5min read In what is believed to be the first direct attack on Israel from Iranian territory, Tehran fired hundreds of drones and missiles into Israel this weekend in response to a recent strike on the Iranian Embassy complex in Syria.
Although the majority of the missiles and drones were intercepted, the attack has raised concerns about the escalation of conflict in the region. This analysis aims to explore the broader implications of this event for the countries involved and the global community.
The attack, which was thwarted by Israel's Iron Dome and Arrow 3 defense systems, as well as support from the United States, caused minimal damage to the Nevatim air force base in the Negev desert. Despite no reported fatalities, the incident marks an escalation in the long-standing covert warfare between Iran and Israel. Iran's support for proxy forces such as Hezbollah, Hamas, and the Houthis, has led to retaliation from Israel in the form of targeted assassinations and attacks on Iranian interests.
The immediate cause of the attack can be traced back to an Israeli airstrike on a building in Damascus that is part of the Iranian Embassy complex on April 1, resulting in the death of several senior Iranian commanders. Iran vowed to retaliate for the loss of its top military leaders, and the subsequent attack appears to be a direct response to that promise.
Prime Minister Benjamin Netanyahu of Israel has so far refrained from commenting on the attack itself, instead focusing on the successful defense efforts. President Biden, who has previously criticized Netanyahu's actions in Gaza, has affirmed Israel's right to defend itself and provided weapons to the country. The United Nations Security Council and the Group of 7 leaders have also convened to discuss the attack and its potential consequences.
Iran's actions have been met with celebrations in Tehran and described as a defensive measure by the country's Foreign Ministry. The Islamic Revolutionary Guards Corps has warned the United States against involvement, highlighting the potential for further escalation if provoked. The attack could serve as a distraction from the previous conflict in Gaza, but it also highlights the ongoing volatility in the Middle East region.
The implications of this attack are significant, as it marks a shift in the nature of conflict between Iran and Israel. The use of hundreds of drones and missiles in a direct assault demonstrates Iran's willingness to engage in a more aggressive approach, potentially leading to further retaliation from Israel and the involvement of other regional and global powers. U.S. officials have advised caution, hoping to avoid further escalation, but the potential for a severe response from Iran if provoked remains.
Iran's attack on Israel reflects an intensification of the longstanding conflict between the two countries and their proxies in the Middle East. While the immediate damage was limited, the event has far-reaching implications for regional stability and the potential for broader international involvement. The global community, including the United States, must carefully navigate this volatile situation to prevent further escalation and seek diplomatic solutions to de-escalate tensions.
Financial Market Impact Potential
The recent escalation of tension between Iran and Israel has led to a significant depreciation of the Iranian currency, the rial. In 2022, one dollar was exchanged for fewer than 220,000 rials, but now it has reached a record-breaking 647,000. This economic downfall of Iran could potentially provide investors with an opportunity to buy gold and silver at lower prices.
Peter Spina, the founder and president of GoldSeek.com and SilverSeek.com, predicts that, if there is a significant sell-off in the stock market, it could lead to a spillover effect on precious metals, including gold and silver. In times of market volatility, investors often seek safe-haven assets like precious metals to protect their losses. Spina refers to this potential event as the opportunity of a lifetime for precious metals.
The point Spina is making is that, in many historical cases, uptrends in the precious metals can be suddenly and sharply impacted by a sudden drop in other assets that, when combined with leverage, quickly send investors into a potential margin call situation, and raising the cash needed to maintain certain treasured positions (such as investments in top AI companies) necessitates cashing out positions in other assets, such as gold and silver.
But such events rarely represent a true change in trend. They just cause a quick and powerful puke event in those other assets used to raise cash. Those puke events are often excellent buying opportunities.
Cryptocurrencies reacted to the news of the attack in a similar manner to what Spina anticipates, with Bitcoin and Ethereum experiencing a temporary sell-off before regaining some lost ground. The global crypto market tumbled 9% on the day of the attack, highlighting the potential of cryptocurrencies as a gauge for market sentiment in times of geopolitical uncertainty. Selling here is likely preparation for the potential for margin calls and liquidity cascades in other key assets.
In addition, as Middle East tensions rise, oil prices have also been affected and could potentially become more powerfully impacted. Manish Raj, the managing director at Velandera Energy Partners, expects highly volatile trading in oil in the coming week following Iran's attack on Israel.
While Iran has signaled that it does not wish to escalate the situation further, Israel's response and the solidarity of OPEC producers with Iran will determine the direction of oil prices.
Raj believes that oil supplies are likely to continue unabated, which could limit oil's upward potential. However, if Israel decides to retaliate with greater force or if Iran receives solidarity from Arab neighbors, there is a potential for oil prices to reach $100. Hence, Israel's reaction will be a key ingredient in determining the extent to which oil prices will be caught in the crossfire. If Israel directs a powerful response, it could target oil production, sending crude oil into a major geopolitical upward price spike, which has implications for EU monetary policy as well as oil producer share prices and, naturally, the price of ETFs like USO.
Amid these events, the Federal Reserve's approach to interest rate cuts could be influenced. Neil Shearing, the group chief economist at Capital Economics, suggests that the Fed may adopt a more cautious approach to rate cuts due to the rising tensions in the Middle East. Despite this, Shearing still expects the Fed to cut rates, with the first move predicted in September.
Iran's foreign minister, Hossein Abdollahian, stated that there are currently no plans to continue defensive operations against Israel, but the government will not hesitate to protect its interests against any new aggression. The attack on Israel was described as a demonstration of Iran's responsible approach to regional and international peace and security.
Conclusion
The recent escalation of tension between Iran and Israel has led to a depreciation of the Iranian rial and potential opportunities for investors in precious metals and cryptocurrencies. Oil prices have also been affected, with volatile trading expected in the coming week.
One key barometer of the potential for dramatic market behavior that eventually leads to a core buying opportunity in many key assets is the term structure for the forward curve for VIX futures contracts.
History is replete with examples that demonstrate this phenomenon: when emotions run hot in a geopolitical headline minefield, we generally see the pricing on near-term VIX futures expiries rise above the pricing for contracts several months further out on the expiration calendar—a dynamic called backwardation. This is extremely rare because the further future is always less known—less certain—than the immediate future.
As a result, VIX futures pricing for contracts is almost always higher the further out the curve you look—known as contango. A rare VIX futures backwardation event should add to the confidence quotient for investors looking for opportunities to buy on the puke. This goes primarily for stocks, gold, silver, and bitcoin given the current market context.
The Federal Reserve's approach to interest rate cuts could be influenced by these events, but a cautious approach to rate cuts is still predicted. Iran has stated that there are no immediate plans for further attacks on Israel, but the situation remains tense, and the market will be closely watching for any further developments.