Bruce Pile's  Instablog

I posted yesterday on the well informed opinion of the intelligence service STRATFOR on war with Iran soon. As investorsinsight.com summed it up, the opinion is that the odds have recently (over the last 3 months) gone up "exponentially". They did not assign a probability figure to it but said that, while war is not inevitable, it is much more likely while pointing out that Israel seems to have assumed it to be a certainty in their intel planning.

These two entities, STRATFOR and Israeli intelligence, know more than the rest of us.  So what do "the rest of us" think?  Let's look at intrade.com for a collection of opinion who've studied it seriously enough to wager money on odds contracts. They bill themselves as "THE Leading Prediction Market" and invite you to "tap into the wisdom of crowds".  This wisdom sets a probability for events of interest to occur by a certain date.  For example, what would you say are the odds for Mike Huckabee to be the Republican presidential nominee in 2012?  The pricing of the current contract you can buy has this chance at 10%. Turning to the markets, there was a running bet all year on the U.S. GDP declining 10% or more off the peak between Q4 2008 and Q4 2009 (inclusive). The wisdom of the crowds had this probability spiking to 50% in late February when the market was spiking toward the floor.  It's currently at 0.9%. So this wisdom, as far as the markets are concerned, may be of use as a contrary indicator.

They have had a series of contracts for an Israeli and/or U.S. air strike on Iran over the last few years.  I checked out the two covering about a year period for 2008 and 2009 and compared them alongside the sabre rattling out of Israel about an imminent strike.  As the charts below show, there is some correlation between this sabre rattling and what the wisdom of the crowds think about a war (click to enlarge)

In both years, mid-year sabre rattling by Israeli officials roughly accompanied a chance of war outbreak spiking to as high as 40%! But then a slide into year end - current quote for a strike by March 31 is 11%.

But, as was the case with the February GDP/market outlook, the smart opinion may be just the inverse of this pattern.

The quieting pattern into year end isn't what you would expect from the saber rattlers if we are building to a blowup. But consider the observation of Andrew Apostolou and other analysts interviewed a few months ago on Israel's willingness to strike Iran.

"... it's unlikely, they say, that Prime Minister Benjamin Netanyahu will reach that conclusion in the coming weeks or months...Israel is locked in a wait-and-see mode, planning to let U.S. diplomacy exhaust itself.  Matthew Silver, a historian at Emek Yezreel College in the Galilee, agrees: "Netanyahu figures, "Okay, let Obama talk to the mullahs.  It's a preordained failure."  That the Israeli prime minister is making loud noises about a possible military strike, Apostolou says, suggests one won't come anytime soon.  "If the Israelis really wanted to scare the Americans, they'd say nothing. When the Israelis go really quiet, that's when you have to start worrying.  But in the meantime, Israel will continue to match Iran's belligerent signals."

And theatlantic.com ran a July 13 article titled "The U.S. Should Worry When Israel Gets Quiet".  Well, Israel does seem to have "gone quiet".  Lately, their pronouncements have been preferring diplomacy if the military option is even mentioned.  And now they say things like what Michael Oren, Israel's ambassador to the U.S.  recently said on August 16 - Israel is "far from contemplating" a strike on Iran. That statement reminds me of the kid who denies eating any cake with chocolate smeared all over his face.  It's interesting that the quiet zones in the above chart for this year and last coincide with the optimal time window of the year for a strike, September to November, when the prevailing monsoon winds keep the radioactive fallout and dust primarily in Iran and out of neighboring countries.  I suspect that they were on the verge of doing the strike last year, but the financial crisis may have aborted it.

The opinion that knows, Israeli officialdom and STRATFOR, indicate the opposite of the slumping odds out to the March 2010 contract shown above.  The current contract goes out to June 2010, and its current quote is a little higher at 18%.  But all this would imply that the stock market impact would be severe - it doesn't seem to be very highly discounted.

More evidence is coming to light suggesting that investors should perhaps form a strategy around a massive strike on Iran coming up soon.  I began posting on this emerging threat at my blog back in August - see
 
               Art Cashin's Strange Comments - Aug. 21
               Silence May Not Be Golden For Iran - Sept. 3
               AWACS Prep In Iran Theatre - Sept. 24
               Investing In Trouble - Oct. 3
               Reading Between The Lines On Iran - Oct. 28

An Oct. 13 article over at investorsinsight.com discusses STRATFOR's new analysis. This geopolitical intelligence service is very well respected and is not given to alarmist rumor mongering.  In late 2008, when there were many signs that a strike was being readied, an Aug 3 story by Reuters read "U.S. Israel attack on Iran Unlikely: STRATFOR Founder".  The main reason was the growing financial crisis, which, as I've mentioned before, may have been the only stay of execution for Iran. But now, the well considered opinion reads "STRATFOR: Odds of War With Iran Spiking". Quoting their write-up:

"A new topic has rocketed to the top of STRATFOR's international concerns: the possibility of a war between the United States and Iran. There has been much discussion of this topic for years now, and STRATFOR has tended to dismiss it; there is a great chasm between remedial uranium enrichment programs and having a deliverable nuclear weapon. But events in the third quarter added credibility to the scenario...
The opening weeks of the fourth quarter will be dominated by 11th-hour negotiations primarily between but not limited to Washington and Tehran to see if war can be avoided. Washington and its allies will seek formal, transparent oversight for the entire Iranian nuclear program, and failing that, sanctions on the Iranian sector that is most vulnerable to foreign pressure: gasoline imports."

But STRATFOR doesn't believe gasoline sanctions have any realistic chance of working even if Russia seriously wanted to cooperate (which is doubtful) because the black market opportunities are too uncontrollable and too lucrative.  Russia, Israel, Obama, and everybody knows this. They may go through the motions of more meetings and sanctions talk, but the enrichment deal was probably the last chance for a peaceful resolution.

Two news stories that STRATFOR says were deliberate intelligence leaks are of particular interest:

"Two major leaks occurred this weekend [the weekend of October 2-4] over the Iran matter.

In the first, The New York Times published an article reporting that staff at the International Atomic Energy Agency (IAEA), the U.N. nuclear oversight group, had produced an unreleased report saying that Iran was much more advanced in its nuclear program than the IAEA had thought previously. According to the report, Iran now has all the data needed to design a nuclear weapon...

The second leak occurred in the British daily The Times, which reported that the purpose of Israeli Prime Minister Benjamin Netanyahu's highly publicized secret visit to Moscow on Sept. 7 was to provide the Russians with a list of Russian scientists and engineers working on Iran's nuclear weapons program...

The message was twofold. First, previous assumptions on time frames on Iran are no longer valid, and worst-case assumptions must now be assumed. The Iranians are in fact moving rapidly toward a weapon; have been extremely effective at deceiving U.S. intelligence (read, they deceived the Bush administration, but the Obama administration has figured it out); and therefore, we are moving toward a decisive moment with Iran. Second, this situation is the direct responsibility of Russian nuclear expertise. Whether this expertise came from former employees of the Russian nuclear establishment now looking for work, Russian officials assigned to Iran or unemployed scientists sent to Iran by the Russians is immaterial. The Israelis — and the Obama administration — must hold the Russians responsible for the current state of Iran's weapons program, and by extension, Moscow bears responsibility for any actions that Israel or the United States might take to solve the problem."

This adds a new dimension to the Middle East problem - a strike on Iran may now be tantamount to a strike on Russia.  The trip to Russia by Netanyahu with the results of Israel's undercover intel on the Russian scientists' work developing Iran's nuclear bombs for them was probably not a "stop this right now" visit. STRATFOR says the Kremlin keeps very close tabs on the whereabouts and activity of these people, and they know they are doing this.  Rather this appears to have been a "the jig is up" visit by the Israeli brass.  As the STRATFOR piece phrased it:

"Given that this specific charge has been made — and as of Monday not challenged by Iran or Russia — indicates to us more is going on than an attempt to bluff the Iranians into concessions. Unless the two leaks together are completely bogus, and we doubt that, the United States and Israel are leaking information already well known to the Iranians. They are telling Tehran that its deception campaign has been penetrated, and by extension are telling it that it faces military action — particularly if massive sanctions are impractical because of more Russian obstruction.

As the spy game goes, you intentionally blow your cover when you are sure you're not going to be needing it for awhile. In a section of the analysis they titled "A Question of Timing" STRATFOR reasons:

But there is a mystery here as well. To have any impact, the Russian involvement must have been under way for years. The United States has tried to track rogue nuclear scientists and engineers — anyone who could contribute to nuclear proliferation — since the 1990s. The Israelis must have had their own program on this, too. Both countries, as well as European intelligence services, were focused on Iran's program and the whereabouts of Russian scientists. It is hard to believe that they only just now found out. If we were to guess, we would say Russian involvement has been under way since just after the Orange Revolution in Ukraine [late 2004-early 2005], when the Russians decided that the United States was a direct threat to its national security.

Therefore, the decision suddenly to confront the Russians, and suddenly to leak U.N. reports — much more valuable than U.S. reports, which are easier for the Europeans to ignore — cannot simply be because the United States and Israel just obtained this information. The IAEA, hostile to the United States since the invasion of Iraq and very much under the influence of the Europeans, must have decided to shift its evaluation of Iran. But far more significant is the willingness of the Israelis first to confront the Russians and then leak about Russian involvement, something that obviously compromises Israeli sources and methods. And that means the Israelis no longer consider the preservation of their intelligence operation in Iran (or wherever it was carried out) as of the essence.

Two conclusions can be drawn. First, the Israelis no longer need to add to their knowledge of Russian involvement; they know what they need to know. And second, the Israelis do not expect Iranian development to continue much longer; otherwise, maintaining the intelligence capability would take precedence over anything else.

It follows from this that the use of this intelligence in diplomatic confrontations with Russians and in a British newspaper serves a greater purpose than the integrity of the source system. And that means that the Israelis expect a resolution in the very near future — the only reason they would have blown their penetration of the Russian-Iranian system.

Iran, well aware of all this, is behaving as if someone has just told them "the jig is up". They are frantically digging hundreds of new missile silos, held their big air defense drill, and are blustering to the world now that they are planning to build 10 new nuclear facilities, a behavior a European official recently described as "childish".  Perhaps the child has just been made aware that he is in for a severe spanking.

We think of gold as a crowded "trade" as far as our investment alternatives are concerned.  I feel that way, and that's the main thing I don't like about gold.  But those feelings may be more psychological than based on actual fact. If you look at actual investment alternative facts, you see this excellent chart depiction in a November 20 article over at safehaven.com by Jordan Roy-Byrne "Gold Contrarians Will Get Killed" : (click to enlarge charts)
As a reserve asset, gold was put into the dog house in the 80's and is just now poking its nose back out of the doorway.  As for our stock market choices, the article shows gold as a dog as well:

I've seen it mentioned a time or two that in the paper money vs gold money dilemma, the entire market cap of gold investing was less than that of just one big stock like Microsoft. This Casey Research graph puts it in perspective. Precious metals tend to make big moves both up and down, and when you see the giant pool of money tilting from paper and usable assets to "useless" gold, you can see a lot of money crowding into a very small space with just a little bit of tilt.  Add to this the fact that the supply/demand equation for gold isn't like that for other investments where more demand is met with factory ramp-ups, IPOs and other supply increases. Over 99% of all the gold that's ever been mined is still around. So even if we could quickly ramp up mine production, it wouldn't make any big difference - a drop in the bucket of all the gold ever mined.  But mine production has actually been declining since 2000.

So it becomes very important to know just where we are in the investment tilt-o-whirl. The following map shows this pretty well:

As Jim Rogers is fond of pointing out, bull and bear cycles in commodities usually run in 12 to 18 year moves.  We are just in year 9 or 10 of an up cycle with monetary problems greater than in any previous cycle. In the big picture, we are probably not to the tulip phase of the gold move yet, even though it may feel like it.

Disclosure: long gold