May 21, 2012
While seemingly the entire world was focused, self-referentially, on the Facebook (NASDAQ:FB) IPO last Friday from my perspective far larger issues were being ignored. The S&P 500 (NYSE:SPY) is within 3% of its opening price for the year, having wiped out in 13 days nearly the entire first quarter rally that had everyone so ready to jump on the Facebook bandwagon.
Looking at this market from my trader’s background I see a market headed towards a climax in selling soon which will then determine the course of the rest of the year. The market will have to make a decision soon as to which direction it will go: Rally or Rout.
SWIFT-Boating of Iran
The G8 is meeting this weekend and the rhetoric with respect to Iran is heating back up again with their statement intimating a release from various strategic petroleum reserves which would be necessary if there was a supply disruption. i.e. an attack by the U.S.
When SWIFT kicked the Iranian banks out of its network, at the behest of the U.S. and E.U. governments it set off a chain-reaction of events that have us hurtling towards the moment when major decisions affecting nearly every aspect of the capital markets and our day-to-day lives will take place.
Major BRICS (AMEX:BKF) nations, China, Russia and India along with Turkey have all refused to stop trading with Iran. Bilateral trade agreements have been put in place and the oil continues to flow. The recent reports of Turkey’s gold exports to Iran, rising a whopping 3500% year-over-year in March, suggest that Turkey is doing without fanfare that which China and India have stated they will do with fanfare, namely paying for oil with gold (AMEX:GLD) reserves.
For those that do not pay attention to these things, Turkey has been accumulating gold at a furious pace over the past 15 months. With a population holding an estimated 5000 tons of gold (AMEX:PHYS), greater than the reserves of Germany and Switzerland put together, and a central bank that has doubled its reserves in the past year, Turkey is well-positioned to continue this trade for quite a while.
Turkey had been the conduit for the Iranian banking system previous to the signing of the NDAA and the prohibition of banks doing business with the U.S. continuing to do business with Iran. I would submit that it would not be hard for Turkey to act as the middle man again for Iran on behalf of the other BRICS nations, except instead of electronically moving U.S. Dollars through their banks, they instead move gold.
Why Gold Needed to Crash
Gold crashed from $1792 per ounce to $1525 per ounce in less than 10 weeks. In an election year in the U.S. record high oil prices had to be dealt with politically. This is why President Obama came out publicly to demonize speculators in the oil markets in April and why Brent Crude (AMEX:BNO) prices have dropped back $15 per barrel from their top. There are new margin rules going into effect to create a broader class of speculators at the commodities exchange which is driving smaller players out of the markets for oil, gold, gasoline and other strategically important items.
But, if the Iran’s major trading partners are willing to defy the U.S. sanctions and trade gold or other currencies for oil then it makes strategic sense to engineer a major sell-off in the price of those currencies. The U.S. dollar (AMEX:UUP) is up 15% vs. gold in the past ten weeks. The Yuan has depreciated 1% since the Chinese announced major changes to deepen Yuan trading. The Rupee (AMEX:INR) has been under attack losing 10% to the Dollar since the end of February. The Ruble (AMEX:FXRU) has devalued 6.5% in the past two weeks.
In 2010 Iran’s balance of trade between the BRICS nations was a surplus of $219.5 billion USD. The average price of Brent was $79 per barrel. Lacking better statistics and assuming constant production of oil from then to now at $110 per barrel Brent the trade surplus is $309 billion per year. That’s a potential flow of 5300 tons of gold per year. Obviously, this example has been simplified but only to make the point that even if 10% of Iran’s trade with the BRICS nations is financed via gold that is an enormous amount of money not flowing through the U.S. Dollar.
It is now flowing through gold. Russia added another 16.8 tons of gold to their reserves in March. Turkey’s plan to bring some of that massive private store of wealth into the banking sector has resulted in 17 tons of flow into the central bank through March. By October, gold will begin to flow preferentially through Singapore as all taxes associated with trading gold will be rescinded.
By devaluing the currencies this makes it more difficult to buy gold on the open market, slowing the rate of accumulation. I would not be surprised to now see the gold rally that began on Wednesday evening in Asia continue while the BRICS currencies remain under attack in this next phase of this currency war as we approach the June 28th deadline for sanctions. This will put serious pressure on the foreign exchange accounts of the BRICS while starving Iran of internationally acceptable collateral.
Despite all of this India publicly announced that their reduction in oil purchases from Iran was not in response to U.S. pressure but rather part of their longer-term plan to reduce oil imports while announcing half-measures to cure their government spending problems.
By June 28th we’ll know just how serious the U.S. is about this situation and whether or not an agreement with Iran and the BRICS can be reached which will return things to a state of near normalcy. Regardless of how it turns out, the effectiveness of SWIFT has been irreparably compromised and an alternative will arise, likely sooner rather than later, at which point things really become interesting.