The war premium
Israel is at war. The ground offensive into Gaza was postponed, allegedly due to bad weather. The clouds would make it difficult for the Israeli Air Force to provide air cover for the troops.
The alternative explanation is that the IDF became convinced that Hezbollah/Iran is going to attack from the north once the Israeli troops become entangled in Gaza and needs time to prepare for this. Today's warning by Iran that it will intervene if Israel doesn't stop its Gaza operation certainly raised the odds of escalation.
Israel is unlikely to back down, as it would be perceived as a sign of weakness. That is something it can't afford now when its deterrence credibility has been questioned. On the other hand, Iran/Hezbollah lost the element of surprise, and a direct confrontation with a fully mobilized IDF is unlikely to get them anywhere. But sacrificing Hamas would close off a valuable attack vector for any future confrontation.
And what role would the Gerald R. Ford carrier strike group stationed in the Eastern Mediterranean play in the decision-making of both sides? Too many uncertainties remain to make a clear prediction.
We can crystallize 3 scenarios:
The war will remain contained to Gaza (no matter the outcome). Skirmishes on the Israeli/Lebanon border would be limited to ATGM ambushes / individual infiltrations and artillery / tank / UCAV counterstrikes. The US Navy will not get involved.
Hezbollah will go all in and fire tens of thousands of rockets on Israel, saturating its air defences. Even the Tel Aviv-Yafo metropolitan area would be hit hard. Its guided missiles would target IAF bases, C&C centers and (maybe) the Dimona nuclear facility. The US Navy, together with the IAF, launches an intensive air campaign against targets across Lebanon and Syria. IDF ground forces move into Southern Lebanon to push out Hezbollah. Iran will not intervene directly, aside from its logistical and ideological support for Hezbollah and Hamas.
In addition to all the actions described in scenario no. 2, Iranian PMF militias in Iraq like Kataib Hezbollah, Asaib Ahl al-Haq, and Badr Organization attack US military installations in Iraq. The prime target would be the Al Asad airbase, in addition to US sites in Iraqi Kurdistan. The Al-Tanf garrison in Syria might also get hit hard. The US/Israel retaliates by ALCM/SLCM strikes against Iranian oil refineries (the Lindsey Graham threat). The potential escalation ladder then goes on through Iran launching its long-range ballistic missiles against Israeli/US targets across the Middle East, up to B-2s taking off from Whiteman AFB in Missouri carrying Massive Ordnance Penetrators intended for Iranian nuclear facilities.
Gold market
Gold has been moving up since the beginning of this week, and oil drifted sideways as markets discounted scenario no. 1, and Iran publicly denied involvement in the Hamas attack.
Then something changed on Friday as both gold and oil shot sharply higher. Maybe shorts covered their positions en masse prior to the expected start of the IDF ground offensive over the weekend, or the markets started pricing in a higher likelihood of scenario no. 2.
In any case, there is no doubt a significant war premium has built up in these markets. It is most visible in gold, which has disregarded both the Dollar (inverse on the bottom subchart below) and even the long-term Treasury yields (middle subchart).
Another proof is the stagnating silver/gold ratio. Silver usually rises more than gold during rallies, but not this time. Clearly, gold's greater sensitivity to geopolitics is in play.
Oil market
Let's turn to oil. If Iran directly joins the conflict, oil would undoubtedly skyrocket. The market is starting to price this risk. But as was the case with gold, it's just the risk premium that's been inflated so far. Take a look at WTI interdelivery spreads. They are clearly lagging behind the underlying price.
You may argue that the US oil market is far from the Middle East. Okay, let's consider the Oman crude oil spreads.
The picture is the same - the physical market remains unaffected by the current crisis. But of course, this can all change if things escalate further.
Conclusion
Trading geopolitical events is incredibly dangerous. It is hard to find a real advantage. Most of the time, the situation turns out not to be so dire as media tends to amplify catastrophic scenarios. The subsequent evaporation of risk premia could be sudden and extensive. But from time to time, the shit actually hits the fan. This can occur either because one side is truly determined to escalate or through a series of miscalculations. That's why we shun speculating on geopolitical events.
Remember, the situation can evolve unpredictably, and the 3 scenarios we outlined above might not be exhaustive. For example, a wildcard would be if Israel recognizes the inevitability of conflict with Hezbollah and launches a preemptive strike on Hezbollah assets in Lebanon before moving into Gaza.
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