of the cycle. Similarly, we've also been conditioned to expect that every time the economy has a hiccup we'll recover from the recession and go on to bigger and better things. In effect, that has happened as well.
TGR: Why should we think that won't happen again?
IG: During the major 1980–1982 recession the U.S. was still a creditor nation. Her manufacturing base was much more significant than it is today. Her economy was probably 40% of the world economy. Now it's about 24% of the world's economy. This depression is something that we've never experienced. The recovery from these takes much, much longer because of all that debt that's being taken out of the system.
TGR: History, as far as the Kondratieff cycle goes, seems to be on your side.
IG: I've been able to go back and map this all the way from 1790 to the present to show that these things are quite repetitive. When you can see that repetition, we know that following that big bull market peak we're going to go into the depression stage of the economy. We can anticipate that. We've made that anticipation and have been invested in gold since 2000. That has been the right decision.
TGR: Based on that logic, though, another spring will come. How far off is that?
IG: The stock market bottomed in 1932, but we say the spring of the present cycle didn't start until 1949. The Second World War essentially took the United States out of the Depression. She wasn't out of the Depression until the war started because you basically had a big manufacturing buildup for the war. So many people were employed in the war that people started saving. As a means of saving, servicemen would put part of their paycheck into war bonds. That's really how an economy starts; it grows on savings, it doesn't grow on debt. The catalyst that got the Chinese and the Japanese economies moving was the huge savings that those people have. I think in China they save 40% of what they earn.
TGR: Given these dire predictions, what sort of investment strategy are you recommending?
IG: Well, there are really three things that we feel make sense in this kind of environment. One is to be long on gold, which we have been since 2000. Two is to be short on the market. We buy the inverse ETFs, the ones we think make more sense in that kind of environment. We like the inverse financial ETF stocks to short or we'll short the growth stock ETFs—the Russell Financial Bear 3x (NYSE:RGUSFL) and also the ProShares Ultrashort Russell 2000 Growth (NYSE:SKK), which is a double. We feel that growth stocks in a bear market are most likely to fail both first and fast.
TGR: And the third part?
IG: I also have bought the Sprott Physical Gold Bullion Trust (NYSE.A:PHYS; TSX:PHY.U). I'm generally a bit nervous about having a paper claim on gold, but I know Eric Sprott pretty well and I'm absolutely sure he has a gold backing for that fund.
TGR: What percentage of your portfolio would you recommend having in terms of gold equities?
IG: In terms of my portfolio, a small portion is in cash, probably about 5%, probably about 15% in the Sprott Gold Fund. Then maybe 30% is in these inverse ETFs. I see my short position as a hedge against a 2008 kind of melt down for these equities that I'm in. About half my portfolio is gold equities. In most cases I'm in junior equities. I have one senior gold equity in my portfolio.
TGR: What are some of the junior equities that you're excited about?
IG: My biggest position is in a company called Timmins Gold Corp. (TSX.V:TMM). I think I recommended that the last time we talked. I have a significant position in a company called Golden Goliath Resources Ltd. (TSX.V:GNG; OTCPK:GGTHF). Then a company called Millrock Resources Inc. (TSX.V: MRO) in Alaska. Millrock has a really good relationship with Kinross Gold Corp. (NYSE:KGC; TSX:K) so I'm fairly heavily weighted in Millrock. I've got a position in a company called Lincoln Mining Corporation (TSX.V:LMG). Their main assets are in Nevada, but they do have a great asset in Mexico.
TGR: Let's go back to Timmins. It has the San Francisco Gold Mine in Mexico that's in production, but their mill throughput is a bit lower than it was earlier in the year.
IG: You're always going to have some slight hiccups when you go into production. I've basically financed Timmins from the seed capital days. The management of this company has always delivered to shareholders essentially what they've promised that they're going to do. There have been some delays in the production process, but I'm very confident that they're going to get it right. Their goal is ultimately to produce 100,000 ounces a year. Their cash costs are in the lower $400 an ounce range. It's going to be extremely profitable. The key for Timmins, as I see it, is to expand that resource at the San Francisco mine from about 700,000 ounces to something considerably more than that. I think that the drilling that they've done to date would indicate that they are doing that. We don't have a new resource calculation yet, but the drill results that they've been producing are similar to the results that they had in their previous resource calculations. I think we can comfortably estimate that we're going to see a resource calculation come out that's going to improve that 700,000 to something significantly better than that. If you can get above a million ounces, then we've got a 10-year mine life. If Timmins can generate a multiple of that, the mine life just increases. I think this company is actually very undervalued; it's about $1.40 a share.
TGR: Golden Goliath is also in Mexico. You seem to be a believer in Mexico. You also mentioned that Lincoln had a project there. What is it about Mexico that you like?
IG: It's been a huge producer since the Spanish discovered gold and silver there. All of these properties, like the one Timmins has, are past-producing mines. There are several past-producing mines on the Golden Goliath properties. It's a maze of tunnels. The old mine was worked without any exploration expertise. They simply followed the veins. Golden Goliath was an extremely rich mining camp; so rich that there was a mint introduced in the local town to mint Mexican coinage from the ore being produced from local properties, most of which are now owned by Golden Goliath.
TGR: Agnico-Eagle Mines Ltd. (NYSE:AEM; TSX:AEM) holds about 9% of Golden Goliath. Is it anywhere near Agnico's Pinos Altos gold mine?
IG: It's a little south but not that far from Pinos Altos. Agnico-Eagle is also represented on the Golden Goliath board through their vice president for project development, Marc Legault. This is very positive, because I think he's been instrumental in getting Golden Goliath focused. They were property rich before and they didn't spend enough time on any one of the properties to do each of them proper justice. He's got them focused on Las Bolas, and I think we're starting to see some interesting results on that property.
TGR: That's generally Agnico's modus operandi. They take a stake in a promising junior, get a seat on the board, have a look at the geology and eventually take the company over. They did that with Cumberland Resources and its Meadowbank Gold Project. Agnico bought Cumberland in 2007 and Meadowbank just went into commercial production.
IG: I was actually instrumental in getting Agnico-Eagle to invest in Golden Goliath in the initial public offering. I knew Sean Boyd who's now the CEO. I phoned him and he sent down his geologist to take a look. They came back and said, yes, they would put money into Golden Goliath's IPO. That was in 2000.
TGR: You mentioned Millrock a bit earlier. Tell me about Millrock.
IG: Basically the company's main focus is in Alaska. They've worked very closely with the native bands in Alaska so they have a very good relationship, and the natives control much of the land.
TGR: Is this a pure exploration play?
IG: Yes, it is, but Kinross has recently financed Millrock at a premium to its share price . Kinross liked the properties that they have. Millrock has a really good gold property called Estelle, which they are joint venturing, again with Kinross. They're looking at doing other things with Kinross in Alaska, too. In some ways you could say Kinross is using Millrock as its exploration arm in Alaska.
TGR: Can you comment on Lincoln Mining? That's another one you mentioned.
IG: I like Lincoln very much. Paul Saxton, Lincoln's president, has put, probably, five mines into production in his lifetime, so he knows how to put a mine into production. They've got a fairly small deposit in Nevada. There's about half a million ounces there. Right now, they're trying to drill it up to a million ounces, but they're going to put the half a million into production.
TGR: You're talking about the Pine Grove project?
IG: Yes, Lincoln has another property in California, which scares a lot of people, but that had been permitted and had actually been in production. Paul is hoping to get the mining permit grandfathered and be able to put that back into production. He really likes this La Bufa property in Mexico. He's surrounded by Gammon Gold Inc. (NYSE:GRS; TSX:GAM). Gammon has always tried to do some sort of deal with them, but they feel they haven't done the property justice to do any sort of deal with any company yet. They think this has the potential to be a fairly significant discovery. It is early stage, but you know how much I like Mexico. I'm a big Lincoln fan simply because of Paul Saxton's ability to put these things into production. He's done it before.
TGR: Do you have some thoughts you would like end our talk with?
IG: I think we're heading down into the next stage of the bear market in stocks. I've always counseled people that if we're in a bear market, then we're going to make lower highs and lower lows. Well, we've seen the lower high below the DJIA's 14,200 in October 2007. And we can expect the next low to be below the 6,547.05 Dow low in March 2009. The next low should be below that. It's not going to be a fun time. I would counsel everybody to be out of stocks. Everything that is, except gold stocks.
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."
Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.
1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.