Money and Markets

If you think the worst has passed in the Middle East, and you recently altered your investment philosophy as a result, listen to me: You are going to regret it.

In the last few days, investors all over the world have breathed a sigh of relief. They think the cease-fire in the Middle East has solved many of the geopolitical problems there. And they think the stand-off with Iran will somehow fade.

My view: The world is stark raving mad, and anyone who thinks otherwise is going to watch their investments get plowed right over.

Right now, the markets are in a holding pattern ... seemingly calm ... trading in narrow ranges. But have you ever watched a pot of water boil? Until it really starts roiling, you'd never know there's heat below the surface.

In a moment, I'll tell you how to avoid getting burned by the chaos ahead. But first, I want to explain why you need to keep your guard up ...

U.S. and Iran on a
Collision Course

As I predicted in my issue of Money & Markets last Thursday, Iran's madman President Ahmadinejad has defied the UN by rejecting its proposal to stop nuclear enrichment.

What will the next move be? President Bush wants economic sanctions as early as next week.

Although Ahmadinejad is dropping hints that he's willing to sit down and talk, don't you buy it! He's merely trying to stall, while his nuclear program inches ever closer to producing an actual nuclear weapon.

In fact, Iran is already showing signs of aggression. Just two days ago, Iranian Navy supply ships surrounded a Romanian oil rig in the Persian Gulf.

One of the ships opened fire on the platform after the captain was denied entry to the rig. Then, five Iranian commandos armed with Kalashnikov machine guns climbed onto the platform, rounded up the rig's crew onto the helicopter pad, and tied up the rest in the cafeteria.

This news wasn't widely publicized here in the U.S., but it's a subtle sign of what's to come. The date: August 22, the day I told you was so important in Shiite history.

Don't kid yourself for one minute -- Iran is on a mission to become the dominant force in the entire Middle East, and to position itself as the leading alternative to the West.

Iran has been emboldened by the events in Iraq ... by the Hezbollah's so-called "psychological victory" over Israel ... and by their progress with nuclear weapons. They think they have the upper hand now, and they're going to play it.

So, if you hear any news that Iran is willing to sit down at the negotiating table with the West, don't expect any meaningful progress. Iran will just be buying time until the day that it's ready to directly confront the U.S. We seem destined to end up at war with Iran.

And remember ..

The Hezbollah Crisis
Is Far from Over

I happen to have a source inside Israeli Intelligence. I can't reveal who it is. But she's very reliable and almost always on target.

Her view, based on good information: Don't be surprised if the cease-fire fails within a week or two.

She feels Hezbollah is likely to fire the next round of shots to break the cease-fire, once Lebanese troops fully arrive in the southern region.

Hezbollah's strategy: If they can trigger another battle -- especially while Lebanese and UN peace-keepers are present -- Israel's inevitable retaliation would further hurt Israel's reputation with the international community.

And don't forget the Iran connection. My source tells me the country is already sending new supplies to the Hezbollah, north of the Litani River. Such a quick re-arming is significant, and lends credence to the theory that the conflict will soon erupt all over again.

Don't Let Your Guard Down:
Prepare Yourself Now

Remember: Just because Wall Street is hoping this will all blow over doesn't make it happen.

So, if you've let your guard down recently -- for whatever reason -- I urge you to get your financial house back in order right now ...

First, seriously consider putting some of your money in gold!

The yellow metal is back down to the $625 level, a great entry point. Especially considering the latest demand stats, just released from the World Gold Council:

• Investment demand for gold jumped a whopping 19% year-over-year at the end of June.

• Gold jewelry demand reached a quarterly record of $11.4 billion.

• Second-quarter total gold demand jumped 23% to a record $16.2 billion.

• And gold demand is on pace to reach a record $62 billion this year!

Importantly, through June 30, $2.72 billion worth of gold flowed into gold Exchange Traded Funds. That's 28% more than last year, and 55% more than all of 2004!

If you like bullion, use 1- and 5-ounce gold ingots. Alternatively, look at the StreetTracks Gold Trust (GLD). It trades like a stock, but each share represents one-tenth of an ounce of gold.

Second, keep your cash in a safe money market or short-term Treasury-only fund. I consider this absolutely mandatory. Yields are now as high as 5% and I can't think of a higher quality investment in the world today.

Third, avoid long-term bonds.

Fourth, if you don't own key oil and gas shares, stop waiting! Or if you recently sold some, buy them back now!

If you want broad exposure, consider the Oil Service HOLDRs (OIH) Trust ETF, which contains a number of major companies. With oil's pullback, now is a great time to buy!

Best wishes,