first majestic silver

Vancouver, Iran, Russia, Europe

January 25, 2006

VANCOUVER GOLD SHOW
The Cambridge House Vancouver Gold Show, put on by the intrepid team led by Joe Martin, was a resounding success with over 7000 passing the gates. Once again, a gorgeous setting. The high volume numbers are a sign of the times, and indication of the heightened interest in gold. My duties were completed, impressions were gathered, people at key companies were engaged, some subscribers were met, a few fellow writer analysts were joined, a superstar CEO dined me, and one of the most exquisite Investor Relations people on the planet displayed her considerable charms.

The biggest surprise to me was what went unsaid, except by me. It seemed not a single speaker, analyst, or writer cited the heightened risk connection between the Iran nuclear confrontation and the defense of the Petro-Dollar with the inauguration of the Iranian Oil Exchange in March. All three topics are integrally related. They see it only as a geopolitical stress point and conflict which has drawn several key world players in an energy region. Nobody sees the Iranian sale in euros as connected to the claimed nuclear threat. My view is that Iran has years to go before it can conduct the necessary steps on the scientific laboratory front, regardless of what the International Atomic Energy Commission has stated. Recall just three years ago, certain agencies were strongarmed into claiming Iraq had weapons of mass destruction. Wake up and smell the disinformation branded coffee!!! Huge steps must be accomplished before peaceful nuclear fueled electric generation can jump to the weapons grade processing for bombs. And then there is missile delivery system. A bigger problem for the US & West is that Iran can defend its coast with missile batteries, unlike Iraq since its "No Fly Zone" was imposed. Beware of closure of the Persian Gulf itself, whose narrow passageway is the Strait of Hormuz. This is the ultimate pressure point, the carotid artery in the neck whose blood leads to the brain, for those who have a brain.

THE IRAN THREAT
The bigger threats in my view are two-fold. The real nuclear threat might be from Russia in defense of Iran, if attacked. Last summer, Russian President Putin promised a military response to any outside aggression against Iran. This creates a standoff with the United States, and helps to explain why the USGovt has appealed to the for UN sanctions. Let it be known that when it came to Iraq, the USGovt leaders proclaimed the extreme irrelevance and corruption of the United Nations generally. Now the UN is critical to US interests? No way! In my view, the US is hamstrung and frustrated to respond to Iran, which is working with Russia on nuclear technology. Last March 2005, Putin promised that Russian processor plants would treat all spent nuke plant fuel, to assure that any weapons grade material would not fall into Iranian hands. That gesture seemed to defuse the entire Iran problem for the entire spring, summer, and autumn. So why is Iran suddenly so important? That is an easy question to answer, at least for those who are naturally suspicious.

The Iranian Oil Exchange opens for business in March, to sell oil in euro currency denomination. That is what! Iran intends to do what Saddam did, to sell oil for euros and to undermine the US-centric world banking system. This is so strange. Ben Laden pronouncements identified the financial vulnerability of the West, yet when a choke point is threatened, nobody seems aware of it.

My contacts in Zurich inform me of recent pressure by banks to shut down Iranian bank accounts. So a nuclear problem in Iran has seen a bank response. Bull. The proper viewpoints is that Iran represents an assault on the banking system, so a bank response was the first volley. Naturally, since the real threat is to the Petro-Dollar. By accepting euros in transactions to sell oil, and soon natural gas and more, once again the world banking system superstructure is shaken. The year 2006 will go down as the one when the USDollar lost its tight grip on the commercial transaction world.

THE DEFACTO USDOLLAR OIL STANDARD
Let's back track a bit. In 1945, the world embraced a USDollar Gold Standard. Not labeled as such, the 1971 abandonment of the Bretton Woods agreement by Richard Nixon represented a US Treasury default. Charles DeGaulle demanded gold for the seemingly minor trade surplus that France enjoyed bilaterally with the United States. Nixon basically said "F.U." to France, and told him to go eat our USTB paper rather than to wallow in our gold. The US then began to enjoy the extreme benefits of a world financial system which catered to our debt production. Sadly, the biggest exports out of the USEconomy these past few years are jobs and debt securities. After the Arab oil embargo in 1973, the world put in place a defacto USDollar oil standard. That is the important point. The USDollar has a defacto backing which receives far too little publicity. The US-Saudi security alliance has sealed the Petro-Dollar standard. The USDollar is not backed by oil. Oil is backed by the USDollar via that alliance. If anything, the USDollar is nowadays backed by a powerful military and permission to have access to the US marketplace, i.e. shopping malls, retail chains, and car dealer showrooms.

The Petro-Dollar meant the Persian Gulf oil producers would recycle their oil revenues into the US financial system, bonds and stocks, even real estate property. The Petro-Dollar system meant the US Military would protect the Arab sheikdoms and their royal governments. The Petro-Dollar system also meant that global nations would accumulate US Treasurys to pay for large oil transactions. The world banking system, and in particular the central bank currency reserves system, would be US$-centric.

The Iranian Oil Exchange challenges the Petro-Dollar. This time it is different. Iran aint Iraq. Iran has two big friends who have a good memory of recent heavy-handed dealings. When the United States invaded Iraq, established the reconstruction, and began to install a new government, it did so with little resistance. In the process two big events took place, not mentioned much by the lapdog US press & media. Russia got screwed out of multiple billion$ in Iraqi debt. China got screwed out of multiple billion$ in large contracts for Iraqi oil.

MOTIVES FOR THE IRAQ WAR
The American public was once led to believe the Iraq War was all about removing the threat of weapons of mass destruction (WMD), and spreading democracy in the Persian Gulf. These are lofty goals held as high ideals in the US historically. My view was the former was pure smoke screen intended for the uneducated (scared, patriotic) masses to devour, and the latter was an impossibility in a Moslem nation whose religious factions are openly hostile to each other. Behind the scenes, six motives for the Iraqi War can hardly be minimized or dismissed, all of which are financial in nature. At best, these are coincidental add-on benefits. At worst, these are hidden motives. You be the judge. It is not for me to say. The editorial world has an inherent responsibility to report the news, and offer analysis of it. The US media sorely falls short in providing balanced reporting, possibly due to conglomerate ownership of the media networks by large corporations, a factor which was not the case during the VietNam era, and not during the Watergate era.

While we hear in the media like an endless drumbeat the benefits of WMD removal and democratic reform, we hear next to nothing about the six other major potential motives.

  1. Stop the world market sale of crude oil in euro denomination by Saddam Hussein, which benefited Iraq as they held a rising euro currency instead of a falling USDollar currency
  2. Guarantee the United States "first in line" position for purchasing Iraqi crude oil output, at a time when locking in supply chains became critical to economic health, and major oil field production was on the decline
  3. Establish low-cost US Military bases in the strategically centered Iraq, next door to Saudi Arabia, after repeated requests that the Saudis were uncomfortable with large US presence on their soil
  4. Corner the entire oil services contracts with US corporations for rebuilding Iraqi oil operations, securing multi-year multi-billion dollar deals, shutting out European firms
  5. Cancel and rescind all oil purchase contracts with China extending to future years
  6. Put France, Germany, and Russia in secondary positions for bargaining on Iraqi debts, which would be paid from future Iraqi oil revenue controlled by the US

These are not small factors, yet they receive little attention. They drive home the point that military activity might be the ultimate fixed investment, clearing the path for future business activity. A friend hoots about his big Halliburton (symbol 'HAL') stock gains. Each factor could fill a book with consequences to economies, corporations, banking, business contracts, geopolitics, and military implications. The sale of Persian Gulf crude oil for three years has been brisk, in USDollar terms. The investment to preserve the US Treasury Bond system has been successful. Nevermind that half of all USTBond purchases come from overseas by foreign hands, the embodiment of a massive transfer of wealth. The Iranian Oil Exchange threatens the Persian Gulf sales on the eastern flank, the flank more tied to former Soviet republics where China has made huge inroads, the flank where the big important new oil pipeline is located, connected to the Central Asian republics.

Iraq, Russia and China remember well their Iraqi debt loss. They remember well their energy contract loss. With Iran, it is their second chance to halt any second shock & awe thrust executed by the USA. By raising the defense, the US must raise the stakes. We see it.

BACK TO IRAN
By enlisting Russian and Chinese assistance militarily, Iran has won some effective defense. Clearly, Russia is the key participant, but not without China supplying key Silkworm missiles themselves. Recall Putin is a master chess player. Russia recently announced the sale of world class missile systems to Iran. Be sure that overtaking Iraq was akin to taking the lunch pail from a 7-yr old boy sitting for a school bus. Overtaking Iran bears no resemblance to Iraq. Iran has over 70 million people, as opposed to Iraq's 23 million. Iran has no easy borders and no friendly neighbor for the US to base an attack. The "shock & awe" was mere target practice and an exercise of advanced weaponry on largely undefended sites. Iran is not that 8-yr old undefended schoolboy. The bear and the dragon walk to the boy's left and right, like body guards. Iraq was not the Luftewaffe, the Panzers, or Werrmacht from the powerful Germany Military in World War II. This Iran is much more formidable an adversary. The failure to influence Iranian national elections has led to a gathering storm in Iran. My view is that the storm is to widen the crack on the Petro-Dollar, and the winds are to shake its foundation in the banking sector.

Iran does not have a solid mandate and consensus for a stable mullah-led Islamic government. They have bigtime problems. My few Moslem friends laugh about how seriously the USGovt leaders and the American public took the calls for Iran to wipe Israel off the map.Teheran leaders have a challenge of their own, to distract the public from the economic troubles in their country, and to defuse the resentment for the draconian rules imposed by mullahs on daily life. We in the United States mistakenly regard their election of Ahmadinejad as a wide mandate with a majority. It is easy to win a loud majority when the opposition is forbidden to appear on the ballot for the election. In the US high schools, we have a lovely custom of meeting on Friday late afternoons a little early before the closing bell for the clear purpose of whipping up the student body emotions. The football coach and certain important teachers will stir up the young kids to a frenzy, as that night a football game is to be played. The emotions are directed toward the other team, the other school, urging the varsity squad good guys to kick the butts from the opposition, to run their noses into the ground. School unity is easy to achieve. Ahmadinejad had the same purpose, to whip up the crowds in national unity. Israel and the United States are the easy targets, with Israel the less risky target. My Moslem friends point to US high school pep rallies as being very similar. Recall that so many of Iran's population are under the age of 30 years.

The entire nuclear story is the disinformation about Iran. Can anyone remember the incessant drumbeat of Weapons of Mass Destruction concerning Iraq? Have we learned anything?It is a sad observation for me that Americans and their leaders do not learn from history, when it comes to bubbles, to dealing with tyrants who opposed communism, to misunderstanding cultures abroad. We were made fools (not me) about WMD in Iraq. We are being made fools about nuclear proliferation in Iran now. Few even at the Vancouver Gold Show seemed to identify the vast disinformation on the Iranian threat. The threat is to the Petro-Dollar superstructure banking system.

RUSSIA WANTS A STRONGER EURO
In 2004 and 2005, it became clear that the Saudi-led OPEC ministers were increasingly uncomfortable with the declining USDollar as legal tender for oil sales incoming revenues. It seemed to me that OPEC had enlisted the only other military power with a vested interest in selling oil in euro denomination for political alliance and help, Russia. Behind the scenes, it seemed to me that Russia has become the spearhead to fracture the Petro-Dollar. Iraq was all about defense of the Petro-Dollar. Iran is all about the fracture of the Petro-Dollar. That fracture will be enforced by military means, or brought about with military support behind the levered pressure.

With over 80% of its energy product sales to Europe, Russia has a vested interest to sell in euros. Imagine how ridiculous it would be for the US to purchase Canadian oil in Japanese yen transactions. Soon we might purchase Canadian oil with Canadian Dollars! Putin might have tweaked the nose of Europeans with a Ukrainian finger to gain the attention of Europeans to constructively engage Iran. It is my belief that Putin eagerly wants Europe to engage, secure, and conduct business with Iran for the purchase of oil & natural gas products in euro transactions, SO THAT CHINA WILL NOT LOCK UP IRANIAN OUTPUT. Remember that Putin and the Russians have more European blood coursing their veins that the Chinese genetic variety. The ties from Russia to Europe might have a long history of conflict, but that history is full of long tentacles and deep embraces. Russia might see China as an eventual adversary, since their eyes are open. USGovt leaders still see China as a low-cost supplier and credit supplier. With undue focus on Iraq to fight terrorism, the US leaders might be outflanked by Russia and China in Iran. In no way does a UN assault complete any Pincer maneuver.

THE WIND AT EUROPE'S BACK
Today, the German IFO business confidence index came out, a favorable rise for the third consecutive month. It registered the highest level in over five years. In the US financial sphere, confidence measures are the fluffy concepts whose statistics are closely tied to stock indexes, probably responding to the S&P index and not leading it. In Germany, the business confidence index is a more important reflection of their economy, their exports, and a leading indicator on the euro currency. Even without help, the EU currency is pointed toward a nice recovery in 2006. My standing Hat Trick Letter forecast is for the euro to hit 125 by midyear, and 129 by year end. These might be easy forecast hits, achieved in spring for 125.

Notice how the euro has risen with the crude oil price jump last week on the Iran news. The 20-week moving average has turned upward. The 50-week MA is stopped its decline and is flattening nicely. The 125 mark is within easy reach. Recall how FOREX traders called for 115 as the next stop this winter. They might have hoped to lead sheep to sell the euro as they bought. The chart indicates "the euro is a running" and is now in overbought territory. Recall just a month ago, in "T/A: Euro Bullish Divergence" a warning was given by this pen that the euro is about to go running to the northern plains, to graze, to feed off the bloated USDollar pastures.

The European Union has a trade surplus, a fact lost on the US intrepid sleep press & media. The Euro Central Bank probably has much more gold in their vaults to back their euro currency than the USA has in its vaults to back the USDollar. Their EU economy limps along at 1% GDP growth, roughly equal to any "untreated & unmassaged" US GDP growth after distortions, exaggerations, and other negligence are removed.

Here is a tidbit to display vividly why the US GDP is nowhere near 4.0% growth. This past autumn, competent economists proclaimed the twin hurricane damage would inflict a 1.0% to 1.1% hit on the economic growth. Instead, we saw a 0.5% upward adjustment to Q3 growth and will probably see a similar distorted lift in reported Q4 growth. Most, if not all, of US claimed economic growth is improperly unadjusted price inflation, labeled as growth. The lie is at least 3%, and likely 4% or more. Our growth is nothing but price inflation.

My point all along is that with an absurdly under-stated Consumer Price Index, and an even lower misrepresented Deflator series (used to remove price inflation), the US GDP is perhaps 3% lower than reported. Yes, the EU and USA have a similar 1% GDP economic growth rate. They tell the truth in Europe, while the USA lies through its teeth. In fact, we lie on all important economic statistics, which any young teenager can discern with the tools learned in school. We lie on GDP growth, lie on CPI inflation, lie on unemployment rate, lie on productivity, and lie on savings. This is a grand disappointment for me personally, to realize my nation has such engrained institutional lying, apart from politics. Such statements have no bearing on personal patriotism or lack thereof. Any such accusation flies in the face of freedom of speech, and freedom to think for that matter. Of course, a job requirement for our politicians is to play fast & loose with the truth and also be well connected to big corporations.

THE 2006 YEAR AHEAD
The 2005 year saw Wall Street dead wrong about the energy price, but for weather reasons. The 2006 year will see Wall Street dead wrong about the energy price, but for geopolitical reasons. As the global economy heaves from the stress of extended asset bubbles, astronomical imbalances, and gargantuan USGovt federal deficits, that stress will be felt increasingly on the geopolitical stage. The continued subsidies to the USEconomy cannot continue. The continued shun of China from the G10 Finance Minister Meetings cannot continue. The table needs at least one more seat.

The United Nations will soon come center stage. China and Russian hold seats on the important Security Council, where they can veto sanctions and other initiatives. Iran has made two important friends. Iran holds the controlling button on their national crude oil output, and appears willing to use it as a weapon. They command 4.1 million oil barrels per day in output, and export 2.5 mb/day. The crude oil price jumped $3 last Friday when the Iranian leader threatened to respond to UN sanctions with a 1 million barrel daily cutback. The oil price has relaxed since. The Dow Jones Industrial index gave up over 200 points. Volatility is back, a catch phrase for 2006. Iran is all about using military leverage, with nuclear overtones, to fracture and bring an end to the Petro-Dollar. Perhaps one should hope, in nuclear language of yesteryear, for a new era of peaceful co-existence for both a Petro-Dollar and Petro-Euro. Mutually assured destruction (MAD) is not a viable option. The Western world must adapt to the arrival of the Shanghai Coop Group, whose store front will be the Iranian Oil Exchange. Move over, International Petroleum Exchange (London) and New York Mercantile Exchange. An Asian kid wants a store front, removed from Western influence, whose influence has too much history of heavyhandedness.

Unfortunately, the USDollar world reserve system has been wickedly used and exploited by the USGovt and US Economy to obtain a free ride amidst what can be loosely described as an extortion ring. See my "Petro-Dollar & Protection Racket" from April 2005 for a wake-up call. Three decades have wrought tremendous abuse and enormous resentment. The US has obtained a free ride on the highway of power and wealth. We get rich via inflation without a sweat operating clean inflationary machinery, while Asia works in dirty factories and spoils its environment, Europe struggles within the confines of its own nettlesome social networks, and the Persian Gulf & Central Asia suffers as a war zone.

The implications to gold are tremendous and not to be minimized. If central bankers around the world, not just in Asia and the Persian Gulf, decide to diversify their massive foreign reserves, they will grab more gold for their vaults. It protects them from declines even as it fortifies their banking systems. It is curious to me that the Petro-Dollar implications extending from Iran to the oil market linkage to bonds and currencys is lost on many analysts. However, the specter of central bank diversification of US$-based reserves is fully understood and DREADED. The concepts are extensions of each other, lost on the financial press. Iran stands as a direct assault on the Petro-Dollar superstructure system.

My view is that removal of the Petro-Dollar system could mean an increase of 2% to long-term US interest rates, a 2% increase to long-term US mortgage loan rates, a 20% decline in the USDollar exchange rates, a 20% decline in the S&P500 index, and a 20% decline in US housing prices. The end, or even the sunset, of this system would mean a gigantic lift to the gold price and crude oil price, likely to rise by at least 50%.

Look for trade war to render most financial market and economic forecasts wrong in 2006. Trade war is always on my monitor. Just when one thought China might be the key player on trade protection and sanctions and tariffs, enter Iran with its oil card. With Iran, WE HAVE THE LOUDEST OF TRADE WAR. Not to be outdone, China has responded to the failed Unocal acquisition deal. When the US Congress nixed the Unocal deal, and declared "your US$-based money is no good," China responded by locking down the deposits from the entire nation of Kazakhstan, gained a foothold in Nigeria, and fortified its Iranian contracts. The message is clear: China will secure Central Asia and leave the United States to struggle for what it used to obtain without a struggle. Watch as the fringe of OPEC splinters.

These important events and concepts are examined from an inter-market viewpoint in the monthly newsletter referenced below. Huge opportunities exist for personal investment profit.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at [email protected]

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website http://www.goldenjackass.com that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).
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