Israel-Hamas: Full-Scale War is Coming
Israel-Hamas: Full-Scale War is Coming
The asymmetry of gold here is mouthwatering.
Discussion
This is one of those really rare moments in markets where a huge edge is sitting out in the open in plain sight. All you have to do is look, not second guess yourself, size your position appropriately, and WAIT.
The debate about the direction of Israel-Hamas is four-fold: 1) Will Israel conduct a full-scale invasion of Gaza? 2) Will Hezbollah open a second front on Israel’s northern border via Lebanon? 3) Will the US get involved if Hezbollah opens a second front? 4) Will Israel deal with Iran once and for all?
The West is laser-focused on question 1 as a result of widespread support for Palestine on the political Left. If one is of the suasion that Hamas is at least somewhat justified in its position, and the brutality of its attack on Israel is simply part of the normal cycle of violence, then one would be sympathetic to the notion that it is a war crime of sorts to attack Hamas fighters hiding behind Gaza’s citizens. This is far from a majority view in the West, but because the political Left controls the media narrative, widespread support for Gaza citizens dominates the conversation and thus the conversation is not allowed to proceed to pondering, let alone answering, questions 2-4.
Peggy Noonan of the Wall Street Journal and Thomas Friedman of the New York Times summarize the case for a constrained Israeli response in a very well thought out, balanced manner. And on paper the case makes sense from the standpoint of Israel seeking to maintain the long-term ability to engineer a strategic deal with Saudi Arabia and reshape the Middle East power dynamic.
But this “constrained Israeli response” view misses two key factors: 1) Hamas wants “every Jew dead” and 2) Israel’s citizenry is fully, fully locked and loaded to not only invade Gaza to eradicate Hamas but to attack Hezbollah in Lebanon if necessary AND deal with Iran once and for all.
“They Want Every Jew Dead”
As discussed on Monday, the October 8 interview with Hamas leader Ali Baraka and my October 15 secured-line conversation with a US Army strategist were key pieces of support for my conclusion that Israel-Hamas is not the run-of-the-mill “cycle of violence” Middle East conflict. Something larger is at play.
Subsequent review of an October 16 Financial Times article detailing Iran’s enthusiastic support for Hamas only bolsters the conclusion that something larger is at play here.
Rallying support with a warm embrace.
“Fingers on the trigger.”
In short, whether Iran and its proxies get involved, and the extent to which if so, depends entirely upon Israel’s response in Gaza.
Full-Scale Invasion of Gaza is Israel’s Duty
In the wake of Hamas’s bombing of a hospital parking lot in Gaza, I was struck by a quote in a Bloomberg article detailing Israel’s resolve to forge ahead despite the global fallout from Hamas’s bombing that was immediately blamed on Israel:
“The contract between the state and its citizens requires Israel to remove that threat.”
The surrounding context for the quote emphasizes its critical importance…
…As does this mission critical interview with Israeli citizen and reporter Haviv Rettig Gur.
Questions 2-4 & Gold
Will Hezbollah open a second front on Israel’s northern border via Lebanon?
In the interview above, Rettig Gur says that within two months Israel will be fully enmeshed in Gaza and fighting Hezbollah on its northern border.
Will the US get involved if Hezbollah opens a second front?
Per Axios, it certainly sounds like it would.
Will Israel deal with Iran once and for all?
Rettig Gur says possibly.
Full-scale war in the Middle East is coming, it’s just a matter of degree.
How to position for a war in the Middle East is complicated, but I see two key vehicles: oil and gold.
Because oil is generally under the control of OPEC and the US, I’m skeptical that oil will act as a pure hedge against Middle East unrest. Over the course of the war it’s highly likely to move higher, but because it’s in the Biden administration’s best interest to keep the price of oil contained ahead of the 2024 Election it’s likely to be a volatile ride, swung around by headlines of SPR releases, OPEC production increases, and the recent lifting of sanctions on Venezuelan oil production.
In my opinion, gold is the play. I think it will trade as a pure war hedge, and once Israel formally invades Gaza I expect it will move vertically as market participants scramble to hedge against questions 2-4 playing out.
But in addition to its status as a pure war hedge, gold is backed by the full faith and credit of the US government’s inability to rein in its fiscal deficit. As inflation expectations continue to ratchet higher in anticipation of runaway deficits, even higher deficits as the US inevitably ramps up spending to combat a 2024 recession, and the prospect of higher oil prices keeping inflation higher for longer as a result of war in the Middle East, the asymmetry to the price of gold here is very attractive.
Exhibits
