On the war front

Iran is continuing to ready itself for conflict.

Hassan Abasi, a senior member of Iran's Revolutionary Guards, has boasted that Iran has "a strategy drawn up for the destruction of Anglo-Saxon civilization."

That sounds serious to me. The interesting thing to consider is that Iran is in the cat bird's seat and could deal a devastating blow to the United States economically - without touching Israel or even fomenting chaos in Iraq.

The Middle East is home to nearly 70% of the world's proved oil reserves. The United States imports 20% of its oil from the Middle East. Nearly all of the oil that comes from the Persian Gulf must pass through the Strait of Hormuz, which Iran has already trained a host of missiles on. With supplies in the United States already so tight...the sinking of just one oil tanker in the Strait of Hormuz would cause the price of oil to spike out of control. The simple threat of civil war in Nigeria was enough to drive oil futures prices over $50.

The slightest hint of an act of hostility by Iran will send the markets reeling and push the price of a barrel of crude over $100.

Precious Metals

With all the attention on the latest high-tech stocks, the price declines in gold have been attributed to lack of demand. Surprisingly though, gold, has experienced supply deficits for more than a decade amounting to over 22,000 tonnes.

How can the price of a commodity decline in the presence of a supply deficit?
Basic economics tells us that a supply deficit causes prices to rise, but that hasn't happened in the case of precious metals. The fanfare that always accompanies central banks sales gives the impression that these sales have made up the deficits. However, net central bank sales only account for a small part of the deficit. The balance of the deficit has been made up through the practice of leasing, creating an artificial supply that acts to suppress prices.

Central banks lease out gold to bullion banks at low interest rates. Bullion banks, in turn, lease the gold to mining companies and hedge funds that sell the bullion and invest the proceeds in higher yielding investments. Calling this practice leasing is a major misnomer. In the case of the mining companies, it is more accurate to refer the practice as "covered short selling" and in the case of the hedge funds, it should be called "naked short selling". In both cases, the artificial supply that suppresses prices will be a major contributor to the coming price increases as these entities are forced to buy bullion at market price to mitigate escalating losses and cover their short positions.

Although there is some controversy about the total amount of leased gold, the estimates are between 192 million and 800 million ounces. Any sharp price rise in either metal will have a slingshot effect, caused by a massive short-covering demand that cannot be filled with even several years' worth of mine production. This will greatly magnify any increased investor demand and put extreme upward pressure on prices.

For 3,000 years precious metals have maintained their purchasing power and have been the most liquid, universal form of money throughout the world. Since 1971, both the Canadian and US dollar have lost approximately 80 percent of their purchasing power while gold has enjoyed an increase. In 1971, for example, a new car could be purchased for $3,500 ( 100 ounces of gold ) and a starter house in the suburbs for $35,000 ( 1,000 ounces of gold ) . Today, 100 ounces would buy two new cars and 1,000 ounces would buy two houses or an estate in the country.

If investors take the time to examine why they have a negative bias towards gold, and can accept that what they believe to be true may be myth or misconception, even the naysayers may realize the important contribution precious metals can make to a portfolio and how they can both increase and preserve their wealth in the coming decade.

China has one of the highest savings rate in the world, and in recognition has liberalized the ownership of gold. China's central bank governor estimated that Chinese citizens currently have 1.2 trillion yuan or $145 billion of savings, which contrasts sharply with the spent savings of the Americans. Historically, the Chinese have an affinity to gold and the government's recent move to allow individual ownership has prompted the World Gold Council to predict "the rise in demand for gold in China from the current 200 tonnes to an annual 600 tonnes over the next few years."

I believe Chinese demand will surprise even the World Gold Council. Already five banks jumped the gun and queues were formed, similar to the long lineups outside the Bank of Nova Scotia in the late 1970s. The Chinese have one of the lowest grams per capita usage, at 0.1 grams per capita in contrast to 0.73 in India and 1.41 in the United States. China's official gold reserves are less than 2 percent at only 600 tonnes. The central bank is expected to boost its holdings in line with the more industrialized nations. To achieve a level of the Europeans at 15 percent of reserves, China would need to consume all of the gold produced in the next two years.

Gold just recently tested $430, a level that has been resistance for gold all year. Gold is likely to pullback or consolidate before it breaks $430. This would give us a consolidation period in gold stocks and, more than likely, a final buying opportunity. This scenario is also in line with the dollar bouncing off of 84 support for a few weeks. The action in the gold stocks is giving us important clues to which stocks are likely to go up the most during the next gold bull run."

Protect yourself. Buy gold.

Energy

The Fed

The Federal Reserve is successfully overseeing the demise of the U.S. Dollar. If you have accumulated any wealth in your life, and you currently have it stored in Federal Reserve Notes, you must, for your sake and that of your family, convert it into some alternative form. The Fed is out of control. The rules have changed.

Buy gold. Make your own rules.

Financial Survival

There is an increasing threat of domestic terrorism, heightened materially by the rapidly approaching national election. Considering where the major sentiment measures are at present, the stock market is ill-prepared for such an event. It would melt down!

Keep your eye out for a catastrophic event occurring this weekend. There are people on both sides of the fence that would like to exacerbate chaos in our country next week.

If you are depending on Social Security, stop.

Get out of debt. Figure out ways to conserve. Take up gardening. Sell everything you don't need.

Follow the course opposite to custom and you will almost always do well...

Its not what you don't know that will screw you up, it's what you know that is wrong. The spin you hear from the mainstream media is intended to mislead you. Open your eyes and face the future. If you leave your head in the sand and ignore it, you are only leaving your butt exposed for the world to kick. This all may sound like gloom and doom, but when you get a handle on what is going to happen, you will have a future filled with opportunity. Fortune favors the Informed.