When I was a boy, cartoonist Charles Schulz introduced a new comic strip called Peanuts. Its central premise was children having the same problems as adults, and it was an instant hit.

There were several recurring themes and, each autumn, the cartoonist would have his main character, Charlie Brown, attempt to fly a kite. At first all would go well, and Charlie Brown would build up his hopes, only to have them dashed when a tree would snag his kite and eat it.

This theme was endlessly enjoyable, as it reflected a syndrome familiar to all adults. The cartoonist was careful to ensure that he could do new variations on the theme every autumn, due to the fact that Charlie Brown never succeeded. At the end of the strip, the tree always ate his kite.

And so it often goes in the adult world. Albert Einstein famously said, “The definition of insanity is doing the same thing over and over and expecting different results.”

And, yet, in every era, we can see this strange behaviour play itself out, time and again.

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People go to casinos, imagining that, somehow, the casino will lose and they will win. They buy lottery tickets with odds of hundreds of thousands to one against them.

And, amazingly, they invest in the stock market, not just badly, but in the very same pattern that has historically proven to virtually guarantee loss. More amazingly, this is not the behaviour of the occasional loser; it’s the approach adopted by the great majority of investors and is one that they staunchly defend as “wise and informed investing,” right until the crash that cleans them out.

So what, then, is this pattern? Well, generally, a potential investor contacts his broker and asks him if there’s anything he can recommend. The broker virtually always says yes—that whilst some stocks do not earn his endorsement, there are others that he feels are almost certain to go up.

Should the investor then buy, he can count on the broker to push the prospect of further investment, whenever one of his recommendations has risen in value. (He’s less likely to get in touch if his recommendations go down.)

As each bull market unfolds, the broker advises his clients that, if they don’t continue to buy, they’ll be “missing out,” and the opportunity for enrichment will pass them by.

Each investor who’s roped in by this spiel reinforces the broker’s prediction, expanding the bull market and attracting more and more investors to get into the game.

Then, something very interesting happens.

In a major bull market, when investors have reached their limit, they’re advised that they can buy on margin and increase their position. This is acknowledged as being risky in normal times, but these are not normal times. This is the mother of all bull markets, and “the sky’s the limit.” The investors dive in.

When they become so strapped that they cannot buy on margin any further, many investors, believing that they’re on the cusp of getting rich, borrow money privately to buy on margin and, in so doing, become dramatically leveraged, but they do so because the broker promises that the bull market is going “to the moon.”

But, like all bubbles, this one, too, eventually pops. Naturally, Wall Street doesn’t want an uncontrolled collapse of the market (after all, they wish to get themselves out before a crash), so, their ideal scenario is to create a controlled crash. Once the writing is on the wall, they themselves sell out, just prior to a trigger that will collapse the market.

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In 1929, this was achieved through a sudden raise in interest rates. Since investors were up to their eyes in debt, any rise in interest rates meant that they’d default on their loans. The brokers would then unilaterally sell off their clients’ portfolios (as they are entitled to do in a margin call). They, of course, hope to salvage the maximum amount possible for themselves, so they do their best to liquidate everythingovernight.

The customary reaction by investors is to be stunned that a crash occurred that they didn’t see coming and that they woke up one morning to find that they’d sustained a massive loss.

In the early 2000s, a small number of people (myself included), predicted a stock market crash. I estimated its occurrence to be in 2007, so, in order to be out well ahead of time, I was out in 2006. (As it transpired, I was out earlier than necessary, for which I had no regret.)

Prior to the crash, I warned friends and associates, who invariably said, “All indicators say that the market’s still going up. If it starts to slide downward, then I may sell.”

I repeatedly reminded them that a major bull market never ends with a whimper. It invariably ends with a major upside spike, before it suddenly plummets downward.

And this is not a coincidence. It’s based upon the behaviour stated above.

What I find truly amazing is that most investors never learn. Even after they’ve been cleaned out once, they simply find another “better” broker and start all over. Incredibly, the average investor will work hard at his regular job and do all he can to get better at it, then, whatever savings he can create that year, he hands over to someone else to manage. He makes little or no effort to educate himself in the patterns of bull and bear markets so that he can avoid another failure.

He repeatedly takes his kite out to fly it amongst the trees.

Many investors make the same mistake over and over, throughout their careers, working hard for their pay, then literally throwing away their savings.

Today, we’re approaching the end of a major bull market. This one is especially interesting, in that, since 2008, we’ve been in a depression that virtually no one acknowledges. Those on Wall Street state with confidence that, despite increased unemployment, manufacturers leaving the country in droves, diminishing GDP, extensive business closures, etc., “This can’t be a depression if the market is up.”

Unfortunately, what we’re really witnessing is the world’s longest sucker-rally.

In the 1930s, a popular, if bitter-tasting, joke was that, “When every shoeshine boy is offering stock tips, it’s time to get out of the market.” That advice arrived too late.

We’re presently at that point again, except that the profession of shoeshine boy has disappeared.

Incredibly, even heads of banks and Wall Street firms are now warning that the end is near. Perhaps the most unlikely expert of all to join this group is Lord Jacob Rothschild, who has now said, in a semi-annual report,

We do not believe this is an appropriate time to add to risk. Share prices have in many cases risen to unprecedented levels at a time when economic growth is by no means assured.

Clearly, he was careful not to employ phrasing that would be overly alarming, but he did make the quote to explain why he has dumped massive amounts of US assets (i.e., he’s getting out before the crash).

Meanwhile, the average investor, who contributes the oxygen to create all bubbles, is once again flying his kite, convinced that the tree will not once again eat his kite.

Regards,

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

– Former U.S. Congressman Ron Paul

He who holds the gold makes the rules.

– Old saying

Chris Lowe: Why did you start researching the petrodollar system and its potential unraveling?

Nick Giambruno: This has been on my radar since 2006. That’s when Ron Paul, then a Republican congressman, spoke to Congress about the collapse of the dollar-based global monetary system.

As I recently told my Crisis Investing readers, I think it’s his most important speech ever. It’s called “The End of Dollar Hegemony.”

During the speech, Dr. Paul lays out why a global monetary order built around a fiat currency is doomed to fail.

Crucially, he pointed out the one thing that would precipitate the US dollar’s collapse—the end of the petrodollar system.

I recommend reading the speech in full. But this is the most important part:

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros.

I discussed this with Dr. Paul at a past Casey Research conference. He told me he stood by his assessment.

In a nutshell, he’s saying we’ll know the dollar-centric monetary system is on its way out when countries start trading oil for gold instead of dollars.

That’s already starting to happen.

Chris Lowe: To catch up real quick, why is the petrodollar at risk?

Nick Giambruno: Under the current petrodollar system, all global oil sales are made in dollars. However, the Chinese government recently announced a new mechanism that will allow oil producers anywhere in the world to trade oil for gold.

China’s new mechanism will totally bypass the US dollar and the US financial system… along with any restrictions, regulations, or sanctions from Washington. So for many oil producers, it will be much more attractive than the petrodollar system.

I call it China’s “golden alternative” to the petrodollar. Whatever you call it, though, it will allow for the large-scale trade of oil for gold, instead of dollars.

Here’s how it will work. The Shanghai International Energy Exchange is launching a crude-oil futures contract denominated in yuan, China’s currency. This will allow oil producers around the world to sell their oil for yuan.

Of course, the yuan is a fiat currency, just like the dollar. And most oil producers don’t want large stashes of yuan. The Chinese government knows this. That’s why it’s linked the crude-oil futures contract with the option to efficiently convert yuan into physical gold through gold exchanges in Shanghai and Hong Kong.

Chris Lowe: How soon will this new system be up and running?

Nick Giambruno: I spoke with officials at the Shanghai International Energy Exchange. They told me they plan to go live with it before the end of the year, or shortly thereafter.

Chris Lowe: But isn’t that a good thing? Isn’t gold, as a currency, more reliable than the dollar?

Nick Giambruno: I think it’s high time gold played a more central role in the global monetary system. The problem is ditching the petrodollar would negatively affect the US economy.

Think about it. If Italy wants to buy oil from Kuwait… or Argentina wants to buy oil from Brazil… they have to buy dollars on the foreign exchange market first.

This creates a huge artificial market for dollars.

It means the US can simply print dollars and exchange them for real things like French wine, Italian cars, Korean electronics, or Chinese manufactured goods.

It also helps create a deeper, more liquid market for US Treasury bonds. This pushes up prices… and pushes down yields… which allows the US federal government to finance enormous and permanent deficits.

The petrodollar has allowed Washington to spend astronomical amounts of money on welfare and other benefits for over half the population. This gives Americans a much higher standard of living than they would have otherwise. Most of them don’t know this or understand how it affects their everyday lives.

Thanks to the petrodollar, Washington can also sanction or exclude virtually any country from the dollar-based global financial system at the flip of a switch. By extension, it can also cut off any country from the vast majority of international trade.

Chris Lowe: Others have argued that this has led the US Deep State into military actions against anyone who threatens the petrodollar system. Is the Deep State that scared about the effects this could have on the economy and on its position as the world’s top power?

Nick Giambruno: Let’s put it this way, world leaders who have challenged the petrodollar system have ended up dead. Saddam Hussein and Muammar Gaddafi are prime examples.

In October 2000, Saddam started to sell Iraqi oil in euro only. He said Iraq would no longer accept dollars for oil because it did not want to deal in the “currency of the enemy.”

A little over two years later, the US invaded Iraq. After Baghdad fell to US forces, all Iraqi oil sales were switched back to dollars.

And thanks to WikiLeaks’ release of Hillary Clinton’s emails, we know that protecting the petrodollar—not humanitarian concerns—was the main reason for America’s involvement in the ousting and killing of Libyan leader Muammar Gaddafi.

According to the leaked emails, the US—along with France—feared Gaddafi would use Libya’s vast gold reserves to back a pan-African currency. This gold-backed currency would have been used to buy and sell oil in global markets. It would have likely displaced the CFA franc—a version of the euro used in 14 central and west African nations.

As I’m sure you recall, the US and France backed a rebellion that overthrew Gaddafi in 2011. After his death, plans for the gold-backed currency—along with Libya’s 4.6 million ounces of gold—vanished.

Chris Lowe: What’s Russia’s role in all of this?

Nick Giambruno: The dollar is not just a currency. It’s a political weapon… and Washington is not shy about using it.

Most recently, it tried to punish Russia for its actions in Ukraine by imposing economic sanctions. This made it harder for Russia to access the dollar-based financial system. So it’s no surprise that Russia struck a deal to sell oil and gas to China for yuan afterward.

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Chris Lowe: How big a deal is it that Russia is working with China on bypassing the dollar?

Nick Giambruno: Russia is one of the world’s largest energy producers. And China is the world’s largest energy importer. Historically, they would trade with each other exclusively in US dollars.

But the Shanghai International Energy Exchange futures contract will streamline and solidify the process of selling oil to China for yuan—or effectively for gold.

When two of the biggest players in the global energy market totally bypass the petrodollar system, it’s a very big deal.

And it’s not just Russia and China. Other countries want to sidestep the US financial system and US economic sanctions, too. China’s “golden alternative” will give them the option to do just that. This will make the US dollar a much less effective political weapon.

Take Iran, for example. It’s the world’s fifth-largest oil producer. And it’s now accepting yuan as payment for its oil. So is Venezuela, which has the world’s largest proven oil reserves. I think others will soon follow.

This all makes perfect economic sense. Oil-producing nations can continue with the petrodollar system and sell their oil for dollars. But there’s not much financial incentive to do that anymore. The Fed has deliberately pushed down US Treasury yields to “stimulate” economic growth. Plus, the system exposes US rivals to the whims of Washington.

Now oil producers have a second option. Through China’s “golden alternative,” they can sell their oil for yuan, then quickly and easily convert it to gold.

Unlike the dollar, gold is an international form of money with no political risk. From the perspective of an overseas oil producer—especially one with a poor relationship with the US—this is a no-brainer.

Chris Lowe: Russia may be one of the world’s largest oil producers. But Saudi Arabia is still the world’s largest oil exporter. And a lot of that oil goes to China, the world’s largest oil importer. The Saudis were also America’s partner in the petrodollar agreement back in 1974. Can’t the House of Saud use this influence to protect the petrodollar system?

Nick Giambruno: For now, the Saudis are refusing to participate in China’s “golden alternative.” That’s because selling oil for anything but dollars would break the petrodollar deal they made with the US back in 1974. Remember, the Saudis agreed to sell their oil exclusively in dollars in return for US arms and military protection.

Last year, on the campaign trail, Donald Trump said, “If Saudi Arabia was without the cloak of American protection, I don’t think it would be around.” He’s absolutely correct. If the Saudis started selling oil for yuan, they would immediately lose American diplomatic and military protection.

But Saudi Arabia is already looking for alternatives to American protection.

Chris Lowe: Who is it turning to?

Nick Giambruno: This is where the story gets really interesting. Russia and Saudi Arabia have been enemies for decades. The Saudis, along with the US, supported the Afghan mujahideen that drove the Soviet Army out of Afghanistan. The Saudis also supported a number of Chechen rebellions against Russia. And more recently, the Saudis and Russians have been on opposite sides of the Syrian Civil War.

But recently, the Saudi king—along with 1,500 members of his royal entourage—visited Moscow. It was the first official visit by a Saudi king to Russia. The trip coincided with a $10 billion Saudi investment in Russian energy projects and a $3 billion arms deal.

As part of that deal, the Saudis will buy Russia’s S-400 missile system. It’s arguably the most capable air defense system in the world. It’s a powerful deterrent to even US fighter jets.

Chris Lowe: I didn’t know the Saudis bought Russian weapons systems.

Nick Giambruno: They didn’t… up until now. Ever since the birth of the petrodollar, the Saudis have depended on American military protection. After all, it’s what they get in return for pricing their oil in dollars.

Chris Lowe: So why would the Saudis enter into an arms deal with Russia?

Nick Giambruno: The Saudis are hedging their bets. First, they’re not buying an American-made air-defense system. Second, they’re buying a Russian air-defense system that’s capable of deterring an American attack. The House of Saud is making significant moves, in other words, to give itself alternatives to American protection.

Chris Lowe: Is there any other evidence that Saudi Arabia is moving away from the US?

Nick Giambruno: Last August, Saudi Arabia announced it was willing to issue “Panda bonds” to finance its government spending deficit. These are yuan-denominated bonds from non-Chinese issuers that are sold in China.

This is remarkable. The Saudi currency, the riyal, is pegged to the dollar. Up until this point, Saudi Arabia has exclusively used US dollars for all of its major financial initiatives. Issuing debt in yuan is a significant move. It means that financially, Saudi Arabia is drifting closer to China.

Chris Lowe: Why does Saudi Arabia need to hedge its bets like this?

Nick Giambruno: A few years ago, Saudi oil made up over 25% of Chinese oil imports. They were Beijing’s No. 1 supplier. Today, the Saudis’ market share has dropped below 15%.

The Saudis are losing massive market share and getting pushed out of the biggest oil market in the world—mainly because they refuse to sell oil to China in yuan.

China has made itself clear. It’s willing to expand business with anyone who will accept yuan as payment.

Chris Lowe: If the Saudis bow to Chinese pressure, where does all that leave the petrodollar system?

Nick Giambruno: The Saudis haven’t made a clean break with the US and the petrodollar—yet. But they are drifting toward China financially and Russia militarily. These moves are already sidelining the petrodollar. The Saudis are clearly setting up the option to dump the petrodollar.

If the Saudis start to sell oil to China in yuan, it would kill the petrodollar overnight.

Short of that, things still look very dire for the petrodollar. What is baked into the cake—thanks, in large part, to China’s “golden alternative”—is the petrodollar’s significant erosion.

Chris Lowe: What specific advice do you have based on this prognosis?

Nick Giambruno: The increased demand for gold from China’s “golden alternative” to the petrodollar is going to shock the gold market. And this demand shock clearly hasn’t been priced into the gold market yet. As many of your readers will be aware, gold is still down significantly from its 2011 peak.

That’s why I am so bullish on gold right now. As the petrodollar dies, gold is going to replace it as the go-to currency for the oil trade. That makes the yellow metal the single best way to profit from this major shift in our monetary order.

I started warning about the end of the petrodollar late last year. That’s when I told Crisis Investing readers that the death of the petrodollar would be the No. 1 black swan event of 2017.

Eventually, people will look back and see China’s “golden alternative” as the catalyst that made it happen.

Editor’s Note: Few people appreciate how unstable America’s monetary system is. Our colleague and financial world legend Bill Bonner has an unparalleled track record for making spot-on political and economic predictions… and he says we’re teetering on the edge of a full-fledged economic shutdown. Click here for more straight from Bill.

When I visited the memorial at Pearl Harbor, I briefly wondered if the Japanese were simply suicidal.

Why start an uncertain battle with a much more powerful opponent?

Japan’s leaders knew the US military was far superior when they attacked Pearl Harbor, Hawaii on December 7, 1941. The attack killed over 2,400 people and brought the US into World War 2.

But Japan’s leaders had a powerful reason to gamble with their nation’s fate…

Access to energy.

For Japan—an island nation totally dependent on imports—access to oil was a matter of life and death. The country needed to secure its energy supply. That made attacking Pearl Harbor a practical proposition.

Turns out, the Japanese thought not attacking Pearl Harbor was suicidal.

Here’s why…

In the early ’40s, Japan had big plans to dominate East Asia. The imperial Japanese military was on the march. And the US was the only country that could stop it.

The US wanted to block Tokyo and protect its geopolitical position in the region. So it moved to restrict Japan’s access to oil, which Japan needed to feed its economy and war machine.

Not surprisingly, the Japanese considered this hostile and aggressive. The US government didn’t expect it to provoke an attack, though.

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The Assistant Secretary of State for Economic Affairs at the time, Dean Acheson, said, “No rational Japanese could believe that an attack on us could result in anything but disaster for his country.”

The Japanese disagreed.

They knew they would run out of vital commodities soon. So they had two choices… let the US slowly strangle their country and ultimately surrender… or take their chances on a risky war against a vastly superior opponent.

In Japan’s samurai culture, surrender was the ultimate disgrace.

Death in battle was better. So they chose option two. It was the only honorable choice.

Japan’s leaders thought the Pearl Harbor attack could knock the US Navy out of the Pacific for at least six months. This would give Japan a sizable window to secure its energy sources without US interference—and to fortify its military positions across the Pacific.

By the time the US could respond, it would face a deeply embedded opponent and decide it was best to leave East Asia to Japan.

That was Tokyo’s plan, at least.

In reality, Japan did successfully capture Singapore from the British. It was an enormous victory. Winston Churchill called it the “worst disaster” in British military history.

And, after a string of big wins during their six-month window, the Japanese were entrenched. They appeared unbeatable. Their leaders hoped this would sap US morale so much that Washington would seek a compromise.

But President Roosevelt did not want to compromise.

Many believe he was actually waiting for the perfect pretext to sell a hesitant US public on another world war. Some even claim the US had deciphered Japan’s military code and knew the Pearl Harbor attack was coming.

In any case, the Japanese could not have been more wrong. Ultimately, their decision to strike Pearl Harbor culminated in the atomic bombings of Hiroshima and Nagasaki, total defeat, and unconditional surrender. Even today, the US still maintains military bases in Japan.

Today, Japan is in the midst of another energy security crisis.

Right now, it depends on imports for over 90% of its energy needs. Tokyo won’t go to war over it this time. But this crisis could lead to enormous profits in the world’s most hated resource market.

Earlier this year I traveled over 25,000 miles to Japan—and Kazakhstan—to find out how to profit from this historic opportunity.

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The World’s Most Hated Commodity

On March 11, 2011, one of the largest earthquakes in history hit off the coast of Japan. The earthquake, and the tsunami that followed, killed thousands of people and caused over $200 billion in damage.

The tsunami also caused a nuclear meltdown at Japan’s Fukushima power plant, which released radioactivity into the air. It was the worst (and only) nuclear disaster since Chernobyl. Afterward, Japan took all 54 of its nuclear reactors offline.

Japan suddenly needed a major new source of energy.

The country has a law dating back to the 1970s that requires it to stockpile at least five years’ worth of energy supplies. Uranium, which fuels nuclear power plants, is the only feasible way for Japan to do that. It’s simply not practical for Japan to stockpile enough coal, oil, liquefied natural gas (LNG), etc.

For now, Japan is making an emergency exception to its five-year law because of Fukushima. But this puts it in a very vulnerable geopolitical position, especially since tensions with China, its historical rival, are increasing.

The Japanese know that relying on the kindness of foreigners for their energy security is foolhardy. This situation can’t continue indefinitely.

Eventually, Japan will have to bring most of its nuclear power plants back online. However, restarting idled plants is not as simple as flipping a switch. And, with LNG prices near recent lows, they haven’t had an immediate need to do so.

Nonetheless, Japan recently stated that it would like nuclear power to account for as much as 22% of its energy mix by 2030.

Japan is just one factor driving the coming uranium boom.

Even if Japanese demand for uranium doesn’t return soon, the enormous amount of new demand from China’s new nuclear plants will more than offset it.

Before Fukushima, Japan was a major source of demand for uranium. The country had embraced nuclear energy in the 1960s, despite being devastated by nuclear weapons in World War 2.

Not surprisingly, global demand for uranium tanked after Fukushima. A global supply glut followed.

The uranium price crashed from around $85 to under $30. Then it continued sliding to around $18 per pound, far below the cost of production.

That was last November, and it appears to have been the bottom.

That same month, I said uranium had entered a new bull market and recommended a “best of breed” uranium company in Crisis Investing.

Uranium is now on a confirmed uptrend, but it’s still far below the cost of production. It’s still near the moment of maximum pessimism.

No other commodity has more upside and less downside right now.

The uranium market is one of the best crisis investing opportunities I’ve ever seen.

Psychology plays a big part in all this. After Hiroshima, Nagasaki, Chernobyl, Three Mile Island, and of course Fukushima, it’s easy for certain media and politicians to villainize uranium.

Besides that, investors are terrified that uranium prices have fallen over 85% from previous highs. I don’t know of a market where the sentiment is worse.

This is all good news for us.

Nuclear power delivers immense value to its users, there’s no substitute for it, and production is falling while demand rises.

This situation only has two possible outcomes:

1. Uranium prices don’t go up. Miners have no incentive to produce. Nuclear power plants run out of uranium, and the lights go out for billions of people.
2. Uranium prices go up and incentivize enough production to meet the demand.

There are no other options. Which one do you think is more likely?

Right now, the current uranium supply/demand imbalance is setting the stage for the next uranium boom.

Now is the time to get positioned for the same kind of explosive returns we’ve seen in previous uranium bull markets.

Until next time,

Nick Giambruno
Senior Editor, International Man