By David Galland, Managing Editor, BIG GOLD from CaseyResearch.com

In the minds of most, an attack by the U.S. or its allies on Iran would be an act of extreme foolishness. And that's putting it charitably.

Not that the U.S. would actually lose, at least not in military terms. While the precarious position of the U.S. armada in the Persian Gulf--the narrow shores of which are crowded with all manner of ship-killing missiles, including the deadly Chinese C-802 with its 98% hit rate --all but assure a loss of American life on a scale of Pearl Harbor, the Iranians, like the Japanese in WWII, have no real chance of prevailing.

The U.S. might lose the battle for the Persian Gulf, but it would certainly win the short conventional war that would follow.

But that assessment doesn't mean the U.S. would come out a winner in the long run; as the minor-league skirmish in Iraq demonstrates on a daily basis, boots on the ground -- a prerequisite to proclaiming victory -- are boots that quickly become muck-bound.

In fact, the only real winner, should hostilities break out, would be investors in precious metals and energy plays.

The True Cost of War

While the upside for oil in a shoot-out with Iran is clear, there are several reasons why gold and silver will also rally, and strongly so.

One, of course, is the long and unblemished history of the precious metals as a crisis hedge.

Another, less obvious, is that an expansion of the war in the Middle East could very well be the load of straws that break the back of the U.S. dollar. Or, less metaphorically, the direct and indirect costs associated with the war would hurry along the monetary crisis that is already inevitable.

You see, war is not cheap. The price tag on the Iraq War alone is already credibly estimated to ring in at over $2 trillion by the time the sand eventually settles.

The cost of expanding the war to Iran, a conflict that would invariably boomerang back to the "new" Shi'ite-controlled Iraq -- as well as Muslim populations from Pakistan to Indonesia and everywhere in between -- would put immense pressure on the U.S. Treasury. The raging river of U.S. deficit spending would, almost overnight, turn into a Niagara Falls.

Especially as the war -- which, given its scope, could rationally be called WWIII -- would be accompanied by upward-spiraling oil prices.

As the chart below shows, gold tracks oil fairly closely. The world runs on energy, and for the foreseeable future, most of that energy comes from oil. As oil prices rise, therefore, so does price inflation... an environment that decidedly favors gold.

War or No War?

Just because attacking Iran would be an invitation to disaster doesn't mean that an attack won't happen. Governments are capable of the most egregious blunders, blunders that in the 20/20 hindsight of history are viewed with incredulity. Among the very long list, we could point to the decisions of both Napoleon and Hitler to invade Russia. And Kennedy's choosing to step into the boots abandoned by France in the rice paddies of Vietnam. And those are just the palest of scratches on the surface.

In the case of Iran, our grandchildren may some day look back and identify October of 2006, when the U.S. deployed a carrier battle group led by the U.S.S. Dwight D. Eisenhower to the Persian Gulf, as being the first spark of the flame that led to conflict. That carrier group has since been joined by the U.S.S. John C. Stennis (March 27), and the French carrier Charles De Gaulle. On May 10, the nuclear powered U.S.S. Nimitz super carrier, the lead ship of its class and one of the largest warships in the world moved into the gulf to relieve the Eisenhower. This is only the second time in history that the U.S. has maintained two carrier groups in the narrow and dangerous waters of the Persian Gulf: the first was during the Iraq war in 2003.

And the saber rattling goes on. At a recent UN conference, the U.S. warned that the Iranians may plan to withdraw from the Nuclear Non-Proliferation Treaty, as North Korea did in 2003. The underlying message: "And look what the Koreans have done since." At the same time, Iran's president is touring the Persian Gulf states, doubtlessly trying to rally support for his cause.

Even if the U.S., or Israel, is not intending to strike, who's to say the Iranians, feeling threatened, won't give themselves a fighting chance by striking first? Or, that a terrorist cell won't unleash missiles from the Iranian shores to get the ball rolling. Once the shooting starts, who fired the first shot won't much matter. What will matter are the consequences.

And among the most immediate of those consequences will be, according to the Iranians, a closing of the Strait of Hormuz, the only sea route through which oil from Kuwait, Iraq, Saudi Arabia, Bahrain, Qatar and most of the United Arab Emirates can be transported.

That means a halt in the shipment of the approximately 16 million barrels of oil that transit through the Strait every day, roughly 20% of the world's daily oil production. By conservative estimates, this alone could send oil to $100 per barrel.

As a preview, consider the oil crisis in the '70s, when members of the OPEC announced they would no longer ship petroleum to nations supportive of Israel, i.e., the U.S. and its European allies... crude spiked 134.6% increase in a 30-day period. Simultaneously, gold rallied for a 72% year-over-year increase in price.

But today, the situation is far more dire. That's because, today, the U.S. dollar is already under extreme pressure due to decades of prolific government spending, spending only made worse by the Iraqi war.

Today, there are over six trillion U.S. dollars in foreign hands, and worse, those dollars now serve as the world's de-facto reserve currency, littering the vaults of central bankers from Australia to Zanzibar and all the letters in between. That is an unprecedented occurrence in the history of humankind. A further loss of faith in the U.S. government, an inevitable reaction to an expanding war, and sure knowledge of the extraordinary direct and indirect costs of that war would only accelerate and exacerbate the monetary crisis now looming on the horizon.

Bet on war? Despite the saber rattling, it's still a coin toss. But it seems to us, a coin toss gold investors can't lose on.

That's because, on one side of the coin we have the status quo -- an inevitable monetary crisis -- while on the other we have a war with Iran, sending gold straight to the moon.

Either way, it seems extremely rational to be diversifying into gold -- and for the real upside, quality gold stocks -- at this critical point in time.

We are in uncharted waters, every bit as dangerous as the overcrowded Persian Gulf.

David Galland is the Managing Editor of BIG GOLD, from Casey Research. For over 27 years Doug Casey and his team have been helping investors profit from contrarian opportunities with the potential to deliver 100% or better profits within the next 12 months. BIG GOLD, a new monthly newsletter, provides time-strapped investors with a one-stop source for critical analysis on today's accelerating gold and silver bull markets and in-depth information on the world's leading gold mining companies, gold ETFs, precious metals mutual funds, and much more. Click here for a risk-free 3-month trial with money-back guarantee.