Nice mentionIan Gordon: Ignore the Illusion of Spring
Source: Interviewed by Karen Roche, Publisher, The Gold Report 02/22/2010
Nevermind that fruit trees are blossoming all over the Northern Hemisphere.It doesn't matter that Punxsutawney Phil of Pennsylvania saw his shadowon February 2. We're in for a lot more of a long, harsh Winter—a realwhopper in terms of the Kondratieff cycle that the Longwave Group's IanGordon has become expert at analyzing and interpreting. In thisexclusive interview with The Gold Report, Ian pulls no punches aboutthe dreadful times ahead as economies wring out decade's worth ofaccumulated debt. The only gleams shining through in his drearyforecast: ample opportunities in precious metals equities.
The Gold Report:According to your analysis based on the Longwave Principle, we are in aperiod of the cycle when the economy dies, the stock market crashes andwe enter depression. Could you provide readers who may not be familiarwith the Longwave Principle a high-level description of this concept?
Ian Gordon: Thebasis of the Longwave Principle is the Kondratieff Cycle. Russianeconomist Nikolai Kondratieff developed his thesis on this in the1920s. The cycle lasts approximately 50 to 60 years. I call it alifetime cycle, because we live only one cycle in a meaningful way. Forthat reason, it is also very difficult for anyone to recognize where weare in the cycle because we haven't lived it that period before.
Forexample, we are now in the depression stage, but no one really refersto it that way. I do believe we are in depression because the realnumber on U.S. unemployment is somewhere around 17%. That to me is adepression.
TGR: You call this period the Winter.
IG:I've broken the cycle into the four seasons, and others have done thesame—with Spring being the birth and rebirth of the economy, Summerbeing the time when the economy reaches its fruition, Autumn being thefeel-good period. Kondratieff called Autumn the plateau period becauseit's when the economy levels out and it's also the season—always—ofmassive speculation in stocks, bonds and real estate.
There areindications of each season changing, and you have to know where you arein a cycle to be able to predict where you're going. At the LongwaveGroup, we've been able to demonstrate with a lot of comfort where weare 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 1920and 1921. Four events anticipated each of those Autumns. One was a peakin interest rates, second was a peak in prices, third was a bear marketin stocks and fourth was a recession.
And then you go into thismassive speculation in stocks, bonds and real estate in the Autumnbecause once the Federal Reserve takes interest rates quitedramatically down from the peak, money floods into the banks. It's alsothe season when you get the biggest build-up in debt. Any debt chart inthe United States, for instance, shows that the debt really starts totake off at the beginning of Autumn.
When the big speculativebull market ends, it indicates that we're going into Winter. And Winteris when all the huge debt that's been built into the economy is wrungout, through either payback or—in most cases—bankruptcy. Creditors anddebtors alike suffer very, very much during the Winter period. Itcauses a crisis in the banking system because banks are the biggestcreditors. If you look at the last Winter after the 1929 stock marketpeak, 10,000 U.S. banks failed by 1933. In fact, when Roosevelt becamepresident, he closed all banks for 10 days and sent in examiners. Banksdeemed to be okay were allowed to reopen, and basically the doorsstayed closed on the rest.
So, we're now in the Winter. I'veargued the real peak in the stock market occurred in 2000; that wascertainly the speculative peak on the NASDAQ. At that time, too,consumer confidence peaked. Alan Greenspan decided he didn't likeWinter and to save the American economy from a depression, he cutinterest rates from 6% to 1%, and pushed enormous amounts of money backinto the banking system to try to refloat the economy. He did that tosome extent, but in effect, he really built up the debt level toabsolutely unmanageable proportions and particularly in the housingmarket, which resulted in this huge speculative phase in real estate.
Thathousing market bubble burst, and it has a lot further to go on thedownside. The stock bear market that began after the NASDAQ peak—and ithas never gotten anywhere close to that level since—began for the Dowin October 2007.
TGR: If we infer that each season lastsabout 15 years, give or take five, we're pretty much halfway throughWinter now. Is that right?
IG: I don't think we are. Thisis the first Kondratieff Winter in which the entire world has beensubjected to a fiat system. It's so much easier through the printingprocess to try to stave off the bad days. As I've said, Greenspan madeit appear that Winter hadn't started by printing all this money. And wedid have a bear market. The Dow dropped—what?—35%, and the NASDAQdropped almost 80% into 2002.
TGR: You indicated that themajor thing that happens during Winter is debt gets taken out, eitherthrough bankruptcy or payback. Where does hyperinflation fit in thatpicture?
IG: I am very much a deflationist. Taking thedebt out of the system is in itself a deflation process. You can see itin falling housing prices. As debt comes out of the housing andmortgage markets, it deflates prices. We're going to see the same instock prices. Wealth is being reduced considerably, and that isdeflationary.
A lot of people who argue for inflation say thatall the money being printed eventually has to go through the banks backinto the economy. But it's like being on a treadmill. You running asfast as the treadmill goes, but you don't get anywhere. The FederalReserve is printing copious amounts of money trying to re-start theeconomy. Unfortunately, the rate of debt being taken out of the systemeventually 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 governmentsimplementing policies that will harm Chinese exports. If the ChineseGDP 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 againwe have a parallel. China is the U.S. of the '20s. The U.S. came out ofWorld War I as the world's largest creditor nation, with a majorsignificant growth in its industrial prowess—all of which China istoday. At that time, the U.S. government was paying down debt, and itwasn't that significant anyway. And now, the Chinese government doesn'thave much debt; either. But in the U.S., corporations and consumers ofthe "Roaring '20s" built up huge amounts of debt. You see parallels inthe housing market in the '20s to what we see today in China. A lot ofsuburbs were developed because people had automobile or railway accessto the suburbs. At the same time, we had a major development ofskyscrapers in city centers, monstrous buildings carrying monstrousdebt.
China is in that kind of process. What happens when youget so wealthy, you're exporting so much, particularly to the UnitedStates, the Chinese government takes the U.S. dollars and credits thebank with renminbi. The bank has all this money on hand. So a localbusinessman goes to the bank and says, "I want to build a factory andbuild 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 andbuilds his factory. Somewhere across town, someone else goes to anotherbank and does the same, and again and again with different borrowersand lenders. It's the mal-investment that occurs when you have so muchmoney floating in the system.
TGR: And then what?
IG:Eventually, the United States, the biggest importer of Chineseproducts, cannot continue buying at that level. Despite the pace ofgrowth in China's economy, it still takes probably at least 50 years,maybe more, to develop a middle class. Those are the people who havethe wherewithal to spend. So, it's going to take China a long, longtime; it's still very much an agrarian economy.
For thesereasons, 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 acollapse. But out of it, she will rise as did the U.S. as the greatesteconomic, 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 thatcash is one of the best investments. What makes cash a good investmentduring the Winter period?
IG: Because it's deflationary.The value of everything your cash can purchase is going down, so youcan buy more. For instance, when we were renting a house in Phoenix, wewere told you can buy 4,500-square-foot homes here for $150,000. Youcan't even build them for that kind of money today. If you have $1million in cash now, it might buy you one really nice home where I livein White Rock, BC, but in four or five years' time, it might buy youfive of them. We're seeing that in all sorts of things; evenautomobiles are getting cheaper.
TGR: Why wouldn't U.S.investors have all their money in gold? And when they need to paybills, they convert it into cash? That's assuming that gold ultimatelywill retain its value, whereas all fiat currencies are going to comedown.
IG: I don't know that all currencies are going tocome down relative to each other. For years I said the Euro was acobbled political currency that would never survive a KondratieffWinter. And we're starting to see that's likely to happen. Everybody istrying to pick the winner. Right now they're picking the U.S. dollar.Before they were picking the Euro. Except maybe the renminbi, all thecurrencies are vulnerable. Definitely the yen is very vulnerablebecause 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 cashinto 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 respondto those who own gold. It's dangerous to put all of your eggs in onebasket. You'd be trusting the politicians not to do what Roosevelt didin 1933. After he confiscated gold, Americans kind of got around it byinvesting in gold companies. They were very profitable, and all themoney, all capital ultimately flowed to gold because it was the onlything people trusted. It was going to gold because that's where peoplewanted to be.
That led to a major number of discoveries made,including, in Canada, all along the Abitibi Greenstone Belt and inBritish Columbia. They couldn't have been made without money. By 1940,according to the U.S. Bureau of Mines; 9,000 gold mines were operatingin the United States. Of course, those were the ones that peoplereported. People panning gold up in Alaska didn't tell anybody thatthey 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 sayprecious metals—we'll expand it out to silver. Should our portfoliosconsider other elements?
IG: As for silver, it didn'treally work as a monetary instrument in the early 1930s. Although atthat time U.S. coinage from the dollar to the dime was minted insilver, so there was certainly hoarding of silver coinage during thelast depression. During this depression silver may well take on amonetary role, since the price of gold might take that metal out ofreach of many people. I think only the precious metals work—againbecause of the stock market debacle that I see occurring. We know thatinvesting in precious metals worked in the '30s. People were pushingtheir money into gold stocks because they wanted to be in gold in anyshape or form.
TGR: Because you're suggesting that allgold companies will increase in value during this timeframe, should theaverage investor be concerned about which specific gold companies toinvest in?
IG: Certainly the producing companies will goup with the rising price of gold. Don't forget in the early '30s thegold 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, bothexplorers and big producers such as Homestake.
Today, I tend toput my money into the juniors because that's where I see the leverageto a rising gold price. But you've got to be very, very selective andvery cautious. You have to evaluate management of these companies. InCanada, particularly in Vancouver where most of the junior preciousmetals companies are situated, we're living with these people. It'svery tough in the United States, where you have to rely much more onwhat others tell you. Fortunately, a lot of very reputable newsletterwriters 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 twoyears. I'm not going to say that happens every time, but it hashappened fairly frequently. We've had a number of 10-baggers. A few ofthose that give you 10 times your money can make up for a fair numberthat are wrong.
TGR: Where do you hunt?
IG:I look at companies that others are ignoring or have lost interest inbecause people feel they haven't accomplished much. I also look atcompanies where I really like the management—managers who are trulycommitted to their shareholders and not themselves. And through theyears, when I invest in a company, I tend to stay in it if I can see adouble 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. Isold it at about $6.50 or $7, though, because I couldn't see itdoubling 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 mineinto operation in Mexico, where they're going to produce between 80,000and 100,000 ounces at just over $400 an ounce. Right now they have onlyabout 600,000 ounces there, so it's a mine life of only about fiveyears. However, the exploration potential there is quite significant,and I really can see that mine operating probably three times longer.
Inaddition, Timmins Gold also has some other excellent potentialexploration properties in Mexico. So I like this company a lot; I likethe management a lot. A very good Mexican contingent, including thepresident, 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 feelcould do really well for investors. I did the IPO for this company in2000. We had committed to raising $3.5 million at 50 cents based on agroup of properties in the Uruachic Mining District in Chihuahua,Mexico. It was a real struggle for me. If you can believe, no one hadan 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 theIPO from $3.5 million to $4.5 million. That was one of the things thatI 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 LosBolas. With the help of Marc Legault, Agnico-Eagle's chief explorationofficer, who is also a director of Golden Goliath, they're starting toput together a really good base, more silver than gold. According to anindependent report, based on exploration to date that deposit couldcontain better than 100 million ounces of silver. The deposit is openat depth and in both directions and could grow substantially. And theyhave 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 isinvolved in a hands-on basis. They see it as a really important becauseUrihuacic is not that far from Penas Altos, the Agnico-Eagle mine thatis either in production or shortly going into production. GoldenGoliath's biggest shareholder is Sprott Asset Management, which holds18.4%.
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 amillion-plus ounces already. I like the management. I think thiscompany's going to certainly grow its already significant golddiscovery.
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 arepermitting for putting a small mine into production on one of theirNevada projects, where they have about a half-million ounces. Theproperty in California is an old past-producing mine. They also have agreat 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 historiclittle gold mining town in British Columbia. This company, which usedto be called International Wayside, has 60 kilometers of land holdingsclose to Barkerville, and I think there were up to eight producingmines on its properties. Three of those mines were discovered—here wego again—in the 1930s, during the last Kondratieff Winter. It's justgoing back into production, small-scale production, 50,000 ounces ofgold a year. But it has tremendous upside exploration potential. That'sanother 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 kmbelt. African Queen has also acquired the right to earn in on a Newmontproperty called Noyem, which is situated along the Ashanti Gold Belt inGhana. There is already a gold resource on the property.
I thinkthat it is important that your readers do their own due diligence onthese companies. They are very speculative and may not be suitableinvestments for everyone. They should consult with their investmentadvisor before making any investment decision.
TGR: In2008, we saw junior gold stocks, all gold stocks, go down. Fundmanagers were selling anything they could because they needed cash.You're predicting another major financial collapse in the U.S. Why willit be different this time?
IG: I think the run to goldwill become very extreme this time around, but in many cases these goldstocks 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 valuebetween September and November of 1929, Homestake crashed. But insubsequent 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 inthese kinds of stocks. I don't really have much cash sitting in myinvestment accounts.
TGR: How long do you think theWinter is going to continue? And when do you guesstimate this nextcrash 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 of1930. That's very similar to the rally we went through from March 2009to mid-January this year. Now, we're on the downturn again in themarket, and I am predicting that this one will take us down tosomewhere about 5250 on the Dow either this year or early next year.And then we'll get another rally. Hope springs eternal.
But thenI think the whole stock market bottom will be reached in 2012. The onlyreason I am picking 2012 is I am a huge fan of a great cycles guy whodied in 1955, called W. D. Gann.
TGR: Oh, yes.
IG:He did a lot on anniversaries and so on, and 2012 happens to be the30th anniversary of the 1982 bottom, which was the beginning of the bigspeculative Autumn bull market. And it's the 10-year anniversary of thefirst 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 Iwrote a piece on my website called "This is It" in 2007, and one of thethings that convinced me was when I saw those Bears Stearns funds sortof 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 ofnumbers came in at the same time in 2007. That was so compelling that Iwas absolutely convinced that 2007 was the end. And that's proved to becorrect.
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 bottomedin 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 theLongwave Principle originally expounded by Nikolai Kondratieff. Andwith Longwave Strategies, Ian—who believes that the precious metalssector will continue to provide very secure investment options—assistsselect 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'sforecasts "have taken on a life force of their own and if you care tolisten Ian will tell you how it will all end."
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DISCLOSURE:
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 havementioned in this interview. I and my family are not receiving anycompensation from the companies.