Last week was an eventful one in the saga surrounding Iran and the corresponding tensions in the global economy. Before we get into where this is all headed, let's recap what's gone down:
1. Lots of saber-rattling has been going on in the Middle East for years now between the US and Iran; the game was taken up a notch with the passage of the National Defense Authorization Act (NDAA) in the United States, which contained provisions to place harsher sanctions on the Iranian Central Bank in an attempt to cut them off from the global dollar-based economy. Devaluation of the Iranian Rial ensues.
2. India proceeds to establish deal with Iran to buy oil using non-dollar currencies, including gold.
2. The EU imposes its own sanctions on Iran and freezes accounts of the Iranian Central Bank in the EU.
So here we are: oil is over $100 a barrel in the States and the geopolitical stage is tenser than it has been in some time - no small feat when one considers the past ten years.
So where is this all headed?
1. Well, I remain skeptical that a full-blown war will emerge. If it does, though, I think it could easily turn into World War III. I view global war as bearish for basically everything except gold bullion in your hand.
2. More likely, in my opinion, is the increasing onset of resource imperialism - the use of key resources to control the world. China, controller of 97% of production of rare earth minerals (REE), is the prime example of resource imperialism in action. However, this can clearly extend to oil (USO), as the sanctions placed this past week clearly illustrate.
3. Resource imperialism will be very bullish for speculators in the commodity market. I suspect speculators will be blamed if resources go up very high, as they already are. I don't share this view, as I think it is a great oversimplification of the matter, but I suspect popular sentiment will and restrictions on speculative activity may thus emerge.
4. Oil is the first and easiest commodity to be brought into the resource imperialism fray, but it is far from the last. China is a major trade partner of Iran and has already criticized EU sanctions. If China enters the resource wars, it could curb exports of silver (China is the third largest silver producer) as well as zinc and nickel (DJP), which China currently exports en masse to the US.
5. As this is another step towards the breakdown of the dollar-based global economy, resource imperialism is also bullish for gold (GLD) - though not all gold is created equal, and physical, allocated bullion remains advantageous.
6. It remains to be seen, though, to what extent resource imperialism will become the dominant paradigm in the global economy. The first step is being taken with oil, and higher oil prices will create greater demand for alternative energy. From the perspective of physics, there are only two sources of energy that have sufficient energy and power density to serve as a viable substitute for oil (excluding coal, whose polluting effects make it difficult to be economically viable): natural gas (GAZ) and nuclear (NLR, PKN, NUCL). The US has huge reserves of natural gas and it has become even more inexpensive, thanks largely to innovations resulting from hydraulic fracturing. Natural gas and nuclear are some of the most promising opportunities at this point in time, in my opinion.
Will resource imperialism be bullish or bearish for indices at large? I believe it depends on how severe this gets. If China steps in and curbs exports of industrial commodities, I think that could set off a new bear in the US. It is critical to note, though, that the US bond market is still under stress and capital will need to go somewhere - if not bonds, then likely stocks. Being in the right sector, and having significant exposure to real gold, will help investors immensely in their quest to navigate this turbulent environment.