Israel-Hamas Journal: State of Play
And thoughts on the gold trade.
The price of oil and gold are now trading below levels last Friday that preceded the post-invasion breakout.
In a variety of forums since Friday I said that this week’s post-invasion price action would be very key in assessing how the war is likely to proceed from here. What makes the move lower in oil and gold since Friday so telling is that it’s occurred DESPITE clear-cut escalation at the border with Lebanon and in the West Bank. Some possible explanations:
Israel has been so methodical and effective in its approach that financial markets believe Israel will simply be able to take care of any escalation. And if Iran itself gets involved, the US is there as back-up.
The incessant calls for a humanitarian ceasefire have led financial markets to discount the possibility of further escalation on the belief that the US has enough sway over Israel to engineer said ceasefire.
Markets are simply waiting to react to the “big bang” escalation of Lebanon Hezbollah more formally entering the war.
I actually lean toward #1, as I think Israel has been very impressive in its execution of this war. The problem is, the calls for a ceasefire have been RELENTLESS (see video below) and I can’t help but think it’s a material driver of this price action.
The fact gold remains well above its October 6 price tells me the market is still structurally concerned about escalation and this recent sell-off could be just a ceasefire-driven consolidation.
Oil on the other hand is almost back to its pre-war lows. Iran appears to be quickly ramping up oil production to accumulate USD, so the signal may be skewed a bit - but, if this was about to break out into a full-scale war in the Middle East oil should be powering ahead. Something to keep in mind.
As discussed in the video below, not only is a ceasefire not happening, the risk of escalation is very high. I have confidence in Israel with the US at its back, but I don’t yet have confidence the market shares that confidence enough to continue driving gold lower from here. I think the talk of a ceasefire is a big driver of sentiment, so I’m willing to take a bit of a longer view here on gold and closely monitor events and price action this week and next, as I believe if Iran & Co is really going to escalate this thing it’s going to come sooner than later.