Saudi Arabia

Did Iran Back 9/11 Hijackers? Saudi Arabia? Iraq? Afghanistan? America? Israel?

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Prevent WWIII  (Which Would Be Really Bad for Your Investment Portfolio, Notwithstanding Keynesian Thinking) by Learning this Little-Known Secret of History 

There are three key factors to modeling trade flows - or relevance - in a post-globalization world. While competitiveness is important, countries gain from being generally 'Technology-rich', 'Labor-rich', and/or 'Resource-rich'. The following chart, from Deutsche Bank, shows where the world's countries fit into the Venn diagram of give-and-take in a post-globalization market. The red oval highlights where Italy, Greece, Portugal, and Spain (and Argentina sadly enough) do not fit into this picture. Two words - Euro-sustainability?

And NOTHING Has Changed ...

Saudi Arabia has gone on the offensive against Iran to protect its interests.  Their involvement in Syria is the first battle in what is going to be a long bloody conflict that will know no frontiers or limits. Ongoing Disorders in the island kingdom of Bahrain since February of 2011 have set off alarm bells in Riyadh.  The Saudis are convinced that Iran is directing the protests and fear that the problems will spill over the twenty-five kilometer long COSWAY into  oil rich Al-Qatif, where The bulk of the two million Shia in the kingdom are concentrated. The territory is likely to adopt the more fundamentalist principals of the Salafists as it serves as a stepping stone to Iran Itself.  It promises to be a bloody protracted war that will recognize no frontier and will know no limits by all of the participants.

Military budgets are only one gauge of military power. A given financial commitment may be adequate or inadequate depending on the number and capability of a nation's adversaries, how well it spends its investment, and what it seeks to accomplish, among other factors. Nevertheless, trends in military spending do reveal something about a country's capacity for coercion. The following charts, from the Council of Foreign Relations, present historical trends in U.S. military spending and analyze the forces that may drive it lower.

The biggest geostrategic change of the past decade overlooked by Washington policy wonks in their fixation on their self-proclaimed “war on terror” is that Latin America has been throwing off the shackles of the Monroe Doctrine. These ignored developments may well soon refocus Washington’s attention on the Southern Hemisphere, as Venezuela’s President Hugo Chavez reorients his country’s to China. So, where does Washington go from here? If it wants to preserve its increasingly tenuous foothold in a nation with the world’s largest oil reserves, it might begin by engaging in some honest diplomacy.

The jury is still out whether Israel will or will not attack Iran, despite the endless and relentless (dis)information in the media from all sides, and certainly when such an attack might happen, but if it did take place, these are all the logistically possible formats what an airborne attack could look like.

While the geopolitical focus is once again all over Iran and Israel, it may be time to take a quick look Egypt, where the recently elected, and pro-US president Mohamed Mursi is "preparing to use aircraft and tanks in Sinai for the first time since the 1973 war with Israel in its offensive against militants in the border area." Reuters continues: "The plans to step up the operation were being finalised by Egypt's newly appointed Defence Minister General Abdel Fattah al-Sisi as he made his first visit to Sinai on Monday following the killing of 16 border guards on August 5. Egypt blamed the attack on Islamist militants and the conflict is an early test for President Mohamed Mursi - elected in June following the overthrow last year of Hosni Mubarak - to prove he can rein in militants on the border with Israel. "Al-Sisi will supervise the putting together of final plans to strike terrorist elements using aircraft and mobile rocket launchers for the first time since the beginning of the operation," an Egyptian security source said. Another security source said the army was planning to attack and besiege al-Halal mountain in central Sinai, using weapons including tanks, where militants were suspected to be hiding." Of course, what can possibly go wrong in the middle east once a government decides to escalate military expansion against militant terrorists. Look for crude to rise ever higher, and for SPR release rumors to hit the tape daily as yet another market is ensnared in price controls ahead of the election.

No, He Didn’t Say That!

The World Gold Council released its quarterly report today, Q2 2012 Gold Demand Trends Report and can be read in full on the World Gold Council website here. Accumulation of gold bullion from central banks was the bright spot in demand last quarter, as total demand fell 7% globally, which was driven by a 38% fall in consumer demand from India.  Price sensitive Indians have been shunning gold and many have been opting for far cheaper poor man’s gold – silver. Jewellery and investment demand both fell. Jewellery consumption was down 72.3 tonnes at 418.3 tonnes, while investment fell 88.3 tonnes to 302 tonnes. The report shows how while record levels of demand from western markets, China and particularly India have been followed by a decline – the seismic shift that is central banks going from being bet sellers to net buyers has provided a new fundamental pillar of support for the gold market.  Physical demand slowed down in western markets and especially in India in recent months but large buyers continue to accumulate - both hedge funds and central banks and this is providing fundamental support to gold above the $1500 to $1,600/oz level. 2Q total central bank gold purchases were double the level reported a year ago as emerging market sovereign nations sought to diversify away from the dollar and euro and heightened economic insecurity. Gold purchases among central banks hit its highest quarterly levels (157.5 metric tons) since the sector became a net buyer of the yellow metal in 2Q 2009. 

While the highly "sophisticated" traders that make up the gold market continue to buy or sell the precious metal based on whether the Fed will or will not do the NEW QE tomorrow (or just because, like Bruno Iskil, they have a massive balance sheet, and can create margin position out of thin air with impunity), China continues to do one thing. Buy. Because while earlier today we were wondering (rhetorically, of course) what China is doing with all that excess trade surplus if it is not recycling it back into Treasurys, now we once again find out that instead of purchasing US paper, Beijing continues to buy non-US gold, in the form of 68 tons in imports from Hong Kong in the month of June. The year to date total (6 months)? 383 tons. In other words, in half a year China, whose official total tally is still a massively underrepresented 1054 tons, has imported more gold than the official gold reserves of Portugal, Venezuela, Saudi Arabia, the UK, and so on, and whose YTD imports alone make it the 14th largest holder of gold in the world. Realistically, by now China, which hasn't provided an honest gold reserve holdings update to the IMF in years, most certainly has more gold than the IMF, and its 2814 tons, itself. Of course, the moment the PBOC does announce its official updated gold stash, a gold price in the mid-$1000 range will be a long gone memory.

Paint is drying, so what is the best way to break the monotony? Why with renewed Iran war speculation of course. Sure enough, here comes Saudi Arabia to the rescue. From Reuters: "Saudi Arabia has ordered its citizens to leave Lebanon “immediately”, the state news agency reported in an SMS alert on Wednesday. “The Saudi Arabian embassy in Lebanon calls all Saudi citizens to leave Lebanon immediately,” the alert said, without elaborating." Making an imminent Iran attack far less likely, however, is an article in Bloomberg titled "Israel Plans Iran Strike; Citizens Say Government Serious." Of course anyone expecting Israel to launch a strike with every paper in the world blasting the above title as a headline may as well buy some Las Vegas 10,000 square foot haciendas because housing has "bottomed." For now however Brent is leaning on the side of caution, and is back to all time highs in EUR terms.

With the presidential elections fast approaching, the last thing the incumbent wants is for the one thing that can spoil the party - a surge in oil, and thus gas prices - to happen. Which is why despite a sharp return in Iran/Syria war rhetoric, we doubt that the trade off between a "wag the dog"-type transitory war euphoria and $5 gas will be an accretive one for the administration at least in the short-term. Others who certainly would prefer to avoid the record $140 WTI prices seen just before the Lehman collapse are the majors, where margin contraction can only be offset by very finite end-demand destruction. Yet there are those who not only would like to see a surge in oil prices, but in fact need it, to preserve their viability. Chief among them: Iran. Because according to a just released analysis by the Arab Petroleum Investments Corporation, the price at which oil (read Brent) must trade for Iran's budget to balance has soared to $127/barrel, the highest among all OPEC members, $20 higher than 2 years ago, and about $17 higher than the Friday closing price. And far more dangerously, the APIC study has also found that the cartel (which after last year's fiasco in Vienna is anything but) breakeven price has soared from just $77 two years ago to a whopping $99/barrel. Which means that any and every deflationary plunge in oil prices will inevitably be met with a supply collapse or else OPEC members are in danger of pricing themselves right into fiscal insolvency, and economic collapse.