The Israel-Hezbollah Conflict: Why The “Flight to Safety” Trade Doesn’t Work Anymore
By Al Martin
FREE SAMPLE COLUMN- SUBSCRIBE NOW(7-24-06) Tensions in the Middle East are continuing to increase. The war has expanded because Israeli soldiers have gone beyond the northern security zone. So the conflict has expanded slightly, although it can’t expand much more -- not unless another player gets involved. And that’s not happening yet. At Insider Intelligence Daily Market Trading Service, we had recommended shorting the oil late last week when the $78.57 new high was achieved, because we looked at this as a short-selling opportunity. This whole scenario in the Middle East has gotten ratcheted up. And even though it has all been played out before and the planet is a changed place, the Russians nevertheless would cooperate with us regarding resolution of conflict.
What we see is that the market reactions have changed. Traditionally, a big flare-up like this in the Middle East would bring buying into the dollar, which is called “safe-haven buying.” It would also bring buying into the gold for the same reason. And it would, obviously, also bid up the oil due to the geography of the conflict.
What has happened, however, is that, since this crisis began, the price of oil has fallen $7 a barrel. Gold has fallen almost $50. The dollar, which initially rallied, has now fallen sharply from the high reached early in the conflict. As of Thursday, July 20th, the only tangible beneficiary has been the Swiss franc.
What we are seeing, once again, is that there were an awful lot of sellers on the sidelines waiting for prices to get bid up via this conflict. And it didn’t happen. Orders simply didn’t come in. When that didn’t happen, the sellers that were in the wings began hitting the bids, and there was nothing underneath.
What this exemplifies is a changing planet. We did not see the traditional flight to quality rallies in the bonds, the gold and the oil that had always occurred during flare-ups or increased geo-military tensions. The reason that’s not happening, by the way, is that smart money understands the enormity of the fiscal deterioration of the United States that has occurred under the Bush Cheney Regime, and how that has debased the underlying value of not only the U.S. dollar but of U.S. assets.
Thus there is a general planet-wide confusion as to what exactly is a safe haven. What we’re seeing now is that there is no new safe haven yet developed in the market psyche. This is a global phenomenon that has changed. People don’t want dollars anymore.
American investors are increasingly concerned about Bushonian efforts at gold confiscation, for instance. You see physical demand in the United States within the bottom 80% of the population. That would be the segment of the population that is not going to expatriate and could not get their gold outside of a would-be Bushonian confiscation. You have seen that physical demand for gold within that segment of the market has dropped precipitously. It also has affected worldwide demand for gold-based holdings in the United States, because people are concerned.
The Bush Cheney Regime is now claiming global jurisdiction for everything. First it declared global political-content Internet jurisdiction. Now it is claiming global confiscation jurisdiction, claiming that it has the unlimited power. The Supreme Court has agreed that it is alright for the United States to kidnap any citizen anywhere on the planet, of any nationality, for any reason, and to detain that citizen in a 3rd-party country under an assumed name, forever, without any charges. This type of thing frightens people. Not only in the United States but it frightens investors globally -- the imperial nature of the Bush Cheney Regime.
It should be noted that regimes, just before they become dictatorships, become very paranoid. They will start claiming lawful jurisdictions far beyond their own borders. They will start instituting clearly unconstitutional laws that will be supported by their own courts because they have their own courts either intimidated or packed with their minions.
We have seen this play out before -- this type of paranoia, exhibiting extra-legal jurisdiction prior to a democracy collapsing into a dictatorship.
As of now, there is no safe haven for money that’s clear. By the market reactions to these increased geopolitical and military tensions in the Middle East, no safe haven has yet developed. And this is what is masking it.
Isn’t it interesting how the Bush Cheney Regime suddenly toned down its pressure on China when China was planning to make the yuan fully convertible?
The real reason, I think, that the regime is blocking Russian entry into the WTO has nothing to do with arcane points of an agricultural export dispute. That’s nonsense. The real reason the regime is doing this is because they know that once Russia becomes a WTO member the Russian ruble would start to gain.
The ruble has risen more in value against the dollar in the last 15 years than any other currency on the planet. But, with Russia as a WTO member, suddenly this will change, and a lot of people who previously wanted to invest in the Russian ruble through mutual funds or different types of partnership pools, but were precluded from doing so because Russia was not a WTO member will be able to do exactly that.
The reason why the Bush Cheney Regime is back-pedaling on the Chinese Yuan convertibility issue is because they know China is already a WTO member and has all the infrastructure in place now.
If they made the Yuan a fully convertible currency, tied their gold reserves to it, and if Russia becomes a WTO member, guess where the new safe-haven currency’s going to be on this planet?
The Russian ruble and the Chinese Yuan, the two currencies that are appreciating at the fastest rate against the U.S. dollar.
That would be an enormous political embarrassment to the Bush Cheney Regime because it would destroy several pillars underneath the foundation of this nation that must be maintained for the USA Incorporated to remain in business.
Namely, that the U.S. dollar will always be the premier currency, always, no matter what happens. Not only is it simply the global reserve currency, but it is, more than that, it is the premier currency. Secondly, that U.S. paper, i.e., Treasury paper, is premier and will always be triple-A.
Why has the Bush Cheney regime continuously exerted pressure, the way the Reagan Bush regime did, against the nation’s bond rating agencies --S&P, Moody’s, Fitch, etc. -- not to expose U.S. Treasury instruments to an actual market risk-rating system, but to continuously exempt U.S. Treasuries from any type of rating? This has been done using the claim that the U.S. government has the right to declare that U.S. Treasury instruments are triple-A quality regardless of any underlying deterioration in the fiscal condition of the United States caused by this regime’s own economic policies.
This has also changed. S&P has been the only rating agency to publicly admit this, which is an arcane part of PATRIOT II by the way. They are now precluded from rating U.S. Treasury instruments as to their credit quality the same way every other government treasury instrument on the planet is rated. Why? Because it is specifically an act of sedition to attempt to rate a U.S. Treasury instrument anything less than triple-A. They didn’t make an announcement, but one of their commentators had commented on this subject.
But it’s true. And they talk about it all the time. You only need to watch financial media. There’s no secret to this, but it is now an act of sedition for any credit-rating agency to rate U.S. Treasury instruments anything other than what the U.S. government says that they are, even though the U.S. government is not in the rating business.
Smart people understand what this means. They are mostly foreign investors, who tend to be much smarter than U.S. investors. Throw into that pool the top 20% of U.S. investors, the best educated, the wealthiest, who understand what is happening, and you can see why there is record expatriation out of this country within the top 20%.
This confusion regarding what is a safe haven will continue to be a problem in the marketplace, as money is seeking a safe haven at every new crisis. This will not be resolved until a new safe haven emerges. That safe haven, by the way, is going to be ultimately gold, as it always has been. The reason why we’re not seeing that now is because of nervousness over this regime specifically, and its intent towards gold with the idea of confiscation.
Has anything changed with the bullion market? No. There have been rumors rife on the Internet about some sort of a closure of physical gold sales in the United States altogether, but I think that’s more a rumor by gold bugs than anything else.
However it is true that the U.S. Treasury announced in recent weeks that there would be reporting requirements for citizens holding gold bullion and/or gold bullion coins, although they didn’t peg an exact date. That was just in the last 2 weeks, although no date has been affixed.
The reason? What this regime often does is publicly send a message to the top 10% of the population to get your gold out before we move further down the road of confiscation. The Joe 6-Pack-ers are too stupid to understand this.
It’s an interesting conundrum that bespeaks of where we are at this particular moment in the history of the planet. As the American empire continues to decline under the weight of Bushonomics and the Russian and Chinese empires continue to ascend, in terms of geo-economic structure, it is leaving a so-called “safe-haven” vacuum. However, have no doubt that this vacuum will ultimately be filled by gold when this nervousness is over about what this regime’s intent is.
Since 2003, you see this enormous shift has taken place with physical bullion. Since the 1970s, Americans held, on aggregate, more gold bullion and/or bullion coins than did anyone else in the world, in their capacity as private citizens and private investors.
There has however been a dramatic shift in the last 3 years. Now Southeast Asian nations, including China, hold more physical gold than private citizens in the United States. So you’re seeing a shift in gold holdings on the planet.
What’s causing that shift is that Joe 6-Pack-ers who are still buying their 10 one-ounce American gold bullion Eagle coins are still buying them. But the Doctor Smith’s of this country are taking their thousand one-ounce gold bullion coins out. That’s what’s making the difference.
This is only a temporary vacuum. It is an interesting phenomenon, but it is a phenomenon that has occurred in history before. This financial marketplace phenomenon is a symptom of a change in the balance of geopolitical and economic power on the planet.
We were recommending shorting the August oil contract, despite an increase in this Middle East flare-up. And it turned out to be a correct call. The oil contract came down $7 from the time we recommended shorting it. We had recommended shorting gold. Gold has come down substantially. We had recommended shorting the dollar earlier this week, which has sold off substantially.
So what indicators did we see? It’s very simple. The price of oil began to fall instead of rise. Furthermore, because we went lower, the selling picked up accelerated from the down side.
You saw that in gold trading as well, during the day sessions, when the preponderance of volume was on the sell side and has been on the sell side in the gold market since this war began. The dollar index (DXU index) at 8700 earlier this week simply became tired, and you began to see some genuine selling in the dollar.
This further augments my contention of not only is the planet now undergoing a major shift in geopolitical as well as economic power, but it also illustrates where this shift is going. What is the end result of this shift?
What the financial marketplaces are telling us is that the United States will be a power continuously in decline, and that the Russian and Chinese empires, now under construction, are where you want to be in the future.