Turmoil in the Middle East - oil, inflation, gold
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A Turmoil in the Middle East - oil, inflation, gold
Iran – US - Israel Festering Problem: 33 years after the Iranian Revolution in 1979, not much has changed. Iran is and has always been a thorn in the side of the USA and much of Western Europe. The Iranian government has a deep dislike and distrust of the west. Iran claim not to be developing a nuclear weapon - most people don't believe them - the UN does not. It seems to be a game of cat and mouse – Iranian rhetoric is likely to come to a crescendo in the next few months in the run up to their March 2012 elections – they may wish to distract their population away from sanctions and economic hardships at home and be seen high profile on the international stage - blaming the west for their problems as sanctions start to bite. It’s all getting ugly indeed. The British Embassy in Tehran was over-run last month, something almost unheard of in any country. For many years now the USA has wanted to stop any Iranian nuclear weapons programme – the Israelis feel extremely threatened. Meanwhile Saudi Arabia is concerned – evidenced by their recent order of $30 Billion of US fighter jets. UAE is just ordered $3 Billion of missile defence upgrades. The US pull out in Iraq might mean Iranian regional influences might increase. 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 and/or Israel launched set the Iranian nuclear enrichment programme back about three years some years ago - they have probably now caught up again. The US likely believes Iran is 1-2 years away from developing a viable nuclear weapon than can be launched against Israel or another neighbouring state. Iran aspires to be regional leader. They prefer to be centre stage. They feel very bitter about western influence, sanctions and bullying going back the last 100 years. It’s doubt Iran trusts Saudi, Iraq, USA or anyone else for that matter. They are probably furious with US drone surveillance. The UK is furious about the invasion of it's Tehran Embassy.
Oil Disruption: The reason why we mention all of the above is that this situation will create further economic turbulence in 2012. It's one of the biggest threats to global economic stability. And it could even lead to a full scale regional war in the Persian Gulf areas – off the back of the Arab Spring up-risings. This would then:
1 Send oil prices sky-rocketing
2 Send gold prices sky-rocketing
3 Send silver prices sky-rocketing
4 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 tenfold 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:
1 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)
2 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
3 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:
1 Buy gold
2 Buy silver
3 Buy oil production and exploration company stocks and shares
4 Other opportunities include buying physical commodities like food (sugar, beef, pork, wheat, rise)
5 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:
1 Syria – production dropped from 0.38 to 0.25 mln bbls/day
2 Yemen – production dropped from 0.4 mln bbls/day to 0.2 mln bbls/day
3 Venezuela – production continues to decline because of low investment levels
4 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
5 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
6 Libya – recovery from the civil war will take a few years before production is fully restored to the original 1.5 mln bbls/day
7 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.
B Red lining on debt and printed money - 2012 elections and crisis in 2013
What Does 2012 Have In Stall: It really looks likely that in the USA, UK and Europe this year:
1 Interest rates will remain at their current extremely low levels
2 Money printing will continue, designed to prop up stock markets and the banking system whenever required – governments will intervene and manipulate the markets wherever necessary to “keep the show on the road”
3 The USA will use its strategic oil reserves to flood the market if oil prices rise much above $110/bbl (WTI) or $125/bbl (Brent)
4 There will be very little central bank regard for inflation – it will fluctuate as a symptom of the printed money
5 A full blown crash will likely be averted until 2013
Markets: What we expect is that oil prices will rise, inflation will remain high and rising, and consumer confidence will remain low because of high inflation and low wage inflation. Stock markets will be range bound gyrating depending on when the printed money arrives – when it is exhausted – stock markets will drop again.
Global Bubbles: The US printed money is and has created many asset bubbles around the world – feeding through to high real estate prices in China and high food prices in the Middle East. Its creating an overall global inflation problem – manifestations of this problem are increasing civil disorder because of rising food and fuel prices, and general breakdown in law and order in affected countries. Nigeria, Syria, Iran and Yemen are examples.
Kick The Can Down The Road: This will all lead up to a bigger crisis down the road, but it will likely avert the real problem for another year. Some degree of renewed confidence could emerge in the USA and Western Europe – some mirage effect of the fiat printed money. As prices rise, and economies look as if they are starting to grow, then people might start feeling a bit better about the situation. It short-lived feel good period. A dead cat bounce.
Election Uplift: In the USA, there will be an election end 2012 and regardless of who wins, it’s likely the US public will start feeling a bit more optimistic as the Fed gets the printing presses going again. It’s also likely to be the same in France where they will do all they can to create a feeling of optimism. But really, the problems will be kicked down the road into 2013. It’s most likely President Obama will get re-elected – the common person likes the printed money and blaming the banksters. If President Obama is re-elected, and Helicopter Ben keeps his job (the two go together), then massive money printing on a grand scale will continue and with it gold prices will be driven far higher, especially when compared to if a Republican got into power.
Iran: Iran will continue to be a thorn in the side of the USA – and they have their own elections in March 2012 – but their economy will rapidly deteriorate as rampant inflation kicks in after their currency collapsed a few weeks ago – oil export revenues will start to dry up and with it Iran could get desperate – there could well be another war between the USA and Iran. Iran is probably 2-3 years or less away from making a nuclear weapon. Iran do not trust any western country, have very long memories and deep rooted resentments that manifest themselves in a very poor relationship with the USA and most of Western Europe.
Nigeria - Oil Disruption: In 2011, it was Libya that was the cause of 1.5 mln barrels of light oil a day coming off the market – enough to drive oil prices from $80/bbl to $125/bbl and cause Euro debt contagion to re-surface four months later by mid 2011. This year it’s likely to be Nigeria’s turn to take 1.5 mln bbl/day light oil off the market (65% of their capacity) – the key reason is fuel subsidies leading to general strikes that will likely shut down oil production and general civil unrest, including insurgency in NE Nigeria. The country is Africa’s most populated nation with 160 million people, has to import almost all its fuel despite being about the tenth biggest oil producer in the world. Nigerian issues alone could drive prices well above $125/bbl in the western world – and this could then lead to a recession. We are that finely balanced. Western economies are so fragile and debts so large that any oil prices above $125/bbl should cause recession.
UK Property – London: In the UK, we’re likely to have a situation where bankers will start losing jobs and the financial services sector is hit hard, but European, Middle Eastern and Far Eastern money floods into London property. As bankers help force property prices down, this effect will be outweighed by super-rich international people moving into the market – taking advantage of London prime property in the best areas at competitive prices – after Sterling’s decline in recent years. We therefore see West London property prices continuing to rise. Areas in the north of England well away from London will see prices stagnant – not keeping up with the general inflation in the range 4-5%. The richest people will shift money from bonds and stock into London property as a safe haven before the real crisis begins – and inflation takes off. As more international people arrive in London, housing shortages will be magnified and rental prices will continue to rise sharply. There are so many people arriving in London through the back door – the government either cannot or does not want to control it. London is getting far more overcrowded by the day – it’s quite noticeable. More people being crammed into tiny homes. We are pretty sure London’s population has grown by about 25% in the last 10 years – it’s just that no-one has measured it yet! It’s had a very buoyant impact on the rental market and property prices as a whole.
Government Get Out Of The Way: Capitalism has been to a large extent destroyed in the last five years by central governments. Rather than letting markets decide what the real price of goods and services should be, governments have stepped in to regulate prices. Instead of letting markets decide the appropriate interest rates for lending, central banks have been printing money and keeping rates ridiculously low – some 5% below inflation - and intervening when market rates rise to uncomfortable levels for them. They have bailed out failed banks. Bailed out failed businesses. Bailed out failed public sectors entities. Misallocated land, labour and capital. Then blamed bankers and the private sector the economic problems. The US government in 2001 held rates far too low for far too long and created a housing bubble - that also manifested itself in Western Europe. In 2008 the Fed then printed money out of thin air and created far more government debt. They transferred private sector debt to sovereign debt with the bailouts – shift debt to the tax payers. They set rates at zero. Any private sector person will tell you this is doomed to failure – this interference drives investment elsewhere. Instead of letting efficient well run banks take over failed banks, they have propped up the worst offending big banks, made them into zombie banks and rewarded failed bankers with bonuses instead of sacking them or letting the market decide where they go. The financial markets are now well and truly broken – being manipulated by the Fed and Wall Street in concert - another reason why inflation is just around the corner – and people will shift into gold and silver as a safe haven away from interfering governments and untrustworthy failed banks.
Inflation: Now you may be a little confused about the inflation outlook. Recall the Bank of England’s claims every month that inflation is projected to drop to 2% in a 2 year time frame. But let’s get real. Who believes them? When was the last time they were correct with their inflation forecast. They have consistently predicted a decline for the last 3 years, every month, and it never happens. We actually think inflation will increase, not decrease. It’s all to do with two things:
A Printed money
B Bond markets
Tidal Wave: The tidal wave of printed money is yet to arrive in earnest. People have also been buying bonds – and we are now at the top of a 20 year bond market bull run – all fund managers and hedge funds got into bonds in a big way. The bond markets are now about $75 Trillion in size – gigantic. Grossly too large. A bubble waiting to pop. When everyone gets out, this wall of money will hit the streets and cause rampant inflation just like it did in the 1970s. Things will turn very rapidly. It’s also likely that world markets will finally wake up to the fact that the USA by all normal measures bankrupt – it has $15 Trillion of debt, $75 Trillion of unfunded liabilities and a 10% deficit that relies on printed money to service the debt. It has government spending of tax $2.8 Trillion and tax income of $1.7 Trillion. There will eventually be a switch away from the US dollar and bonds as so called “safe heavens” because markets will realized it is clearly not safe at all. The books look like Argentina in 1980 or Greece in 2010.
Inflation Panic: When this wall of bond selling money arrives and prices start rising, people will then start to panic – and they will actually start buying things, real assets, not paper – as many things as fast as possible to offload their currency that has a declining value. TVs, cars, oil paintings, property. There is no panic at the moment, but we believe it will come. Then all prices will be driven sharply higher at a rapid pace, as rich, middle class and poor all try and offload their fiat currency. Money will arrive from all over the place – and money will become rapidly pretty close to worthless.
Gold and Silver: This is when gold and silver prices will go ballistic – any time after end 2012. It could be quite some time later – a year or two, or in 2013. But we think it will happen. Property prices will also be driven higher, but they will likely not keep pace with overall inflation. Debts will be inflated away. The rich know that property is an excellent hedge against inflation and that’s one reason why London property prices have been rising so fast in the last few years.
All Signs Point To Inflation: So you see we have all the ingredients in place for rampant inflation – namely:
1 Gigantic quantities of printed money
2 Bond market about to pop
3 Oil prices rising with supply shortages
4 Interest rates at or close to zero
5 Inflation about 5% higher than interest rates
6 Commodities prices rising sharply
7 Western currencies being devalued
8 Central banks wanting to save every failed bank and business under the sun regardless of consequences
9 Central Banks ignoring inflation targets and cooking the inflation numbers by changing the baskets and rules
10 Private sector and public sector efficiencies and productivity not growing as more subsidies and bail out are implemented to help get politician elected
Strategic Thought: There is no way that governments are able to raise interest rates – because this would bankrupt everyone with debt payments. Hence the only way out now – after the point of no return was been reached around 2010 - is to print the money into oblivion – yes, we are serious. Cash savers will be destroyed, pensioners also. The big winners will be people holding silver, oil and gold – who also have property with large debts that are deflated away rapidly. It’s that simple.
Investment: So there is not much to report at this time – apart from more of the same. In 2012, our view is that it’s best to:
1 Own property (low debt) as a hedge against inflation
2 Own oil, gold and silver
3 Not own bonds – stay well clear
4 Consider owning commodities (food, farmland, agriculture)
Hence look for the dips in the price of gold, silver and oil – then buy. Hold property, but if you invest in the UK. West London is the best place to put your money.
Rising Everything: The scene is set for rising oil, gold and silver prices this year – with higher inflation and things looking up through to November 2012 albeit unemployment will probably keep rising slowly. But after this – a crisis will surely break out – and a western recession will start in earnest again after the “election season”. It will have been 4½ years since the last major recession – and as oil prices rise above $125/bbl – this should be enough to tip most western economies into recession and the printing presses will start again, along with more currency debasement and gold/silver prices exploding. Stock markets will stay range bound but will continue to decline in inflation adjusted terms.
2012-01-15 | Add a Comment
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