That's why we're saying $4,000 per ounce gold, but that's a number that we've been predicting for about two years. About eight years ago we were predicting $2,000. But we think the sort of calamity that we're anticipa..
The Gold Report: Today we are talking with Ian Gordon, president of Longwave Analytics. Your market analysis model, known as the Longwave Principle, is a modified version of the Kondratieff cycle. Could you give us an overview of how it works?
Ian Gordon: I think that I've actually embellished it quite a lot. I've done far more than I think Kondratieff ever envisioned. For instance, breaking the cycle into four seasons—I don't think that's original. But I think those season breaks are very appropriate.
Spring is the birth or rebirth of the economy. Summer is the time when the economy reaches fruition. Autumn is a period where everyone feels very good because it's always the season where you have the biggest bull market in stocks, bonds and real estate. Winter is the period when debt is washed out of the system so that it can start refreshed again in the spring. The cycle lasts a lifetime of about 60 or 70 years. I call it a lifetime cycle, because we live only one cycle in a meaningful way. For that reason, it is also very difficult for anyone to recognize where we are in the cycle because we haven't lived in that period before.
TGR: And that model says we are in the winter of that cycle.
IG: Yes, we're in winter. The indication of the season change from autumn to winter is the bull stock market peak. We say that peak was effectively reached in 2000, not 2007, because NASDAQ obtained the real speculative peak in the market in March 2000. When that peak is reached, as it was in September 1929, it signals the onset of winter and the deflation/ depression stage of the cycle. That whole winter period is really where debt is expunged from the economy and that process is extremely difficult for creditors and debtors alike.
The last depression, for instance, following the 1929 stock market peak, brought the entire U.S. banking system to its knees. In fact, between 1929 and 1933 about 10,000 banks failed. That kind of process is bullish for gold because people move to gold as money of last resort. It's the money that they ultimately place their full trust in. They move away from paper as a monetary medium.
TGR: And this is what you believe will push gold to $4,000 an ounce?
IG: That's why we're saying $4,000 per ounce gold, but that's a number that we've been predicting for about two years. About eight years ago we were predicting $2,000. But we think the sort of calamity that we're anticipating here is going to make the rush to gold quite dramatic. We're not even sure $4,000 will be the high. It could be something significantly greater than that.
TGR: Could we see another 10,000 banks close?
IG: I think there are only 8,000 banks in the U.S., but you could see a significant number of the banks fail. We have a major debt crisis worldwide right now. Who are the biggest creditors? The creditors are the banks, so as debt comes out, many of those banks are going to be in dire straits. We haven't really seen what's been happening to the banking system with regards to commercial real estate. We've certainly seen what's happening with regards to consumer real estate. But on the commercial real estate side, the banks are shielding themselves from obviously very difficult times in that area.
TGR: In addition to $4,000 gold, you're predicting that the DJIA is going to fall to 1,000. It's about 10,500 now. That would have gold trading at four times the Dow Jones Industrial Average (the Dow). How would you respond to people who might ask, "Ian, have you gone mad?"
IG: Well, I think a lot of people think I am mad. But so far everything that we've anticipated through our understanding of this cycle has come to pass. We know how desperate the winter of the Kondratieff season is because that process of debt unwinding is very, very painful. In the last depression, 25% of the American work force was unemployed. You had a massive drop in GDP in the United States; the economy basically collapsed by 45%. If that were to happen today, you would go from a $14 trillion dollar economy to about an $8 trillion dollar economy. That means that things are desperate. Major institutions are going bankrupt. People are going bankrupt because they've taken on too much debt and it's pushing the banks into bankruptcy as well.
TGR: So we are going to see the first signs of this at an institutional level?
IG: I remember going to Japan to speak on the cycle about seven years ago. I was ferried around Tokyo by a man in this chauffeur-driven Jaguar. This gentleman was very interested in investing in gold. He was talking and pointing to these big skyscrapers and he said: "See this building? Owner bankrupt. Bank bankrupt." That was a big lesson for me. We're going to have the same kind of experience here in North America because the people who put those buildings up have borrowed heavily from the banks. They're going to go under and the banks are going to be in dire straits as a result of lending them all that money.
TGR: What's the timeframe for all of this?
IG: It's already happening. I mean the debt bubble is unwinding worldwide. I think the next leg down restarts in earnest when it becomes apparent that North America's not immune to the banking crisis. We've already had the initial banking crisis here in North America; the Brits have had their banking crisis, and so on. But I think the next leg down will be some big bank in trouble in the United States. Then people will start to panic and move to gold. With that, the stock market will come down quite dramatically because the economy won't be recovering. We're not going into a double dip. We're going into a depression. I'm convinced of that.
TGR: Is there enough gold to go around?
IG: We don't actually produce very much gold every year. We only produce about 80 million ounces from the mines. You've got a lot of people who are going to return to gold because that's the monetary medium that they really trust. Eighty million ounces a year isn't going to go a long way to satisfy the demand that I see happening.
TGR: But gold stocks went down along with everything else when we had the massive correction in 2008. If we get to $4,000 gold and a 1,000 DJIA, won't everything be pretty much wiped out?
IG: We know what happened to the gold stocks following the 1929 peak. In the initial October 1929 crash, the gold stocks crashed alongside the general stock market. We had a rally back into April 1930 and the gold stocks came back in that rally. Then after April 1930, it was almost straight down for the Dow, yet the gold stocks continued to rise. The price of gold was fixed until January 1934 at $20.67, yet the gold stocks continued to go up.
For instance, Homestake Mining's price more than doubled between that drop in 1929 until early 1934, when the price of gold increased from $20 to $35 an ounce. So it doubled in the face of the Dow dropping quite dramatically. In fact, between 1929 and 1936, Homestake's price actually increased by six times its value. We see a similar thing happening this time. I mean at $4,000 gold, gold stocks are going to be worth a lot of money. Let's say they're producing gold at a cash cost of production of $500. At today's gold price per ounce they're making $600 or $650 an ounce in profit. If you go to $4,000, they're making $3,500.
TGR: But won't there be anarchy on the streets?IG: Well, I think there's going to be major civil unrest. You're starting to see a little bit of that manifesting itself in the form of these Tea Party groups that are in the United States. But when you start to see 25% unemployment and a Dow that's basically as worthless as it was in 1932, I think people are going to be pretty angry.
TGR: In your last conversation with The Gold Report, you talked about this happening perhaps as quickly as 2012.
IG: The reason I picked 2012 as a bottom is because I was using anniversary dates because I'm a huge fan of W.D. Gann and that's kind of the work that he would've done. There are lots of anniversaries associated with 2012. . .It's the 80-year anniversary in 2012 of the 1932 bottom when the Dow was at 41 points. And 1982 was the bear market bottom that saw the beginnings of the big autumn bull market. Also, you've got an anniversary in 2002 when we had our first bear market bottom from that 2000 peak. There are so many anniversaries around that that I picked 2012, which would mean that you'd have to have a massive collapse starting almost immediately.
IG: It is very difficult for people to comprehend this because, first of all, stocks have risen in value since the 1932 bottom when the Dow hit 41. Every time we've had a bear market, stocks have always recovered pretty well from that bear market and gone up to new highs. We've been conditioned to believe that stocks are a lifetime investment. We've demonstrated through our work they're actually not a lifetime investment. They work in the spring of the season because of the rebirth in the economy. They work in the autumn because of the speculative period spins in real estate. That's the massive bull market and it always occurs in the autumn of the cycle. Similarly, we've also been conditioned to expect that every time the economy has a hiccup we'll recover from the recession and go on to bigger and better things. In effect, that has happened as well.
TGR: Why should we think that won't happen again?
IG: During the major 1980–1982 recession the U.S. was still a creditor nation. Her manufacturing base was much more significant than it is today. Her economy was probably 40% of the world economy. Now it's about 24% of the world's economy. This depression is something that we've never experienced. The recovery from these takes much, much longer because of all that debt that's being taken out of the system.
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