A century of "credit money" may be coming to an end...
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, Ian assists select precious metal companies in financings.
In this interview with The Gold Report, Ian Gordon explains why he believes the world economy is in the "winter" portion of an approximate 80-year cycle, how the financial excesses of the past 60 years are now being wrung out of the system, and why he believes the gold standard could return in as little as three years from now...
The Gold Report: Good morning Ian. Thanks for taking the time to bring us up to date with your current thoughts about the economic situation. Can you give us an idea of what you think people should do with their financial investments now in order to protect their assets? What changes do you see, and what do you think now in light of what's happened since January?
Ian Gordon: I think things are actually getting worse. Basically, the currencies of the world are under fire right now. I'm not sure that the Euro will even survive this year. All it will take will be one country, like Greece, to leave it, and then the whole thing will probably collapse like a house of cards.
Of course, the US Dollar, as the reserve currency, has been under fire, as well. So, I think things are coming to a head here, which is something we anticipated in our own work because it's based on the Long (Kondratiev) Wave Theory.
In 2011, we see parallels to 1931 because we're 80 years beyond that time. We believe 20-year cycles are important anniversaries, and this is just four twenties. In 1931, the whole world monetary system effectively collapsed. We've been long anticipating a collapse in the current world monetary system based on the collapse of 1931. However, we see that the current collapse is going to have far more significant and devastating implications than the collapse between 1931 and 1933 simply because it's the collapse of the paper-money system now.
Essentially, paper money is credit money. When paper money fails, credit fails. Effectively, the economy will fail on credit.
TGR: So, given what could be a major upheaval in the way the global economic cycle works, if this all comes to pass, what sort of system will we end up with? Are we going back to the gold standard or something similar to it? How is this going to happen, how long is it going to take and what are the implications for investors?
Ian Gordon: I'm pretty sure that we will go back to a gold standard system. Paper-money systems have never survived throughout history. Generally, they've been set around a one-country experiment. And when those have failed, as in France after John Law's paper-money scheme failed in 1720 or the Assignat failed in about 1798, there was tremendous upheaval. And, following these failures, the country resumed gold as the backing for its currency.
So, I think we have to go back to something like that because, in essence, gold enforces discipline on governments. We've seen a complete lack of discipline in the paper-money system that's been ongoing since the 1931 collapse of the world monetary system. Paper-money printing has just gotten out of control; and now, parallel to the paper-money printing is the debt. They go hand in hand.
We've built massive debt worldwide, which, in total, is probably well in excess of $100 trillion. In the US alone, the total debt is something like $57 trillion. So, that debt is starting to be wrung out of the world's economies and everybody is facing a pretty frightening depression.
As investors, we have to protect ourselves as best we can. We've long been advocating positions in gold and gold stocks. In fact, we've been 100% positioned in both of those — physical and gold stocks — since 2000 because our cycle told us that that's where we should put our assets. So, that's what we've done. I think investors have to do that and they have to be out of the general stock market because, eventually, the stock market has to reflect the realities of the economy.
The current US stock market has been propped up by quantitative easing (QE) with massive amounts of money injected into the banking system. That banking system is not putting that money back into the economy because consumers are completely tapped out; they can't borrow any more money. So, much of the money the Federal Reserve is putting into the banks is being used for speculation.
TGR: Can we pursue the mechanics of this a bit further? Given the internationalization of the world economy and money being just electronic numbers on computer systems, how does the world get back on some sort of a hard-money standard without years of turmoil?
Ian Gordon: When the global monetary system started to collapse in 1931, it began with the failure of the Austrian Creditanstalt Bank in Europe. Everyone was trying to bail out this large bank. The Fed was trying to bail it out, the Bank of England was trying to bail it out and JP Morgan also was in there trying to bail it out.
They all knew the implications of the failure of this one bank would cause the bankruptcy of Austria and the failure of many other banks plagued with rotten paper money on their books. So, when this bank collapsed in May 1931, it was the beginning of the end of the world monetary system. A bankrupted Austria was forced out of the gold exchange standard system and was soon followed by Germany.
Great Britain was forced out of the monetary system in September 1931, which effectively brought down the entire world monetary system. A new monetary system didn't evolve until 1944 when the Bretton Woods system was signed into law. It was a long hiatus. The parallels with the current evolving monetary system collapse are pretty plain to see.
After 1931, America was pretty self-sufficient, had all the oil and food it needed and became very isolationist. Great Britain traded within its then-empire. World trade collapsed following 1931 and 2011 may well be a repeat of that tragic year, with the collapse of the Euro and the unraveling of the entire global monetary system.
It could be a long hiatus before a new system is developed. It goes back to that 20-year anniversary cycle I mentioned. The pure gold standard system that had evolved initially in Great Britain in 1821 collapsed in 1914 because the combatants in World War I couldn't remain on a gold standard system and print the money they needed to fight the war. So, I would say that we will likely return to a gold standard in 2014 — 100 years after the gold standard collapsed in 1914.
TGR: So, you're saying investors have a two- to three-year window to position themselves and their investments to profit from what's going to happen when this is all turns around.
Ian Gordon: Right.
TGR: We've had all this volatility in the metals prices over the past year and some substantial gains. How is this affecting companies in the mining business?
Ian Gordon: For the main part, I've positioned myself in either new producing companies or companies that have gold assets in the ground. I'm principally more disposed to investing in gold than I am in silver. I think these assets are going to be extremely valuable.
I met with one of my website subscribers just yesterday and said it's quite possible that there won't be enough physical gold available on the market to supply the demand. We produce only 80 million ounces (Moz.) of gold a year from existing mines. I think, eventually, the demand for gold will become so extreme that the producers won't want to be paid in paper money because the paper system is collapsing.
So, gold may well be taken out of the market, that's why it is important to get the physical Gold Bullion now rather than later. Of course, Gold Mining stocks that produce physical gold are going to be extremely valuable, as well.
TGR: Obviously, you're quite selective about which companies you decide to invest your own money in and suggest that other people do the same with their money. What criteria do you use in selecting companies for your portfolios?
Ian Gordon: First, I have to meet with management before I ever put my money into a company. I realize that a lot of investors can't do that, but they can certainly talk to management. On the junior side, management is usually very disposed to talking with perspective shareholders. It's just a matter of picking up the phone and asking the president of a company why it is a good investment, and then listening to the answers. I have to feel confident that a company's management will be able to produce what they say they're going to produce on behalf of the shareholders.
Another criterion that I use is geopolitical risk. I want to invest only in companies that I am confident are in politically secure jurisdictions. I have been bitten in the past by investing in companies in countries that I thought were politically secure, which became insecure. In Ecuador, the rules changed and mining almost ceased to function in that country.
So, I particularly like companies that have assets in Canada, which I think is a very safe jurisdiction. Many of the companies that I've selected for my own portfolio have assets in Canada. I also like Mexico.
I think the US is ok, but I'm a bit worried about what might happen when the whole system starts to collapse. After 9/11, I remember when an unnamed Federal Reserve spokesman said in an interview that it looked at many ways to avert a panic. One of the things he mentioned was buying gold mines. If the US doesn't have the gold it purports to have, it could well be that the country could nationalize gold companies. I do have investments in companies that are exploring for gold in the US, but not a lot. I particularly like companies in Canada.
TGR: There was a little fear recently about the possibility that the New Democratic Party (NDP) may be coming back into power in British Columbia. Its administration had a devastating effect a generation ago, when it caused the whole BC mining industry to retrench. I guess that's probably not going to happen at this point; but if something like that was to happen, would that possibly have a negative effect at least on BC?
Ian Gordon: Well, it might. If the NDP does win in British Columbia, I think it probably learned from past experience. Under recent governments, there's been a tremendous amount of exploration and a lot of companies going into production in the Province.
It's going to be very hard to shut those down because they're all permitted under present mining laws. So, if the NDP was to win in BC, it's not something that I would be in favor of because I live in the Province and know what negative effect it had on the region's mining not long ago. I think most of the companies in BC now are sufficiently advanced in terms of their exploration, and some have gone into production. So, all the permitting is in place and it's going to be very difficult to rescind it.
TGR: Did you have any last thoughts about the future of the economy you'd like to share?
Ian Gordon: Unfortunately, I'm very pessimistic about the economy. If paper money, which is credit money, collapses, then, essentially, credit collapses and the economy grinds to a halt. Quite a scary scenario could evolve from a collapse in the paper-money system. We almost had a major credit failure in 2008. What happens if credit does that again? Everything stops — trucking stops, the movement of goods stops and it becomes a very difficult time for everyone. I think people have to prepare for the worst.
TGR: We've certainly gotten used to a system that is automated and electronic. People press buttons and expect results. If things start falling apart as you predict, we could see some real turmoil — financial and possibly even physical.
Ian Gordon: Investors need to keep those possibilities in mind and protect their assets as best as they can. I'm a little reluctant to admit it, but one of the things I keep on hand is a one-year supply of food. It's a relatively inexpensive way of protecting your food source. If the system falls apart, as it could, you won't be able to run down to the store and get what you want when you need it.
TGR: Thank you very much, Ian, for your valuable insights.
Ian Gordon: Thank you very much.
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