A Melman Minute
By: Leonard Melman
July 7, 2008
One of the patterns we have been watching through
the past couple of years is at work once again this morning. Just as the
currency, petroleum and precious metals markets were about to move decisively in
directions opposite to the desires of governmental authorities, money began to
flow into securities markets creating a stock market rally, a stronger U.S.
dollar, weaker petroleum prices and a resultant sharp drop in quotes for gold,
silver and the other precious metals.
After about 90 minutes of trading, gold is down (all
prices US$) about $10.00 to the low $920s, silver is off 26 cents to $18.00,
platinum and palladium are sharply lower but, in a sharp reversal, the base
metals are stronger on the session. Crude oil has slumped by about $3.00 to the
$141 level, the Dow Industrials ahead by about 85 while the TSX is down by
nearly 30 points.
Despite the Dow's modest rally this AM, the chart on
that widely-watched market indicator remains in a clear downtrend.
The world's leaders have gathered in Rusutsu, Japan
in the latest round of G-8 talks. While environmental concerns and the world's
economic difficulties will certainly be high on the meeting's agenda, we hope
they will also address a problem which involves potential trauma of a historic
nature. We are referring to the growing crisis between Israel and Iran. This
situation, which does indeed appear to be moving toward direct confrontation
between the parties, has the potential to inflict massive damage, both socially
and economically - and it highlights the importance of maintaining insurance
positions in gold and the other precious metals.
The crisis involves the deepest of all human
fundamentals - the desire for life itself. Although many of these facts are
well known, it is still worthwhile to take a quick review.
Following the Holocaust of WWII, world pressure
became intense to provide the remaining Jews of Europe with a homeland in
Palestine. In the fall of 1947, the United Nations voted for a plan to
partition Palestine and to create a new Jewish state which was later named
"Israel". Unfortunately, the small (8,000 square mile) State was located in the
middle of a sea of Arab populations which hated the idea of a Jewish State in
their midst and the past 60 years have seen one war after another.
Some of the wars have resulted in quick triumphs for
Israel, but recently, the struggles have become more evenly-matched and there is
real concern for Israel's survival - particularly among Israel's Jewish
population. Given the history of the Holocaust, the population there has
adopted the slogan "Never Again", meaning no threat to their existence as a
people will be tolerated.
On the other side, the hatred of the Arab nations,
with only a few exceptions such as Egypt under Anwar Sadat, has been
relentlessly directed against the concept of a Jewish State in their midst.
While matters may have eventually reached some point of stability regarding
conventional weapons, two nations, Iraq and Iran, have sought to acquire nuclear
weapons and, considering the proximity of those nations to Israel and the
relentless hostility to Israel they have demonstrated, Israel has regarded the
possession of nuclear weapons by Iraq and Iran as intolerable.
In 1981, the Israeli Air Force unleashed a massive
attack against Iraq's growing nuclear reactor facilities at Osirak and utterly
destroyed them. Iraq, under the leadership of Saddam Hussein (who later sent
missiles into Israel as part of the first Gulf War), had uttered threats against
the very existence of Israel and the Israelis took those threats with the utmost
seriousness. Hence, the destruction at Osirak was unleashed.
Let us fast forward now to the present era. Iran is
being led by President Ahmadinejad who has been documented as making powerful
verbal threats against the existence of Israel. Having suffered through the
aftermath of Hitler making powerful threats, Israel is not inclined to ignore
such words when uttered by a powerful world leader, particularly when those
verbal threats are being backed up by actions which appear to have the goal of
creating an arsenal of nuclear weaponry which could be directed toward
Jerusalem, Tel Aviv, Haifa and other centers of Jewish population in Israel.
According to an in-depth study written by Peter
Goodspeed and published in the National Post, Iran has constructed a,
"...nuclear reactor complex at Bushehr, nuclear enrichment and conversion
plants at Natanz and Isfahan, a heavy water plant at Arak and uranium mines at
Saghand." The article also noted that, "There are also a host of secondary
targets including missile-assembly plants, air and naval bases, arms factories
and military headquarters." While Iran claims its nuclear activities are of a
peaceful nature geared toward the production of nuclear-generated electric
power, the array of actual facilities either already built or under construction
would seem to belie that conclusion.
In Israel's interpretation, the threat appears to be
immediate, growing rapidly, and one which threatens to literally annihilate
their nation - and therefore must be faced directly and powerfully.
Two statements crystallize the ominously threatening
nature of this looming confrontation. Israel's Transportation Minister stated
directly, "If Iran continues with its program for developing nuclear weapons,
we will attack."
On the other side, the head of Iran's
Islamic Revolutionary Guard stated that if Iran was attacked, "...Iran will
launch retaliatory missile strikes on Israel and move to
halt (oil) shipments through the Straits of Hormuz."
It is this last fact that lends immediacy and
potency for the international community to the threats which are building almost
daily. More than 40% of the world's oil supply flows through those Straits
located at the southeast end of the Persian Gulf. If the world loses that
supply, the price of petroleum would literally skyrocket and massive shortages
would quickly appear, shortages which could quite literally disrupt the entire
workings of our industrial national societies.
If it happens at all, it will happen quickly. Word
of an Israeli attack would hit the computer information networks of the world
and the markets would likely react on an immediate and monumental basis - with
no time to take new positions at reasonable prices. Unless positions relating
to hedges and safety were on hand in advance, they might not be able to be
acquired at all - and that is why, in our opinion, we believe that safety
positions in precious metals, particularly gold, should be part of investment
portfolios.
To those who say, "...it cannot happen, the world
would not allow it", we would remind them of the period from September 1939
through April, 1940. That was the seven month spell between the end of the
German assault against Poland and the attacks against France and the Low
Countries. Because nothing was happening, people began referring to the ominous
threat of war as being "phony" and, in fact, that period was called the "Phony
War".
But powerful and opposite forces had been unleashed,
and they were destined to clash in the greatest crescendo of murder, death and
misery the world had ever seen.
Powerful forces are once again being placed into
direct confrontation, one against the other. The world should take warning -
and it would seem prudent that investors should take positions to protect
themselves.
Israel will not commit mass suicide.
Iran did not build up their array of nuclear
facilities just to pass the time of day.
The potential for deadly conflict is real - and
should be followed with the utmost concern and intensity.
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