Gold and A Kondratieff Winter

The Kondratieff Wave

Is an excellent way to get a good overall understanding of the outlook for Gold vis-à-vis other asset classes as well as getting a good picture of both the US and the global macro economic outlook. As the 4th Kondratieff winter unfolds, most of the world is party to the debt bubble and its congruent speculative excesses: The sheer size of the Debt ratio to total world GDP (including S/S and Medicare liabilities) make total debt a 100 times greater than 1920s. Thus, the repercussions are likely to be far more severe than during the 'dirty 30s'. To bring the danger into proper perspective note that the bursting of bubble led downturn was set off by a collapse in business capital spending which, at its peak in 2000, accounted for only 13% of the country's GDP. In 2006, real estate accounted for 20%+ of GDP: While the coming recession will be all about the capitulation of the American consumer - "who's spending now" accounts for a record 70% + of GDP.

The world's dominant economic power is teetering on a knife-edge between uncontrollable inflation and a deflationary recession. The only way to sustain the credit bubble is through increasingly larger doses of liquidity (monetary/debt/credit expansion) until the bubble, like every expanding bubble, eventually POPS. As night follows day, a boom is always followed by a bust; the bigger the boom the bigger the bust. The bust always catches the majority unawares, coming as it does from a zenith of apparent prosperity and speculative excess. Gold and precious metals are the only assets that outperform in either runaway inflation or deflation (depression).

A Kondratieff Winter

Understanding the Kondratieff K-Cycle (which is a long-wave economic cycle driven by prices and credit/debt) may be the best way to understand what is most likely to follow as to Gold, the Economy, the Stock and Bond markets. The current K-Cycle, which began in 1948, is the fourth such observable cycle since the Industrial Revolution. A deflationary recession, known as a "Kondratieff Winter", which purges the debt and asset bubbles from the system, is the natural result when a major credit bubble bursts.

NOTE: Gann wrote that when the time cycle was over there was nothing that anyone could do to alter the inevitable financial onslaught.

The K-Cycle is the long-wave cycle in the economic activity of the capitalist system focusing in particular on the price level (inflation) and debt. It is named after the Russian, Nikolai Kondratieff, who was appointed by Lenin to analyze cycles in capitalist economies (in an attempt to establish when the system would fail). Kondratieff published his findings in a 1922. Kondratieff analyzed 21 economic statistics for the major economies (US, Britain, France and Germany) which included the price level, interest rates, wages, production, employment, imports and exports. In 15 of the 21 statistics he studied he identified a "long wave" cycle with an average length of 54 years.

Kondratieff began his analysis in the late eighteenth century, which he believed was the beginning of the "broad development of industrial capitalism." When Kondratieff completed his work in 1922, he had identified two full cycles and the start of a third cycle; which subsequently ended in 1948 when the current fourth cycle, which we are now in, began.

Ø First cycle: 1789 to 1844 (55 years) Ø Second cycle: 1845 to 1896 (51 years) Ø Third cycle: 1897 to 1948 (51 years) Ø Fourth cycle: 1948 to today (59 years so far)

Kondratieff concluded that the capitalist system is inherently self-regenerating. Stalin rewarded him for his work by sentencing him to solitary confinement in a Siberian labor camp, where he subsequently lost his mind and died.

The K-Cycle provides a roadmap for the most likely long term outcome of economic events. As we move into the latter stages of the current K-Cycle, the K-Winter, government's central bankers are doing all they can to delay the painful 'pay-back' period which is the feature of all previous cycles. There is no way of avoiding the final collapse of a credit boom. The only question is whether it comes sooner as a result of a engineered controlled recession (to reduce the excesses and re-align the imbalances) or later as a total catastrophe. I am afraid that we do NOT have the political will to do the right thing even if the powers that be know what they are.

The current cycle, which is already longer than average, at 59 years, can be explained by the fact that this time the US dollar is the world's only reserve currency as well as to globalization and the resultant flexibility of monetary policy following the abandonment of the Gold Standard: However, this is unlikely to remain as a positive for much longer. The longer the payback is delayed, the worse the inevitable consequences. The US is attempting to defy economic gravity and resist the natural cycle that has been a feature of capitalist economies since the start of the Industrial Revolution. (Modelski and Thompson have identified K-Cycles that go back to the Sung Dynasty in China between 930-1250 AD.)

The rising first cycle of the K- phase is often driven by major innovations that were conceived during the downswing of the previous cycle, but really begin to impact economic growth during the upswing. For example:

  • First cycle: 1789-1844 The Industrial Revolution
  • Second cycle: 1845-1896 The Railway Boom
  • Third cycle: 1897-1948 Electricity/Autos/Industrial Chemistry
  • Fourth cycle: 1948- today Electronics/Plastics & Information revolution


  • First cycle: War of 1812 (1812-14)
  • Second cycle: American Civil War 1861-65
  • Third cycle: World War I (1914-18)
  • Fourth cycle: Vietnam War 1966-75, Iraq


  • First cycle: "The Era of Good Feeling" (1815-23)
  • Second cycle: "The Gilded Age" (1867-72)
  • Third cycle: "The Roaring 20s" (1922-29)
  • Fourth cycle: "The Peace Dividend Era?" (1988 - 2000s)

The long-term inflation/debt cycle is a natural phenomenon associated with the self-regenerating capitalist system. Consequently, the K-Winter is inevitable and cannot be staved off indefinitely. There is no such thing as a "free lunch".

"There is no means of avoiding the final collapse of a boom brought on by credit and Fiat monetary expansion. The only question is whether the crisis should come sooner in the form of a Recession or later as a final and total catastrophe of Depression as the currency systems crumble." -- Ludwig Von Mises

Proponents of the Theory, have been ignored. However, the facts pointing to the existence of the long wave are too consistent, the results too vivid to ignore.


Recognition of the current fragility of the financial system has been triggered by the sub-prime crisis, closely followed by the temporary seizing up of the commercial paper markets and the run on the Northern Rock Bank in the UK, etc. As night follows day, a boom is always followed by a bust; the bigger the boom the bigger the bust. The bust always catches the majority unawares, coming as it does from a zenith of apparent prosperity and speculative euphoria.

The biggest credit bubble in modern history is showing signs of extreme distress. Meanwhile, the banks don't have the money to loan to businesses or consumers because they're trying to raise more cash to meet their capital requirements on assets that continue to fall in price. (The Fed may pay $0.85 on the dollar, but investors know better and are not willing to pay almost nothing at all.) The main reason the banks have stopped lending is not because they "distrust" other banks, but because they are strapped for capital This is the main reason for the MASSIVE injection of money ($Trillions) by the worlds Central Banks and If the Basel regulations aren't modified in a hurry, money markets will remain frozen, GDP will shrink, and there will be a wave of bank closings.


The fact that almost no one (except us of course) had perceived the danger of the Huge Credit Bubble that the world is in and which was exposed by the Bear Stearns (Black Swan) debacle, suggests that the perils of unlimited debt/credit creation and the extreme debasement of currencies taking place today remains poorly understood. As an example, CITI CORP is being touted as an excellent buy and has been chosen by one well known analyst as his #1 pick for 2008. Oh really? Since when does the best buy of the year have to pay 11.5% (junk bond rates) in non tax deductible dividends and on a convertible yet, in order to raise money? And now, two weeks after the announcement of this fabulous deal, the stock is flirting with 8 year lows. Do you hear anybody, even their existing shareholders, clamoring to get in on this fabulous great deal? What about the dilution? As for me, it is still my largest short position. Perhaps, It's about time a few hot shot Sheiks got their comeuppance.


A Rising Gold price is a warning signal; casting doubt on every economy in which Gold is appreciating against its currency. I am convinced that inflation is far higher than reported, especially since money supply growth is currently growing at a 14% clip and has been doing so for more than 7 years. Moreover, the Debt/GDP ratio is now over 350% vs. the 270% peak prior to the 1929 Crash. To make matters worse, the 'fiscal deficits' of the Federal Government are so convoluted that their auditors have refused to sign off on its books for more than ten years.

The US is sitting on the cusp facing either a bout of rapidly rising inflation or diving into a deflationary recession. Credit bubbles always end in a deflationary bust. Helicopter Ben (like Greenspan before him) will most certainly try to defy economic gravity using increasingly inflationary means. But, at best, that can only delay the inevitable for a short while as inflation has already shown itself to be front and center and thus will end up making its eventual resolution much worse. Gold is the only asset sure to outperform during periods of either uncontrollable inflation or deflation.

Just as most of today's financial market participants do not remember the last bull market in Gold, most are still not yet considering Gold as a sound investment. Adjusting Gold's all time high price for the, low-balled, US CPI figures, gives an inflation adjusted equivalent price well over US $2,000/oz. During the last phase (Wave 5) of the 1971-1980 Gold Bull Market, Gold rose 128% in less than three months to reach its all time high. And the Wall St. experts are recommending Citi and Merrill as best buys?

GOLD Where to now?

In my opinion, we have just completed an Elliott Wave: Wave 4, diagonal triangle consolidation and any move to a new high will confirm my Wave 5 buy signal explosion to my target of between $925 to $1075 and this would only mark the end of Wave I with Up Waves III and V yet to come. At some point, I think that the rise in the price of Gold will lead to a rapid acceleration in demand, not only from Central Banks with large US dollar reserves, but also from Mutual Funds, Hedge Funds as well as from private investors. (In economic terms, Gold is deemed to be a Superior Good). This explosion in demand could be triggered when Gold blasts through its all-time high of US $850/oz or in response to an economic (Black Swan) event.

Jim Sinclair divides Gold's characteristics into four arguing that:
"…gold migrates from a commodity form, to a barometer, to a currency, to an international assets balance sheet form."

He goes on to explain, "Conflict between governments and Gold's role as the ultimate form of money puts Gold into a situation of permanent competition with fiat currencies created out of thin air by governments and, consequently, with the governments themselves".

Gold is able to perform the role of the ultimate money due to the following:

  • It has a high intrinsic value per unit of volume.
  • It is homogeneous, divisible and durable.
  • It is traded in a continuous market on a global basis.
  • It cannot be debased; production averages approximately 2% per annum at most, in contrast to the unchecked creation of fiat currency by central banks.
  • It is the only financial medium of exchange that is not a third-party's liability.
  • It is accumulated rather than consumed.


Before becoming a political animal, he was a disciple of Ayn Rand and a strong advocate of 'sound money' and a return to a Gold Standard. He outlined his case in an essay, 'Gold and Economic Freedom', which was published in Ayn Rand's 1967 book, "Capitalism, the Unknown Ideal" in which he argued against a system of un-backed fiat currency in favor of returning to a Gold standard and made three very interesting comments:
"As the supply of money increases relative to the supply of tangible assets in the economy, prices must eventually rise… "In the absence of a gold standard, there is no way to protect savings from confiscation through inflation…."

"Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as the last protector of property rights." He then argues that a Gold standard and a banking system based on Gold reserves acts as "the protector of an economy's stability and balanced growth."

It is a shame that he sold his soul in return for power.

It is also important to NOTE that Gold is rising against all currencies, even strong commodity currencies, such as the Australian and Canadian dollar as well as such safe havens as the Swiss Franc. Gold's role is slowly but surely, becoming the currency of choice.

CPI understatement

"In calculating inflation, the Bureau of Labor Statistics (BLS) takes a basket of goods and services and tracks their prices. This worked just fine when they tracked the actual price of the same basket year after year. The problem is they no longer use the actual price and they no longer track the same items year to year." In brief, the major changes made by the BLS are:

  • Hedonic regression: Actual prices of consumer goods are revised downwards
  • In order to account for quality-adjusted improvements. For example, the price change associated with a more technologically advanced car or computer is reduced to reflect the benefit to consumers of innovations.
  • Substitution: When the price of a higher quality good rises significantly, the BLS assumes that consumers switched to lower-priced alternatives (ie. steak to hamburgers).
  • Geometric weightings: The arithmetic weighting of CPI components was changed to geometric, resulting in a lower impact from components rising in price and a higher impact from components falling in price.
  • Intervention: Used to moderate changes in the prices of goods subject to seasonal swings. While price rises are rarely fully reflected "declining prices are always fully accounted for.
  • The systematic understatement of the true inflation rate is around 3% using the BLS methodology prior to the early 1980s and around 7% using the methodology after the adjustments in the early 1990s.

A lower CPI figure has the effect of exaggerating the reported level of economic growth. If the inflation rate is higher than it is currently assumed to be, then it may be true that the USA is already in recession.

The Federal Reserve focuses on the concept of "core" inflation, i.e. excluding food and energy. The latter represents approximately 25% to 35% of US consumer expenditure and is obviously the most basic of human requirements. If food and energy prices always underwent a mean reversion, this concept might have some validity. However, the fact that a strong case can be made that both food and oil prices are experiencing structural bull markets nullifies the core inflation measure. It is just not logical to believe that in a Guns and Butter economy, inflation could possibly be below 2%.


"The recycling of massive dollar liquidity back through the US markets as well as the Japan carry trade has distorted the credit system and led to a huge artificial demand for US Treasuries. But eventually the masses will wake up and become suddenly aware of the fact that inflation is a deliberate policy that will go on endlessly. That's when a breakdown occurs. Nobody wants to give away anything against Fiat currency. This is exactly what happened with the Continental currency in America in 1781, with the French Mandats territoriaux in 1796, and with the German Mark in 1923 and others AND It will happen again whenever the same conditions appear. If something has to be used as a medium of exchange, the public must believe that the quantity of it will NOT increase beyond all bounds. Inflation is a policy that cannot last."

Critical to this discussion are both Greenspan and Bernanke's views on the two main deflationary episodes of the last century, the US Great Depression and the more recent 1980-2000 deflation in Japan:

  • They both believe (along with Milton Friedman) that the main reason for the 1930s Depression was the ill-timed tightening of monetary policy by the Fed in an attempt to cool the surging stock market in the late 1920s and 1980s Japan. But Empirical evidence tell us that it just ain't so. The level of debt in the economy at those times is also never mentioned or taken into consideration.
  • Japan's inability to extract itself from its deflation was due to the country's monetary policy remaining too tight, even after short-term nominal rates had been reduced to zero. They argue that in deflation, even zero short-term interest rates are too high in real terms and rates at the long end of the curve tend to remain well above zero. But whose fault is that if not massive Government spending and how do you lower LT high interest rates? By reducing spending and increasing savings, that's how!

In either case, that is certainly not the situation in the US today. When was the last time we ever saw short term interest rates at 3% and long term rates at 4% after seven years of continuous record economic growth averaging more than 3.5% per year?

NOTE: If the real inflation rate is 7%, then a 4% rate of GDP Growth is really a negative 3%.

THE WRITING IS ON THE WALL: But so far, like the Biblical Daniel, none are able to read and interpret it. The real question is no longer IF, but when will we be in Recession AND will it or will it not turn into Depression.


The one and only solution I can think of, is to immediately implement a Bill Seidman savings and loan type solution. However, we are in the Political Season and the chances of that happening (even if Bernanke, the President and Congress recognized the danger) is slim to none.


The most logical course of action is a wave of new credit and fiat monetary creation and a resultant rapid increase in inflation as Bernanke attempts to stave off the inevitable. We may (I repeat may) see one more rally to new highs as Wall St. will initially deem his moves to be favorable. But shortly thereafter, the Stock and Bond markets will crash as Gold begins to rocket skyward as FEAR sets in and combines with Greed. The Stock Market will lead the economy down. You may recall that, as I have often mentioned in my previous letters, there is nothing more powerful than a BULL MARKET IN GOLD which is fueled by both greed and fear! BUY GOLD on any $15 to $25 dips or on a break-out to new all time highs.


I wish all of you a HEALTHY and HAPPY NEW YEAR



Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL


31 December 2007

The above information has been gleaned from information that I believe to be reliable but is not guaranteed by me. The information provided is strictly for educational purposes and is not meant to be used as investment recommendations.

A BI-WEEKLY MARKET LETTER, "UNCOMMON COMMON SENSE" I have resisted starting my own subscription letter in the face of many consistent requests because I thought, who needs another market letter? But now, given the type of economy and markets we will shortly be in, I have allowed myself to be convinced that maybe, just maybe, some investors could use my type of independent analysis. Since I'm not on anyone pay role I can say what I really believe and not have to put any patrons spin on my findings,

It will be published bi-weekly at a cost of $199.00/yr. Along with the type of letter that you are all used to, I will be including my own actual trades as well as what to look for in instituting your own future trades, whose opportunities may present themselves between letters. I will also be including regular detailed Elliott Wave Charts on Gold, the DJII or any other charts of interest. Starting date will probably be February 1st, 2008, depending upon the level of interest and will be emailed to subscribers at least one week before appearing on any websites.

For those of you who are interested and wish to subscribe, please forward your check for $199.00 to:

Aubie Baltin
2078 Bonisle Circle
Palm Beach Gardens FL. 33418-6503

Please remember to include your Name Phone# and your email address.

A single ounce of gold (about 28 grams) can be stretched into a gold thread 5 miles (8 kilometers) long.

Gold Eagle twitter                Like Gold Eagle on Facebook