Thomas
DeChastelain
Memorial Archives

Playing Iran: Gold, Oil and Cash
posted Feb 4, 2006 at 02:39AM

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XAU/Gold Ratio



My thinking is that consolidation/retrenchment will be required before this resistance metric, perhaps the only one that hasn't been taken out, also falls.

I find it hard to believe however that a return to the major support metric will occur now that gold has been moving bullishly against all currencies.

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Left to its own devices I think oil will stay within a trading range, akin to what gold has done the past two years. Developments in Iran can change this at a moment's notice. The longer the basing within this range takes place the more explosive the move will eventually be.

Discussion

I have been wanting to do a more detailed piece on the Iran situation but simply have not been able to allocate sufficient time towards it. Suffice to say that the situation in the entire Middle East continues to deteriorate as the forces of negative nationalism and religious zealotry rise to make an already complex situation intractable.

My view is that increased military action spreading to Iran is all but a certainty. The only question is when, what form will it take, and the nature of the repercussions. In this latter category particularly there are many scenarios possible. Suffice to say that if Middle East populaces are threatening murder, terrorism and other mayhem over satirical cartoons, then one can only imagine how they will feel when the bombs start dropping. The screaming and mindless ranting won't help them. For the Joe Six Packs of the Middle East the future holds nothing but misery. They will stay that way until they get some men with the brass to draw their own satirical cartoons. Until then there will be no frolicking with virgins but the potential realities of whole percentages of pupulations being turned into jam.

I have no interest in general equities at this time and indeed anything that is based on consumer spending should be avoided like the plague.

I believe the best combination of assets to hold during this time is oil, gold and cash. A few months ago I did have that combination in hand but as regular readers will know, I got "cute" and tried to swing trade gold and then fell asleep at the switch on the break-out.

So right now my portfolio is energy and cash. Within the energy sector I am extremely overweight within the oil sands sub-sector, where I remain in long standing positions. I intend to hold these positions despite overall overbought condition and my belief that the sector as a whole is undergoing a consolidation of high degree.

If the market comes under the impression that Middle-East oil supplies are at risk, or will not be available for any period of time then I think the multi-decade reserves of oil sands will start attracting even a potentially shrinking pool of available money to near manic levels.

The rise of oil will have to two immediate impacts. One is the rise of all production costs and prices in general. The other will a sucking in of available liquidity and a big drop in demand. Whether the end result is stagflation or deflation, or one leading to another I do not know. Stagflation will see gold go through the roof. In deflation cash is king. I think one should have both.

The paranoia that has seen US military and security spending sky-rocket will now reach empire toppling proportions. (See Collapse: Soviet Union)That is a plus for gold.

Right now, outside of the fact that I hold some speculative uranium penny stocks, that have the word "gold" printed somewhere in their brochures, I have no real exposure to gold. I am reticent to break into the cash portion to buy into gold at this technical juncture. It is important to understand that those who are holding profitable positions in gold and oil are the ones in the drivers seat. Those who are buying in at this time are not.

Cash? Yes. One impact of higher crude prices will be a down-turn in global liquidity, and this shrinking of liquidity may very well be of the type that can't be offset by central banks offering up more debt.


With the outbreak of military action in Iran, it is a good assumption that something out there in the market place is going to get hit hard. And having cash on hand makes sure you are in a position to take advantage. My own feeling right now, is that at some point in the future, some very high quality, high technology companies are going to become even cheaper than gold and oil stocks were a few years ago

It is important to realize, that outside of oil, the Middle East has little relevance in the global economy. Without outside help it is doubtful that these societies can actually create anything with more than five moving parts. In the end real power, the power to have some influence to dictate one's future course, comes only from the ability to create. The Middle East lost that power hundreds of years ago and continues to hurtle into the abyss. China is frantically trying to gain that power. The rise of Western Civilization was based on it, and despite all the baggage that it is carrying, will see it through no matter how messy things get.

And it will get messy. There are many people in the West who are in for suffering and hard times. Tragically most of it will be needless, and yet unavoidable as people become overcome by forces and circumstances beyond their control. I think that most of you who read this and other commentaries understand this and are taking what actions you can to not become an economic victim, or at least mitigate some of what may be coming down the road. It is important that sufficient numbers of people survive the economic turmoil to come.

In the ultra-big picture I do remain an optimist. Western Civilization has survived rulers even more stupid than the current crop of idiots. It has overcome religious theocracies more entrenched than those existing today, both outside and inside of the West. When push comes to shove the west has always turned away from blind ideologies, religious or secular, that have become detached from any ethical basis. More cyncically, when everything comes crashing down, common sense always finds a way to reassert itself. 60 years ago Europe was an ashtray, and now you have to look hard to find any vestiges of that war. Indeed the mullahs that are screaming for blood should take note of that war, which was Western nations putting the boots to each other. The impulse that lets Western men pound each other one day, and becomes friends the next is construed by the Islamic mind as weakness, when, indeed, it is a strength that Arab nations do not have.

Afghanistan, Gulf War I and II, are in the context of western history little more than adventures and large scale equipment field trials. If the West decides that thier existence is at stake, then they will really go to war; go to war with nihilistic glee, and they will bring hell on earth and not lose a single night's sleep over it until well after their enemies are dead and buried and the asshole quotient of the universe has been lowered a few points.

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