Ian Gordon: Economic Winter Could Thaw Gold Equities

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Ian Gordon has said it before: We’re on the edge of an economic maelstrom that will breathe new life into the gold exploration industry.

 

The Gold Report: Ian, you believe that 2013 is likely to be an economic and financial disaster. But you have been saying similar things for years. Why is 2013 likely to be different?

Ian Gordon: Yes, I have been saying similar things for years. However, I know through my work that we are in a longwave winter. The whole purpose of the longwave winter is to cleanse the economy of debt.

The longwave winter began with the stock market peak when the Dow Jones Industrial Average hit 11,750 in January 2000. That was akin to the 1929 stock market peak. Following the 1929 peak, the worst of the longwave winter that followed was over by 1933. Between 1929 and 1933, 10,000 U.S. banks failed, the U.S. stock market lost 90% of its value, U.S. unemployment reached a peak of 25% and U.S. gross domestic product collapsed by 45%.

“The whole purpose of the longwave winter is to cleanse the economy of debt.”

This time around, it’s been 13 years since the peak and the process of debt elimination hasn’t occurred. If anything, we’ve added to the debt issue. I’m convinced that the worst is still in front of us. We haven’t had a catastrophic economic decline that forced massive unemployment rates and collapsed the U.S. banking system. This is the year that is going to occur because I believe there’s going to be a major peak in stock prices that is going to start a decline that will be every bit as vicious as the bear market decline between 1929 and 1932. The Federal Reserve Bank has been able to hold back the ravages of winter this time around. It wasn’t nearly as active between 1929 and 1933 as it has been during this period.

TGR: Some believe that the Fed and other market manipulators will be able to hold back those ravages in perpetuity until the economy does permanently get on its feet again. Why do you believe they’re not likely to succeed?

IG: That’s an impossible task because we haven’t gotten rid of the debt. Economies function on savings. The purpose of this winter is to get rid of the debt. It appears to be a very benign winter, but we’re convinced that all markets are ultimately governed by natural law and that man is powerless to hold back the natural occurrences. What goes up has to come down. We’ve had an economy that has been rising since 1949. Total worldwide debt is about $200 trillion ($200T). Total debt is the U.S. is about $56T. It has to be washed out. It’s going to be very painful during that process.

TGR: If you are correct, one would expect the gold price to climb dramatically in 2013. Won’t global governments do all they can to stanch gold’s upward momentum?

IG: They’ve been trying to do that since the late 1950s, when the U.S. set up the London Gold Pool to try and keep the price of gold down to $35/ounce ($35/oz). That was a six-year fiasco where if the price was bubbling above $35, the members of the London Gold Pool sold gold. Eventually, it collapsed because the French, who were 10% of the London Gold Pool, gave up on it.

In the late 1970s, when the gold price was starting to rise, the International Monetary Fund and the U.S. government sold gold to try and hold down the price.

There was no reason to control the price of gold in the 1980s and 1990s because it collapsed.

Then it started to look as if the gold price wanted to bubble again, so that countries like the U.K. were inveigled to sell huge portions of their gold. In 1999, European countries set up the Washington Agreement on Gold that controlled the amount of gold that they could sell.

The gold price has been controlled in the COMEX market. Once the gold price really starts to get away and demand overwhelms that, which I suspect will occur this year, then governments are going to lose control of the gold price through COMEX. The mining industry only produces about 80 million ounces (80 Moz) gold/year. It’s a very small amount.

TGR: Do you expect silver to rise in tandem with gold?

IG: I do. As the whole system starts to collapse, as we believe it will in 2013, a huge demand for precious metals is going to develop. Silver will rise in tandem with gold.

“Silver will rise in tandem with gold.”

Last year, central banks bought 500 tons of gold, mainly in China and Russia. Central banks are already amassing gold. There will be a time when you won’t be able to obtain gold at any price. It will simply be off the market.

Silver, the poor man’s gold, will also rise, but I don’t believe you’re going to see the gold-silver price ratio change that dramatically. Some people are talking about it moving from 50:1 down to 16:1. I don’t see that happening because the demand for gold is going to be so massive.

Silver demand will be big, but a major part of the silver price is its industrial component. I’m talking about a huge economic depression, which means that that industrial demand for silver will be vastly reduced.

TGR: Industrial demand will be reduced, but won’t monetary demand skyrocket? If gold is trading at a few thousand dollars an ounce, wouldn’t most of the planet be unable to afford it?

IG: Most of the planet won’t be able to afford it, but the wealthy and the central banks will buy it at any price. As I said, the central banks bought 500 tons last year. They’re buying gold right now. The wealthy will continue to buy it.

TGR: Germany recently announced plans to repatriate its gold from U.S. and French banks. What did you make of that move?

IG: It’s a small ripple in a big pool because the amount that it is taking back from the New York Federal Reserve is 20% of the German gold held there. But Germany is taking it back over a seven-year period—that makes me suspicious. A lot of people have suggested, and I feel that it’s probably true, that the Fed doesn’t have the gold that it purports to have because a lot has been lent out. Maybe some of it has been sold to try and suppress the gold price.

TGR: In your research you’ve quoted Dr. Robert McHugh, who sees a major topping formation in the Dow. He calls it the “jaws of death pattern.” Tell us more about that.

IG: Dr. McHugh is suggesting a megaphone pattern. There’s the peak in 2000, when the Dow hit 11,750. There’s a higher peak in 2007, when the Dow hit 14,200. Now, he’s suggesting the third peak, which will be when the Dow hits approximately 15,000. Once we reach that peak, he says that it is the beginning of a multi-century bear market. This bear market, according to McHugh, is one degree worse than the winter bear market in 1929 to 1932. This is going to be a devastating bear stock market.

TGR: In order of magnitude, what is one degree worse?

IG: It’s difficult to imagine prices dropping much below the 90% drop experienced between 1929 and 1932, but I think it’s going to be greater. I’m quoting about a 93% drop to take the Dow to 1,000. I picked 1,000 because the Dow made 12 attempts to get through 1,000 from 1966 to 1982. That level was a huge resistance level for the Dow. These big resistance points become support points.

TGR: Are you more concerned about the European or U.S. economy?

IG: I’m concerned about all of them. There’s too much debt everywhere, and that is overwhelming all the countries.

TGR: Yet you recently returned from Europe where you believe there is still an appetite for junior mining company equities. Why do you continue to be involved with these companies if you see this massive economic collapse approaching?

IG: I have to go back to the previous winter cycle that started in 1929. Once that stock market collapsed, the remaining capital flowed to gold. You can see it in the price of Homestake Mining Co., which appreciated between 1929 and 1936 by 600% with only one increase in the gold price, from $20.67/oz to $35/oz in January 1934.

“I am convinced that the worst of the winter is right in front of us, and that is extremely bullish for gold.”

It’s been a very hard period for the junior mining sector. Why? Because the general stock market has performed so well. Gold stocks perform well when the general stock market performs very badly.

TGR: Homestake was a gold producer. Most of the companies you’re involved with are exploration plays, which are at the high-risk end of the gold equity space.

IG: Capital flowed to the gold mining stocks in the 1930s, particularly into exploration. People wanted to find gold mines. So many of the gold mines that were started were founded by junior mining companies. Take the Abitibi greenstone belt—I was just helping market Temex Resources Corp. (TME:TSX.V; TQ1:FSE), which has three operating mines on the Whitney property that commenced operations in the 1930s. The current Osisko Mining Corp. (OSK:TSX) mine, the Canadian Malartic mine in Quebec, was started in the 1930s. There were probably 200 gold mines that were started in the 1930s here in Canada. According to the U.S. Bureau of Mines, there were 9,000 operating gold mines in the U.S. in 1940. The junior sector was extremely bullish in that period.

TGR: You’ve been marketing companies in Europe. Is there a greater appetite for gold companies there?

IG: I really do think so. We toured a different city each day. We saw about 120 investors and money managers. In my presentation, I gave the example of a company that came to me in 2001 and asked me to finance it. This company had 1.2 Moz gold in the ground and a market cap of $10 million ($10M). We raised about $1M to finance this company, called Pelangio. It’s Detour mine was acquired by Detour Gold Corp. (DGC:TSX). And that tiny $10M market cap has now grown to a $2.75 billion market cap. This is the kind of appreciation that you can have in the junior sector if you get in early enough and buy good management with good assets in safe jurisdictions.

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