The K-Wave & Gold

The astute investor might now be wondering amongst this madness, what next?

Before pondering too much on this an important theory must be considered, the Kondratieff Wave. Without getting into too much history, here is a brief definition and a chart to follow:

Kondratieff Wave is a theory designed by a russian economist, Nikolai Dmyitriyevich Kondratieff (1892 - 1938) that determined capitalism is a self renewing sytem with boom and bust cycles. These cycles are defined by four seasons:

Spring - Defined by inflation and growth
Summer - Stagflationary recession
Autumn - Beneficial disinflation, where inflation grows at a decreasing rate
Winter - deflationary recession or depression

Courtesy of HoweStreet.

For an incredibly in depth analysis of the pros and cons of using the k-wave, please refer to The Kondratieff Cycle Revisited.

What Now?

Right now we are in K-Winter. The question that most interests me at this point is not whether or not a deep recession or depression is coming, which I believe is obvious, but is how will gold perform? I am skeptical about investing a portion of a portfolio in gold this late to the game considering the impressive run gold has had in the last two years. Therefore, I turn to the k-wave and gold history.

In the Past:

At the onslaught of the great depression, gold performed exceedingly well.

In the recent past:

Since 2000 gold has been a great place to have invested your money. Why? The theory is that 2000 marked the beginning of the k-wave, but Greenspan acted to counter the natural recessionary effects of excess credit and money purging by adding even more excess credit. The effects have been devastating and even more unsustainable. What has been learned is that the cycle cannot be avoided, only delayed, hence the run up in the price of gold in anticipation of the inevitable because gold is money and a safe haven in inflation or deflation.

Currently:

and,

The future of gold?

I cannot predict accurately, but only use common sense and economic history as a guide. Gold has been rising in price partly because the dollar has weakened and debt has risen to unsustainable levels creating a lack of trust in the dollar. Gold did very will in the years after and during the great depression and I expect it will due well over the next few years as deleveraging continues to crack its nasty whip.

Gold is approaching new 6 month lows again, possibly a buying opportunity. I am not technically saavy, so I have no indicators to suggest so. Long term though over the next 3 - 5 years at least, I would expect gold to perform well for the very reasons mentioned above, and stocks, real estate and other paper investments to underperform as the K-Winter plays out.

Please note I am not recommending any one purchase gold as part of their portfolio, this has been for discussion purposes only and I do not hold myself out as a gold or commodoties expert.

Gold Price data was compiled from FinFacts