Trading volumes in Gold Mining stocks have fallen...
FOUNDER and chairman of Longwave Analytics and Longwave Strategies, Ian Gordon believes we're on the precipice of very difficult and frightening times and predicts complete financial collapse.
Those periods of darkness though is when Gold Bullion really shines. Gordon, who recently published a special edition of his Investment Insights entitled "The Gold Rush of the 1930s Will Rise Again," believes that companies with gold in the ground now will be the ones to prosper. In this interview with The Gold Report, Gordon discusses where he thinks the Dow will bottom.
The Gold Report: In a recent edition of Investment Insights, you charted the NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index (HUI) of senior Gold Mining stocks, gold itself, the TSX Venture Exchange as a proxy for junior mining stocks and one particular gold company from Dec. 29, 2000. All four were equalized to $100 to make the comparison accurate. What did they show?
Ian Gordon: I wanted to look at relative performance since 2000, when gold bottomed out at around $250/ounce (oz)—that was the beginning of the big bull market. The chart shows that the HUI has outperformed all the other benchmarks since 2000. Since then the value of the HUI has increased about 10 times. The second best performer has been gold itself, which has increased about six times. The Venture Exchange has increased just over two times.
TGR: You've been monitoring the trading volumes of junior precious metal equities, which are down significantly from levels established in the previous decade.
Ian Gordon: They're at about 20% of the volumes in 2008 when the Venture Exchange began to perform very well. That performance was enhanced by rising volume. Since its peak, which was in about April 2011 on the Venture Exchange, the volume has been falling quite dramatically, along with price.
I maintain that is actually bullish rather than bearish because normally volume should follow price. What we have here is volume that is not going anywhere near where price is going. Volume has been decreasing in a downward market. People have been moving their money out because they are scared of the risk associated with investing in the junior stocks, but there has been essentially no buying coming into the Venture Exchange to offset the selling.
TGR: You believe we're now in the winter of the Kondratieff Cycle and that it started in 2000 (http://www.longwavegroup.com/kondratieff-cycle).
Ian Gordon: It's not that I believe—I'm convinced. We're in the winter, the deflationary depression stage of the cycle when debt is essentially washed out of the economy. That process is always a very difficult period. This is only the fourth winter in the long wave cycle. The same process of debt deleveraging occurred in all of the previous winters. In 1837, the stock market peaked followed by a crash, which ushered in the winter depression. The same happened after 1873 and 1929. We are enduring the same process again, going through debt elimination, concurrent with the winter of the cycle.
The reason we picked 2000 for the chart is because winters are always signaled by a peak in stock prices concluding the big autumn stock bull market. Some people will say that the Dow Jones Industrial Average actually made a higher high in 2007 and that's true. However, the speculative end of the market never got anywhere near where it had been in 2000. That's what happens in the final stage of the big autumn bull market—there's a massive amount of speculation. In the current cycle, speculation occurred in the NASDAQ. The NASDAQ is absolutely nowhere near where it was at its peak in March 2000.
TGR: Is it typical for junior stocks to perform as well as they did in the winter of the Kondratieff Cycle?
Ian Gordon: I don't have a record of the actual trading in the junior sector at the beginning of the depression stage following the 1929 stock market peak. All I know is that the money was moving dramatically into the physical metal as well as into the producing Gold Mining companies' shares. What we do know is during the 1930s, huge amounts of capital were employed to fund exploration and build gold mines throughout Canada and the United States. There were many mines developed here in Canada at that time and, according to the US Bureau of Mines, there were 9,000 gold mines operating in the United States in 1940.
There is the example of Homestake Mining. Homestake enjoyed very dramatic moves in its share price in the '30s even though the Gold Price was fixed at $20.67/oz until 1934, when it increased to $35/oz. Investors were Buying Gold stocks regardless of a massive decline in the Dow, which dropped 90% between 1929 and 1932. Homestake's share price fell to $65/share during the stock market crash of 1929, but was up to $83/share in 1930 to $138/share in 1931. By 1933, it reached $373/share. During those years the company paid out significant dividends as well.
TGR: The Dow Jones is around 12,500 now. Are you surprised at all that the Dow continues to do as well as it's doing?
Ian Gordon: I'm pretty sure that the stock market is manipulated by the authorities. I know that people will say that's just conspiracy nonsense. However, Fed Chairman Ben Bernanke and former Chairman Alan Greenspan both have said they feel that stock prices are extremely important to the confidence of the American people. That confidence leads to confidence in the economy. If stock prices can be held at high levels, people feel wealthy when they look at their mutual fund statements and when they spend money. I don't believe that this kind of manipulation is sustainable. I'm a big believer that markets follow natural law.
TGR: Once the Federal Reserve loses the ability to prop up the stock market, will we see a collapse and a rush into gold, much as we did in the early 1930s?
Ian Gordon: Yes. I believe that the Dow will bottom at around 1,000 points or less, mirroring the economic depression caused by the debt bubble collapse.
TGR: Allow me for a minute to play devil's advocate. The investors of the 1930s didn't have the options that investors now do. There are now currency markets. Investors can put their money in Renminbi, German bonds, Swiss bonds, exchange-traded funds, real estate or other commodities. Why is it going to be gold?
Ian Gordon: Because gold is money. Unlike paper money, there's no debt attached to gold. The Chinese are Buying Gold. The central banks are Buying Gold. They're Buying Gold because it's the money of last resort.
TGR: Do you expect interest rates to go up dramatically?
Ian Gordon: Yes. The big debtor nations are having problems with interest rates. Look at Greece. Go to Spain and then Portugal. Interest rates in Spain are over 6%. Italy is getting up over 6%. Imagine what happens to the US if interest rates go to 6%. It's going to be a massive problem. The whole system is collapsing here. It's going to be very traumatic. The move to gold is going to be very dramatic as a result. The move for anybody who has gold assets in the ground is going to be very big, as it was in the 1930s.
TGR: You've helped raise hundreds of millions of Dollars in equity financings for juniors that you feel are deserving companies. What are some examples of those?
Ian Gordon: Let me tell you what I think a deserving company is, first of all. Deserving companies are well managed with good assets in areas without major political risk.
It's been much more difficult lately to find companies that you want to get involved with simply because political risk has increased in many parts of the world, Argentina and El Salvador, for example.
TGR: Do you do site visits?
Ian Gordon: I do fewer now than I used to. I'm getting to be 70 years old and I just find that a lot of traveling is a little onerous. I spend a lot of time discussing companies. I often make several calls a week to different companies that I have an interest in.
TGR: You wrote in your paper, "What we must do is hold shares in companies with already good gold in the ground assets, properly managed, and with sufficient cash to last at least another 18 months, even if that means cutting back on planned exploration expenditures." Does that mean we can expect at least another 18 months of poor performance from junior precious metal equities?
Ian Gordon: I don't expect that's going to happen, but I want to be prepared because it might be a difficult period for companies to obtain financing. Things in Europe are going to unravel pretty quickly. I don't think it's going to take 18 months for this thing to completely collapse, but it might.
TGR: Do you have some parting thoughts for our readers, Ian, before I let you go?
Ian Gordon: What we face here is something that is actually quite frightening: the breakup of the world monetary system, which is a credit-based system. I don't know how the economy functions without credit. It's very difficult and we are facing frightening times. But it's in these periods of darkness that gold really shines. Gold companies are going to come to the fore, just as they did in the 1930s, particularly the ones such as those that we've been discussing today with good gold-in-the-ground assets in politically safe locations.
TGR: Thank you, Ian.
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