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Ian Gordon: Why Stocks Outperformed All Other Gold Investments
Source: Brian Sylvester of The Gold Report (6/22/12)
Ian Gordon of Longwave Analytics and Longwave Strategies believes we're on the precipice of very difficult and frightening times and predicts complete financial collapse. But it's in those periods of darkness that gold 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 exclusive Gold Report interview, Gordon discusses where he thinks the Dow will bottom and what companies will come out on top.
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 stocks, gold itself, the TSX Venture Exchange as a proxy for junior mining stocks and a specific company, Temex Resources Corp. (TME:TSX.V; TQ1:FSE), 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.
I used Temex because it happens to be one of my favorite junior mining stocks, but the performance of Temex as a junior miner has been pretty miserable. That's generally true of any junior mining stock, at least since 2006. In 2008, the price of Temex was destroyed in the panic sell-off. It was down to one-tenth of where it had been in 2000. The price of Temex has recovered since that disaster, but it is still down at about half the price in 2000.
TGR: The chart seems to make a case for the senior gold miners versus the juniors.
IG: It certainly does. That's something that I've noticed in my own portfolio performance. My portfolio performance to about 2006 was outstanding. Thereafter, the junior stocks' performance has been pretty abysmal, which correlates to the performance of my portfolio.
TGR: You've been monitoring the trading volumes of junior precious metal equities, which are down significantly from levels established in the previous decade.
IG: 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).
IG: 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?
IG: 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 U.S. 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?