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
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
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
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’
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
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
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
Here is the link to an article about the proposed
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
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
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
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