Gold und Silber... Informationen und Vermutungen I

PRESSURE MOUNTS ON ‘JUMPING JACK’

· Bush can win Iraq
· Dollar and Dow to strengthen
· Gold can dip to $630 – then up

Investment Indicators from Peter George
Friday, June 22, 2007

http://news.goldseek.com/GoldSeek/1182527556.php

…The above long-drawn out analysis is like a game of chess that is reaching its end. Whereto for Iran? The implications for world markets are important. Most analysts have long-since written off America’s President Bush, the Dollar, a sustained recovery for the US economy, and any prospects American troops may have of bringing peace and prosperity to Iraq. This writer differs with these views across the board. In order to persuade his readers he has any prospect of being proven correct, it was necessary to be somewhat exhaustive, even long-winded. In a recent article explaining why Saudi Oil production was about to be significantly affected by rising ‘depletion levels’, the author sought to explain why his report became so lengthy:

“Given the importance of the subject, in a choice between being thorough and being brief, it seemed better to be thorough.”

The writer shares his sentiments and trusts his readers will eventually agree.

6.0 WHEN WAR SEEMS INEVITABLE…….ONLY THEN DOES PEACE BECOMES POSSIBLE

There is a well-known Latin tag which the writer quotes often. It well-encapsulates the gist of the above heading:

“PAX VOBIS PARE BELLUM”

It means: “If you want peace, prepare for war”

The past thirty odd pages of evidence and argument invite certain key conclusions to be drawn when dealing with ‘rogue states’. They spell victory when resort is had to the strategy of force or meaningful threat but continuing failure where reliance is placed on the soft options of ‘negotiation’ and ‘compromise’.

The clearest example when dealing with Iran followed President Ahmadinejad’s hot-headed act of aggression in abducting members of the British Royal Navy. The writer referred to it as:

LESSONS FROM AN IRANIAN ‘CLIMBDOWN’

Certain external interventions took place to make it possible. These were described as ‘PRESSURE JETS’ 1, 2 and 3. They were set out in detail on pages 10 to 13 above. The proof of the pudding was in the eating. Overwhelming pressure was the answer, particularly when the threat of military intervention was vividly spelt out by the Saudi King. In the case of North Korea and Iran, the strategy of holding a knife to the throats of their respective leaders must be sustained. Blair, Cheney and Bush were spot on. However long and drawn out, when dealing with rogue states, diplomacy is counter-productive. Whatever the economic costs of UN sanctions, Ahmadinejad will ride them out. High oil prices have helped him. Internal political pressure will only unseat him if the threat of military intervention becomes intense and imminent.

The threat worked with Libya. It will work with North Korea and Iran. The alternative, as Robert Joseph pointed out, is that Iran will follow in the footsteps of North Korea. She too will acquire her own nuclear arsenal and it will not take more than another few months. Time has run out.

6.1 CONCLUSION – IRAN WILL CAVE BY END 2007

After careful consideration the writer is persuaded that before the end of 2007, the Iranian crisis will pass boiling point. The US, Britain, France and Germany will likely form what the ‘Neo-Cons’ term a ‘Coalition of the willing’. Led by the US, they will convey an unmistakable message to the Iranian ‘elite’. Disband your nuclear enrichment and stop interfering in Iraq. Refusal will trigger war by way of a major strike against Iranian nuclear facilities. There will doubtless be collateral damage and insignificant US casualties but there is no alternative. Iran will finally be back in her box. President Ahmadinejad will retire into obscurity. The way will be open for a peaceful and democratic solution to the situation in Iraq. It could potentially serve as a model for the entire Middle East, defying current critics in the West and Islamic radicals in the East. America’s key western partners would then have reason to fund reconstruction of Iraq as a joint effort in coope ration.

7.0 POSTSCRIPT TO A ‘CLIMBDOWN’

If the Iran – US standoff pans out as projected, the implications for US international interests could on balance prove highly beneficial. They will separately impact the dollar, oil prices, popularity of the American President, and the strength of world markets and commodities.
· In the case of the dollar it may surprise by accentuating the strengthening trend already under way. This is explained below.
· It will similarly contribute to a reduction of tension in oil markets but way insufficient – in the opinion of the writer - to negate the growing impact of ‘Peak Oil’. Latest developments here could prove dramatic and are dealt with in the section on oil.
· Despite the political fortunes of Bush having reached a nadir, his term as President only ends in late 2009. If Iraq chaos subsides, he will confound the world of nay-sayers. Sentiment could swing in his favor. Reasons are given below.
· The next section will focus on world markets, specifically the Dow, S&P and NASDAQ. Contrary to sentiments of a year ago, the outlook here continues to improve. The first two have both made new highs, as have one or two key performers in the NASDAQ. The world’s most famous chartist has strong views concerning the way forward.
· A final section deals with commodities, with particular emphasis on the outlook for gold, at a time when the overwhelming majority of opinion is negative.

7.1 OUTLOOK FOR THE DOLLAR – 2007 TO 2008

No.77, headed: ‘Race to Win’, was published on September 21, 2006. The letter alluded to the Dollar’s ability, in the first 11 months of the preceding year, to spring surprising strength from a pit of extreme weakness. In under a year it had rallied from an all-time low of $1,36 against the EURO on December 31, 2004, to $1,16 on November 16, 2005. The slide of 2004 had been triggered by a series of disappointing economic data. From the end of 2004 onwards, thousands of speculators ‘shorted’ the dollar, expecting the slide to accelerate. Instead it swung right back round and bit them. Prominent victims were Warren Buffett of Berkshire Hathaway - the world’s second richest man – and Bill Gross of PIMCO, manager of the world’s biggest bond fund. They got whipsawed, covering in panic as the rally drew to a close. It happens in the best of circles. The Dollar recovery had been occasioned by a surprising improvement in economic data in face of rapidly rising interest rates. In vestors were attracted by US yields which made Dollar-denominated assets more profitable. The party didn’t last long.

Fifteen months later, the Dollar trend was swinging back into weakness. It propelled the EURO from $116 on November 16, 2005, to $1,31 by February 16, 2007, publication date of No.78. ‘Dollar Bears’ went into full cry. In his letter the writer inserted a six-page section on the US currency, suggesting it would most probably ‘range trade‘, between $126 and $136 and that predictions of runaway weakness were likely to prove far too pessimistic.

In the event the EURO re-tested its previous 31 December 2004 peak of $1,3642, beating it by a marginal 40 points. This occurred on 27 April 2007. Over a three-year period it had traced out a ‘DOUBLE TOP’. Once again the cause was a fear that the housing crash would trigger a widespread American recession.

Since the end of April 2007, the Dollar has begun began to show signs of wanting to rally, pulling the EURO down from $1,3682 to a recent low of $1,3380. Thomas Flury of UBS thinks this level represents strong short-term resistance and will prove a turning point. He projects a push up to $1,38 over the next three months in anticipation of two further ECB rate rises. This would bump the Bank’s discount rate from 3,75% to 4,25%. If it happens, he figures this would cause the EURO to target new highs. What can go wrong?

There are three possibilities. First, downward momentum in the EURO may yet have a way to go. Second, an implosion in the Spanish property market could spark ripple effects through Europe. This might persuade the ECB to place further rate increases on indefinite hold. Third, and most important, an Iranian ‘climb down’ could significantly boost long term prospects for both the dollar and America’s international standing. All three of the above are discussed below.

· Based on a ‘momentum tracker’ derived from an old-fashioned Indexia charting system, Dollar strength could persist for a while, dragging the rate from a current $1,3450, down to $1,3150. Potential drivers of Dollar strength are as usual indications from job figures that the US economy continues to grow faster than most have predicted. In May, 157,000 new jobs were created, higher than expected. In addition, data from the Institute for Supply Management showed strong growth in the manufacturing sector. Michael Woolfolk at the Bank of New York conclude as follows:

“Connect the dots and we seem to be heading for a strong rebound in the manufacturing sector….We see $1,32 as FAIR VALUE against the EURO, and if these data keep surprising on the upside, this is a fait accompli.”

The housing slump has so far failed to generate the ‘knock-on’ feared by the likes of Greenspan. The need for rate cuts is therefore receding. Some suggest the compounding effect of rising oil and commodity prices in boosting costs, might even lead the Fed to consider RAISING rates. This could happen towards the end of the year or early next. The anticipation of such a possibility reflects in falling bond prices and gently rising long-term interest rates. In terms of yield attraction, Dollar debt therefore retains its edge over assets denominated in EUROs.

· What of the European economy itself? As Clinton would have said: “It’s the ‘Rain in Spain’, stupid!” Irrespective of general ECB optimism, certain members of the community face turbulent times. The US housing market fell off a cliff. A far worse fate could face property speculators in Spain. Why should this affect overall ECB interest rates? In the words of John Stepek in Moneyweek:

“Statistics on the Spanish property market make for terrifying reading. More than 800,000 homes were built last year – that’s more than Germany, France and Italy combined, leaving a glut of property hanging over the market. House prices have risen 270% in 10 years. Household debt has climbed from 75% of disposable income in 1995 to 133% now…Spain’s market is unusually vulnerable to rising interest rates and panicky speculators. In a country of 40m people, 4m foreigners own property…and a whopping 96% of mortgages are on floating rates. Since 2005 there have been seven hikes.”

Bernard Connolly of Banque AIG spoke to the London Daily Telegraph:

“Spain is going to face the direst of economic circumstances; a cycle of recession, deflation and widespread private sector default – a depression in fact. This stock market slide is not just a ‘correction’. It has a very long way to go.”

For the month of May, Euro zone retail sales fell for the first time in three months. Although Germany stands strong, the ECB may yet need to exercise caution, holding rates in check, particularly if the Spanish construction industry experiences a potential meltdown. The overall European climate is not a ‘slam dunk’ scenario for rising rates.

· A final boost to the Dollar could come from developments in the Middle East, the focus of this letter. An Iranian ‘climb down’ would overnight slash perceptions of a US trade deficit spiraling endlessly out of control, on the back of rising military outlays in Iraq. A Dollar rally would then not stop at $1,32 but could easily push back down to $1,26. Based on the Middle East scenario sketched above, the writer believes a Dollar rate of $1,26 could well be on the cards by end 2007. That would give Dollar Bears something to think about, wouldn’t it?

· As this letter was going to print the writer watched Victor Adair being interviewed. A well-known currency specialist from Man Financial, his forecast for the Dollar was a gut-wrenching $1,20. His reasons were simple. EURO rate rises are already ‘factored in’, whereas Dollar rates, US growth, and Domestic inflation, will all surprise to the upside. Seems good to the writer.

7.2 OUTLOOK FOR OIL AND GASOLINE PRICES - 2007 to 2010

Two years ago the writer laid out a five-year forecast for the prices of oil and gold. Based on their respective 1980 highs of $40 a barrel for oil and $875 an ounce for gold, he projected a five-fold increase for oil to $200 a barrel by end 2010, and a mildly tamer four-fold increase in gold to $3,500. Supply problems would give oil the edge, enabling it to accelerate away from its multi-decade relationship with gold.

Having read Matt Simmons’ book, ‘Twilight in the Desert’ barely two years ago, the writer became an avid subscriber to the theory of ‘Peak Oil’. In essence it holds that easily obtainable oil resources are limited and that global production is set to decline. The theory specifically claims that Saudi Arabia’s main oil deposit, the Ghawar Field – and biggest in the world - is way past its ‘sell by’ date and set to experience a sharp fall-off in output. It suggests that for some years, Saudi production has been maintained at artificially high levels, allowing consumers to grow complacent.

Quite recently the writer’s attention was drawn to an independent source of information supporting Matt Simmons ‘Peak Oil’ theory to the tee. It was entitled ‘Depletion Levels in Ghawar’. The original article was posted on a website called ‘The Oil Drum’, on May 15th this year, by author Stuart Staniford. The report was quite technical and ran to 49 pages – effectively a ‘thesis’. Staniford then took the unusual step of inviting e-mail blogging by recognized experts. They have since contributed a further 81 pages of commentary, most of which was highly complementary.

The bottom line appears increasingly to be that Saudi production peaked at 9,5million barrels a day in 2005. It has since fallen to 9mb/d in 2006 and looks like sliding to 8mb/d for the year to December 2007. The report then infers production levels of 7.0mb/d, 6.0mb/d and 5.5mb/d for the years 2008, 2009, and 2010. One blogger made a strong case for the rate of decline accelerating down to 4mb/d before hitting a plateau!

The general consensus from both the author and his ‘bloggers’ was that oil prices would hit $100/barrel by end 2007, rising to a minimum of $200 by end 2010. Matt Simmons would probably agree with those estimates although in his book he postulated that under certain circumstances the price could appreciate substantially faster, ultimately reaching as high as $500 a barrel. All values are assumed to be in constant 2005 Dollars.

Using the conservative scenario of $100 by end 2007 underscores the attractions of most well-run energy stocks. Specific recommendations will follow in the section on stocks.

A heightened Iranian confrontation would give a short term boost to prices in the event that sunken ships were to block the Straits of Hormuz. However, if followed by a ‘climb down’ before the end of the year, the net effect on prices would ultimately be deflationary. A far greater measure of peace would return to Iraq. Production of oil could conceivably double from 2mb/d to 4m. In Iran itself, if a more moderate administration came to power, sanctions would be dropped. Over time the nation’s oil resources would once again receive proper attention by way of foreign technical expertise and fresh investment from offshore. This would make it possible for production to revive. Unfortunately none of these benefits would wholly offset the sharp fall off expected from Saudi Arabia. Nor could any increases be implemented as rapidly as the declines now predicted.

7.3 CAN BUSH BOUNCE BACK?

The political fortunes of George Bush junior long ago became the butt of jokes. His faith-based strategies gave rise to snide allegations regarding the President’s alleged lack of cranial capacity. However, before siding with mockers, one would be well-advised to take a tip from legendary stock trader Baron Rothschild.

‘The time to buy is when there’s blood in the street’.

Similar swings in and out of favour are frequently observed in the world of politics, but in the case of Bush there are other factors at work. For all his faults, the man is a ‘Committed Christian’. In deference to his stand the writer sought a scripture appropriate to his current dire circumstances but pregnant with potential for a ‘bounce-back’ based on God’s promises. These are generally attributable to any man of God who sticks ‘faithfully’ to whatever he believes God is asking him to do. He may of course have misheard, but, in Bush’s situation this is unlikely. Throughout his term he has been surrounded by ‘Godly advisors’, in particular people like Billy Graham’s son, Franklin, who prayed for him on the day of his inauguration. After September 11, Franklin Graham’s comments were bold and forthright:

“The God of Islam is not the same God of the Christian or the Judeo-Christian faith. It is a different God, and I believe a very evil and wicked religion.”

The writer’s arguments with regard to a Bush ‘bounce back’ may be presumptuous. Time will tell. The scripture chosen is found in the Old Testament Book of Lamentations, chapter 3, verse 16, 31, and 32. It fairly describes Bush’s predicament but carries promise of a change for the better:

"He has broken my teeth with gravel; he has trampled me in the dust.
I have been deprived of peace; I have forgotten what prosperity is…
but…men are not cast off from the Lord forever. Though he brings grief,
he will show compassion, so great is his unfailing love."

The Prophet Kim Clement felt the same way:

“I will not allow a Bush to be leaving the White House in shame. I will yet bring some honour to what has happened.”

Although it is fashionable to condemn the March 20, 2003 invasion of Iraq out of hand, one must still distinguish between the reasons given publicly at that time, and those which could, should and still can be given today. These arguments were fully addressed in section 3.0, entitled:

‘The Iraq War in Retrospect’

However convenient it may be to condemn the war and the reasons for launching it, dealing with the present situation is another matter entirely. It allows no scope for ‘beating around the Bush’. Everyone has to lay their strategy on the line.