Gold and Oil Price Rises Driven by Geopolitical Tensions and Increased Global Defense Spending


By Victor Sperandeo with the Curmudgeon


Gold and Oil closed at the highs of the week last Friday:

·        June Gold futures closed at $2,349.1 -an all-time high. That Gold price has increased by $40.60 in the last month. 

·        Brent crude settled at $91.17 a barrel, up 52 cents, or 0.57%. U.S. West Texas Intermediate crude (spot) finished at $86.91 a barrel, up 32 cents, or 0.37%. Both benchmarks settled on Thursday at their highest levels since October.  May Crude Oil futures closed at $86.73 on Friday.

→ What’s behind those large price increases?

There’s a very serious concern that Iran is likely to retaliate against Israel for a recent missile strike that hit Iran’s consulate in Damascus, Syria.  It killed senior Revolutionary Guard Corps (IRGC) commander Mohammad Reza Zahedi, his top deputy, and other IRGC officers.

Israel has not claimed responsibility for the strike, although Reuters cited a Lebanese security source as the first to identify Israel as the responsible party, to which an Israeli military spokesperson responded, “We do not comment on reports in the foreign media.”

Aftermath of Air Strike in Syria:

The Telegram reported: “Though Israel has not taken credit for the strike on Iran's consulate, the IDF has made several operational changes, such as canceling leave for any IDF personnel and calling up additional reservists to bolster the force’s air defense systems.”

"If Iran directly attacks Israel, that's never happened before," said Phil Flynn, an analyst at Price Futures Group. "It's just another geopolitical risk domino about to fall."

The fear is that the war in the region will escalate and expand. This is the primary reason for the upward movements of gold, oil, and other commodities as well.

During war you always get inflation, but you also get “chaos.”  Gold is a hedge for both. Oil is a direct beneficiary of an expanded Middle East war due to the unknown potential outcomes that could cause crude oil prices to increase dramatically, especially if Iran closed the Strait of Hormuz. We’ve previously discussed that in these posts: 1, 2, 3, and 4.

The scale of Iran’s retaliation is yet unknown, but if it is significant, Gold and Oil will trade at much higher levels.

Threat of Iran Retaliation Against Israel:

At the slain IRGC officer’s funeral on Friday, the IRGC's overall commander General Hossein Salami, warned that Israel "cannot escape the consequences" of assassinating Iranian military officers, he did not give any further indication of how or when Iran might retaliate,

“None of the embassies of the (Israeli) regime are safe anymore,” General Rahim Safavi, an adviser to Iran’s supreme leader Ayatollah Ali Khamenei, was quoted as saying while speaking at the fallen Iranian generals’ memorial service.

Both Israel and the U.S. have been preparing for escalation by Iran since the strike. Israeli Prime Minister Benjamin Netanyahu reportedly told his government in a cabinet meeting, “Whoever harms us or plans to harm us, we will harm them.”

Pentagon spokesperson Sabrina Singh said a U.S. assessment determined Israel was behind the attack in Syria. The Biden administration quickly communicated to Iran that the U.S. wasn’t involved, and though the Pentagon doesn’t believe Iran will attack U.S. forces, it expects imminent retaliation against Israel, U.S. officials told Politico.

CBS News confirmed that the U.S. received a written message from Iran. A State Department spokesperson told CBS that the U.S. responded by sending a written warning to Iran not to use the Israeli strike as a "pretext to attack U.S. personnel and facilities."  The Swiss government acted as a conduit for the written message since the U.S. and Iran do not have direct diplomatic relations.

Victor’s Market Comments:

I would not chase gold and oil price increases at this time.

·        If Iran does retaliate and the Middle East war expands, the U.S. will surely intervene and attempt to make a deal for peace. Rising gas prices in an election that is 6.5 months away could end Biden’s chance of winning a second term as U.S. President.

·        If Iran does not retaliate in the early part of the week, gold and oil will sell-off.

War Threats are Everywhere as Global Defense Spending Surges:

The Middle East is not the ONLY global hot spot.  Many others are simmering, ready to boil over.

1. In Europe, the threat from Russia has grown significantly since Russian forces invaded Ukraine in 2022. The situation has become more acute with the war dragging into a long conflict that increasingly favors Moscow. Smaller Baltic nations have pushed to bolster defenses against a potential, future Russian attack.

European Council President Charles Michel called for “real paradigm shifts in relation to our security and defense. Now that we are facing the biggest security threat since the Second World War, it is high time we take radical and concrete steps to be defense-ready and put the EU’s economy on a ‘war footing,” Michel wrote in a March 19th letter.

2. China has threatened to use military force to annex Taiwan since December 28, 2023, weeks before the island's presidential election. China has long claimed Taiwan as its own territory and has vowed to eventually unify the island with the mainland. Some experts warn that a Chinese invasion of Taiwan would be globally catastrophic, with the United States and the world suffering massive economic and geopolitical consequences.

A rocket in the dark with Tokyo Tower in the background

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In this photo released by Xinhua News Agency, a missile from the rocket force of the Eastern Theater Command of the Chinese People's Liberation Army takes part in operations during the combat readiness patrol and military exercises around Taiwan on April 8, 2023.


3. U.S. military and defense officials are increasingly concerned that as China and Russia forge ever stronger ties, they might attempt to challenge Western unity and eventually alter the balance of power on the world stage.

“Cooperation from those two authoritarian nations puts us in a different security environment. That heightened security environment is the most dangerous I’ve seen in 40 years in uniform,” said U.S. Adm. John Aquilino, head of Indo-Pacific Command, before the House Armed Services Committee in March.  “My sense is this is a way to combat the broadened United States alliances [and] partnerships with our like-minded allies and partners around the region,” he said. “This is their counter.”

And with signs of expanded cooperation with North Korea and Iran, as both countries have sought to supply Russia with weapons for its war in Ukraine, “it should be concerning to the whole globe,” Aquilino added.

4. The rise of new geopolitical tensions has been driving up global defense spending.  In an annual report this year, the International Institute for Strategic Studies found defense spending was up 9 percent worldwide last year, reaching $2.2 trillion.   In a breakdown by country, a majority of nations increased defense spending from 2021 to 2023.

According to the Stockholm International Peace Research Institute, the U.S. remains the world's largest arms exporter responsible for 41.7% of international arms sales between 2019 and 2023, up from 38.6% between 2017 and 2021.

5.  According to Reuters, U.S. Secretary of State Blinken told reporters in Brussels, "Ukraine will become a member of NATO. Our purpose at the summit is to help build a bridge to that membership."

-→What an irresponsible statement! 

Ukraine joining NATO would be an absolute red line for Russia. It would for sure mean war between two nuclear powers. In such a war, no one wins and the world as we know it would end.

A New Iran, China, and Russia Axis?

Iran, China, and Russia have formed a defense pact to replace the American-led world order with a multi-polar world order. On March 12th, those three (hostile to the U.S.) countries began a joint naval drill in the Gulf of Oman, a crucial waterway near the mouth of the Persian Gulf.  More than 20 ships, support vessels and combat boats from the three countries, as well as naval helicopters, were involved in the joint military exercise. 

The Gulf of Oman has seen a series of attacks since 2019 that the U.S. has blamed on Iran, as well as ship seizures by Tehran, since the collapse of its nuclear deal with world powers. A fifth of all oil traded passes through the Strait of Hormuz, the Persian Gulf’s narrow mouth.

Russia Weapons Superiority:

Russia has more powerful weapons than the U.S. with 5,997 nuclear warheads. The Satan II (aka RS -28 Sarmat) missile, which carries 16 lighter warheads, has been put into combat duty. The deadly missile could turn the UK into ashes in just six minutes.  It could also obliterate the U.S. Eastern seaboard (from Washington, DC to Boston). 

The Satan II can drop nukes over a large area using one missile. It is also hypersonic (i.e. flies at more than five times the speed of sound) and can’t be stopped!  Check out this chilling You Tube video.

Recognition that Russia is further enhancing its reliance nuclear weapons is clear in the Director of National Intelligence’s (DNI’s) 2023 “Annual Threat Assessment of the U.S. Intelligence Community” which states:

Russia maintains the largest and most capable nuclear weapons stockpile, and it continues to expand and modernize its nuclear weapons capabilities.”

In December 2023, Russia President Putin announced:

“This year, thanks to the consistent implementation of the state armament program and the efficient operation of the defense industry enterprises, the level of modern weapons and equipment in the strategic nuclear forces as a whole has reached 95 percent, and the naval component – almost 100 percent.”

-->That’s an increase of 91.3% from the year before.  The comparable U.S. number is zero!

A rocket launching in the snow

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A Sarmat intercontinental ballistic missile blasts off from the Plesetsk launch pad in northwestern Russia.

Credit: Russian Defense Ministry Press Service via AP Photo


Victor’s Conclusions:

Truly, the leaders of the major western nations have gone insane! The job of leaders is to protect their citizens’ rights and lives. Instead, they are endangering lives via potential wars across the globe.

To not even talk to Russia President Vladimir Putin about peace in Ukraine is the epitome of brazen and treacherous behavior!

The U.S. President and the senior leaders of the House and Senate should all be impeached as their foreign policy is so inept and reckless that it has to be challenged.  What the leaders in the U.S. and western world are doing (or not doing) is playing chicken with civilization!

End Quote:

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”   Ernest Hemingway

A person writing on a book

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Be well, stay calm, success and good luck.  Till next time…………….

The Curmudgeon

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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