Source: George Mack of The Gold Report (10/10/11)
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. 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?
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