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March 26, 2007

War of Blackmail
by Martin Weiss

Martin Weiss here with an urgent update on the breaking Iran crisis and its potential impact on your money.

On Friday, precisely when the United Nations was preparing to slap new, tougher sanctions on Iran, President Ahmadinejad's gunships captured 15 British sailors and marines on a routine patrol off the waters of southern Iraq.

And just in the past 24 hours, Iran's leaders have unleashed the most venomous diatribes against the West since their capture of U.S. embassy hostages nearly 28 years ago:

• Iran's Foreign Ministry spokesman condemned the British for their "interventionist and suspicious move" against Iran's sovereignty.
• After moving the 15 British captives to Tehran for "interrogation," Iran promptly declared that they "have confessed the illegal entry of territorial waters of the Islamic republic," an act of "blatant aggression."
• 500 Iranian students, gathered on the shore near where the soldiers were captured, shouted "Death to Britain" and "Death to America," urging the government to hold the detainees until the U.S. grants Iran a series of unlikely concessions.

British officials are hoping -- and praying -- that the Iranians will come to their senses and release the hostages within the next few days.

However, on Saturday, even as British diplomats were trying to reason with Iranian officials in London, the U.N. Security Council in New York not only voted unanimously to pass the new sanctions against Iran ... but also promised even tougher punishment within 60 days.

This confirms and double-confirms everything Larry Edelson has been warning you about.

Our view: Even if the current hostage crisis is resolved, there's nothing of substance that could soon end the broader, brewing conflict with Iran.

Some analysts still hope the Iranians will finally respond favorably to the carrots the U.N. continues to offer.

But don't hold your breath, because, right now ...

Iran's leaders are waging a war of blackmail!

And they seem to believe they have all the blackmail weapons they need to manipulate the U.S. and its allies:

Blackmail Weapon #1
The British Hostages

Never forget: Iran's nearly 3-decade conflict with the West was born in a similar hostage crisis.

On November 4, 1979, militant Iranian university students stormed the American diplomatic mission in Tehran, took 66 captives, and began the most bitter hostage crisis in modern history.

Had this occurred in virtually any other nation, diplomatic protocol would have prompted the government, no matter how hostile to the West, to condemn the students and compel the hostages' release.

But, to the West's utter dismay, the newly minted Iranian revolutionary government did precisely the opposite. It rallied to the support of the students. It prolonged the hostage crisis for an unprecedented 444 days. And it created the rift between Iran and the U.S. that's still at the heart of the conflict today.

In 1980, an attempted U.S. hostage rescue effort, Operation Eagle Claw, crashed and failed in the desert of southern Iran, killing eight American Marines. President Carter lost his bid for re-election. Any semblance of diplomatic ties between the two countries was destroyed.

But one man, widely suspected to be a student leader of the hostage crisis (see photo), not only became an Iranian hero, but later, also rose to power as Iran's president.

His name: Mahmoud Ahmadinejad, the same man who is now presiding over the latest round of hostage taking.

Menzies Campbell, leader of the Liberal Democrats in Britain, says "The United Kingdom will not be blackmailed." But that's precisely what Iran is doing.

Blackmail Weapon #2
Strait of Hormuz

Iran's capture of the 15 British sailors and marines sent U.S. crude oil futures to a three-month high above $62 a barrel on Friday.

But that strange incident, occurring in the northwest corner of the Persian Gulf, pales in comparison to the potential stranglehold that Iran could gain over the West at the opposite end of the Gulf, in the Strait of Hormuz.

The Strait of Hormuz handles 17 million barrels per day of oil, approximately one third of the world's sea-borne crude oil shipments. And there's growing fear among U.S. experts that Iran can easily harass, probably disrupt, and possibly choke off, those huge supplies.

Indeed, the Arab nations in the region are so concerned about this threat, they're scrambling to build a massive pipeline that could bypass the Strait of Hormuz. But that will take years to complete.

David Ochmanek, a senior policy analyst at the RAND Corp. in Washington, doesn't think the Iranian navy is powerful enough to cut off the oil flow.

But according to Congressional testimony this week by Ariel Cohen of the Heritage Foundation, Iran could shut down the Strait by simply lacing it with anti-ship mines. The impact on energy markets: "Significant, if not disastrous."

Indeed, Iran has a plethora of weapons to disrupt tanker traffic in the Persian Gulf. Iran's Revolutionary Guards have underwater mines and missiles that they say "could sink large U.S. warships." They're trained to strike U.S. ships using attack boats, mini-submarines and even jet skis. They also have underwater demolition teams that can attack offshore platforms.

Unquestionably, the Strait of Hormuz is the choke point in the global trade of crude oil. And according to Erik Kreil, an analyst at the U.S. Energy Information Administration, "the world has never seen anything close to the size of the Strait of Hormuz closure."

If the Strait closed down, he says, it would have approximately FOUR times the impact of the largest oil supply disruption in history -- the 1991 invasion of Kuwait by Iraq, which shut down about 4.5 million barrels per day.

Another big problem: There's now so much military hardware in the Gulf, even the smallest of incidents could escalate dangerously.

The U.S. and Britain know that. So does Iran. That's why, this weekend, Tehran warned -- again -- that it will "not be able to control the consequences" if it's attacked.

Blackmail Weapons #3 and #4
Hamas and Hezbollah

Hamas is still the dominant faction in the Palestinian Territories. And despite a much-celebrated pact with its rival faction, Fatah, its militants continue to attack neighboring Israel.

Meanwhile, just 20 days ago, on March 6, Iranian President Ahmadinejad met with Hamas political leader Khaled Mashaal to "solidify and tighten" their relationship ... plan strategies against the West ... and prepare for the broader conflict they see on the near horizon. At the same time ...

Hezbollah still controls much of Lebanon. Its political influence in the country surged dramatically in the wake of its war with Israel last year. And this year, it is dangerously close to toppling the U.S.-backed Lebanese government. Its single largest political sponsor and arms supplier: Iran.

Between these two terrorist organizations -- Hamas and Hezbollah -- Iran wields two more powerful blackmail weapons that it can deploy at almost any time.

It can use them to torpedo fledgling Mid-East peace negotiations. It can use them to sabotage U.S. interests throughout the region. It may even be able to mobilize Hamas or Hezbollah operatives to help launch terrorist attacks and assassinations in the U.S. and Western Europe.

Blackmail Weapon #5
Shiite-Controlled Iraq

The longest war of the 20th Century was neither World War I nor World War II. It was the protracted, 8-year conflict pitting Iran's Shiite ayatollahs against Iraq's Sunni dictator -- Saddam Hussein.

What were Iran's goals and dreams throughout that conflict? To topple Hussein ... to replace him with a friendly Shiite Islamic Republic ... and to build a powerful, new Shiite crescent across the Muslim world.

In its long war against Saddam, Iran failed. The war ended inconclusively. Saddam remained in power. Iraqi's Shiite population sank further into a state of powerless poverty.

Ironically, however, since 2003, Iran has been accomplishing each of its goals without firing a single shot. The undeniable reality:

While the U.S. has occupied Iraq militarily,
Iran has been occupying Iraq politically.

Consider the facts:

Fact #1. Iraq's largest and most powerful political party is the Shiite's Supreme Council for the Islamic Revolution in Iraq (SCIRI). But guess how and where SCIRI was born! It emerged from an insurgent group backed by Iran during the Iran-Iraq war!

It was founded in Tehran, Iran's capital.

It draws most of its political philosophy, strategies and tactics from Iran.

It is Iran's pride and joy in Iraq.

In contrast, SCIRI's support for the U.S. in Iraq is based exclusively on an alliance of convenience to fight a common enemy -- the Sunni insurgency. As soon as that fight is won -- or lost -- its ties with the U.S. will fade, and its deeper, broader alliance with Iran will prevail.

Fact #2. Iraq's U.S.-supported prime minister, Nouri Kamel al-Maliki, lived in exile in Iran and is closely aligned with Iran's current leadership.

Fact #3. In the U.S.-sponsored government of Iraq, the most powerful ministries are aligned with Iran.

Fact #4. Iraq's entire southern region, including oil-rich Basra, has closer commercial, religious and cultural ties with Iran than most Canadian border provinces have with the United States.

Even with the U.S. in Iraq, Iran has already established virtually all of the alliances and structures it hoped to create during the Iran-Iraq war.

This is a truly powerful blackmail weapon, and Iran has barely begun to wield it. But it can. And it probably will.

Worst of all:
Nuclear Blackmail

Most Americans and Europeans seem to underestimate the consequences of this Saturday's events on First Avenue and 42nd Street in Manhattan.

When the U.N. Security Council voted to impose new sanctions on Iran, it did more than just pinch a few nerves among Iran's leaders. It targeted the core of Iran's military endeavors -- its arms exports, its elite Revolutionary Guards, and the state-owned bank that finances its overseas operations.

The U.N. resolution bans arms exports from Iran. It freezes financial assets of 28 Iranian individuals and entities. And it has specifically targeted commanders and companies associated with Iran's Revolutionary Guard, broadening its scope beyond nuclear activities.

Now, finally, you'd think this increasing pressure would force Iran to the bargaining table. But given the many blackmail weapons at its disposal, it's more likely that Iran will decide it still has all the leverage it needs to ...

Pursue its nuclear ambitions ...

Make further inroads into Iraq ...

Persist in its support for Hamas and Hezbollah, and possibly ...

Continue to detain the 15 British hostages.

Recently, there's been widespread discussion in the U.S. media about growing dissatisfaction in Iran with Ahmadinejad's hard line foreign policy, leading to some hope that he will fall from grace.

Yes, that could happen.

Someday.

But right now, Iranians have done nothing to restrain him -- let alone remove him from power.

An unwelcome omen: During mass demonstrations marking the 28th anniversary of the Iran's Islamic Revolution last month, banner after banner continued to support the country's nuclear activities.

What to do ...

The potential impact of this escalating crisis on your money is far-reaching. It could quickly drive oil prices to new all-time highs. And it could set the stage for an upsurge in inflation the likes of which have not been seen since the late 1970s.

In anticipation of that possibility ...

First, continue to avoid long-term bonds or any investment that locks you in to a fixed yield. For your cash, stay short term and liquid, favoring Treasury bills or a Treasury-only money market fund.

Second, protect yourself from the inflationary consequences of an oil-price surge -- not only with investments that are tied to oil, but also with those linked to gold, silver, uranium and other scarce natural resources.

Third, diversify internationally, spreading your money among countries that (a) are far removed from the looming Mid-East dangers, (b) enjoy the steadiest and fastest economic growth despite higher energy costs, and (c) will be among the foremost beneficiaries as China begins to invest its massive foreign reserves.

For more details on this last, critical point, be sure not to miss the Money and Markets I sent you Saturday morning with the subject "Gala Edition: Harness the Power of China's $1 Trillion!" You should find it in your inbox.

Good luck and God Bless!

Martin

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

For more information and archived issues, visit http://www.moneyandmarkets.com.

About MONEY AND MARKETS

MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Red Morgan, Ekaterina Evseeva, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.

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