Showdown In The Middle East?

As if the world and the United States didn't have enough holes in their collective dams to plug, here comes yet another leak.  Based on a recent interview with John Bolton, who has served as an interim ambassador to the United Nations from August 2005 to December 2006, action against Tehran must be taken within days, or risk a nuclear enemy in the resource rich Middle East.

Israel has days to launch a military strike against Iran's Bushehr nuclear facility and stop Tehran from acquiring a functioning atomic plant, Bolton said.

Iran is to bring online its first nuclear power reactor, built with Russia's help, on August 21, when a shipment of nuclear fuel will be loaded into the plant's core.  Russia, voted for the sanctions, yet has assisted Iran in bringing this facility on line.  What does Russia care?  They are one of a small group of countries whose oil supplies are growing.  No Peak Oil for them.

At that point, Bolton warned,  it will be too late for Israel to launch a military strike against the facility because any attack would spread radiation and affect Iranian civilians.

"Once that uranium, once those fuel rods are very close to the reactor, certainly once they're in the reactor, attacking it means a release of radiation, no question about it," Bolton told Fox Business Network.

Absent an Israeli strike, Bolton said, "Iran will achieve something that no other opponent of Israel, no other enemy of the United States in the Middle East really has and that is a functioning nuclear reactor."

The UN Security Council hit Tehran with a fourth set of sanctions on June 9 over its nuclear programme, and the United States and European Union followed up with tougher punitive measures targeting Iran's banking and energy sectors.

Bolton doubts that any military action is forthcoming, however.  In fact, despite his warning, he believes the window of action may have already closed.

The significance of this to investors is multi-fold.  In the first place, any military action would undoubtedly cause a major disruption in Middle East oil and a closure of the Gulf of Oman shipping lanes.  That would have grave consequences on the world economy and the financial markets.

Secondly, the other impact would be a heightened crisis bid in Gold.  One can only imagine the resultant spike in the price of Gold.  We could see a move of $100 per ounce in minutes or even more. 

A deflationary scare might suddenly turn into an inflationary scare.

For the record, one must believe that the odds of such a dramatic occurrence is pretty low.  The world is already engaged in numerous military conflicts and resources are quite constrained for more military spending.  But, it does alter the investment calculus.  One would be well-advised to maintain some positions in assets that benefit from crises.  GOLD.

Marko's Take

Gold Or Precious Metals Stocks?

Recently, I proudly and confidently proclaimed that GOLD was ready to head for $2,000.  As Bill Clinton's former press secretary, Dee Dee Myers, used to saying when Billy was caught lying, that forecast is "no longer operational".

An interesting dynamic has put itself into motion.  As GOLD continues to hover near its highs, the equity market is rapidly falling apart.  Precious metals mining companies are battling a tug-of-war between higher metals prices versus a vastly more difficult environment for equities.

This sets up a very difficult question:  how does one play the market volatility?  Carefully.

During the financial meltdown of 2008-09, GOLD held up pretty well, gaining a "flight to safety" bid.  Despite the very good action in GOLD, however, mining stocks got blasted for losses of up to 90%.  Any one of a number of events could trigger an explosion in the metal:  war in Iran, a breakdown of the Euro-Zone, more quantitative easing or more problems in the financial system.  This list is hardly exhaustive.

The above notwithstanding, many signs have emerged that another DEFLATION scare is imminent.  The money supply is plunging at un-precedented rates.  DEFLATION.  Bond yields have broken to new multi-generational lows.  DEFLATION.  Bank loans and credit are contracting at historic rates.  DEFLATION.  The dollar, despite all the government spending and low interest rates keeps rallying.  DEFLATION.

The "Gold Bugs" index, also known as the HUI, has been carving out an ascending wedge pattern.  These are normally, but not always, bearish.  The HUI has also approached the 500 level on several occasions, and can't seem to break through.  A material violation of either 475 on the downside or 500 on the upside would provide a pretty good indication of what to do. 

It's possible that GOLD itself could rally while precious metals stocks could decline.  So, for now, the best bet is the metal itself.  I would be VERY cautious about the equities at this juncture.  I tend to think there will be a better buying opportunity down the road.

As to the metal, I would use $1,225 as a stop level.  If it breaks below, chances are that we will see some decent downside and there will be a much better entry point.  For now, the amber light is flashing.
Warning Will Robinson!

So, what to do here?  If you're going to stick with your portfolio of miners, I would at least add a hedge to insulate against equity pressure.  Personally, I like the inverse ETFs FAZ, SKF and TWM.  There are plenty of others you can use.  I would NOT recommend purchasing a GOLD inverse ETF.  What's the point of being both long AND short?

As investors, it is ever so important to not get wedded to a particular point of view or to stay either perma-bull or perma-bear.  The easiest way to lose money in the world is to be stubborn and insist that your pre-conceived notions must be correct.  Minimize your losses and wait until a better opportunity presents itself.

Marko's Take