409: Turmoil in the Middle East - oil, inflation, gold
Happy New Year: First of all, Happy New Year – would hope it is very prosperous and peaceful for you. Let’s get down to business – with the aim to improve your returns in 2012.
Iran – US - Israel Festering Problem: 32 years after the Iranian Revolution in 1980, not much has changed. Iran is and has always been a thorn in the side of the USA and most of Western Europe. Iran claim not to be developing a nuclear weapon - most people don't believe them - the UN does not. It’s a game of cat and mouse – Iranian rhetoric is likely come to a crescendo in the next few months in the run up to their March 2012 election – they will likely want to distract their population away from sanctions and economic hardships at home and be seen on the international stage - blaming the west. It’s all getting very ugly indeed. The British Embassy in Tehran was over-run and violated last month, something almost unheard of in history. For many years now the USA has wanted to stop an Iranian nuclear weapons programme – the Israelis feel extremely threatened. Meanwhile Saudi Arabia is deeply concerned – has just order $30 Billion of US fighter jets. UAE is just ordered $3 Billion of missile defences. The US pull out in Iraq likely means Iranian influences will be more difficult to nullify or control. The question for countries like the USA, Israel and the UN is whether they can sit back and watch Iran develop a long range nuclear weapons capability in the next few years or whether they need to act now to stop this. The computer worm the US/Israel launched set the Iranian nuclear enrichment programme back about three years some years ago - they have now caught back up again. The US thinks Iran is probably 1-2 years away from developing a viable nuclear weapon than can be launched against Israel or other neighbouring states. Iran wants to be the regional leader. They prefer to be centre stage. They like the attention. They feel very bitter about western influence, sanctions and bullying going back the last 100 years. They don't trust Saudi, Iraq, USA or anyone else for that matter. They are probably furious with drone surveillance and US secret service missions. The UK is furious about the invasion of it's Embassy.
Oil Disruption: The reason why we mention all of this is that this situation will create further economic turmoil in 2012. It's one of the biggest threats to global economic stability. And it could lead to a full scale regional war in the Persian Gulf areas – off the back of the Arab Spring up-risings. This would then:
· Send oil prices sky-rocketing
· Send gold prices sky-rocketing
· Send silver prices sky-rocketing
· Send US and UK inflation far higher along with the unemployment rate – and lead to another protracted recessionary period.
End Of Cheap Oil: The bottom lines is that there is not enough low priced oil in the world anymore. Any hint of disruptions to supplies sends oil prices far higher because there is little or no spare capacity. This then feeds through after six months to higher food, energy and general inflation and leads to western developed oil importing nations to suffer significant economic slowdowns and then recession.
Oil Over $100/bbl = Recession: It’s absolutely no co-incidence that every time oil prices rise, western economy’s GDP growth slows down to a crawl and government debt levels increase further. Then the government need to print more money to create the illusion that growth is still occurring, even though it’s just monetary inflation – that is destroying savings.
Peak Oil Exports: Also consider the likely more important measure that we are past "Peak Oil Exports" - that's the maximum ever oil exported. The reason is that all oil producing nations normally rapidly expand their oil consumption through subsidies, inefficient oil usage and a feeling of individual and industrial rights to using oil since it is produced indigenously. Hence over time, oil exports drop in oil producing countries. This can be seen in this unique calculation we have prepared going back to 1965 - a compilation of 90 countries oil surplus in each year. As you can see, the world reached Peak Oil Exports in 2006. Despite consumption rising 1.5+% per year, exports decline. No wander oil prices are rising. Interesting also to note that oil prices skyrocketed after 2006 when oil exports dropped sharply - from 50/bbl to $147/bbl by mid 2008. Oil prices have remained stubbornly high at ~100/bbl as exports have stay low - at the same level as 1997. More countries fighting for less oil as the global economy struggles to grow and diesel shortage become more common.
M3 and Oil Prices: It’s also good to consider that there is a pretty close correlation between the M3 US dollar money supply and oil price. In essence, if the US was still on the gold standard and had not created so much money, oil prices would still be about $8/bbl. The main reason why oil prices have risen ten fold is because the dollar supply has gone up ten-fold, along with increasing costs of the marginal cost of oil production in non-OPEC producers (though this is partly because of more dollars in circulation as well). Its difficult to calculate now because in 2006 the US government stopped reporting M3 money supply when it got out of control!
Consider some fundamentals:
· Official inflation RPI in the UK is 5.2% whilst interest rates are 0.5% - that’s destroying savers money by 4.7% per annum (about 27% compounded in 5 years)
· Actual inflation – un-manipulated – is more like 10-12%, so savers are in fact losing more like 10% per annum (55% compounded over 5 years) because their money is diluted by the printed money
· In the US it’s little different – official inflation is ~3%, unofficial inflation is more like 10% and savings are being destroyed
UK Inflation: The Bank of England have been promising for four years now that inflation will drop back to 2% from its current official level of 5.2%. Do you really believe them? Based on what? Let’s face it – high inflation is here to stay – if anything inflation rates will accelerate in 2012. Don’t get caught out on this. Waves of printed money, interest rates at 0.5% and high oil prices don’t lead to reducing inflation rates!
Slow Collapse: Western developed nations economies started a slow decline and steady collapse back in 2006 after the US housing bubble started to burst – property prices in inflation adjusted terms are still declining and this is damaging consumer confidence. Many people are trying to pay down their debts – or at least not get load themselves with new debts – and this is slowing economies as well. Meanwhile to keep the illusion of growth, governments all around the world are printing money, bailing out poorly performing banks and businesses and instigating social programmes that are destroying value still further. They take from the savers and tax payers and give to the failed bankers. No wander there are so many upset people. But rather than capitalism gone wrong, its actually government interference that then makes capitalism go wrong. Remember governments stepped in, in 2008, and used tax payers money to bail out the failed banks. They should have let them collapse and started again afresh - like Iceland did in 2008 - now a fast growing economy once more. But now they have printed so much money and issued so much debt, the problem is three times bigger and has now shifted from private business level to sovereign debt level. The western currencies will eventually fail – the Euro, Dollar and possibly Sterling as well. It’s a very serious possibility that the $100 Trillion US derivatives market and $85 Trillion US Bond market will fail in the next year or so and western currencies will go up in smoke after the Fed tries to print even more money in attempts to shore up the collapse.
Investment Opportunities: Bottom lines is – sometime in the next 6 months to 6 years, currencies will collapse and the gold and silver prices will go ballistic. But the immediate threat is again Peak Oil and Iran that will drive commodities prices up far higher in 2012. The important thing for investors is to consider these ramifications with regard to ones investment strategy for 2012. For us here at PropertyInvesting.net – it’s pretty clear what we should be doing:
· Buy gold
· Buy silver
· Buy oil production and exploration company stocks and shares
· Other opportunities include buying physical commodities like food (sugar, beef, pork, wheat, rise)
· Hold or purchase property in oil cities – for the UK that’s London and Aberdeen, for the USA that’s Houston, North Dakota (Bakken oil boom) – also Norway, Canada and Australia - or farmland close to cities
Think In Gold and Silver Terms: The real question is not so much what is silver or gold worth in dollars, but how much of an asset silver or gold can buy. At the moment, it takes about 100 gold coins at $1550/ounce to buy a US house. But eventually is will probably only take 10 to 20 gold coins to buy a house – we are serious.
Razor Blade: A classic example of how ridiculously undervalued silver is, is that the recommended price for a Gillette Razor (with 8 spare blades) is £38. That’s about 1.3 ounces of silver (1.3 silver coins) for each razor pack. That is the most ridiculous ratio ever seen. Silver is used for all electronics, mobile phones, medical, water purification, solar panels, wind turbines – the world would stop without it. It’s incredibly difficult to mine. It's rarer than gold - yes, there is more gold on earth's surface than silver - silver is running out. Silver is the screaming buy of the century. One day you will be able to buy 10-20 or more razor kits with a coin. It's so cheap it scares people! Don't hold back. Just buy it!
Oil Shortages: We believe oil prices will continue to rise from $100/bbl end 2011 and could go ballistic if Iran disrupts the oil flow through the Straits of Hormuz – the shipping channel that exports 15 million bbls/oil a day or 15 super tankers a day globally and about 30% of LNG global exports from Qatar. This is about 20% of global oil production and 30% of oil exports – any blockade or severe disruption for more than a week or so would drive oil prices north of $200/bbls – oil prices would double in short order – and lead to a western recession six months further down the road.
Saudi Can’t Help This Time: Saudi Arabia announced a few days ago it would make up any shortfall that the Iranian situation may cause. What they did not highlight was that their 8 million bbls/day exports come out via the Straits of Hormuz – so how can they make this up? They will be the biggest exporter affected. They have some other export pipeline options, but their capacity to export in other directions is very limited. Kuwait, Iraq, Qatar and UAE would all be severely affected along with Iran itself. Iran has been threatening for years to blockade the Straits of Hormuz, but no-one took them seriously because they did not have a viable navy. But now they have built up a significant naval capability, currently finalising exercises, and they could now start a blockade, albeit they might get rapidly blown out of the water by the US Naval 5th fleet. The mere threat will drive oil prices higher in 2012. The sanctions will start to bite and Iran is likely to start increasingly desperate measures to create friction, trouble and deflect away from problems at home. This might also be the case for the USA as they have an election end 2012 – and the current administration might find it popular to blame economic woes on high oil prices and Iran, thence start another stupid war.
Stupid Wars: Let’s face it, we’ve all seen so many stupid wars – do we really trust the politicians not to get involved again? The testosterone levels will rise and they will start firing off again – that’s our prediction. Best protect oneself and invest in gold, silver and oil for 2012.
Oil Production Problems: There are just too many oil exporting nations that are now in political or civil strife – and this will lead to oil shortages in 2012:
· Syria – production dropped from 0.38 to 0.25 mln bbls/day
· Yemen – production dropped from 0.4 mln bbls/day to 0.2 mln bbls/day
· Venezuela – production continues to decline because of low investment levels
· UK – production has crashed 30% (gas) and 15% (oil) since North Sea taxes were raised March 2011 – just at the wrong time again the government shoots itself in the foot big time
· Russia – demonstrations about recent elections put a security question mark hanging over 10 mln bbl/day of production for the first time in a decade
· Libya – recovery from the civil war will take a few years before production is fully restored to the original 1.5 mln bbls/day
· Egypt – 0.5 mln bbls/day is being affected by ongoing strife – the number of bomb attacks on gas pipelines heading north to Israel has increased since the Arab Spring uprising
We’ve added the UK into the mix because the UK has the most unstable oil tax regime on the planet after it’s been increased three times in 12 years – a sign of political turmoil and/or desperation.
Global Production Maxed Out: The world produces about 89 mln bbls of oil a day, but with so many disruptions and Saudi Arabia's internal consumption having skyrocketed to 2.5 mln bbls/day, it’s difficult to see how Saudi Arabia can increase export any further from now onwards. Any further disruption will see severe tightening of oil supplies. If oil rises too high, wars may break-out because the economic disparity been oil exporters and imports in the Middle East increases regional friction as food prices sky-rocket and the massively booming desert populations get more desperate. Furthermore, as mentioned above, the US is likely to go to war to blame someone for the high oil prices.
War: Whenever oil prices sky-rocket, war always seems to break out. Sorry for being so depressing, but it’s just the truth. This time will be no different. Resource wars of some shape or form will come. Whether this is politicians desperate to do something, some blame game, some method to boost the economic output through military spending, some mix or other reason – we don’t know. But it always seems to happen and this time will be no different.
Where there is a threat there is an opportunity. We urge all our visitors to get serious in 2012 - investing in silver, gold and oil. Happy investing in 2012