- Stocks start major bear market, the bear market is in proportion to the preceding bull market.
- Debt repudiation significant.
- Banks and quasi banks in crisis.
- Credit crunch - interest rates rise.
- International currency crises - a la 1931-34.
- Gold and gold equity prices rise as deflation takes hold.
The onset of the Kondratieff Winter is signaled by a peak in stock prices at the end of the great autumn bull market. So it was in 1929 and 2000. This means that we are now in the deflationary/depression stage of the cycle.
'Winter is the worst of times, and the best of times'. It is the worst of times for stocks, real estate and bonds, just as autumn was the best of times for these investments. But it is the best of times for gold and cash. Thus, investment risk has increased dramatically for stocks, bonds and real estate; whereas investment risk in gold and cash is at the lowest point of the entire cycle.
At the height of this autumn bull market an investment manager deemed cash 'trash'? It isn't any more. Cash is king now. Why? Because it's liquid and because its purchasing power rises during the deflationary winter.
If cash is king, what is gold? Well, according to John Exter, a New York Federal Reserve banker in the 1970s, it's a more powerful king than cash. Indeed, during the deflationary winter depression, gold is the most liquid of all assets. In the 1970s John Exter produced an inverse pyramid in which he showed assets in descending order of liquidity. At the top of the pyramid, he deemed small business the most illiquid asset. At the very bottom of the pyramid is gold, considered the most liquid of all assets; more important than cash, which Exter pronounced 'IOU Nothings'. Gold has no IOU attached to it. It is easily transportable and is accepted as money in any country.
There are several reasons why gold performs so well during the Kondratieff Winter and why investment risk in gold is at its lowest during this time.
1. During winter there is a high probability of severe financial and economic dislocation. The massive debt bubble disintegrates, causing bankruptcies and banking problems. The largest debtors and the largest creditors are always vulnerable during the winter debt cleansing process.
Other likely occurrences include the following:
- Derivatives debacle.
- Real estate bust.
- Private Pension plan failures.
2. The world monetary system is collapsing just as it did in the previous Kondratieff Winter. At that time, after Britain abandoned the gold standard in 1931, all other countries followed suit and the world monetary system disintegrated. This Winter, the world is abandoning the US dollar. This portends monetary chaos.
Reserve monetary leadership always goes to the world's largest creditor nation. The US is the world's largest debtor nation.
3. American leadership in the financial, economic and political arenas is waning. This leadership too, passes to the leading creditor nation.
4. Under British stewardship throughout the 19th Century, gold was money. For the first time in more than 5000 years, following US refusal to back the dollar with gold in 1971, the entire world has been subjected to a fiat money system based on the dollar. Governments, particularly the US government, want to convince you that their paper (debt) is as good as gold. You be the judge.
Fiat /Paper money systems have never survived. History is filled with examples like the Assignant and the Confederate dollar.
5. Gold and gold equities are scarce. Annual gold production amounts to a measly 2500 tonnes, which is approximately 75,000,000 ounces. The total market capitalization of all the publicly traded gold stocks is only $200,000 billion versus $17 trillion US equity market cap. Imagine what happens to the price when real demand comes into both the physical metal and gold equities!
Producers vs. Explorers
If gold is a low risk investment during the Kondratieff winter, should we buy the gold producers or the exploration companies? Let's examine the 'pros' and 'cons' of each of them.
- Investment grade. Large Market Caps-appropriate for investment funds.
- Cash flow via production.
- Excellent liquidity.
- Share prices generally rise faster than the price of gold itself.
- Depleting their resources through production. Difficulty finding sufficient reserves to maintain production at current levels;
e.g. Newmont produces 7.2 million ounces each year. Approximately 9 million ounces is required to replace this production.
- Hierarchal management-slow to make decisions.
- Exploration subject to committee review and budgetary constraints.
- Limited exploration since 1998.
- Only a small number of companies to choose from.
- Responsible for 70% of discoveries.
- Growing their gold.
- Quick response management.
- Innovative geologists; prepared to see the unconventional.
- The onset of the Kondratieff winter suggests the largest bull market in gold in the entire cycle. In that environment share prices rise faster than those of their production counterparts.
- A major discovery positively impacts the share prices of most exploration companies.
- An ability to release regular news in progress.
- Management usually owns a large stake in the company and has a vested interest in achieving positive results on the behalf of all shareholders.
- Management not trusted - think Bre-X
- Viewed as very high risk investments.
- Investors don't understand news releases, because they are usually not geologists-and are unable to evaluate a discovery in progress.
- Poor liquidity; small market caps-not suitable for most investment funds.
- Difficulty in raising money; major dilution at low share prices.
The key is Management. The Long Wave approach, developed by my team at Bolder Investment Partners is subjective but still useful.
A Simple Evaluation System:
Management: 30 Points
- Technical skills
- Management skills
- Ownership in the company
Properties: 20 Points
- Grass roots/discovery/gold in the ground
Blue Sky: 15 Points
Political Risk: 15 Points · A, B, C, or F
- A = Quebec
- F = Venezuela, Ecuador
Market Capitalization: 15 Points
- Comparative values
- Value of gold in the ground
Promotion: 5 Points