What goes around comes around! For those who believe in long wave cycles, the Kondratieff Wave is perhaps the economic daddy of them all and has come in for a fair share of controversial assessment over the years. But the patterns suggested by the wave theory are predicating a major downturn in the markets with much of the globe moving into depression, despite the machinations of government economists. Ian Gordon, of Longwave Analytics pointed to his company's modified version of the Kondratieff Wave to suggest, in a recent interview with California's The Gold Report, that the U.S. economy, in particular, and probably much of the rest of the world in consequence, is currently in the ‘winter' phase of the cycle pointing to drastic falls in the markets ahead - and he sees as soon as 2012 as being the time when the downturn element of the wave will really hit home. For those unfamiliar with the concept, the Kondratieff Wave appears as a regular, sinusoidal-like cycle in the global economy. Normally seen as averaging fifty and ranging from approximately forty to sixty years in length, but in the modified form from Long Wave Analytics seen as maybe a little longer, the cycles consist of alternating periods between high sectoral growth and periods of relatively slow growth (recession or depression). The Wave was originally described by Russian economist Nikolai Kondratieff, a Soviet economist, in the 1920s. He was eventually sentenced to death by Stalin for his views which were seen as a criticism of Soviet economic policy. Some market commentators divide the Kondratieff wave into four 'seasons', namely, the Spring (improvement or plateau) and Summer (acceleration or prosperity) of the ascendant period and the Fall (rated the cession or plateau) and Winter (acceleration or depression) of the downward period. Long Wave Analytics follows this assessment of the interpretation and has plotted the wave pattern back to the 1790s and has found the repetitive pattern to be very accurate in terms of the overall economic cycle. According to Gordon in the Gold Report interview "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." Gordon points to the performance of gold and the few gold stocks around at the time of the 1929 crash and the Depression of the ‘30s as a guide to the likely performance of gold stocks under this scenario. At the time Homestake Mining was perhaps the key North American gold stock and after initial falls as everything crashed (a phenomenon seen again 2008), Homestake then soared in value while nearly everything else remained depressed overall, despite occasional upturns. The gold price was fixed at the time - and then revalued - so one cannot plot the performance of bullion on that occasion, but Gordon is among the more bullish predictors of the gold price suggesting it will rise to $4,000 - or perhaps higher. Not surprisingly, therefore, gold and gold stocks form an important part of his ideas on protecting oneself from what he sees as a forthcoming crash. He recommends "One is to be long on gold, which we have been since 2000. Two is to be short on the market. We buy the inverse ETFs, the ones we think make more sense in that kind of environment." And on his overall portfolio "a small portion is in cash, probably about 5%, probably about 15% in the Sprott Gold Fund. Then maybe 30% is in these inverse ETFs. I see my short position as a hedge against a 2008 kind of meltdown for these equities that I'm in. About half my portfolio is gold equities. In most cases I'm in junior equities. I have one senior gold equity in my portfolio." The recent debate among some Central Banks over possibly - or actually - increasing the proportion of gold in their reserves certainly reflects unease over the direction of the U.S. and global economy, although few contemplate the full extent of the Gordon and Long Wave Analytics scenario - perhaps because it is too severe for them to contemplate. Uncontrolled quantitative easing may be the solution for perhaps mitigating the depth of what many see as the coming return to deep recession, but then that has other potential worrying consequences as noted by Julian Phillips on these pages - see The Fed's dilemma. More easing inevitable but consequences scary - and either scenario looks likely to be positive for gold. The almost unlimited quantitative easing solution seems likely to see dollar devaluation, which in turn would beget devaluation of other currencies to remain competitive, thus perhaps the only element truly available for the dollar to devaluate against would be gold! There certainly is a strong element out there which reckons that a number of recent moves in the markets have effectively meant that gold is de facto being remonetised. George Milling Stanley of the World Gold Council, is quoted in the U.K.'s Financial Times as commenting on the recent BIS gold swaps for example. "The gold swaps commercial banks carried out with the BIS demonstrate the effectiveness of gold as an asset class, because even in the depths of the worst liquidity crisis in living memory, institutions with access to gold were able to make use of it to generate dollar liquidity....The issue also feeds right into the current debate among Asian central banks about the lack of assets suitable for use as cross-border collateral." That assessment certainly suggests gold is gaining credibility in the mainstream Central Banking arena as a true monetary element. Certainly it's not just viewed as another commodity. Although there are signs, however, that economies are recovering, a resurgence of bank debt problems is certainly not impossible despite some recent positive figures, and this remains a cloud on the horizon. If anything causes investor confidence to slip - and the budget deficit problems and debt positions of most U.S. states could provide a trigger,- then a whole batch more of bad debts in the commercial property, housing and credit card sectors could bring the big banks crashing back to earth, see defaults among the smaller banks and the stock markets dive. One hopes that this does not happen - but holding gold as an insurance policy against economic disaster may not be such a bad policy at least for another year or so while we wait and see whether any of the more dire predictions are coming about,

Source