The world was shocked on Friday, October 6, by the surprise attack on Israeli soil by the group Hamas, operating out of Gaza. While skirmishes happen often and are expected in the region, attacks of this scale and complexity (from sea, air, and land) caught intelligence and security forces off guard. But it is not the conflict between Israel and Hamas that has the world on edge. It is the prospect of a wider regional conflict or even a world war that has world leaders on edge. The monetary metals responded in the way they normally do during times of perceived crisis, with gold up 9% in under three weeks and silver 10.25% higher. As the situation develops, there are indications that gold and silver have further to run in the months ahead.
Largest Fleet Assembled
In what some are calling the largest fleet of warships NATO has ever assembled, ships from 2 U.S. carrier strike groups and an amphibious assault force are being joined by ships from other NATO countries in the eastern Mediterranean “as a deterrent.” China also has naval warfare assets in the region, including a guided missile destroyer and other ships from the PLA’s 44th Naval Task Force. Ironically, the stated reason for the presence of these warships in the region is to limit or prevent further conflict. There are real or perceived threats to Israel from Lebanon, Iran, Syria, and others in the region. Iraq hit Israel with missiles during the first Gulf War, and they would likely side with others against Israel should a wider conflict develop.
The danger is not that a wider conflict develops only throughout the Middle East but that it spreads worldwide.
Iran has frequently expressed the desire to push Israel into the sea, and Israeli minister Nir Barkat said that if Hezbollah enters the conflict from Lebanon, Israel will destroy the leaders in Iran. Iran also supports the Houthis in Yemen, who were already at war with Saudi Arabia.
Syria would likely be supported by Russia against Israel, and China would likely support Iran and Russia against Western forces should the conflict spread further. Many of these nations already have developing economic partnerships as part of the expanding BRICS+ coalition. The current tensions between Israel and Hamas could also serve to fan the flames of a brewing economic conflict between the BRICS and Western nations.
United Nations - Not So Much
The United Nations was founded in 1945, after the end of World War II, with the stated goal of maintaining international peace and security and developing friendly relations among nations.
But recent efforts at conflict resolution in the war between Israel and Hamas have been ineffective, as comments made by UN Secretary-General Guterres were considered prejudicial and inflammatory.
As a result, the Israeli foreign minister canceled an upcoming meeting at the UN, stating there was no little reason to meet. With the already existing tensions between the Western and BRICS nations and the ongoing conflict between Russia and Ukraine, there seem to be few impartial adults in the room with enough influence to call all the parties together. This has contributed to the instability that has sent silver and gold higher.
Any conflict that has the potential to involve Iran has the potential to influence world oil markets.
Even though Iran is not among the top five oil-producing countries, 30% of seaborne oil worldwide traverses through the Strait of Hormuz. Iran has anti-ship missile capabilities that could shut down this narrow oil transit channel, thereby disrupting oil flows worldwide. This is partially why oil prices have been volatile since the Hamas attacks and partially explains why gold and silver have rallied. Oil rarely moves higher without influencing the monetary metals to follow suit.
Gold & Silver vs Bonds & PGM
Not every metal responds the same way amidst geopolitical chaos and threats to world peace. A look at the platinum group metals (platinum and palladium) reveals a different outcome than that for gold and silver. At 4%, platinum is up less than half as much as gold.
Palladium initially moved lower before recovering up a fraction today over what it was on October 5. This illustrates the difference between gold and silver (monetary metals) and platinum and palladium, which are primarily industrial metals. Even silver, which has many industrial uses, behaves more like a monetary metal in times of instability. When people become unsettled, there is an economic rush to safety that often takes place.
Gold and silver are often viewed as a hedge against geopolitical and economic catastrophe, whereas platinum and palladium are at risk when world economies are threatened.
Hopefully, the conflict between Israel and Hamas can be resolved quickly without enveloping the wider region or world. That would be the best-case scenario, though not likely. Even if it does, the impact on gold and silver prices is likely to continue. Many of the reasons why gold and silver have rallied will remain, even if peace is found between Israel and others in the region. There remains a growing rift between Western nations and BRIC nations, which predates the current war. Nations that previously were the largest purchasers of U.S. Treasuries (China, Japan) have been liquidating those positions in record numbers and moving into gold and other regional currencies. Compounding the problem for American banks and investors, the Federal Funds Rate has increased at the fastest pace in history in the last 1.5 years, from 0.25-5.50%. This has led to a global rout in government bond prices and shattered the illusory safe-haven status of these bonds.
Run to Safety- Here to Stay
There is a reason why central banks worldwide have been purchasing record amounts of gold for the last two years. The powers that be understand the imbalances that exist in the world financial system and the avalanche of negative impacts that can come quickly. While it is not likely anyone knew that an unprecedented attack against Israel by Hamas would provide the snowflake that started the avalanche, we live in a world that is ripe for outsized consequences arising from any region.
While we don’t yet know how or how long this conflict will play out, we know that when it does, another will take its place.
For the foreseeable future, the “run to safety” found in gold and silver is likely here to stay.