Last week jittery waves crawled through the markets when Iranian television reported that an explosion occurred near its only nuclear reactor. The stock markets briefly roiled and oil prices jumped. Initially it was feared that a missile had hit, fired either by Israel or the United States both of who are accusing the Iranian government of secretly developing nuclear arms. Washington denied knowledge of the blast and Iranian television later reported it was a fuel tank falling from a plane and then later said it was because of a blast linked to the construction of a nearby dam. Either way the message was clear to the markets. A real strike in Iran could shake the world.

A bomb of a different sort fell on Tuesday when South Korea announced that its Central Bank will diversify its currency reserves. There is talk that other central banks will back away from the US$ as well. Indeed there is evidence to suggest that this action is already underway and if that is correct then the demise of the US$ as the world's reserve currency is already underway. This economic bomb hit the US$, then the stock markets and later oil markets soared over $51 and Gold soared $7 over $430. South Korea, who has one of the largest foreign exchange reserves in the world, has to be taken seriously.

Later South Korea issued a note that the plan to diversify their foreign exchange reserves was not new and didn't say specifically that they would sell the US$. Certainly with $200 billion in US Treasuries they are not going to do that without seriously disrupting the bond market. Markets steadied on Wednesday so the message was effectively damage control.

Some other economic bombs lurking in the background are the Russians and possibly other oil producing nations demanding payment in Euros rather than US$ for oil and the birth of a nascent oil trading market in Tehran that could threaten the supremacy of London's International Petroleum Exchange. In the case of the oil trading market the major oil producing countries are determined to take control of trading advising that the current markets in London and the NYMEX in New York do not work in their favour. Neither of these stories is new either.

The potential for war of either the real or economic kind is what makes markets roil and raises the stakes for the potential of a financial meltdown. For months now the rhetoric has been rising between Tehran and Washington over the potential for Iran's nuclear industry to produce nuclear weapons. The Europeans have been trying to cut a deal with Iran now for some time in order to keep the problem under control. The Iranians deny that they are aiming to produce nuclear weapons. And on it goes. In 1981 Israel pre-emptively struck nuclear facilities in Iraq on the basis that the Iraqis were going to produce a nuclear weapon. A strike today in Iran could trigger a global conflict as both China and Russia have significant ties to Iran through oil agreements in the case of China and Russia supplying military assistance.

But Iran is seen by the US and Israel as supporting terrorism through Hezbollah and other groups. Iran has been accused of supporting the insurgents in Iraq. Tehran has close ties with groups who won the recent election in Iraq where numerous Iraqi Shiite clerics were in exile in Tehran. Conflict has existed for years between Israel and Iran and it is no secret that Israel would like to see Iran taken out. This also fits with the agenda in Washington who sees regime change as essential for the countries deemed to be anti-American or as they put it "countries of tyranny". This includes Iran and Syria who is being accused of being behind the recent assassination of Rafik Harriri the former Lebanese Prime Minister. Iran and Syria have vowed to assist each other should they be invaded. Other countries in the Mid-East on the list include Saudi Arabia and Yemen. The Mid-East sits on the biggest oil reserves in the world and currently supplies the US with about 21% of its imports.

Amongst other countries on the US hit list for regime change is Venezuela where there is no love between the US and the Chavez government. Venezuela supplies about 11% of US oil. Recent indications are that Venezuela is signing contracts to provide more oil to China and less to the US. It has been surmised that the US was behind a failed coup d'etat in 2002. Chavez was elected as President of Venezuela and as well survived a recall vote with strong majorities following the failed coup d'etat.

Continuing to lurk in the background is the Israeli/Palestinian conflict. While efforts are being made to reach an accord with Yassir Arafat out of the way and the newly elected Mahmoud Abbas in charge many challenges remain that could derail the current shaky peace. Recall it was hard right Israeli settlers that derailed earlier peace efforts including the assassination of Yitzhak Rabin. As well Abbas has to deal with hard core groups such as Hamas. Any of these could derail the current process. Both Abbas and Sharon could face civil war and either could be target for assassins.

Despite the great claim that democracy is breaking out in Afghanistan and Iraq we are reminded that much of Afghanistan remains under the control of war lords and is effectively a narco state with one of the lowest standards of living in the world. The Iraqi election has not ended the Sunni insurgency. The party blessed by Shiite Ayatollah Sistani with close ties to Iran won the most seats in Iraq election. Al-Jaafari a former Iranian exile stands to become President. There have been calls to institute Islamic law which would be very problematic for the US. Other groups in the Iraqi coalition are unlikely to want Islamic law and the Shiite groups that won will have to compromise or there is the risk of civil war. Calls have been made by numerous groups that now that the election is over that US should leave. So election or not in Iraq there remain very high risks.

What all this is pointing to is that any incident that may have already occurred or one that has not occurred could trigger war, either of the real or economic kind. Markets do not like war. The thought of it or the outbreak of hostilities does trigger sharp drops in the markets. In this case a sharply falling US$ could also trigger a bond market collapse. This tells us that the odds of a financial accident in the upcoming months has now become real and very high. While it might not happen the question that needs to be asked is "do we feel lucky"? Given the high level of debts and leverage that exist in North America today coupled with the low level of savings this heightens the concern of a financial meltdown. We are potentially staring at a precipice or as Financial Sense would say "we are facing a potential perfect storm".

We thought it would be interesting to provide a short summary of US wars in the 20^th century and their impact on US stock markets (using the Dow Jones Industrials as the proxy). The general observation is that threats of war or a trigger event (i.e. Pearl Harbour, 9/11) are more likely to trigger market sell offs while invasions and an appearance that the war is going well triggers huge market rallies. An unexpected escalation of the war also triggers market sell offs. The 20^th century and early part of the current century has seen the US involved directly in seven wars starting with the Spanish American War that got underway at the end of the 19^th century. We did not count the long Cold War (1945-1989) as that involved no direct conflict but instead proxy wars. Nor did we count the Balkan Wars of the 1990's where the US involvement was through NATO.

We follow the wars chart with a weekly chart of the S&P 500 and of Gold as we believe that Gold will be a major beneficiary of a market meltdown. We have placed some interpretations on the charts. Please keep in mind that these are interpretations only and there may be others as well. Elliott wave is subject to numerous interpretations even by serious devoted Elliott wave practioneers. We have only looked at big waves and made no attempt to interpret sub waves that can change the entire count.