Posts Tagged ‘Israel’

New urgency for action against Iran

Wednesday, October 7th, 2009

Two years ago, we mulled over the possibility of an Israeli strike on Iran. Back then, even though it was already strongly suspected that Iran had the intention to build nuclear weapons, a working bomb was still years away.

Just a few days ago, there were a couple of developments (that we learned from that will bring in a new urgency for action. Over the weekend, there were two leaks:

  1. The New York Times reported that an unreleased report from the International Atomic Energy Agency (IAEA) discovered that Iran is closer to building nuclear weapons than previously thought.
  2. The Sunday Times reported that the purpose of Israeli Prime Minister Benjamin Natanyahu’s secret visit to Moscow in early September was to provide the Russians with a list of Russian scientists and engineers working on Iran’s nuclear program.

These two leaks were significant developments:

  1. Many initially believed that Iran is still far away from a working nuclear weapon. This leak busted that wrong belief.
  2. It’s thanks to the Russians that development (1) happened.

Now, there’s a renewed urgency to the threat of Iran’s nuclear ambition, especially from the perspective of Israel, who is facing an existential threat from Iran.

Assuming that these leaks were true, coordinated and planned, it can be interpreted to send a message to the Russians and the Iranians. To understand why, consider why would the Israelis gave the Russians a list of their scientists and engineer currently in the Iranian nuclear program? Surely, the Russians do not need that list because they should know where their personnel are and what they were doing (given their highly competent intelligence service). By giving the Russians a list of names that they already knew, the Israelis essentially blew the cover of their intelligence operation. The only explanation of the Israelis’ action is that they already knew what they needed to know and the point of that list was intended to surprise the Russians of the extent of the Israeli intelligence. The message to the Iranians is that their deception of the extent of their nuclear program was penetrated and that they faced military actions soon.

With the Iranians getting the signal that they are facing war and the Russians put on notice that their relations with Europe and the US can potentially descend into a crisis, there are two possible outcome:

  1. Russians pull their scientists and engineers out of Iran and join in sanctions against Iran, which will force the Iranians to abandon their nuclear program.
  2. Russians will play dumb and continue goading the West, which will invite war.

Assuming that the leaks were intended by the US/Israel, then it means they are throwing the ball into the court of the Russians.

Should war break out, it is likely that oil and gold prices will surge while stock prices will tumble. Perhaps even US Treasury bond prices will rise too.

Could the fall in oil prices be due to geopolitics?

Monday, January 29th, 2007

In our previous article, What if the Israelis strike Iran?, we mentioned that it was ?interesting to note the Saudis? nonchalance about the recent falls in oil prices.? Today, we saw this article, How the Saudis plan to put oil squeeze on Iran, from the mainstream news media.

Given that any military strikes against Iran will result in extremely serious consequences, using the suppression of oil prices as an economic tool to deal with Iran is the most sensible option. Iranian President Mahmoud Ahmadinejad is in a very vulnerable position?his regime lacks economic credibility and hence, it is very much possible for him to be ousted from power because of it. Falling oil revenues, which are detrimental to Iran?s economy, will probably make this possibility even more likely.

We certainly hope this best-case scenario will ensue. Since President Mahmoud Ahmadinejad (an extremist within his Shia Islam religion) has the destruction of Israel as part of his ?theology,? we see that he is beyond rationality and reason. Thus, as long as he remains in power, Israel will be in a lose-lose situation?when faced with an irrational enemy who is on the way to acquire destructive weapons against you, your remaining options are pretty much limited!

What if the Israelis strike Iran?

Monday, January 22nd, 2007

Today, we will look at a Middle-Eastern geopolitical scenario that we believe can possibly happen?an Israeli strike on Iran. However, the likelihood of it is impossible to quantify. Nevertheless, it is our firm conviction that investors will do better to be prepared for it (even though it may be an arguably improbable event) than completely ignore it because its effects will have a massive impact on their portfolio.

It is interesting to note that ING, one of the world?s largest investment banks, had came up with an internal report to analyse the possibility and effects of this scenario. It is certainly even more interesting to note that they had come up with a possible timeframe (February to March 2007) for such an extraordinary event. For the sake of today?s discussion, we will assume that the report is genuine. We encourage you to read this report with an open mind. Please note that ING is not predicting that this scenario will happen?rather, they are saying that this scenario is possible and that should it happen, what the impact on the financial markets will be.

As we said in How the folks in the finance industry got the idea of ?risk? wrong!, this is an example of a ?fat-tail? scenario in which by definition of the normal distribution curve assumption (which we sees it to be an academic assumption that does not fully reflect reality), is so highly improbable that it borders towards the realm of impossibility. Hence, we believe that this scenario is a risk that is not fully appreciated and ?priced in? by the financial markets. Thus, there are some in the financial industry who have the mind-set that since it is impossible to quantify the probability of such a scenario, it should be ignored.

As contrarian investors, we believe that it is unwise to adopt such a mind-set. Firstly, though the probability of an Israeli strike is impossible to quantify, its impact on our investments will be extremely severe. Since the financial markets will be taken by surprise by such an event, we can be assured that it will trigger a massive shift of capital from one asset class to another. (No prize for guessing which asset class we prefer!) Thus, a high impact but low probability event is something which should not be completely ignored. Secondly, though we cannot do everything to hedge every aspect of our lives if such a scenario eventuates, we certainly can do something now to hedge ourselves in terms of our investments. Doing something now is certainly better than doing absolutely nothing.

Assuming that a military strike is being seriously considered, what is the most logical course of actions to take?

Definitely, military training is the first step. Indeed, there are rumours of it in this news report. Secondly, preparation for Iranian retaliation will have to undertaken. Already, there are unusually significant US navel and marines deployment in the region. The recent deployment of 20,000 more US troops in Iraq may perhaps be not what it seems. Thirdly, oil will have to be stockpiled because there is no doubt that oil supplies will be disrupted. The recent fall in oil prices in response to reports of rising oil inventories may be the result of such accumulation. Lastly, it is certainly interesting to note the Saudis? nonchalance about the recent falls in oil prices?they declined to agree on another OPEC oil production cut to prop up the price of oil. We do know that the Iranian economy is not in good shape and they have heavy reliance on oil revenues. The Saudis (who are Sunni Muslims) have the motivation to undermine the Iranians (who are Shias Muslims), who looks to be taking steps towards dominating the Middle East.

Are we implying that there will be military action? Again, we stress that we don?t know the answer. We believe it is possible. But we would not want to place our heads on the chopping board by making geopolitical predictions.

Is an Israeli strike on Iran so improbable and ?mad? that only those who belong to the conspiracy theorists fringe groups will even bother to consider it?

To answer this question, we have to consider this: As investors, since we may often see things through an economic prism, we can make the mistake of seeing certain actions as ?irrational? when it is completely rational in the context of the overall big picture. In this case, even though an Israeli military strike on Iran is ?crazy? in our eyes, it may be perfectly rational in the context of national survival. The Israelis may see that since the Iranian nuclear issue is such a serious threat to their national survival, if the world economy has to be damned to eliminate this threat, so be it!

In conclusion, our advice is: Be prepared.

The story of gold

Wednesday, October 4th, 2006

Overnight, gold prices plunged to around US$575 while oil prices plunged to around US$58. For more than four months already, ever since the great commodity correction, gold prices had been dancing around and going nowhere. We recalled the days in June 2006 when gold fell to around US$545 and during the Israeli-Hezbollah fighting when gold rose to around US$670. The gold fever, which started late last year and reached a pinnacle in May 2006, had subsided since then. Now, an air of uncertainty and unpredictability surrounds gold. Where will it go next in the short term?

We don?t know. But since we are long-term holders of gold, we aren?t the least perturbed by their untamed price volatility. That is because we know the story of gold…

Six years ago, gold had kept a low profile and rose quietly. Her message, to those who were wise and listening, was that something amiss had been going on in the financial system. She was like a prophet warning us of an impending disaster. As with most prophets, no one listened to the prophetic message of gold anyway. Then late last year, gold caught the eye of the mob. They grabbed for gold even though they knew not the reason for grabbing her. But all of a sudden, in May 2006, the mob changed their mind at a flick. Swiftly, they were dumping gold indiscriminately even though they still knew not the reason for doing so. Since then, the mob was at loss with what to do with gold. She passed from hand to hand, seeking to find an owner who would understand her true worth…

This is the story of gold so far.