Daily Reckoning: Musings on the Work of Harry Browne

April 27, 2012

By Eric Fry

04/26/12 Denver, Colorado – After a quick whistle-stop tour through Chicago and Atlanta, your California editor’s Pullman screeched to a halt in Denver, Colorado last night. Upon arrival, he stepped down from his Pullman, which bore an uncanny resemblance to a Boeing 757, hailed a porter, which bore an uncanny resemblance to a conveyor belt, climbed into his awaiting Packard Phaeton, which bore an uncanny resemblance to a Ford Fiesta rental car…and rolled down the motorway to his father’s house.

Your California editor’s father turns 88 years old in one week, so your editor took the occasion to stop in and wish Dad an early Happy Birthday! But let’s not let these modest festivities stand in the way of our daily reckonings…

A few weeks back, your team here at The Daily Reckoning highlighted the groundbreaking work of Harry Browne, creator of the Permanent Portfolio.

“A few decades ago,” we remarked, “a guy named Harry Browne devised an investment strategy he dubbed the ‘Permanent Portfolio.’ The idea was so simple it seemed almost moronic. And yet, with the passage of time we have discovered that his idea was pure genius.

“He suggested building an investment portfolio out of only four components: gold, bonds, stocks and cash.

The Permanent Portfolio

“The idea was that at any given time, two or three of these four components might underperform — but the other portfolio components would perform so strongly, you’d get an overall gain that would outpace any increase in the cost of living. Incredibly, this simple strategy has delivered some surprisingly strong investment results.”

After providing more detail about the history and underlying philosophy of the Permanent Portfolio, we invited our Dear Readers to ask themselves the following questions:

1) Is Harry Browne’s original allocation still ideal for today’s macro-economic environment?
2) If not, how would you revise his original allocation for the next 30 years?

We called this little exercise the Daily Reckoning Group Research Project and as usual, our Dear Readers responded with some fascinating suggestions.

Several readers struggled to comply with the rules of the Group Project. For example, some readers could not stop themselves from recommending specific companies; others argued that some of the very best Permanent Portfolio allocations do trade on a public exchange.

One such reader suggested buying grazing land as part of his Permanent Portfolio. Another recommended buying a house. And a third named potash as one of his allocations. We sympathize with these readers who “drew outside the lines.” The financial markets do not possess a monopoly on attractive investment opportunities. We also sympathize with those readers who could no longer stomach the idea of buying Treasury bonds as a “risk free” allocation.

“Mr. Browne’s formula was based on the idea of a functioning and fair government and not a criminal enterprise,” writes a reader named Kent. “I would bet he would eliminate most government bonds since today they really are nothing more than counterfeit and would substitute ammunition, food or fuel.”

A reader from Buenos Aires (not Joel) offers a similar observation. He points out that the Permanent Portfolio mutual fund (PRPFX) has held a large position in both US Treasuries and Swiss bonds. “[This allocation] has been great so far in this über bond bubble. But will it stand the test of time?… I looked at the permanent portfolio’s performance in this century, which yields an increase of about 130%… However, looking at its performance from 1996 to 2002 is quite disappointing. Moving around like a cork on the water’s surface, just bouncing around in the waves. It takes off in 2002, when Greenspan lit the fuse beneath the bond bubble. What will happen when the bond bubble ruptures?”

Not surprisingly, most of the folks who had no use for Treasuries had plenty of use for hard assets.

“Dear Harry (RIP). Things are different now while the dollar is dying,” writes a reader named Susan. “It’s all ‘risk on’ as the world hangs in the balance… You must have your own grocery store at home… I want to be able to put my hands on at least a few of the things I need. All the clouds out there storing my stuff for me make me very nervous and I hope to end up with more than vapor and fumes at the end of the day.”

“There might have been a time when the permanent portfolio idea may have worked,” writes a reader named Ken, “but I believe that time has passed, which is why we avoid most bonds and buy gold and silver.”

A reader named Carl concurs. “I do not believe in a ‘permanent’ portfolio,” he writes, “because things work in cycles as you surely know… We are in our sixties and plan to stay conservative and just continue to buy silver bullion each month (dollar cost average). We have had more than a few of our stocks go to zero but we know that gold and silver, especially today, will never even approach that point… Mundus vult decipi, ergo decipiatur. (‘The world wants to be deceived, so let it be deceived’)”

Hard assets were not the only crowd favorites, however. Many readers suggested investing in real estate investment trusts (REITs) and other types of high-dividend-paying stocks. Biotech stocks also seemed to be a favorite.

So without further ado, here is a sampling of the Permanent Portfolios you submitted in response to the latest Daily Reckoning Group Research Project…

Eric Fry
for The Daily Reckoning



Daily Reckoning: Ben Bernanke’s Paper Dollar Embodies Systemic Risk

April 26, 2012

Chairman Fed Ben Bernanke during the first of his four lectures on the power & greatness of the Fed and Fiat currency.

By Charles Kadlec

04/25/12 The paper dollar is now the single most important source of systemic risk to the financial system, the world economy, and the security of the American people.

That is the lesson of the past 100 years that Federal Reserve Chairman Ben Bernanke did not teach during his four lectures atGeorgeWashingtonUniversity’s Graduate School of Business. Instead, he celebrated the importance of the extraordinary powers he and his fellow governors have to manipulate interest rates and the value of the dollar in the name of economic growth and stability.

In so doing, he ignored completely that the ever growing need for heroic interventions by the Fed is itself being created by the paper dollar system he celebrates.

This failure is all the more telling because Mr. Bernanke states up front that central banks perform two critical functions: The first is to “achieve macroeconomic stability.” By that, he generally means “stable growth in the economy, avoiding big swings, recessions and the like, and keeping inflation low and stable.” The second is to provide “financial stability” by either trying to prevent or mitigate financial panics or financial crises.

On both counts, the paper dollar system in effect since the final link between the dollar and gold was broken in 1971 has failed and failed miserably when compared to the results produced under the gold standard.

Let’s begin by stipulating that we agree with Chairman Bernanke’s point that the gold standard is not a perfect monetary system. What is?

The more important question is which system, the gold standard or the paper dollar, provides more macroeconomic stability and fewer financial crises.

To answer this question, let’s examine the historic record beginning with the most difficult example, the Great Depression, which supporters of the paper dollar invoke to discredit the gold standard and thereby avoid defending the abysmal record of the paper dollar.

As Professor Brian Domitrovic pointed out in his recent Forbes.com column, the officials running the Federal Reserve in the critical period between 1928 and 1933 chose to ignore the rules of the gold standard, which would have forced them to increase the money supply in response to inflows of gold. Instead, the Fed exercised discretion and tightened, thereby making the deflation of the early 1930s worse than it otherwise would have been. Explains Domitrovic:

“Rather, as (Richard H.) Timberlake has shown, we know what guided Fed thinking in this period, and this was the doctrine that the Fed would refrain from issuing money unless it clearly would go to financing end-point economic transactions, as opposed to things like stock-market speculation and even investment. Whatever you want to say about this doctrine, it has zip to do with the gold standard. And it was at the root of the Fed’s weird decision-making 1928-33 where it presided over a radical narrowing of the money supply.”

What about the claim that, while the gold standard maintains a stable price level over longer periods of time, in the words of Chairman Bernanke: “over shorter periods, maybe 5 or 10 years, you can actually have a lot of inflation, rising prices, or deflation, falling prices.”

After the largest gold discovery of modern times set off the 1849Californiagold rush the price level in theUSrose 12.4% over the next 8 years. Under the paper dollar, that 8 year cumulative increase was exceeded in 1974, 1979 and 1980 alone. Moreover, an 8 year increase of 12.4% is equivalent to an average increase of 1.5% a year. By contrast, current Fed policy calls for inflation to average 2% a year which equates to a 17% increase in the price level over the next 8 years.

Since abandoning the last vestiges of the gold standard in 1971, inflation has averaged 4.4% a year. Nevertheless, various sectors of the economy have suffered Great Depression like deflations. For example, between 1980 and 1986, the price of oil fell 60%, and the price of agricultural commodities and farm land fell by double digits. Those deflations led to the major bank failures of the mid and late 1980s. And, of course, the most recent financial crisis was triggered by a 30% decline in home prices, a disaster for American families, banks and investors alike that ranks right up there with the hardships experienced during the Great Depression.

The net result is that without the guidance of the gold standard, the Fed and the paper dollar have become the leading sources of economic and financial instability. Since 1971, when President Nixon freed the Federal Reserve from the strictures of the gold standard, recessions have become more frequent, longer and deeper. From 1971 through 2010 (under the paper standard) unemployment averaged 6.3%, much worse than the 1947-67 (gold standard) average of 4.7%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and now above 8% for three years and counting.

Under the post-World War II gold standard, there were no financial crises that presented a systemic risk to theUSeconomy. Since 1971, we have experienced the:

1973 oil shock and international monetary crisis

1979 oil shock and dollar crisis

1982 Latin American debt crisis

1984 banking crisis and effective nationalization of Continental Illinois Bank

1987 stock market crash

1989-91 S&L crisis and bailout

1990 Japanese bubble collapse and banking crisis

1994 Mexican peso crisis

1998 Asian currency crisis

2001 dot com crash

2007-09 Housing collapse and international financial crisis

2010-2012 European sovereign debt crisis

In addition, the massive increase in the Fed’s and other major central bank balance sheets since the first quantitative easing in 2009 has coincided with the slowest recovery ever — even worse than the recoveries experienced during the 1930s — and the fear of yet another break out in inflation.

Under Chairman Bernanke’s leadership, the extraordinary steps taken to contain the financial panic in late 2008 and early 2009 by fulfilling its “lender of last resort” role to banks and, under emergency powers granted to it by the Federal Reserve Act, to non-bank institutions, may well have avoided a complete collapse of the world’s financial system.

But to use that success as justification for a discretionary monetary policy and a defense of the Fed’s ability to manipulate interest rates and the value of the dollar is to miss the greater point. The growing instability of the macro economy and the financial system is itself a product of the paper dollar system.

The most important thing the Fed could do now to fulfill its two fundamental roles of providing for a stable economy and preventing financial crises would be to begin an orderly transition back to a dollar whose value was once again defined by a unit weight of gold — that is to make the dollar once again as good as gold. To do otherwise is to leave in place the fundamental source of systemic risk that no amount of increased regulation or oversight can correct — the inherent instability of today’s monetary system based on a paper dollar whose future value is unknown and unknowable.


Charles Kadlec,
for The Daily Reckoning

CNBC: Fed Raises Economic Outlook, Leans Toward 2014 Hike

April 25, 2012
Published: Wednesday, 25 Apr 2012 | 2:07 PM ET
By: CNBC.com and wires

The Federal Reserve has boosted its outlook forU.S.economic growth this year and is slightly more optimistic about the unemployment rate, reflecting improvements in recent months.

In an updated forecast Wednesday, the Fed predicts the economy will grow between 2.4 percent and 2.9 percent in 2012. That compares with its forecast in January, when it estimated growth this year between 2.2 percent and 2.7 percent.

The Fed is estimating that unemployment, now at a three-year low of 8.2 percent, will be between 7.8 percent and 8 percent at year’s end.

Its prediction for inflation is slightly higher but remains below its 2 percent target. And 11 Fed officials expect the first interest rate hike will not occur until 2014 or later, the same number who said so in January.

But the statement was a bit more hawkish in sentiment, with seven Open Market Committee members seeing a rate hike in 2014.

The forecast is critical in that it is indicative of whether the Fed will take on a third round of quantitative easing measures to boost the economy. An improving economy would suggest that QE3 is not imminent, though Chairman Ben Bernanke reiterated that the central bank is keeping its options open.

“We remain entirely prepared to take additional balance sheet actions if necessary to achieve our objectives,” he said at a news conference. “Those tools remain very much on the table and we will not hesitate to use them should the economy require that additional support.”

The central bank also projected long-run unemployment of between 5.2 percent o 6 percent.

The committee noted several pockets of weakness, particularly in housing.

“The ongoing weakness of the housing market represents a headwind for recovery,” Bernanke said.

Bernanke also expressed concern over the “fiscal cliff,” a name he has given to the damage that would result if Congress does not reach an agreement by the end of the year on deficit reduction. Should an impasse prevail, automatic cuts and tax hikes would take place.

He warned that the lack of agreement “would be a significant risk to the recovery.”

Stocks briefly sold off following the release, while Treasury yields rose before also pulling back. The reaction likely came because investors doubted that the Fed would implement another easing program.

“The Fed has not changed its cautionary view of the economy and is keeping its potential support mechanisms ready should they become needed, Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, N.J., told Reuters “It is likely that the chairman will not voice any deeper concerns for the economy than have been expressed already in the FOMC statement and the Fed economic projections.”

The forecast came on the same afternoon that the Fed, citing concerns about the pace of recovery, held its key interest rate near zero and indicated the economy would have to improve substantially for any changes in policy to take place.

The Fed labeled economic growth as “moderate” and indicated that housing remains at a “depressed” level.

In all, the Open Market Committee statement offered little change in wording from the previous month.

A 9-1 vote accompanied the statement, which renewed the pledge to keep rates low through 2014. The discount rate remains unchanged at 0.75 percent.

© 2012 CNBC.com

Daily Reckoning: No Way Back

April 20, 2012
By Frederick Sheehan

04/19/12 Gold and silver will both rise far above their current levels. “When” is unknowable. “Why” is due to the unremitting and insolent amorality of central bankers and their practices. If not Simple Ben at the Fed, his compatriots across the globe are a daily source of confusion, contradiction, and stupidity.

The stupidity may be real or it may have evolved from an unwillingness to think, as George Orwell wrote of Stanley Baldwin’s and Neville Chamberlain’s abdication of responsibility in the 1930s: “What is to be expected of them is not treachery or physical cowardice, but stupidity, unconscious sabotage, an infallible instinct for doing the wrong thing… Only when their money and power are gone will the younger among them begin to grasp what century they are living in.”

It is important — for those who care about the ascent of gold — to understand it does not matter why they are stupid. It matters that their stupor will continue until the current monetary and credit system is paralyzed. We can be sure of that. Orwell explained: “Clearly there was only one escape for them — into stupidity. They could keep society in its existing shape only by being unable to grasp that any improvement was necessary.”

The central bankers have no other policy than to support asset prices. They have elevated and taken control of markets beyond the point of withdrawal. There is no way back.

As discussed in “Peak Imbalances are Falling,” foreign central banks have bought over $5.5 trillion of US Treasury securities: the reason 10-year US Treasury bonds yield 2.0%. Interest rate suppression is also fundamental to Eurocrat domination. The two attempts at salvaging the European banking system (over one trillion euros lent by the ECB to European banks in December 2011 and February 2012) have failed. The stock price of Banco Santander, the Spanish bank advertised as not exposed to Spanish real estate, has fallen back to the level of mid-December 2011. The country’s banking system is kaput. Again, there is no way back.

Bianco Research in Chicago calculates the balance sheets of the world’s six largest central banks are now twice the size of 2006. With $13.2 trillion of assets, they will double their size again, if they can. For as long as they can, there will be times when confidence in Bernanke and Draghi knock gold and silver for a loop. At some point (“When”), the emperor will wear no clothes. Central banking currencies will be rejected. Gold and gold stocks (hang in there, any day now), will be the currency of choice.

In Frozen Desire (1997), James Buchan wrote: “I have watched the most able men and women in my generation, who might have created unexampled monuments in moral philosophy, mathematics, or engineering, waste their time in a prattle of non-accelerating inflation rates of unemployment… [E]conomics…has retreated into algebra. A profession that begins with priests [alchemists]…ends with hermits. Political economy is now, I suspect, in the same condition in which Scholastic learning found itself on the eve of the Discoveries. It is about to explode.”


Frederick J. Sheehan,
for The Daily Reckoning

CNBC: Among Rich Nations, U.S. Retirement System Needs Work

April 17, 2012

The article below points to a tremendous gap in the retirement provided for most working class Americans & what they will actually need to pay the bills.  As we often suggest the smart investor diversifies their portfolio in an effort to close this gap. A Tangible Asset Portfolio made up of a conservative 10% to an aggressive 20% of your net worth should help. 

Among Rich Nations, U.S. Retirement System Needs Work

Published: Monday, 16 Apr 2012 | 12:14 PM ET
By: Dinah Wisenberg Brin,
Special to CNBC.com

Comparing the lot of US retirees to their counterparts in other wealthy nations can be challenging, given differences in public and private benefit programs, the age at which citizens leave the workforce, and various pension reforms of recent years.

Generally, though, many economists view public retirement benefits in theUnited Statesas less generous than those in many other wealthy nations.

The gaps may be narrowing, though, as other countries — many of which have long had younger retirement ages — seek to adjust their systems.

“There’s a much richer support network inEuropethan there is here,” says Jonathan Gruber, a professor at the Massachusetts Institute of Technology.

U.S. Social Security Insurance  benefits typically substitute less than half the income Americans earned on the job, while inEurope, similar benefits often account for at least two-thirds of pre-retirement income, says Gruber.

“We always are neck and neck with theU.K., but other than theU.K., I think we are among the stingiest,” adds Alicia Munnell, director of the Center for Retirement Research atBostonCollege.

U.S.support for retirees remains below the average for Organisation for Economic Cooperation and Development, OECD, member countries at every income level, she says Munnell.

U.S.Ranking in OECD Study

In addition,U.S.public pension spending amounted to 6 percent of gross domestic product in 2008, less than the 7 percent average for OECD countries.

National comparisons depend in part, however, on whether public or private pensions are considered, and on which aspects of retirement benefits are measured.

Among the 34 member OECD countries, the net replacement rate — retirement income as a percentage of pre-retirement income — for an average earner is 50 percent from public pensions alone, nearly 68 percent when mandatory private pensions are included, according to a 2011 OECD report.

TheUnited Statesslightly trails the 50-percent average for public pensions only, at 47.3 percent, the report showed.

Austria’s rate was nearly 90 percent, Italy’s 72 percent, Hungary’s 62 percent, Portugal’s 70 percent, Germany’s 56 percent, Spain’s 85 percent, France’s more than 60 percent, the United Kingdom’s more than 37 percent, Denmark’s 33 percent, Luxembourg’s 94 percent and the Netherlands’ 33.1 percent.Japan’s public pension replacement rate is 40 percent,Korea’s 47.5 percent.

TheU.S.has no mandatory private pensions. In some of the countries that do, such plans significantly boost the income replacement rate.

Australia’s replacement rate, for instance, is 59 percent, counting public and mandatory private pensions.Denmark’s is 90 percent,Hungary’s is 106 percent and The Netherlands’ almost 100 percent.

Replacement rates assess benefit levels at retirement. The OECD report also measures gross pension wealth — the value of lifetime flow of retirement income — and found that average-earning men in member countries received 9.6 times annual earnings, while women, because of longer life-expectancy rates, received 11.1 times annual earnings.

TheUnited Stateslagged in both measures, with 5.8 times annual earnings for men and 6.8 for women. Countries with higher than average gross pension wealth includeSpain,Switzerland,Saudi Arabia,Argentina, theNetherlands,Greece,IcelandandLuxembourg.

In another measure, the OECD took weighted averages of various indicators and found the pension level for men across the 34 member countries is 55.3 percent of economy-wide average earnings. TheU.S.figure is 37.5 percent.

A “C” Grade

The 2011 Melbourne Mercer Global Pensions Index, released last fall, compared countries’ retirement income systems while acknowledging the complexities in doing so.

Countries were graded on a scale from A, the best, to E the worst, and no country received an A or an E. TheUnited States, along withFrance,Singapore,Brazil,PolandandGermany, received a C.

A country given a C has “a system that has some good features, but also has major risks and/or shortcomings that should be addressed,” the report states. “Without these improvements, its efficacy and/or long-term sustainability can be questioned.”

TheUnited Statesranked close to average among 16 countries in adequacy of benefits provided and above average in sustainability, the likelihood that the system can maintain the benefits in the future. It fell short, however, on a sub-index focused on the private sector pension system.

TheU.S.could take steps for a better score, the report said, including raising the minimum benefit for low-income retirees, improving benefits vesting, and further limiting access to funds before retirement.

© 2012 CNBC.com


WSJ: In War Against Iran, U.S. Firepower Would Vie With Guerrilla Tactics

April 16, 2012

As concerns grow over Iran's nuclear program, the U.S. is beginning to develop a plan in the event that military intervention is necessary. Reports WSJ's Nathan Hodge, Iran has an inferior military that, in many ways, could make it more dangerous.


Adm. Jonathan Greenert made an important observation last fall from the tower of the aircraft carrier USS John C. Stennis while in the Strait of Hormuz on the southern coast ofIran, the world’s busiest oil-shipping lane.

The chief of naval operations was sailing in a flotilla that showed off the Navy’s overwhelming power to strike at long distances: F-18 fighter jets, Tomahawk cruise missiles and deck guns able to fire a shell 15 miles.

As concerns grow overIran’s nuclear program, theU.S.is beginning to develop a plan in the event that military intervention is necessary. Reports WSJ’s NathanHodge,Iranhas an inferior military that, in many ways, could make it more dangerous.

Yet in the claustrophobic waters of the strait, which narrows to just 24 miles, Adm. Greenert noted that all that long-range firepower could potentially be countered by the Iranian patrol boats that came out to track the U.S. warships. Faced with a fight in close quarters, Adm. Greenert told a Senate panel recently, “You also may need a sawed-off shotgun.”

As theU.S.and other Western powers prepare to meet Saturday inIstanbulwithIranto resume negotiations over its nuclear program, theU.S.military is sharpening its contingency planning. Advocates of peaceful engagement say economic sanctions against the Islamic regime are starting to bite, and are hopeful thatTehranwill give up its uranium-enrichment program.Iransays the program is for use in electricity generation, but intelligence services say the regime is close to developing the capability of building a nuclear weapon. The Obama administration plays down the chances of a breakthrough at this meeting, the first face-to-face encounter between US. and Iranian diplomats in more than a year, saying the best outcome may be agreement for a second round.

Should all else fail and the U.S. or Israel decide to attack Iran, say analysts, they would face a miniature version of the U.S. military, circa 1975—sustained, barely, by a world-wide spare-parts bazaar. Experts say the Islamic Republic’s claims of advanced weaponry—such as armed, Predator-style drones—are mere boasts.

Spotlight onIran

Take a look at key dates in the U.S.-Iran relationship and recent international sanctions, details on major players, a map of major nuclear sites, and possible naval strategies.

Military officers and defense analysts say theU.S.could quickly overwhelmIran’s air defenses, leaving evenly spaced bomb craters, for example, on runways to disable Iranian air bases. Pinpoint airstrikes would attempt to destroy allIran’s known nuclear facilities—a goal complicated by the fact that the regime has buried some of its production sites. The Pentagon is rushing to upgrade its largest conventional bomb to better penetrate fortified underground facilities.

Naval officers believeIranwould retaliate by waging the naval equivalent of guerrilla warfare in the Persian Gulf by mining the Strait of Hormuz or swarmingU.S.naval vessels with small boats.

Such threats, so-called asymmetric warfare, could prove as dangerous and unpredictable as roadside bombs inAfghanistanorIraq, with an low-cost mine potentially crippling or sinking a billion-dollar warship.

In such a scenario, theU.S.military would face a time-consuming and often perilous effort to reopen shipping lanes to international oil traffic.

“They have stayed true to their stripes,” said a senior military officer in theMiddle East. “They have always taken an asymmetric approach, going back to the ’80s.”

Before the 1979 Islamic Revolution,Iranhad among the most formidable conventional arsenals in the region, equipped with modern weaponry sold to the Shah byU.S.defense firms.

Iran’s military was later battered during eight years of war withIraqin the 1980s.Iranhas since cobbled together an array of weapons—some homegrown but much acquired fromChina,North Koreaand the formerSoviet Union.

Plane captains stood by as aU.S.helicopter took off from the flight deck of the aircraft carrier USS Abraham Lincoln in theStraitofHurmuzin February.

Iranhas already threatened to block theStrait of Hormuzin response to tighter international sanctions. Military analysts now estimateIranhas amassed as many as 5,000 naval mines, ranging from rudimentary devices that explode on contact, to high-tech mines that, tethered to the sea floor, can identify the acoustic signature of specific types of ships and explode only under the richest targets.

Scott Truver, a mine warfare analyst, said finding and clearing Iranian mines would be a cat-and-mouse game for the Navy. Mine warfare, he said “is as tough and dangerous as the IEDs on land were. Mines are equally hard to detect, if not harder.”

The U.S. Navy knows firsthand. In April 1988, the frigate USS Samuel B. Roberts struck an Iranian mine, which blew a hole the size of a pickup truck in the hull, and nearly sank the ship. TheU.S.retaliated by attacking two Iranian oil platforms and sinking several Iranian vessels.

Among the newest threats are sophisticated torpedoesIranacquired fromRussiathat can home in on the turbulence of a ship’s wake and aren’t easily fooled by the decoys commonly used by warships.

Military planners worry about torpedoes launched fromIran’s three Russian-built Kilo submarines, as well as approximately four North Korean Yono-class mini-submarines, the class of vessel that sank a South Korean warship in 2010, killing 46 sailors.

Iran’s mini-subs cannot range far or stay long under water. But in the close quarters of theStrait of Hormuz, they could be easily positioned for attacks.

Iranalso is known for its fleet of hundreds of small speedboats that can carry everything from machine guns to large antiship missiles. While a single speedboat may not imperil a warship, a swarm of small boats could overwhelm a larger ship’s defenses. In early 2008, a cluster of Iranian patrol boats sailed close to a convoy ofU.S.warships. No shots were fired, but the provocation underscored potential dangers.

Conventional naval vessels aren’t the only concern.Irancan deploy mines or even missiles from merchant vessels, or dhows. Such threats would be nearly impossible to spot in the crowded shipping lanes of thePersian Gulf.

Ten years ago, the Rumsfeld-era Pentagon held a top-secret war game to test aPersian Gulfscenario. A maverick Marine Corps general, Lt. Gen. Paul Van Riper, led the “Red Team,” the fictional Iranian adversary. Gen. Van Riper relayed orders to his front-line troops by motorcycle messenger, so theU.S.could not hack into his networks; he sent out speedboats armed with missiles and explosives to swarmU.S.warships. After the fictional smoke cleared, more than a dozenU.S.warships were at the bottom of thePersian Gulf.

That exercise, known as Millennium Challenge, was a wake-up call about the potential of asymmetric warfare. The Navy has since unveiled plans to boost the defenses of its ships in the Gulf.

Adm. Greenert said the Navy is interested in new robotic underwater vehicles that can search for mines and submarines and improved Gatling guns to counter Iranian small-boat attacks. The Navy has rushed to test and field a new anti-torpedo torpedo—a weapon that would potentially counterIran’s more sophisticated torpedoes.

The Navy recently announced plans to double its fleet of Avenger-class minesweeping ships in thePersian Gulf.

TheU.S.military is taking other steps. Earlier this year, the Pentagon unveiled plans to refit a transport ship as a staging platform for different kinds of missions, from countering mines to launching remotely piloted aircraft. It also could be used as a platform for launching commando operations with small patrol boats to intercept Iranian vessels, escort ships or protect oil platforms.

Beyond the waters of the Persian Gulf, military planners worry aboutIran’s expanding arsenal of ballistic missiles, built with North Korean cooperation and know-how. The Defense Department estimatesIranhas around 1,000 short- and long-range missiles that can travel from 90 to 1,200 miles, the largest inventory in theMiddle East.

The longer-range Shahab-3, which could reachIsrael, has received the most attention. ButIran’s shorter-range Scuds are on mobile platforms, allowing them to more easily evade detection.

Within striking distance of Iranian missiles are U.S. Army installations inKuwait, a command post inQatar, and the U.S. Fifth Fleet inBahrain.

While relatively inaccurate, those missiles may have the potential to strike panic or provoke a wider war if they hitU.S.allies in the region. A retired Navy officer said the missiles don’t have sophisticated targeting but could score a blind hit on a Saudi oil field, a Qatari gas production facility or a city in theUnited Arab Emirates. “Face it, how accurate does it need to be?” he said.

Officials withIran’s elite Revolutionary Guards threaten reprisals against any country used as a launch pad for strikes againstIran. A conflict withIran, then, could be a real-world test forU.S.missile-defense plans. As part of a shift from Bush-era missile defense, which focused on defendingU.S.territory from a long-range missile attack, the Obama administration has sought defenses against shorter-range Iranian missiles targetingU.S.troops overseas, as well as allies.

There is also a presumed terror threat.Iran’s Ministry of Intelligence and Security could activate so-called sleeper agents for acts of sabotage or terror attacks, according toU.S.officials. Militants sponsored or trained byIranmight attackU.S.diplomatic facilities inIraqor bases in theMiddle East.

“The assumption is that there are sleeper cells all around that would be activated in some way,” said retired Marine Corps Gen. Anthony Zinni, the former head of U.S. Central Command, theU.S.military headquarters that oversees the region.

Military professionals generally agree thatU.S.forces would quickly overwhelmIran’s air defenses. Former Air Force Chief of Staff Gen. T. Michael Moseley, an architect of the shock-and-awe air campaign against Saddam Hussein in 2003, said aU.S.air campaign could inflict “a sense of strategic paralysis” onIran’s air defenses by targeting command-and-control facilities, early warning radars and airfields.

But, Gen. Moseley said, Iran’s air-defense system—comprised of mostly older U.S. Hawk missiles and some surface-to-air missiles of Soviet design—was “not a trivial” threat to U.S. aircraft. “Anything that shoots at you merits some respect,” he said.

Military officials saidIran’s forces shouldn’t be entirely discounted. In the late 1970s, the Iranians “had all the latest and greatest stuff” from theU.S., said Richard Brown, a Navy fighter pilot who helped train Iranian aviators inIsfahan.

Iranmaintains a fleet of Vietnam-era F-4 and F-5 jets, according to defense analysts; its helicopter fleet, which includes versions of the Chinook, the Cobra and the Huey, would look familiar to aU.S.military veteran.

It still flies the F-14 Tomcat, made popular in the movie “Top Gun.”Iranwas the only foreign military customer for the F-14, once a high-endU.S.fighter.

Today, many of these aircraft are close to the end of their service life. Aviation experts sayIrankeeps them airworthy by cannibalizing and reverse-engineering spare parts.Iranbought nearly 80 of the F-14s. Analysts believe around 25 can still fly. By comparison,Saudi Arabia’s fleet of U.S.-made F-15 fighters outnumbersIran’s F-14s by about six to one.

Veterans of the 1970s training programs inIrandoubt the Iranians have maintained enough parts to keep its U.S.-made aircraft in flying condition. Ric Morrow, a naval aviator who worked on the Iranian F-14 training program, said what remained of the Iranian air force would be “no contest” for theU.S.

The air-to-air weapons built forIran’s aircraft also may have outlived their shelf life. Steve Zaloga, a missile expert at the Teal Group, a defense consultancy, said the solid rocket motors and batteries go bad over time.

Some evidence suggests, however, thatIranoperates a global procurement network to buy spareU.S.military parts. Since 2007, the U.S. Justice Department has handled more than two dozen export and embargo-related criminal prosecutions related to military spare parts destined forIran.

Clif Burns, an export attorney at the law firmBryanCaveinWashington,D.C., tracks such cases. He saidIranappeared to give shopping lists to independent contractors who buy parts in the world’s aviation market. “The procurement effort is pretty large and enforcement alone isn’t able to stop the flow of aircraft parts intoIran,” he said.

—Jay Solomon contributed to this article.

Write to Nathan Hodge at nathan.hodge@wsj.com

Forbes: Gold Becomes Pricier Than Platinum, That’s Rare And Scary

April 12, 2012
Great Speculations
Adrian Ash, Contributor

It’s more than “interesting” that platinum prices are lagging gold. Gold has risen nicely since the meltdown following Lehman’s collapse, with the gold price in dollars rising 130%. Until last summer, however, platinum had done better still.

Indeed, a trader “could have made a lot of money buying platinum and selling gold since Lehman Brothers,” as Philip Klapwijk, executive chairman of GFMS said Wednesday, taking analyst questions after launching the precious-metals consultancy’s new Gold Survey 2012 at Thomson Reuters‘ HQ in London.

Over the 34 months to August 2011, the white metal rose 150%, recovering faster at first even than thegold price. But it needed to, however, after it dropped two-thirds of its dollar price between March and December 2008.
Since last summer, platinum has slipped faster than gold. More notably, it’s slipped below the gold price itself, something seen for only three trading days in December 2008 in the immediate aftermath of Lehman’s bankruptcy. Before that, you have to go back to the recession of 1991…the peak of the “strong dollar” disinflation of 1984…the global stock market’s once-in-a-generation low of 1982…and gold’s big tops of Jan. 1980 and Dec. 1974 to find platinum trading cheaper than the gold price.

Gold’s latest incursion above the platinum price is “interesting,” said GFMS’s Klapwijk on Wednesday. But scary might be closer to it. Running for 145 of the last 172 trading days, it’s getting to be something of a habit, too.

“There’s a case to be made for the white metal being priced at a premium to gold,” as Klapwijk said. The two metals’ scarcity in the earth’s crust is about the same, but platinum deposits tend to be more diffuse, making extraction more costly. On the demand side, it is clearly more “useful” than gold too, with one third of annual output going to industry and another third going to make auto-catalysts according to platinum experts Johnson Matthey. Fully 85% of global gold demand, in contrast, is for store-of-value or adornment. And there’s the rub.

The vast majority of investors will always prefer gold over platinum, as Klapwijk noted this week, because its store-of-value use is so very much greater than platinum’s. You could ascribe that to 50 centuries of habit, gold being “the universal prize in all countries, all cultures and in all ages,” as physicist and polymath Jacob Bronowski put it in his Ascent of Man.

Today that history is supported by the second, stronger point which Klapwijk made Wednesday: gold’s relative lack of industrial use. That makes it a far better defense against the kind of economic turmoil suffered since our financial crisis broke in mid-2007 (platinum up 24%, the gold price up 153%), as well as the economic crises of the mid-1970s and early ’80s.

Over the last 9 months in particular, Europe’s economic crisis has affected its vehicle demand, GFMS points out. That means lower demand for diesel engines and thus platinum-based catalysts worldwide. Gold may have suffered similarly lower demand amongst Western jewelry consumers, but Eurozone investors have stepped in to pick up that slack. And their counterparts in Asiaare buying gold with both hands, according to GFMS’s new Gold Survey 2012, along with pretty much anyone else who cares to look.