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The Middle East Cauldron and Your Investments

The Middle East Cauldron and Your Investments

Events in the Middle East these days remind us of the famous saying from Shakespeare’s Macbeth: “Double, double toil and trouble, fire burn, and cauldron bubble.”  Here’s our take on the situation, from an investment perspective.

* Power Struggle in Iran

It is no secret that President Ahmadinejad is locked up in a power struggle with the Big Boss in Iran, Supreme Leader Ayatollah Khamenei and his Supreme Council of conservative clerics and jurists.  Ahmadinejad has recently been rebuffed over three different attempted power grabs.  Reports from Iran indicate the president’s status and power are being squeezed.

Ahmadinejad supporters are mainly poor, rural Iranians, while the middle-class and wealthy see the Supreme Leader as the lesser of two evils.  For the next elections in 2013, Ahmadinejad will probably get the heave-ho in favor of someone more pliable to the wishes of the ayatollahs, less egotistical, and less likely to seek the international spotlight and spout unapproved rhetoric as the policy for the nation.

* Syria – Would Change at the Top Affect Regional Balance of Power?

Syria holds a key position in the Middle Eastern mosaic.  The country is Russia’s staunchest ally in the area.  The armed forces, as well as most of the government, are controlled by an Alawite minority who make up only about 12 percent of the population.  Alawites are an offshoot of Shia Islam.  The remainder of the population is about 60 percent Sunni Muslim, with Druze and Christians making up the balance.

Syria has represented a threat and problem to Western interests in the region for decades.  Additionally, the Alawite sect is not considered strongly Islamic, which bothers some religious conservatives.  The Syrian government supports Hamas and Hezbollah.  Should ongoing protests and bloodshed lead to regime change, many players in the region, including Russia, Israel, Iran, Jordan, Saudi Arabia, U.S. and the West may have to reassess their position depending upon who follows the existing government.

* Saudi Arabia and Monarchal Togetherness

The Kingdom of Saudi Arabia has been a staunch ally of the U.S. for decades.  The Saudis have always acted as a swing producer of oil, increasing production when prices go too high.  The country could always be counted on to use its huge reserves to create stability and assurance to consumers in the West, yet in recent years, things have changed.  The formidable oil reserves may no longer be able to keep up with rising global demand, according to many energy experts.

The Saudis also have another allegiance — to the preservation of monarchal government.  As a strong Sunni monarchy in the Middle East, the Saudis are very sensitive to the needs of other Sunni royalty in the region.  As such, they provide active outreach, and even troops in the case of neighboring Bahrain.  There, the majority Shiites have been demonstrating against the minority Sunni rulers.  The Saudis were quick to send in the cavalry and protect their royal brethren in Bahrain.

Domestically, the Saudis have recently showered cash and pay raises on their citizenry and government employees, and in general sought to improve the financial well-being of the populace.  They are spending more and more of their oil money to keep the people happy.  We don’t think they can allow prices to fall and still keep the home front sated.  Higher oil prices are now in the best interests of the monarchy.

* Conflict and Confusion in Yemen

The bubbling cauldron and ongoing conflict doesn’t bode well for a smooth transfer of power in this large country on Saudi Arabia’s southern border.  Rumors have swirled around President Ali Abdullah Saleh being forced from office.  To this point he has successfully resisted, fought back, and survived attacks from seemingly all quarters within the country: Shiite Houthi rebels, conservative Sunni Muslims who think the government is too secular and who have formed a Salafist group, and traditional, geographic rivals from within Yemen who have their own ideas as to who should be in charge.


Sizing It All Up, Investment-Wise…Stick With Your Oil and Gold

The geopolitics in the region are very tense and volatile.  We expect many more attempts to unsettle Syria and the rest of the region.  Among the chief instigators from outside the region is Russia, who wants their important allies to remain in power from within the Iranian region.

We expect fighting, turmoil, and bloodshed to continue for months and years.  The impact will drive oil prices to $150 per barrel and above, especially if the turbulence moves into Saudi Arabia and Kuwait.

Technically, both oil and gold are acting well.  The charts tell a story of accumulation.  The fundamentals also argue for continued accumulation.  Large financial institutions and governments are stockpiling both resources.  Major nations need to have resources to grow and they need gold and other assets to protect themselves in the case of a major financial crisis like the one that began in 2007 and continues in Europe today.  We believe such a crisis has a large probability of recurring.  Financial derivatives, the bane of good financial governance and conservative banking, are proliferating.  This is bad news.

Gold is historically weak or boring in the summer season.  However, we would not be surprised to see the traditional pattern reverse this summer.  Why?  Because major buyers like to buy on price weakness; Russia, India, China, and others have shown themselves to be consistent buyers.

Price corrections will give way to an even stronger gold market, and it will start sooner rather than later.  These reasons are why we expect that gold’s run is far from over, and why we see gold surpassing $1,700 per ounce, eventually going much higher.

Global gold production is growing, but very slowly.  As new mines come into production, old mines’ productivity wanes.

Europeans and Americans seem to be at a loss for good ideas on how to solve their long-running debt, banking, and derivatives crises, and/or they lack the will to implement them.

In Europe, the newspapers continue with their optimism; they view their job as to report what is happening today and pass on to the reader the over-optimistic spin from political leaders who are trying to put a happy face on the fact that they are spending taxpayer money.  What will happen in the future seems to be the purview of the editorial pages. 

We view our job is to tell what we will see in the future, and it is obvious to us that Europe will extend and pretend that a solution can be found without devaluing the face value of Greek debt…and that this will go on until the pain becomes too great.

When the pain for European governments and taxpayers becomes too great, we will see defaults, and they will be called debt restructuring or ‘re-profiling,’ first in Greece and then in several other European countries such as Portugal, Ireland, and Belgium.  The only question is how long can they extend and pretend before the pain becomes too great?  The charade that a Greek default can be averted, and that Greece will be alone, is absurd.  European individuals and institutions with foresight have been buying and will continue to buy gold this summer and we will continue to see their buying.

Meanwhile, China intends to settle 50 percent of all its trade in Yuan by 2015.  By itself, this is an important data point, but it says something much more.  The world’s currency system in practice is moving away from the U.S. dollar.  Already some pundits believe that 20 to 30 percent of former dollar-based trade has already moved away from the dollar, and at some point in time the dollar’s position as world reserve currency will end. 

A continued long-term decline in the dollar provides yet another reason for increased demand for gold.  We again suggest to all of our readers that gold shares and coins held in safety represent a solid strategy.


Price Controls — A Practice in Economic Folly

At the recent G8 meeting of world economic powers, the French delegation proposed price controls on some food and raw materials.  Over the long course of time, many nations have tried to control prices of goods, services, and wages.  Such attempts have never met with prolonged success because they just end up discouraging production, and simply do not have the desired effect.  History is replete with example of how price controls contribute to major economic headaches.

As a prime example, take President Richard Nixon’s effort to install price controls in order to slow the inflation rate of 5 percent before the election of 1972.  After he won re-election, stronger wage and price controls were instituted in 1973.  They were abandoned in April 1974 after they helped sow the seeds of a much worse inflation that saw prices rise as much as 12 percent per annum for a period before the end of the decade.

Our friend and ultra-savvy financial observer Jim Sinclair also pointed out recently the erroneous and misguided nature of price controls.  There is an immediate short-term rise in commodity prices as the market rushes to beat the imposition of controls.  This is then followed by the creation of a major bureaucracy that never disappears — even after the problem has disappeared.  The last thing we need is more government!  Then you may see a short-term decline in prices, but eventually see shortages of the controlled commodities, along with rising prices, and a major price bubble when the ill-fated controls collapse.

To quote Jim:

“Price controls historically are a disaster being discussed among adults.  This is nonsense beyond stupidity.  Controls are artificial, meaning they have never worked in economic history as a method of trying to correct price problems caused by the planners themselves.  The dislocation that this will cause will be scarcities and will wreak havoc on industrial and private consumers.

The plotters that got us into this problem could do anything, but like every exercise of controls in history, the economic dislocation caused by sophomoric attempts at price controls is biblical.  Anyone ever positively discussing this is a world class idiot.”

Here is the link to an article about the proposed controls. http://www.chinapost.com.tw/international/americas/2011/02/13/290909/Brazil-Argentina.htm

In spite of all the evidence to the contrary, price controls will likely be tried in the U.S. and other parts of the world again and again as inflation integrates itself more deeply into the tissue of global life.


The Markets Fear a Global Growth Slowdown

Global growth is slowing modestly and will continue to do so unwaveringly throughout 2011.  We may sound Pollyanna-ish, but we see China, India, and much of the developing world continuing to grow rapidly while U.S. and Europe economies slow to a crawl.

As we mentioned last week, there are renewed fears of slowing export growth and construction in China.  The reality is that infrastructure-building in China continues at a rapid pace.  Many millions of lower-priced homes are being built for the masses as the attention shifts away from building mansions for the rich.

Canada, Brazil, Australia, Malaysia, the Philippines, and others who export to China will keep getting orders, and China will continue to be the engine of growth for commodity demand.  If the Chinese believe they can manipulate prices down, they may pretend that they are not a buyer, or they may even say they have excess inventories for sale.  Should this happen, it would be merely a ruse.  China needs raw materials to meet its current and projected five-year plan.

Meanwhile, Japan is recovering much faster than most experts thought possible from its triple disasters in March.

In Europe, the palliative ointment of money creation will serve as temporary fixes to help handle the ongoing sovereign debt crises of Greece, Portugal, Spain, and Belgium, none of which are able to swallow the real necessary fiscal medicine to remain solvent.  Europe will buy much of the debt and nationalize banks with taxpayer money.  As is usually the case in Europe, most of the pain will fall on the private sector with government employees escaping relatively unscathed.


Politics, Commodity Prices, and the U.S. Election

You can smell it already it the air.  The U.S. election of 2012 is 18 months away.  The campaign season, which gets longer with each election, has already seen some attempts by politicians to shift the blame for high food and fuel prices to evil traders and outside influences.  Expect to see the blame game intensify.  The economy is poor and politicians are being blamed for it by their constituents.  So expect them to do what they do best — shift the blame early and often.


No Real Fiscal Restraint Possible without Changing Military Spending

Militaries in the developed world are focusing their budgets on less manpower and bank-breaking big ticket items, and more on the use of technology to develop smaller, smarter solutions for warfare.

The days of spending on huge programs to build giant machines that float and fly are drawing to a close.  Lethal weapons come in smaller packages.  This trend started last decade and is transforming the biggest area of expenditure in the U.S. budget.

Click here for a link to a recent LA Times article that discusses this development. 

Please see the table below for our current and closed recommendation.


Investment

Date

Date

Appreciation/ Depreciation


Recommended

Closed

in U.S. Dollars

Commodity Market Recommendations





Corn

4/20/2011

Open

+3.5%

Gold

6/25/2002

Open

+371.6%

Oil

2/11/2009

Open

+179.4%

Corn

12/31/2008

3/3/2011

+81.0%

Soybeans

12/31/2008

3/3/2011

+44.1%

Wheat

12/31/2008 

3/3/2011 

+35.0% 


Currency

Recommendations





Short

Japanese Yen 

4/6/2011


Open

-5.6%

Long

Singapore Dollar

9/13/2010

Open 

+8.4%

Long

Thai Baht

9/13/2010

Open

+6.9%

Long

Canadian Dollar

9/13/2010

Open

+5.3%

Long

Swiss Franc

9/13/2010

Open

+19.6%

Long

Brazilian Real

9/13/2010

Open

+8.6%

Long

Chinese Yuan

9/13/2010

Open

+4.1%

Long

Australian Dollar

9/13/2010

Open

+14.0%

Short

Japanese Yen

09/14/2010

10/20/2010

-3.3%

 

Equity Market

Recommendations



 

 

India

4/6/2011

Open

-7.2%

Malaysia

4/6/2011

Open

+0.7%

Canada

3/24/2011

Open

-4.3%

Colombia


9/13/2010


Half Original Position sold

+3.5%

 

Australia

2/15/2011

Open

+0.5%

Japan

2/15/2011

Open

-11.1%

U.S.

9/9/2010

3/11/2011

+18.1%

Canada

12/16/2010

3/11/2011

+7.9%

South Korea

1/6/2011

3/3/2011

-2.9%

China

9/13/2010

1/27/2011

+5.0%

India

9/13/2010

1/6/2011

+7.9%

Singapore

9/13/2010

12/16/2010

+4.8%

Malaysia

9/13/2010

12/16/2010

+1.3%

Indonesia

9/13/2010

12/16/2010

+9.5%

Thailand

9/13/2010

12/16/2010

+11.9%

Chile

9/13/2010

12/16/2010

+8.9%

Peru

9/13/2010

12/16/2010

+32.2%

 

Bond Market

Recommendations


30 YR Long Term

U.S. Treasury Bond  




08/27/2010

10/20/2010

0.00%