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The Giant Financial Risk You'll Never Hear About on TelevisionBy
Thursday, March 11, 2010
From 20 miles in the air, the Musandam Peninsula doesn't look like much.
Sparsely populated and dominated by the Al Hajar mountain range, little happens on the Musandam that matters to the outside world. Some fishing, tourism, and petty smuggling are about all that goes on in this tiny region belonging to Oman, the southeastern-most country on the Arabian Peninsula.
But the desolate landscape belies the Musandam Peninsula's critical role in global politics and industry...
The U.S. government has a massive contingency plan to defend the area... and investors must pay close attention to the peninsula for the same reasons our government does.
Investors must know about the Musandam Peninsula because it juts out into a waterway locals know as Tangeh-ye Hormoz. For thousands of years, this waterway has held vital strategic significance for regional powers looking to control sea access to the Arabian Peninsula, the Persian coast, and ancient Mesopotamia.
Notice... I said "regional," not global. Neither the U.S. nor any other significant economic power obsessed over it until the dawn of the hydrocarbon age, around 100 years ago.
Nowadays, the the Tangeh-ye Hormoz is one of the world's biggest geopolitical trump cards... and it poses a great threat to your financial wellbeing.
You see, this body of water serves as the transit point for more than 16 million barrels of oil per day... more than 40% of the world's daily consumption and 64% of the oil produced in the Middle East. More oil flows through this area daily than is consumed by China, India, Japan, and Germany combined.
The Musandam Peninsula is the constriction point that "chokes off" the waterway Westerners now call the Strait of Hormuz. And the regions it controls sea access to? That's modern-day Saudi Arabia, Iraq, and Iran. This makes it the most important waterway in the entire world.
 The Strait of Hormuz is also Iran's trump card in its desire to go "nuclear."
The great concern here for the U.S. government – and investors – is that Iran could use boats, missiles, mines, or a combination of all three, to attack oil tankers in the Strait... just in case Iran is attacked. Even a small success here for Iran could send the price of oil past $200 a barrel... which would strangle our fragile economic recovery.
The potential solutions to this problem on the table right now are: 1) The U.S. attempts to knock out Iran's nuclear capabilities. 2) Israel attempts to knock out Iran's capabilities. 3) We bluster and clench our fists, then ultimately allow Iran to have nuclear capabilities.
It's the biggest "darned if you do, darned if you don't" situation in the world. Here's why...
An attack designed to destroy Iran's nuclear capabilities isn't 100% guaranteed to work. We don't have complete intelligence on the locations and extent of Iran's facilities. Even if the world knew exactly where all the facilities were, we couldn't be sure attacks would take them out completely. You'd have to invade the country and inspect the damage from up close.
Less than 100% isn't good enough here. A failed attack would immediately place Iran into "war mode," which would destabilize the Middle East and enrage the Muslim world... something the U.S. doesn't want. One of the first moves for an Iran in war mode will be an attempt to shut down the Strait of Hormuz.
An attack would also send lots of young Middle Eastern men and money running for the terrorism business. America has worked too hard, risked too many soldiers' lives, and spent too much money to risk a terrorism renaissance.
So if an attack fails, you'll have a terrible version of what I just described. If you don't attack, you have a nuclear-armed Iran. Like I say, darned if you do, darned if you don't.
I think diplomacy is the likely outcome here. But you're crazy not to buy some financial insurance in case this situation is not resolved without missiles. After all, we're talking Israel, Iran, and the U.S. here. These nations did not get where they are today by sending Hallmark cards and asking "pretty please."
If this conflict goes "hot," SAFE oil and gas assets will soar in price... the kind far away from the Middle East and its problems. In tomorrow's essay, I'll tell you the simplest and easiest way to buy them. In the case of a Middle Eastern conflict, this will beat the pants off gold for "crisis insurance."
Good investing,
Matt Badiali
Further Reading:
Don't ignore Matt's emphasis on "SAFE oil and gas assets." Not all high-upside energy investments are created equal. Get the details on one you're best off avoiding – and pick up a few tips on how to distinguish honest advice from hype – here: Tiny Oil Stock Making Mysterious 200% Jumps.
Of course, oil isn't the only commodity that soars in a crisis. Gold, as Matt mentioned, is another. A third is silver, which "beats the pants off" both oil and gold when it comes to volatility. When things go wrong, silver goes nuts. You'll get the perfect price point to buy silver here: This is Where Smart, Rich Investors Will Buy Silver.
Market NotesDON'T MAKE THE WORLD'S MOST POPULAR TRADE... FOR NOW In mid-December, we nailed the textbook "1-2-3" trend change in the euro... the pan-European currency everyone loves to hate right now.
Back in December however, the euro wasn't so hated. The currency's value was near a yearly high... It was the U.S. dollar and the monster debts behind it that folks hated. But just after our column, the Greece debt problem hit the headlines. Sentiment and trend changed in a big way. The euro fell 6% in two months... which is a drastic decline for a major currency.
But now that "euro implosion" and "Greek debt crisis" are regular evening news fare, everyone is bearish on the euro. Big hedge funds are holding a record amount of bearish bets against the euro. In a great departure from mid-December, it's now one of the most popular trades in the world.
Bottom line? Long term, the euro, like all paper currencies issued by spendthrift governments, is headed lower. But short term, everyone and their brother sees the euro as a can't-miss short right now. The market is set to do what comes naturally... which is to soak as many people as possible. Get ready to see a euro bounce.
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