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After leaving the securities brokerage industry in
2009, Ian Gordon founded Longwave Analytics and Longwave Strategies to focus on protecting investors from
what he believes is a global macroeconomic meltdown that is already underway.
Gordon proposes that physical gold and certain gold stocks will be investors'
best hedge and overall solution to the worst financial crisis the world has
seen. In this exclusive interview with The Gold Report, Gordon shares
his thoughts on the current economic mess and how investors can take action
now.
Companies Mentioned: African Queen Mines - Agnico-Eagle Mines Ltd. - Barkerville Gold Mines Ltd. - Colibri Resource Corp. - Fire River Gold Corp. -
Freegold Ventures Limited - Golden Goliath Resources Ltd. - Northern Freegold
Resources - PC Gold Inc. - Temex Resources Corp. - Terraco Gold Corp.
The Gold Report: You founded this firm based on your long wave
theory that is based on the Kondratieff Cycle. How is this same or different
from Kondratieff?
Ian Gordon: We have gone significantly beyond Kondratieff's original
thesis published in 1925. I am very proud that we have made the cycle far
more encompassing than Kondratieff would have ever envisioned. For instance,
one of the key things we have done is identify an investment cycle within the
long cycle. This is an extremely valuable tool for investors, which allows
them to make appropriate investment decisions in each quarter of the cycle.
TGR: Do you feel that you have legitimized the Kondratieff Cycle
beyond theory and as a general principle?
IG: Well, I think we have. The proof is in the pudding. We have been
able to recognize exactly where we are in the cycle and envision what the
implications are likely to be. I think we have been able to pinpoint that
with a great deal of accuracy the critical aspects of the cycle and how these
relate to the economy and to investing.
TGR: You obviously can't expect investors to wait through an 80-year
super cycle. You've managed to isolate the bull and bear markets. Is that
what you are saying?
IG: Yes, we have not only been able to isolate the bull and bear
markets, but also we have been able to identify the best and most appropriate
investments for each quarter of the cycle, and they generally work throughout
that quarter. We have broken the cycle into the four seasons. We call it a
lifetime cycle because it is 60–80 years, and each of its seasons is
approximately 15–20 years, a quarter of the cycle. By the way, this is
the fourth cycle, and it has always repeated pretty well the same in every
cycle. Certainly essential investment decisions have been the same for each
of the seasons in the cycle.
TGR: Take it from the beginning.
IG: Spring essentially renews economic growth. It is the rebirth of
the economy following the winter of the cycle, which is the time when the
economy dies and when debt is wrung out of the system. Because spring is the
rebirth, stocks and real estate make appropriate investments and do very well
for investors. We can show from our current cycle, which we maintain began in
1949, that the Dow Jones Industrial Average rises
from 161 points at the beginning of spring and ends at 995 points at the end
of spring. Of course, real estate also does exceptionally well during this
period.
Then, following spring we move to the summer, which began in 1966 in our
current cycle. We have always had inflation in summer because there has
always been a war in this part of the cycle, and that war has always been
financed through a huge expansion of the money supply. In the first cycle, it
was the War of 1812. In the second cycle, it was the U.S. Civil War. In the
third cycle, it was the First World War from 1914 to 1918. And, in the fourth
cycle, it was the Vietnam War. With that inflation, stocks do not do that
well and essentially make no gains. If anything, stocks end summer about 30%
below the point from where they began. Conversely, gold performs
exceptionally well, as do all commodities. Gold goes from $35/ounce (oz.) in
1966 to $850/oz. in 1980, and the Dow goes from 995 at the end of spring and
ends the summer at 777 points. Real estate continues to do well in the summer
of the cycle.
Four things always anticipate the onset of autumn in every cycle: These are
the peak in interest rates; the peak in the consumer price index; the bear
market in stocks such as the one that occurred between 1981 and 1982; and a
recession. Now, autumn is always the point from which stocks, bonds and real
estate perform the best in the cycle. It is the most speculative period in
the cycle, and it is when debt really starts to build exponentially, and so gold
performs very poorly in this portion of the cycle. In fact, gold prices go
from that $850/oz. peak at the end of summer to $250/oz. at the end of
autumn, and the Dow goes from 777 to 11,750 and real estate continues to
perform very, very well. So, real estate has a three-season growth period and
stocks have a two-season growth period, to the end of autumn, while gold has
a one-season growth period.
The winter of the cycle, which we call the payback period, is when the
economy dies. It goes into a deflationary depression overcome by the
overwhelming debt in the system that has built-up principally through autumn.
When we get into winter, we get very defensive and we move into gold, which
performs exceptionally well, as do gold stocks. The general stock market
performs abysmally. Between 1929 and 1932, the Dow lost 90% of its value.
And, real estate also performs very, very poorly on account of the economic
depression and the fact that homeowners have assumed huge mortgage debt to
purchase their homes. During this time many people lose their homes because
they are unable to make the mortgage payments. House prices decline to very
low levels and in many cases mortgage debt is significantly higher than the
value of the home.
TGR: Where are we in the cycle now?
IG: We are in the winter. The signal of the onset of winter was the
peak in stock prices in January 2000 for the Dow and March 2000 for the
NASDAQ. That was the end of autumn. And, yes, the Dow was higher than that in
October 2007, but, again, that was really an abnormality created by paper
money systems. The Federal Reserve was able to print copious amounts of
money, pump it into the economy and revive the stock market after 2000 and
into 2007. That money printing also contributed to the greatest real estate
bubble in history and we know what the outcome of that bubble is.
TGR: I'm looking at your dire wintery target prediction that the Dow
Jones Industrial Average will descend by more than 90% to 1,000 from current
levels that are around 11,000. It sounds like a global economic meltdown of
unseen proportions.
IG: Politicians are desperately trying to revive the economy by
printing even more money. So, this bear market that started in 2000 continues
in 2011. Normally bear markets last about one-third the time of the preceding
bull market; obviously that has not been the case this time. So, we think
when the end does come, it is going to be very traumatic. Eventually the
Federal Reserve will lose control and will not be able to get the stock
market reignited because it will reflect the reality in the economy. We think
the Dow at 1,000 is probably a little optimistic. We think it could go below
that to something like 500 if we were to emulate the 1929–1932
experience.
TGR: That translates into massive unemployment, does it not?
IG: It translates into an economy that's basically a disaster: massive
unemployment, huge bankruptcies, breadlines and a government that, in fact,
can't raise the cash to support the depression. Remember, going into the last
depression the U.S. government was extremely wealthy, and America was the
world's largest creditor nation by a huge margin. The U.S. government debt
had been paid down all the way through the 1920s, and it went into the last
depression with government debt of only $16 billion. When the depression hit,
the government had oodles of cash to throw at it to get the economy going.
Yet it was never effectively able to do that. The Second World War brought us
out of the depression.
TGR: Ian, I know you said gold will perform quite well in this kind of
environment, and so I assume you believe there is much more upside yet for
gold.
IG: Well, I do. One of the ways that we've always been able to measure
where we think gold is going to go is simply using the Dow/Gold ratio, the
value of the Dow Jones Industrial Average divided by the price for an ounce
of gold. When this ratio reaches extreme highs, stocks have performed
exceptionally well. So, we would anticipate that it would reach an extreme
high at the end of spring of our current cycle, and so it did when it was
about 28:1. In other words, it took 28 ounces of gold to buy the Dow Jones.
And at the end of summer, gold performs well, and stocks don't. It went down
to a 1:1 relationship that was the lowest low, which we have seen twice. But,
we are envisioning that we are going to go below 1:1 simply because we made
an all time high at the end of autumn of 44:1. The decline must be in
proportion to the advance. So, we think the decline is going to take us to
something like a quarter to one (0.25:1), which is
$4,000/oz. gold and a Dow of 1,000. We're currently at about 6:1 on the
ratio.
TGR: What about gold equities versus physical gold? Will gold equities
climb this wall of fear into this winter cycle?
IG: Well, we know that between 1929 and 1936 gold equities performed
exceptionally well. I think that the reason that they haven't performed that
well recently, particularly in the junior sector, is that [non-gold] stocks
have generally performed pretty well aided and abetted by the Federal
Reserve. If the bear market had followed its normal course, it should have
ended in 2006, but it did not follow that normal course. So, once that bear
market begins in earnest and once the Federal Reserve loses control of the
stock market, we believe that the gold stocks will begin to mirror the actual
price of gold, for which our forecast is $4,000/oz. And, that may be
conservative because we believe that when the whole debt bubble continues to
unravel that you won't be able to obtain gold at any price. But at
$4,000/oz., the gold stocks will perform exceptionally well.
TGR: This would be a dramatic divergence between gold equities and
non-gold equities. What are your recommendations for investors?
IG: Well, we have always believed that you should definitely own the
physical metal as well as the equities. And we have always had a big belief
in the performance of the juniors because of the leverage that they provide
to the price of gold.
TGR: Where do investors go? Which equities?
IG: Well, one that we like very, very much is Barkerville Gold Mines Ltd. (BGM:TSX.V). The reason we like the company is that it is in
production. It's producing 25 thousand ounces (Koz.)/year of gold from its QR
deposit in central British Columbia, Once it receive its permits to mine the
Bonanza Ledge deposit, and that should be very soon, production will increase
to 50 Koz. per annum. This makes the company very positive on a cash-flow
basis. Barkerville is also finding and adding quite dramatically to its
ounces in the ground position. It is going to bring in a second mill, and
once that is permitted, production will rise to about 150 Koz./year. It is
targeting 2013 for the second mill to be up and running.
TGR: Over the past 12 weeks, Barkerville is down 30%, and yet it still
has a market cap of $100 million. It looks like shares have sufficient
liquidity.
IG: I own a lot of it; it could be 30% of my stock portfolio.
TGR: So Barkerville would be your favorite?
IG: It's my favorite, but there are also others that I like an awful
lot. I love PC Gold Inc.
(PKL:TSX) which I own. The company is in Pickle Lake,
Ontario. I sort of trust Canadian mining, not because I'm a Canadian, but
just because I feel it has been our heritage for so long. The Canadian
government is always going to be a party to it. PC Gold has a very, very rich
underground mine at Pickle Lake, and it has outlined about 1.2 million ounces
(Moz.). PC Gold has also discovered a surface zone. It's going to be a lower
grade, but this gold in the ground has got to be worth something.
PC Gold hit $1.80 in April 2010, and I think it's trading at around $0.47
right now. The other thing about PC Gold is that it has about $7.5 million in
cash in the bank. So, even if we are in a major credit crunch, and I suspect
we are, PC Gold has money to outlive a credit crunch and then get back on
track and eventually be able to put its mine back into production.
TGR: The $7.5 million on its balance sheet represents about a third of
its market cap.
IG: Right. We're very keen on it and we own a lot of shares, all of
which I bought in the market. I'm very happy to own this company.
Another one that we think a lot of is Colibri Resource Corp. (CBI:TSX.V). All of the Colibri properties are in Sonora,
Mexico. One of its properties is very near La Herradura, which is owned by
Newmont Mining Corp. (NEM: NYSE) and Fresnillo PLC (FRES:LSE). It's a 12 Moz.
deposit that consistently seems to stay at 12 Moz. In other words, as fast as
the joint-venture partners mine the deposit, they replace it with new found
gold. The Colibri property is about 12 km. from La Herradura and it has
almost the identical geology to La Herradura. Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) is doing a joint venture earn-in on that property.
So, you've got a major producer earning into that property and, if successful
as Newmont and Fresnillo have been at La Herradura, it will take Colibri into
production and hopefully find the 12 Moz. plus that they've found at La Herradura.
I think it is very, very cheap. Agnico owns just under 20% of the company and
Sprott Asset Management owns just under 20% and my wife and I own just under
10%. So, effectively, that's half of the company's shares. Colibri has about
$2 million cash, and it has an excellent board.
TGR: I'm looking at Colibri's market cap of about $7.2 million. I'm
thinking that would scare a lot of people off.
IG: Well, I'm not scared off because Agnico is not going to allow this
company to flounder. I'm sure it's going to support it. And I don't think
Sprott is going to allow this company to flounder given the fantastic assets
that it has.
Another company that has just gone on our website is Terraco Gold Corp. (TEN:TSX.V). I own shares in the company and I really like
Terraco. It owns 100% of a property in Idaho called the Almaden Project,
which it bought from a company in financial distress. The property has just
under 1 Moz. already defined in an NI 43-101. Again, this company has a very,
very strong board. Terraco has another property in Nevada, the Moonlight
Project, which adjoins the north side of Barrick Gold Corporation (ABX:TSX;
ABX:NYSE) and Midway Gold Corp.'s (MDW:TSX.V; MDW:NYSE.A) Spring Valley
Project. We think that this company will do exceptionally well for
shareholders.
TGR: Was there one more you wanted to mention?
IG: Actually there are several other companies that I like, but let me
mention a couple more and give you the names of some other companies that I
own. I am particularly fond of Temex Resources Corp. (TME:TSX.V; TQ1:FSE), which has all its properties in Ontario. One of
the properties has outlined an NI 43-101 resource of about 1.2 Moz. of gold.
It is also now drilling and being very successful on a property that it has
in the Timmins gold camp, of which it owns about 60%. Goldcorp Inc. (G:TSX;
GG:NYSE) owns 40%.
So, that particular mine was the richest mine in the Timmins camp. I own a
lot of shares, and I have just purchased more shares in a private placement
that the company is now doing.
Another company that I have long owned and think will ultimately perform very
well for shareholders is Golden Goliath Resources Ltd. (GNG:TSX.V; GGTHF:OTCPK). The properties are all in Mexico and several have
had significant past producing gold and silver mines on them. Agnico-Eagle
owns about 8% of the company's shares and Sprott Asset management owns a
little less than 20%. The company is working toward a joint venture agreement
with Agnico-Eagle on its Las Bolas property.
Other companies that I own and like are African Queen Mines (AQ:TSX.V), Fire River Gold Corp. (FAU:TSX.V;
FVGCF:OTCQX), Freegold Ventures Limited
(FVL:TSX), and Northern Freegold Resources
(NFR:TSX.V). All
these companies have significant gold in the ground assets. Fire River Gold
is in production. I would encourage prospective investors to visit the
companys' websites and read through the corporate presentations and even to
phone the presidents of companies before they make a decision to purchase
shares.
TGR: My final question is, how long will winter last?
IG: It will last until the debt has been eradicated from the economies
of the world. So, to give it a date is difficult. If the whole world monetary
system collapses under the massive mountain of debt that has accumulated
worldwide, then it will happen reasonably fast, and a new world monetary
system will evolve. I think that new system will be based on gold.
TGR: Ian, this has been very valuable. Thank you.
IG: Thank you very much for having me.
A globally renowned economic forecaster, author and speaker, Ian Gordon is founder and chairman 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 Kondratiev. With Longwave
Strategies, Gordon assists select precious metal companies in financings.
Educated in England, Gordon graduated from the Royal Military Academy,
Sandhurst. After a few years serving as a platoon commander in a Scottish
regiment, he moved to Canada in 1967 and entered the University of Manitoba's
History Department. Taking that step has had a profound impact because,
during this period, he began to study the historical trends that ultimately
provided the foundation for his Long Wave theory. Gordon has been publishing
his Long Wave Analyst website since 1998. Eric Sprott, chairman, CEO and
portfolio manager at Sprott Asset Management, describes Gordon as "a
rare breed in the investment-advisor arena." He notes that Gordon's
forecasts "have taken on a life force of their own and if you care to
listen, Gordon will tell you how it will all end."
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DISCLOSURE:
1) George Mack of The Gold Report conducted this interview. He
personally and/or his family own shares of the following companies mentioned
in this interview: None.
2) The following companies mentioned in the interview are sponsors of The
Gold Report: Barkerville Gold Mines Ltd., PC Gold Inc., Terraco Gold
Corp., Goldcorp Inc.
3) Ian Gordon: I personally and/or my family own shares of the following
companies mentioned in this interview: Barkerville Gold Mines, Colibri
Resources, Terraco Gold, Temex Resources, Golden Goliath, African Queen
Mines, Fire River Gold, Freegold Ventures, Northern Freegold. My company,
Long Wave Analytics, is paid by all the aforementioned companies to appear on
the company's website.
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