Last night, the US assassinated a top Iranian general. He’s described as a terrorist mastermind—and the second most powerful man in that country. Iran has, of course, vowed revenge. Gold and oil prices surged on the news. Most stock markets around the world dropped sharply.
The news is an important reminder of the powerful impact geopolitical surprises can have on all investments—and life as a whole.
Honestly, I’m not sure I have anything to add that hasn’t been said by others, but people are asking for my thoughts, so here they are.
- The most important thing to remember is that this sort of geopolitical event trends to create dramatic, but short-lived volatility.
- Unless Iran’s vengeance is immediate and it affects supply—which seems unlikely—oil prices are likely to slump back to where they were. That’s what they did after the drone attacks in the Persian Gulf last year.
- Gold prices were rising already, due to easy-money policies around the world. The Chinese stimulus program announced just a couple days ago might have brought gold to current levels in the days ahead anyway. So gold too may retreat a bit once the excitement dies down, but I would be surprised to see it drop back to near recent lows.
- Unless something more fundamental changes, I would not expect this to break the back of the ongoing rally on Wall Street.
- Unless Iran’s response does make a permanent dent in the flow of oil around the world, I’d also expect this situation to have no great impact on the global economy.
- I doubt this will have any near-term impact on uranium prices. Withdrawal of Iran sanction waivers could affect Iran’s nuclear ambitions, but I see this as a pretty small factor compared to the global balance of supply and demand in the nuclear energy industry. (And since Trump seems to be in no hurry to act on his Nuclear Fuel Working Group’s recommendations, it seems likely we’ll have to wait several months more before uranium prices get going again. Alas.)
The big question the talking heads on financial media are asking—and rightly so—is what Iran’s response will be.
If it’s some sort of gruesome terrorist action that makes a point but does no harm to the global economy, the party on Wall Street can continue.
But Iran just might respond in a way that has a material and lasting impact on the supply and price of oil. Closing the Strait of Hormuz, as I mentioned in yesterday’s article on the unpredictability of today’s financial world, is the most obvious way it could do this, but it has other options. Iran could see that as in its economic interests (as a result of higher oil prices) as well as a necessary geopolitical move (warning the US and its allies to leave it alone).
This could lead to Gulf War III—after which all bets are off.
What are the odds?
I have no idea.
And I wouldn’t believe anyone who says they do.
What I do know is that even if things go back to how they were after this event fades from the news cycle, “how things were” is a world in which this sort of thing is no surprise.
Not only will there be some sort of response from Iran—sooner or later—there will be plenty of other geopolitical turmoil for the foreseeable future. And the threat of waking up to shocking news like this will be ever-present.
That’s not a world in which I can imagine droves of people waking up one day and deciding they don’t need any safe-haven assets like gold and silver anymore.
I expect geopolitical risk to be a permanent—if erratic—tailwind for precious metals for years to come.
Happily, gold and silver don’t need this tailwind to keep trending higher. The global flood tide of easy money and artificially low interest rates will take care of that, with or without war in the headlines.
That’s my take,
