From the March 2014 issue of Futures Magazine • Subscribe!

Back to the roots of the K-Wave

Gold & stocks

Long cycles, according to Kondratieff, may be regarded as a disturbance and restoration of the economic equilibrium of a long period. The equilibrium balance equation also can be read through the long wave in gold prices. The theory states that gold attains its highest purchasing power at the end of the downward wave of the long cycle.

For the last 30 years, since the peak of interest rates, gold prices were stable up until 10 years ago, when the price increased by about 400%, reaching an all-time high of $1,898.30 per ounce in September 2011 (see “Golden wave,” below). Now we are witnessing lower swing prices in the long-term gold chart, indicating that its highest purchasing power is behind us and, therefore, we are at the end of the downswing of the K-Wave.

The stock market is not the subject of the study of Kondratieff directly in his paper, but it is the best economic barometer available. He mentions in his work that the long downswing will carry successive crises with certain regularity. Since the last peak in interest rates, during the last 30 years we have seen successive crises in the economy that are consistent with the Kondratieff model. Between 1941 and 1981, before the peak in interest rates, we did not see any strong disruption of the stock market. After the fall of interest rates, we have witnessed the 1987, 2001 and 2007 stock market crashes.

Kondratieff explains that crashes naturally happen to shake the economy to its foundations, based on his observations of the 1820s and 1860s. Since the last crisis, the United States’ stock market as represented by the Dow Jones Industrial Average has rallied to mark new all-time highs (see “Higher swing,” below). The upswing in the benchmark seems to anticipate the beginning of an upswing on the long-wave cycle.

Behavioral economics

Behavioral models typically integrate insights from psychology with economic cycles. Kondratieff was not extensive in his research about the behavioral economics in history, because of the non-existent data on the subject, but he was able to establish that in the downward phase, decreasing wages, decreasing profits and the lack of surplus profit opportunity directly correlate to people’s disenchantment with capitalism.

We have witnessed social movements such as Occupy Wall Street and The End of Capitalism, which highlight social and economic inequality, impoverishment and  global warming.  Looking at the bigger picture presented by Kondratieff 90 years ago, this phenomenon is viewed as a typical behavior on the long-wave cycle.

Before and during the beginning of the rising wave of a long cycle, the society’s economic life undergoes considerable changes. These changes are usually in production, exchange techniques, inventions and involvement of new territories in worldwide economic relations. The landscape has changed during the last 20 years in those areas.

It is an interesting period in history. The raw facts of the long-term charts seem to point to better economic times. If this holds true, and we follow Kondratieff findings, we are entering a 30-year inflationary period where wages will increase and commodity prices will allow for the expansion of agriculture around the world. In addition, we are likely to see radical changes to society and greater social upheavals given the high tension in the expansion of economic forces.

Octavio Riano is an independent trader. E-mail: support@digitaltradingsystems.com.

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