I’m at my home office. I’m looking at the Iran crisis very closely. And I see a glimmer of hope that a showdown could be avoided.

The rhetoric from both sides remains venomous. But sometimes, you have to look beneath the words and recognize the more subtle signs.

Last month, for example, a letter from Iran’s president Mahmoud Ahmadinejad to President Bush, although initially rejected by Condoleezza Rice as “worthless,” was later viewed as a clumsy — but meaningful — overture.

Similarly, last week’s White House decision to offer direct talks with Iran, although rejected by Ahmadinejad because of “unacceptable preconditions,” is simultaneously being welcomed by Iran’s foreign minister as “a positive step.”

And just this weekend, despite his usual diatribe against the West, Iran’s president Mahmoud Ahmadinejad struck a more moderate tone. He said Iran will not rush to judgment about a package of incentives agreed to last week by the U.S., Britain, France, Germany, China and Russia. He said he might accept a compromise. He even raised the possibility of a “breakthrough” in negotiations.

For reasons I’ll explain in a moment, the situation is still precarious. But for right now, what’s most revealing is the fact that ...

Despite Hopes of Detente with Iran
The Price of Crude Oil Is Still Moving Up

In the last few months, while commodities like gold, silver and copper zoomed higher and corrected, oil just held firmly.

And in the last few days, even while the West and Iran seem to have moved closer toward a possible easing of tensions, oil has edged higher, approaching its all-time highs.

The big picture that emerges:

We have an oil market that’s not being swayed very much by hot money or speculation ... not likely to go down significantly in the event of detente with Iran ... and ultimately, still on its way to new, all-time highs.

Bottom line: No change in the upward zigzag in oil prices that has persisted for years.

Indeed, each time Wall Street has declared an end to this rise, they were subsequently proven wrong: The price of crude oil failed to fall below its previous lows. It turned around. And it made new, all-time highs.

If we see a similar pattern this time, the next likely near-term target for oil is in the $80-$85 range. This raises some urgent questions for investors:

If oil prices are already rising on their own, what will happen if the Iran talks break down? What will happen if another Mid-East hot spot blows up?

And if energy prices continue going up, what impact is that going to have on inflation and interest rates?

Here are my best answers:

If the Upcoming Iran Talks
Fail, All Hell Could Break
Loose in Energy Markets!

This is the world’s last viable chance to avoid conflict with Iran. If the talks fail, or never quite get off the ground, it’s likely to set into motion a chain reaction of events that neither side can stop:

The U.S. will swing right back to the United Nations, this time with far stronger support from China and Russia. The U.N. will finally slap down sanctions. And Iran, at the minimum, will deploy its oil weapon. Indeed ...

Just yesterday, hours after Iran’s President spoke about a possible compromise with the West, his boss, Ayatollah Ali Khamenei, declared, if there is any “wrong move” by the U.S., “the energy flow in this region will be seriously endangered.”

The ayatollah’s warning is alarming. In the past, Iranian officials have consistently denied their intent to use oil as a weapon. But now, Khamenei’s comments clearly debunk any such denials — the first official signal that Iran is ready to disrupt oil supplies.

Connect the dots, and you’ll see the consequences: If talks fail, oil could quickly catapult to $100 and beyond.

Basra, Iraq’s Oil-Rich Region,
Is Sinking Deeper into Chaos

Last Tuesday, I warned you that Basra is on the verge of blowing up, threatening the 1.4 million barrels of oil that Iraq exports to the world each day.

Sure enough, on Wednesday, Iraq’s newly chosen prime minister, Nouri al-Maliki, traveled personally to Basra to declare a state of emergency, and his tough measures were widely hailed as long overdue.

But they don’t seem to be working. In blatant defiance of the prime minister, a suicide bomber attacked a busy Basra market on Saturday, killing 32 and wounding 77. And regardless of the prime minister, Iran continues to pour weapons, people and money into the region.

Meanwhile, Iraq’s oil industry is in graver danger than previously recognized. According to a yesterday’s New York Times and International Herald Tribune,

“The sabotage attacks that have crippled Iraq’s oil pipelines and refineries for the past three years are now being used to aid a vast smuggling network that is costing the Iraqi government billions of dollars a year ...”

“Once thought to be only a tool for insurgents to undermine the government, the pipeline attacks have evolved into a lucrative moneymaking scheme for insurgents and enterprising criminal gangs alike. Ali Al Alak, the inspector general for the Oil Ministry, said the attacks are now orchestrated by both groups to force the government to import and distribute as much fuel as possible using thousands of tanker trucks.

“In turn, the insurgents and criminal gangs ... have transformed the trucking trade into a potent tool for smuggling.”

The only reason that Iraq’s Sunni insurgents have refrained from destroying the Iraqi oil industry is because they have been so successful at tapping the oil themselves, using it as a steady source of financing.

But now, new groups of insurgents, this time among Shiites in the South, want to grab the oil industry for themselves, threatening a civil war over oil and a sharp reduction in the 1.4 million barrels per day that Iraq is contributing to the world market.

Bottom line:

If Iran doesn’t overtly disrupt oil supplies flowing from the Persian Gulf, it may still do it covertly, through Iran-backed insurgents in Basra.

The Largest Terrorist
Network in the World

After 9/11, Elisabeth and I wanted to take a vacation far from the beaten track and, we thought, as far away from the reach of terrorists as possible.

It took us a couple of years to get around to it. But we finally were able to get away for a few days to Iguaçu Falls, near the three-country border of Brazil, Argentina and Paraguay.

There are no falls in the world that rival the dazzling beauty of Iguaçu (Iguazu in Spanish).

The Niagara Falls are smaller and not surrounded by the lush, tropical vegetation. Victoria Falls in Africa are one mile in breadth, while Iguaçu is spread out over 2.5 miles and 275 separate cascades and waterfalls.

While criss-crossing the borders near Iguaçu, I witnessed rampant smuggling. But it didn’t faze me. I had seen similar smuggling many times before. I also noticed a substantial community of recent Arab immigrants. But that didn’t bother me either. I had grown up with Syrians and Lebanese in Brazil. So I assumed these were all part of the same, well-respected community.

I was oblivious to what was really going on, and I’m glad. Otherwise, it could have ruined our vacation. As it turned out, we were vacationing in one of the pivotal centers of the largest and best organized terrorist network in the world.

I’m not talking about al Qaeda. Quite to the contrary, the largest terrorist network in the world today is Hezbollah.

Hezbollah, Arabic for “party of God,” is the Shiite terrorist organization based primarily in south Lebanon.

It’s funded, armed and trained mostly by Iran. Its international network is believed to include at least 15,000 operatives in cells in the U.S., Canada, Argentina, Paraguay, Brazil, Belgium, Britain, France, Germany, Spain, Switzerland, Indonesia, Malaysia, and throughout Africa.

And it’s deadly.

Hezbollah was deemed responsible for the bombing of the Khobar Towers in Saudi Arabia, killing 19 U.S. servicemen in 1996 ... the bombing of the Jewish Community Center in Buenos Aires, killing 96 in 1994 ... the Israeli Embassy in Buenos Aires, killing 29 in 1992 ... the hijacking of TWA Flight 847 in 1985 ... the bombing outside the U.S. Embassy annex in Beirut, killing 24 in 1984 ... and, biggest of all, the car bombing of the U.S. Marine Barracks in Beirut, killing 241 U.S. servicemen in 1983 ... to mention just the main ones.

Before 9/11, there was no known connection between Hezbollah and al Qaeda. But more recently, it appears the two groups have met more frequently, especially in the tri-border area. The meetings were organized by Imad Mughniyah, who directs Hezbollah in the area. Meanwhile, Mughniyah has also been appointed by Iran to coordinate the group’s activities with Hamas and Palestinian Islamic Jihad.

Indeed, some observers believe the tri-border region of South America has become the new Libya of the world, a conveniently remote location where terrorists with widely disparate ideologies meet to exchange ideas and resources.

Two lessons from this experience: Terrorist activity is by no means confined to the known hot spots. And, unfortunately, detente with Iran, although a welcome event, is unlikely to end its spread to the far corners of the globe.

Indeed, just in the past few days, interviews with U.S. intelligence officials have revealed a growing concern in Washington: If Iran is cornered by the West, it could direct Hezbollah to launch a series of massive terrorist attacks against U.S. targets.

Impact on Inflation
And Interest Rates

After the bad jobs report on Friday, there was a sigh of relief among bond investors.

Their thinking: The economy is weaker than expected. The Fed may not be as tough as feared. So interest rates may not rise as quickly after all.

Our view: It’s going to take a lot more than a slowdown in the U.S. to stop surging prices and hold back rising interest rates.

The price of gold, a good leading indicator of inflation, is up by over 50% in the past 12 months.

Copper, a barometer of economic demand, is up a whopping 130%.

And those gains are after the recent price corrections.

These price rises, along with the rising cost of energy, are just now spreading to consumer prices. And they’re not yet reflected in current interest rate levels.

So even if the Iran crisis is defused ... even if Iraq’s oil industry holds up ... and even if Hezbollah does not launch attacks ... you’re looking at much more inflation and much higher interest rates in the months ahead.

Add to the mix just one major break in the fragile balance of geopolitics, and all bets are off: World inflation and interest rates could explode uncontrollably.

What To Do

First, pray I’m wrong. Hope that, despite all odds, there can be a meaningful reduction of tensions with Iran, which, in turn, could somehow help avert looming disasters in Iraq and Palestine.

Second, don’t count on it. Move a substantial portion of your money to the safest possible havens in the world today — short-term Treasury securities. You can buy 3-month Treasury bills directly from the U.S. Treasury Department or you can use one of many money-market funds specialized in short-term Treasuries or equivalent.

Third, seek to protect yourself from a decline in the dollar with investments that are tied to natural resources, such as gold and oil. Two examples:

• StreetTRACKS Gold Shares (GLD), the leading gold exchange-traded fund, representing 1/10th of an ounce of bullion.
• Oil Service HOLDRs (OIH), the leading exchange-traded fund, including Halliburton, Baker Hughes, Transocean, Schlumberger and others.

Fourth, with funds you can afford to risk, consider betting on rising interest rates. Right now, thanks in part to the weak jobs report on Friday, the investments we’re looking at are very cheap. But given everything going on in the world today, we don’t think that’s going to last.

We estimate that, even if interest rates rise only modestly, each $500 investment can grow into $4,800. And If rates rise more sharply, it can grow into as much as $7,925.

If you bought 10 of them (your total cost: $5,000), you could wind up with $79,250, less broker commissions. If you bought 40, costing you $20,000, you could end up with as much as $317,000.

Your risk: If interest rates don’t go up, you could lose the entire investment, but not a penny more.

We plan to issue our recommendations tomorrow. So tonight is the deadline to join. If you’re interested, call 800-815-2917 before midnight.

Good luck and God bless!

Martin Weiss, Ph.D.
Editor, Safe Money Report
support@martinweiss.com

© 2006 Martin D. Weiss, Ph.D.
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