Living in worrying times.

Below is an extract from John Butler’s (photographed above) book “The Golden Revolution, Revisted: How to Prepare for the Remonetization of Gold”.

It can be purchased here: https://www.amazon.co.uk/gp/product/1090280955/

While the Second World War might have formally ended in 1945, with Germany, Japan and their various Axis partners all signing peace treaties with the victorious Allies, there are some legacy issues of the conflict that were never fully resolved. And one of those presents an exceptional investment opportunity today.

Under long-standing cooperative arrangements, the United States maintains a significant military presence not only in Germany and Japan, but also in several other post-Axis countries. And while they have some measure of nuclear power generation capacity – Japan particularly so – none of America’s “protectorates” has ever dared acquire their own nuclear arsenal.

Indeed, these countries are prohibited under the various WWII peace treaties from doing so. But without an independent nuclear arsenal, such as that possessed by the UK, France, China, India, Pakistan, Russia and almost certainly Israel, this leaves Germany and Japan highly reliant on the United States for their defence, with the implied geopolitical strings attached.

That might not have been a problem several decades ago. But the rise of China and the resurgence of Russia pose a dilemma for these countries. This is a dilemma which the botched withdrawal from Afghanistan seems to have triggered a response to.

Within weeks of that débâcle, policymakers around the world have responded. Japan’s Ground Self-Defense Force conducted its first drills since the Cold War and Japan’s politicians announced plans to double defence spending. At the EU, former German defence minister and current European Commission president Ursula von der Leyen announced plans to build an EU military. And there was the announcement of the AUKUS deal, under which Australia plans to acquire nuclear submarines.

Becoming a nuclear power

The logical step for both Japan and Germany, and perhaps others, would be to develop their own national security guarantee. And, in the modern era, that means a nuclear deterrent. Indeed, the Germans are already threatening to use NATO’s own nuclear power against Russia, with acting German defence minister Annegret Kramp-Karrenbauer’s comments on the matter stirring up controversy.

The UK’s Lord Frost recently emphasised to an audience in Lisbon the importance of this deterrence (emphasis added)…

“The EU is obviously developing as a force in international affairs beyond the traditional areas of economic policy – navigating the rise of China and India and the changing roles of Russia and, indeed, the United States. As it does so, just offshore is a former member with the fifth largest economy in the world with some of the best universities, a seat on the P5, biggest defence spender in Europe and a nuclear power […]”

It’s not just a matter of defence though. The same nuclear topic can be found when it comes to energy security too.

Japan and Germany are both famously competitive in export markets, and famously dependent on energy imports. Historically speaking, that is not a good combination…

German and Japanese sophisticated, high-margin manufacturers are reliant on cheap energy for both their manufacturing and their consumer demand. So, without affordable energy, neither country would retain its advantage for long.

This explains Japan’s reluctance to forgo nuclear power despite the Fukushima disaster, and Germany’s eager participation in the Nord Stream 2 pipeline project to facilitate the transport of Russian-sourced gas into central Europe, despite its security guarantor in the United States having objections. Both decisions are not so surprising or controversial when viewed from the right angle – the angle of energy security.

The real Energiewende is yet to come

Germany’s growing dependence on Russian gas has become a particularly pressing topic of late, with the European gas market in disarray. While winter has yet to arrive, gas prices are soaring as it has become clear that available gas and other energy reserves are dangerously low.

A blame game has begun, with the EU pointing the finger at Russia. Meanwhile, Russia points right back at the EU, which remains reluctant to give final approval for Nord Stream 2 and begin gas transport. Meanwhile, various German manufacturers are already shutting down or limiting production in response to the higher energy prices.

But regardless of where blame is placed, no one can deny the reality: Russia does not have a particularly warm relationship with either the EU or the United States, and Germany is caught in the middle, wanting both gas and defence.

Stuck between a rock and a hard place, Germany simultaneously faces its most challenging domestic political situation of the entire post-WWII era, with neither major party able to form the majority of a ruling coalition. In other words, the German political landscape is looking Italian, where coalitions are famously broad, leading to gridlock and instability.

But if there is one area in which Germans can agree, it is that their highly successful economic model will not long survive a period of high energy prices. Thus, they have a choice to make: either remain reliant on Russian gas indefinitely, or find another source of cheap power. While there are still dirty lignite coal reserves scattered around Germany, only a huge expansion of existing coal-generation capacity would allow for a material reduction in the flow of Russian gas, along with the associated unpleasant environmental consequences.

The only other viable option for Deutschland AG – German Big Business – to remain competitive is to reverse its plans to phase out nuclear generation capacity. Already winding down for years, Germans are quickly coming to regret the decision to pivot away from relatively cheap and reliable nuclear base power to more expensive and unreliable renewables, topped up where necessary with Russian gas.

Hence it may be inevitable that, regardless of which specific coalition controls the German government over the coming years, a strategic decision will be made to build a new generation of nuclear power plants in order to restore energy independence and thereby maintain export competitiveness.

Not another Pearl Harbor

Turning to Japan, a nation historically lacking any significant fossil fuel reserves, it is understandable why the country has built up huge nuclear generation capacity over the years. But, to the extent that Japan nevertheless requires fossil fuels for certain applications, such as transportation, Japan is essentially 100% dependent on imports. This is the vulnerability which led to the attack on Pearl Harbor, no less.

As an island nation 100% dependent on energy imports, Japan must maintain freedom of navigation around its shores. Thus Japan has a huge, technologically-advanced navy of more than 150 ships, the world’s fourth-largest by tonnage. While many of these are of the smaller, littoral variety rather than larger, deep water ships, they provide Japan with the ability to protect their territorial waters from regional threats.

Well, up to a point, that is…

Take a look at a map and you’ll see that the island of Taiwan lies immediately adjacent to Japan’s historical sphere of influence in the North Pacific. Indeed, the Japanese islands of Okinawa prefecture are even closer to Taiwan than Taiwan is to China. Hence the growing Chinese threat to bring Taiwan back under mainland rule is rightly seen by the Japanese as a threat to their energy security, as most of their fossil fuel imports must pass Taiwan on their way from the Malacca Straits into Japanese territorial waters and on to the main islands.

Japan’s borders extend down to Taiwan

To make matters worse, the proximity of Taiwan to Okinawa and the continuing chain of islands leading to Kagoshima Bay implies that it is an ideal staging point from which the Chinese military could credibly threaten Okinawa and, by extension, the main islands of Japan, mirroring the events of WWII. Hence, not only would a Chinese takeover of Taiwan threaten Japanese energy security, but national security more generally.

So, what is Japan to do?

The nuclear option

Ancient wisdom would suggest the Japanese kill two birds with one stone, or, as the Japanese put it, 一石二鳥. Not only could Japan further expand nuclear capacity, it could use its nuclear know-how to develop the most effective military deterrent ever known: a nuclear arsenal.

Yes, I know what you’re going to say: following WWII, Japan foreswore the development of nuclear weapons. But times, and US foreign policy, change. The long shadow of WWII must end eventually. Today, Japan has not just one but THREE nuclear powers on its doorstep – these are China, Russia and North Korea, with none of whom it has warm relations. A large naval force might be able to prevent a blockade. But it can’t deter the threat of nuclear attack.

Let us return briefly to Germany. There is also a strong case to be made that, if that country does indeed decide to cozy up to Russia in exchange for access to a cheap and stable supply of gas, it is going to risk losing the security of the nuclear umbrella traditionally provided by NATO, the anchor of which, the United States, has had deteriorating relations with Russia since at least 2014.

Hence Germany too might want to consider whether, in addition to expanding its nuclear power generation capacity, thereby preventing excessive dependence on Russian energy, acquiring a small, independent nuclear deterrent might satisfy shifting national security objectives. That’s a lot of birds with one stone.

If not for the legacy issues of WWII, given their respective, challenging geopolitical and energy security predicaments, and their established, cutting edge technological capabilities, it would be a no-brainer to assume that both Germany and Japan would have developed at least a small nuclear deterrent already. That they haven’t is best explained by the horrible defeats they suffered over 75 years ago and the security guarantee from their nuclear power guarantor, the United States.

In a sense, therefore, it is as if WWII never completely ended. Germany and Japan are still atoning for the crimes of their great-grandparents, as it were. Atonement is partly in the form of higher energy prices, strangely enough. But, given the threats they now face, that may soon change. And the investment implications are already emerging.

Peace profiteering

If Japan and Germany transition towards nuclear, be it arms or just energy, the world will suddenly find there is much more demand for uranium, the only known practical source of nuclear power.

Moreover, should Germany and Japan not only begin building more nuclear plants, but also a nuclear deterrent, then it stands to reason that a few other countries might consider doing the same. And the more that do, the more pressure on existing nuclear powers to ensure they have a sufficiently modern nuclear deterrent of their own to counter what they might see as a new threat.

I’m not predicting a new nuclear arms race. I’m not even predicting that Germany and Japan will kick it off. But no one can deny that the risk of nuclear power expansion, and weapons proliferation, is higher today than perhaps at any time during the entire post-WWII period.

Alternatively, as I have discussed before, nuclear power is the most viable option to meet emissions goals. Japan and the UK have both acknowledged this in recent weeks. Bloomberg reported that “Japan’s Carbon Goal Is Based on Restarting 30 Nuclear Reactors” and the Wall Street Journal highlighted that “Britain’s plan for net-zero carbon output by 2050 includes new nuclear investments, with China, France and India also expanding production.”

Whatever the trigger, climate change, defence or energy security, the demand for uranium is likely to soar. Given the time it takes to bring uranium mines online, the existing mining and refining capacity will struggle to keep up with demand. The only way the market will be able to clear under such circumstances, and stimulate fresh exploration and production capacity, will be through sharply higher prices, far higher than today.

Making any precise estimate would be difficult. But the point is to build a long position in those businesses which stand to profit: miners, refiners, service companies, waste disposal providers, etc.

About the author.

John Butler is an experienced international investment consultant and author. He has over 25 years experience in international finance and has served as a Managing Director for bulge-bracket investment banks on both sides of the Atlantic in research, strategy, asset allocation and product development roles, including at Deutsche Bank and Lehman Brothers. He has advised some of the world’s largest institutional and private investors in matters ranging from wealth preservation to enhancing returns through a wide variety of innovative strategies and he has been a #1 ranked investment strategist by Institutional Investor magazine.

John’s areas of expertise include economic and monetary history with a particular emphasis on international monetary relations. Among his other accomplishments, John is on the record having anticipated the great gold bull market of the 2000s, the US housing market bust of 2007-09 and the protracted euro debt crisis. His publications include his regular contributions to Goldmoney Insights, the Amphora Report investment newsletter, The Golden Revolution (John Wiley and Sons, 2012) and The Golden Revolution, Revisited (Goldmoney Press, 2017). His research has been cited by numerous publications including the Wall Street Journal, Financial Times, Nikkei Shimbun, Frankfurter Allgemeine Zeitung, Boersenzeitung, Handelsblatt, Neue Zuercher Zeitung, Milano Finanza and De Telegraaf. John is a regular presenter at investment conferences and other events around the world.