Wednesday, February 23, 2011

History doesn't repeat itself, but it does rhyme.


1979 - Iranian Revolution
The Islamic Revolution (also known as the Iran Revolution or 1979 Revolution) refers to events involving the overthrow of Iran's monarchy (Pahlavi dynasty) under Shah Mohammad Reza Pahlavi and its replacement with an Islamic republic under Ayatollah Ruhollah Khomeini, the leader of the revolution.

Demonstrations against the Shah are sometimes said to have begun in January 1978. However, they actually commenced earlier, in October 1977, developing into a campaign of civil resistance that was partly secular and partly religious. Between August and December 1978 strikes and demonstrations paralyzed the country. The Shah left Iran for exile in mid-January 1979, and in the resulting power vacuum two weeks later Ayatollah Khomeini returned to Tehran to a greeting by several million Iranians. The royal regime collapsed shortly after on February 11 when guerrillas and rebel troops overwhelmed troops loyal to the Shah in armed street fighting. Iran voted by national referendum to become an Islamic Republic on April 1, 1979, and to approve a new theocratic constitution whereby Khomeini became Supreme Leader of the country, in December 1979. Wikipedia
2011 - Libyan (Middle East & North Africa) Revolution?
The 2011 Libyan protests are an ongoing series of protests and confrontations occurring in the North African state of Libya against the government of Libya and its head of state, Muammar al-Gaddafi. The unrest began on 15 February 2011 and continues to the present. Media outlets have reported the unrest as being inspired by the uprisings in Egypt and Tunisia, connecting the protests with the wider 2010–2011 Middle East and North Africa protests. According to Richard Engel, NBC News Chief Foreign Correspondent, who entered Libya and had reached the city of Tobruk on 22 February 2011, "the protest movement is no longer a protest movement, it's a war. It's open revolt." Wikipedia
1979 - Energy Crisis
The 1979 (or second) oil crisis in the United States occurred in the wake of the Iranian Revolution. Amid massive protests, the Shah of Iran, Mohammad Reza Pahlavi, fled his country in early 1979 and the Ayatollah Khomeini soon became the new leader of Iran. Protests severely disrupted the Iranian oil sector, with production being greatly curtailed and exports suspended. When oil exports were later resumed under the new regime, they were inconsistent and at a lower volume, which pushed prices up. Saudi Arabia and other OPEC nations, under the presidency of Dr. Mana Alotaiba increased production to offset the decline, and the overall loss in production was about 4 percent. However, a widespread panic resulted, added to catastrophic decisions like U.S. President Jimmy Carter ordering cessation of Iranian imports to the U.S., driving the price far higher than would be expected under normal circumstances. Wikipedia
2011 - Energy Crisis?
The Time columnist Robert Baer had a source close to the Libyan regime telling him that Gaddafi has ordered the destruction of oil pipelines, cutting off flow to Mediterranean ports. 

"There's been virtually no reliable information coming out of Tripoli, but a source close to the Gaddafi regime I did manage to get hold of told me the already terrible situation in Libya will get much worse. Among other things, Gaddafi has ordered security services to start sabotaging oil facilities. They will start by blowing up several oil pipelines, cutting off flow to Mediterranean ports," Baer wrote.

The worsening violence in Libya and the continued uncertainty in Bahrain have sent shockwaves through world oil markets, and prices have started going north in anticipation of supply breakdowns. Crude prices spiked up around seven percent on Tuesday morning in New York, inching towards two-year highs.

The political crisis in Libya, which is Africa's third-largest oil producer, has already forced many oil companies to halt production and exports.
 Observers think Gaddafi's message to the Libyans and the rest of the world is that once he is gone, the country will slip into anarchy, and one major fallout would be energy supply disruptions in the Middle East. IB Times
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History doesn't repeat itself, but it does rhyme - Mark Twain

Just like the financial crisis continued to pop up in different locations, such as the movement to firefight issues in Iceland, then Dubai, then Greece, then Ireland (and there are many others on the brink that I have not listed), so has the political instability in the Middle East and Northern Africa flowed from one location to the next.

From Tunisia, to Egypt, then Bahrain, Libya & Yemen (to name but some of the locations we've seen mass protests and revolution).

Where does this stop?

Gold is not always an inflation hedge, 1980 to 2000 is proof of that.

Gold is not always a deflation hedge, 2008 is proof of that.

Gold is a crisis hedge. It thrives in an environment of financial and/or geopolitical instability.

The world stands on a precipice and there is a lot of uncertainty about where things head from here.

2008 saw the US Fed bailout the world and pull us back from that precipice, but printing dollars is not going to solve the world's political problems and it could be argued that the printing has in fact fueled the current Middle East revolution.

I talk a lot about Silver on this blog, reality is though I wouldn't have started playing the Silver trade without first having a decent position in Gold.

On January 3rd 1978, Gold's London PM fix was $169.20, on January 21st 1980, a short 2 years later, Gold traded at $850 (a 5x multiple of $169, price data from Daily Gold). If we saw a similar rise in Gold in the short term it would take the price from $1400 to $7000.

In my opinion we are heading into the 3rd and final phase of this bull market (as previously discussed on the blog, here). Not only could we see similar gains to those seen in the 3rd phase of the 1970s bull market (over the final 2 years), but the catalyst for sending the price soaring could be similar in nature to that of the 1970s.

Just like the bumper sticker says:

Get in, Sit down, Shut up, Hold on!


BB.

Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

5 comments:

  1. Fantastic post BB.

    I too have thought about the parallels - the 20 year cycle seems apt here (first mentioned by Thomas Jefferson).

    A third underlying dimension is a monetary crisis. In the '70's we had a decade of stagflation, caused in part by the profilgate US printing money to finance an unwinnable war (sound familiar?) which ultimately lead to the closing of the Gold window by Nixon.

    The similarities are striking: a new monetary crisis brewing as the US and other major currencies race each other to the bottom, printing as they go.

    I contend that silver and gold are both creating reverse head and shoulder patterns on the charts - I might post about this on Macrobusiness.com.au shortly (and with a link/copy of this post/blog if you dont mind Baron? - full credits of course!)

    Cheers
    The Prince (aka BirchCreekTrader)

    ReplyDelete
  2. Hi Prince

    Indeed there is the monetary crisis parallel.

    I am interested to see how this plays out with the much larger US public/private debt to GDP levels (currently over double the level in the 1970s). If they continue to print and inflation rages out of control things could get very unstable, I mean I can't see the US being able to raise rates anywhere near the level they did in the 1970s... alternatively we see Bernanke ease off the printing press and see asset prices potentially start collapsing again (?). Very interesting times.

    So many different variables that could have an impact, so many unforeseen consequences to whatever actions the bankers take.

    Reposting with link is no problem!

    Cheers

    BB.

    ReplyDelete
  3. I just discovered your blog and very much enjoy what I've read so far. Excellent insight and analysis.

    If I may be so bold as to suggest you consider changing the colour scheme for the center column where the main text resides. White text on black is notoriously hard on the eyes after even a short period of time. Simply reversing the colours (white background, black or dark grey text) would increase readability immensely.

    Cheers.

    ReplyDelete
  4. Hi Geoff, thanks for the feedback. I will give some thought to a change in colour scheme, I'm not sure how much work that would cause to update previous posts though and personally I prefer the contrast of white on back.

    To make things easier for those that struggle with the colour scheme I have opened up the RSS feed to show full posts, so you can view them here where they are black on white text:

    http://feeds.feedburner.com/BullionBaron

    Also of course there is the option to enlarge the page, this is easiest if you hold CTRL + scroll forward on the mouse wheel.

    Hope this helps.

    Cheers

    BB.

    ReplyDelete
  5. HI BB - I've used your post here: http://macrobusiness.com.au/2011/03/gold-and-silver-to-the-moon/

    Cheers,

    The Prince

    ReplyDelete