Gold and The Next Great War

Let's turn our attention to a cycle which we've rarely discussed over the years. The Kress 24-year cycle is one of the components of the 120-year cycle series which is scheduled to bottom in 2014. The 24-year cycle tends to get eclipsed by the longer-term cycles like the 40-year and 60-year cycles (both of which have a major impact on equity prices and the economy). But the 24-year cycle takes on a special significance all on its own: it's the cycle of war.

The final "hard down" phase of any cycle is defined as the final 8% to 12% of the cycle (averaging 10%). Therefore the final "hard down" phase of the previous 24-year cycle encompassed most of the year 1990. Not surprisingly, the year was a bearish one for stocks. The banking sector was particularly hard hit by this particular 24-year cycle as 1990 was the worst part of the infamous S&L crisis and saw the failure of more than 100 small banks.

The 24-year cycle might be described as the first of the major longer-term cycles and tends to bottom with a strong impact. Not only does this cycle typically bring about a major decline in equity prices, its bottom also historically coincides with the initiation of military hostilities.

Since 1894 when the previous 120-year Grand Super Cycle bottomed and a new one began, there have been four military conflagrations at each subsequent bottom of the 24-year cycle. Most of these wars have been major in scope. The first such instance of war occurred in the years leading up to 1918, which saw the first 24-year cycle bottom of the current 120-year cycle. The 24-year cycle that bottomed that year saw the ending to the First World War. Remembering that the final "hard down" phase of the 24-year cycle approximates to almost two-and-a-half years, this represented roughly the second half of that major war, a war that involved the United States.

The next 24-year cycle bottom occurred in 1942. This year represented the United States' entry into the Second World War against Japan and the Axis Powers. Both the 1918 and the 1942 cycle bottom years proved vicious in terms of military conflicts on the global scale.

Following the 1942 bottom, the next 24-year cycle bottom occurred in 1966. This was a particularly harsh year in the Vietnam War in terms of the United States' involvement. Following the 1965 National Liberation Front attack on two American military installations, President Lyndon Johnson ordered the continuous bombing of North Vietnam.

The year 1990 saw the most recent 24-year cycle bottom in the current 120-year Grand Super Cycle. This year saw the start of the first Persian Gulf War involving the United States and its allies against Iraq. This period also saw a rather conspicuous jump in the price of crude oil as it related to the war and its anticipated supply disruptions.

The final "hard down" phase of the current 24-year cycle begins this year. It shouldn't be surprising in light of this fact that we're already hearing a steady increase in war drums pounding for a preemptive strike against Iran. As I wrote in my book, The Stock Market Cycles, "If history repeats the period between 2012-2014 can be expected to usher in another major war involving the U.S., possibly on the global scale." I've since amended my expectation for war to occur no sooner than the actual 24-year cycle bottom in later 2014.

Mr. Ferguson isn't alone in his feeling. The belligerence on both sides is "getting frightening" said The New York Times in an editorial. Rumors of an Israeli attack this spring are spreading. Leslie Gelb, writing in TheDailyBeast.com, opined that an attack against Tehran would unleash a major reprisal against targets both foreign and domestic. Oil and gas prices would soar and the economic recovery would be imperiled, says Gelb, adding that if diplomacy fails "we're stuck on today's collision course with Iran."

For all the saber rattling, a war against Iran is unlikely this year. War sentiment is high mainly because the economy has recovered enough in the last couple of years to allow officials to finally turn their attention from economic concerns at home to military matters. The current U.S. presidential election should detract attention from the Iran problem in the coming months, however. And if the Kress cycles are correct, the current recovery phase is a temporary phenomenon, and by the end of this year deflationary pressures will return once the 4-year cycle has peaked.

Gold is an excellent barometer of, among other things, military aggression. The gold price will typically spike significantly higher for at least two months prior to the outbreak of war. As you can see here, gold has been in a comatose state for the last several months and has made a series of lower highs since peaking last summer. Gold doesn't smell war as yet. If a major war is coming this year then we should see gold overcoming its nearest high from November followed by a strong and sustained rally in which gold goes on to make a series of higher highs and higher lows.

Another concern being voiced in the media is the potential for a war-induced spike in the oil and gas price the real problem. As it turns out, oil doesn't need a war to move higher. The media haven't given it much coverage lately but energy prices have been steadily approaching their highest levels in three years and could even approach pre-credit crisis levels by summer. (See the weekly gasoline futures chart below.) If the gasoline futures price pushes decisively higher above the 3.06 level (last year's high), expect to see an explosion of fuel-related fulminations in the mainstream media. This in turn would add to equity market volatility going forward and would give investors something new to worry about besides Greece and Iran.

Another point worth considering is that the U.S. has never entered a major theater of war during a presidential election year. This is an important point to remember whenever we hear the rumormongers in the media warning of an "imminent" war with Iran. Consider the following statistics:

• Wilson re-elected in 1916 on campaign slogan of "He kept us out of war." U.S. enters WWI on April 6, 1917, the year after Wilson's election.
• Roosevelt re-elected 1940. U.S. enters WWII Dec. 11, 1941, the year after Roosevelt's election.
• Truman elected 1948. Korean War starts in 1950.
• Kennedy elected 1960. U.S. entry in Vietnam begins in 1961.
• Bush Sr. elected in 1988. Operation Desert Storm Jan. 17, 1991 - Feb. 28, 1991, almost two years before the 1992 election.
• Bush Jr. elected in 2000. The War in Afghanistan starts on Oct. 7, 2001. Second Iraq War invasion started in 2003. Bush re-elected in 2004.

Based on this historical pattern, it's unlikely that 2012 will witness the opening of a new theater of war for the U.S., particularly since the U.S. has just exited Iraq. Also worth mentioning is that major wars are rarely commenced during deflationary winter. Major wars involving the U.S. tend to begin after a major long-term cycle bottom (e.g. the 12-year cycle bottom year of late 2012 saw the start of the second war with Iraq).

The 12-year cycle is exactly one half of the 24-year cycle of war, both of which are scheduled to bottom in 2014 with the 120-year cycle. Accordingly, any major war involving the U.S., which could potentially involve Iran or another Middle East country, is likely to begin at some point after the 2014 long-term cycle bottom.

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Clif Droke is the editor of Gold & Silver Stock Report, published each Tuesday and Thursday. He is also the author of numerous books, including most recently, "Gold & Gold Stock Trading Simplified." For more information visit www.clifdroke.com