Nine Months to War?

Dave Gonigam – December 28, 2011

  • Another disruption to the “quiet” inter-holiday week: Minor blowhard in Iran sends oil prices back above $100
  • Michael Pento with an Iran-driven oil forecast: Read on for a precise price target… and time frame
  • China’s gold crackdown? Tracking a cryptic announcement from the central bank
  • An eye-popping number that points to an outstanding buying opportunity in gold stocks
  • From the mailbag: “Pickup truck oil harvesters” and the real significance of Jefferson County’s bonds

   Hmmm… Here we go again.

As noted in yesterday’s issue, events are conspiring to disrupt the peace and quiet that usually accompanies the week between Christmas and New Year’s.

While the Dow and the S&P are both down about half a percent… and gold drifts a bit further down to $1,573… oil has popped above $100 a barrel for the first time in two weeks.

“Oil price climbs amid Iranian threat,” says the Financial Times. The threat came from Iran’s first vice president: “If they [the West] impose sanctions on Iran’s oil exports,” declared Mohammad Reza Rahimi, “then not even one drop of oil can flow through the Strait of Hormuz.”

As we’ve noted on many previous occasions, that’s a strategic waterway. Up to 40% of the world’s oil shipments travel through this slender passage every day.

Mr. Rahimi is one of 12 vice presidents in Iran. He belongs to one of two opposing factions locked in a bitter power struggle. He’s a bit player spouting off. The bump in crude prices is short-term noise.

But the noise is, nonetheless, a harbinger…

   “It’s pretty clear,” says Michael Pento, offering a major 2012 prediction, “that we’re going to see some sort of military action against Iran’s nuclear infrastructure, either by Israel, the United States or even NATO” — driving oil to $200 a barrel.

Longtime readers know Byron King is calling for a similar price, also driven by Iran. But Byron’s forecast is based on a resumption of the ancient conflict between Shia and Sunni Islam. Mr. Pento’s $200 call is based on an Israeli- or U.S.-led attack.

For evidence, he points to a recent interview with someone in Israel’s power structure who is not at all a bit player — defense minister Ehud Barak. “It wouldn’t take three years [before Iran acquires a crude nuclear weapon]…probably three quarters, before no one can do anything practically about it because the Iranians are gradually, deliberately entering into what I call a zone of immunity.”

For additional evidence, Mr. Pento points to the growing covert war we noted in our Dec. 9 edition. “But it’s not just the promises from Israel, scattered newspaper reports or signs of U.S. surveillance that indicate an attack on Iran is imminent,” he says.

   Let’s return to the crude price. Ignore the pop today and consider the longer-term trend.“Logic dictates that if the global economy were slowing, the demand for oil would drop, along with its price,” says Michael.

“In fact, that’s what has been happening with most industrial commodities. But oil remains a glaring exception.”

Thus oil is up 12% year over year… while copper is down nearly 10%.

The first big divergence on the chart is easy to explain away: The revolt in Libya and the subsequent war took 1.3 million barrels per day of production off the market.

But what gives with the big break starting in September? “I believe,” says Mr. Pento, “oil prices have begun to factor in the removal of the world’s third-largest exporter of oil from the market.” Plus, the prospect of the Strait of Hormuz shutting down.

   As if to underscore Mr. Pento’s point, China is Iran’s biggest crude customer… and it’s making arrangements to replace the oil it currently gets from Iran.

“China will load an additional 12.43 million barrels of crude from Iraq, Russia and West Africa in January, more than covering 285,000 barrels per day (bpd) supply cut from Iran,” according to a Reuters story that largely escaped notice because it came out last Friday, just before a long holiday weekend in the West.

The stated reason is a dispute over payment terms for 2012 contracts. But the move also assures China of a continued oil flow… just in case war breaks out.

“Remember that when Saddam Hussein invaded Kuwait in 1990, oil prices doubled,” Michael reminds us. “And that was just a fraction of the world’s oil at stake, compared with what closing down the Strait of Hormuz could mean.”

[Ed. Note: Michael made a recommendation to play the trend in the latest issue of Survive & Thrive — one that should work out nicely even if the Middle East doesn’t blow up.

For the moment, his publication is available only to members of the Agora Financial Reserve. One of the little-known perks of Reserve membership is that you get a glimpse of our new publications before we roll them out to the general public. We even solicit your input as we fine-tune these publications before general release.

Reserve membership comes with far more benefits than we can possibly list in the course of our mere five minutes. A comprehensive rundown is available here. The Reserve will remain open to new members for one more week.]

   Is the Chinese government changing its tune about public ownership of gold? Six months ago, it was encouraging citizens to buy with both hands.

This morning, word is getting out that the government has ordered the shutdown of all gold exchanges other than the Shanghai Gold Exchange and the Shanghai Futures Exchange. “No local authority, institution or individual is allowed to set up gold exchanges,” according to a directive issued by the People’s Bank of China eight days ago.

The diktat does nothing to limit Chinese citizens’ acquisition of physical gold… but it still raises a bunch of questions. Among them: What happens to the much-touted government-backed Pan Asian Gold Exchange that was scheduled to open in Kunming next June?

We’ll stay on top of this one…

   With both stocks and gold down this morning, gold stocks are taking it on the chin. You can count on one hand the number of days the HUI index has dipped below 500 this year; today is one of them.

“Gold stocks remain very cheap,” says our Dan Amoss, “because the market anticipates that gold prices will soon crash to the $1,000 range and stay there for years. With expectations like that, gold stocks are hardly in a bubble; rather, they are broadly ignored.”

Dan points to a report from RBC Capital Markets that came out 10 days ago. Among “Tier 1” gold producers — Barrick, Goldcorp, Kinross and Newmont — current share prices reflect a long-term gold price of only $1,160 an ounce.

“The way to make money in these stocks is to buy when investors’ expectations for future gold and silver prices are already very low.” Like now.

Without giving too much away to readers who haven’t paid for the guidance, we can tell you this fact is what makes Dan’s play on a pending Greek default so lucrative at this very moment. There’s still time to act on it… but the window of opportunity is about to slam shut.

   The handful of currency traders sitting at their terminals this week were unimpressed with an Italian debt auction that went smoothly today: They’ve sent the euro below $1.30 — another event you can count on the fingers of one hand this year.

With the euro making up 57% of the dollar index, that measure sits now at 80.3 — close to where it was two weeks ago.

   “There are over 600,000 miles of pipeline operated safely in the U.S.,” writes a reader carrying on our debate over the Keystone XL pipeline. “Seems like about 2,100 more miles worth shouldn’t be that big a deal.”

   “I’ve heard,” adds another, “we have 650,000 miles of underground pipelines for everything from crude oil to jet fuel. When was the last break or spill? Drill now; build the line now!”

   “I have worked at Fort McMurray, Peace River and Lloydminster,” writes a veteran of the Canadian oil patch. “Also seen ‘tar sands’ in California and Latin America.”

“The ‘sticky goo’ writer yesterday [who referred to the bitumen getting stuck on one’s tires] has never been within 100 miles of the Wood Buffalo region of Alberta. Also does not appear to know what a ‘truck and shovel’ operation is or why the oil companies have wasted so much money on equipment when they could just hire your reader and all his friends to drive their pickups around Fort Mac and shake them really, really hard every night and save billions?”

“Hell, we have socialist heath care here in Canada, complete with mental health coverage for ‘assistance’ at night for the PICKUP TRUCK OIL HARVESTERS. We also have coats for the 90 degree below winter weather and shoe magnets to prevent mosquitoes from carrying American oil sand experts to their lairs as blood donors.”

The 5: “The actual surface footprint for bitumen recovery is relatively small,” says our resident oilfield geologist Byron King, who visited the ConocoPhillips facility near Fort McMurray in 2009.

“Most everything is done from gravel pads that sit on top of the native soil profile. From the gravel pads, the idea is to drill precise — within a few inches of target — directional wells. Far underground, the wells can drain many square miles with zero surface impact.”

“Bottom line is that the surface disturbance is minimal and relatively ‘light’ even where operations do occur. Many years from now, when the wells are played out, the future operators will seal up the wells, remove the surface equipment, undig the gravel and restore the land to the original state. It’s a well-understood process, with existing projects that show great success.”

“Meanwhile, water usage for oil sands operations is based on cleaning up brackish water from deep aquifers. This water would never have any other use on the surface, even if it somehow or another made its way there. Once the process water goes into circulation as steam, it’s a valuable commodity, and the idea is to recycle it as many times as possible.”

“The dirty-looking ponds that you often see in anti-oil propaganda,” he adds, “are legacy operations from the 1970s.”

   “I think the rubber will hit the road in a few months with general-obligation muni bonds,” writes a reader after yesterday’s issue, “when Detroit wants to go bankrupt….”

“Then, investors may find out the emperor has no clothes. They may find out the hard way that you cannot squeeze blood out of a turnip. JP Morgan knows that if they don’t fight this Jefferson County deal, it could change the muni market dramatically for a long time.”

“In Jefferson County, Ala., the grand total FY2012 budget is $638 million, and they may have to pay back $5 billion…..along with whatever other debt this county has….”

“This muni market and student loan market are very dangerous animals now. Not all, but a fair amount of the issues. They are like raccoons people try to domesticate — eventually, they turn… That is the only way to put it; especially when dealing with some of the 10-30 year issues that are heavily reliant on federal government payments or other specific revenue sources that could prove unstable in the long term.”

“Think about the haircuts that munis could take if a court deems that the term ‘full faith and credit’ means nothing in actuality — it’s only a promise, and it’s only as good as the people that are running the show at a particular point in time.”

“Just my two cents. I could be way off. Actually, I hope I am. Thanks for your newsletters.”

The 5: You raise a really good point about what happens if Uncle Sam cuts off the gravy train to states and municipalities. It’s one of the factors Addison considered in assembling the special report American Oases — pinpointing the five U.S. states best positioned to ride out the coming financial storms. It goes out free to every new reader of Apogee Advisory. You can become one here.


Dave Gonigam
The 5 Min. Forecast

P.S. “The Foreign Account Tax Compliance Act, or FATCA, as it is known, is now causing alarm among businesses outside the United States that fear they will have to spend billions of dollars a year to meet the greatly increased reporting burdens, starting in 2013,” reads a story in The New York Times. “American expatriates also say the new filing demands are daunting and overblown.”

Nice of the Gray Lady to finally discover the unintended consequences of a story we’ve been following for more than six months. But it’s worse than even the Times lets on. FATCA is a large brick in a “virtual Berlin wall” designed to trap Americans within the U.S. dollar and U.S. banks.

Addison explains how it works and how you can still legally leap the wall in a special report called How to Safely Move Your Money out of Harm’s Way. It too is available free to every new reader of Apogee Advisory. Access here.


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