Economic Markets See-Saw

Week Ending, 19th April, 2024

Following on from last Saturday’s geopolitics (Iran firing rockets at Israel), US officials confirmed (to the BBC’s partner CBS News) an Israeli missile hit Iran in the early hours of Friday night. Israel does not confirm such attacks. It is not clear what type of weapons were used. Iran said it involved small drones and are downplaying its significance. No casualties have been reported. The strike was on Isfahan - a large area in the centre of Iran. It harbours significant military infrastructure (large airbase, a major missile production complex and several nuclear facilities). Italy’s foreign minister informed reporters that Washington was informed at the very last minute. The US denied involvement in any offensive operations.

It’s too soon to draw conclusions and we don’t know the full extent of the damage incurred at Isfahan. Iranians are certainly playing it down. Was it simply a warning from Israel that it can strike sensitive targets if it so chooses? Or was real damage done and is Iran simply downplaying the whole thing? Iran does not have an “Iron Dome” defence system! In the fullness of time, satellite images will reveal the real picture. Netanyahu’s ultranationalist coalition partner (also the Security Miniter) has described Israel’s strike as “feeble” while others (like Tally Gotliv) within his Likud party offered praise. The uncertainty of it all still leaves the region / rest of the world nervous as to what Iran does next. So far, Iran has not made any indications of immediate military or political responses and has not signalled it has any plans to retaliate. Thankfully, there was no damage to nuclear facilities. Iran described the strike as a failure. The optimistic view is that both sides leave it at that. Iran made its point last weekend and Israel, today, has done the same.

No surprise that markets have gone through a see-saw. Safe haven assets (like gold) shot up. At the time of writing, it has settled at $2,414 per ounce. Bitcoin, on the initial announcement, tumbled to below $60,000 (-5.5%) but then clawed its way back to settle at $64,210. Sovereign bonds are up on the back of a flight-to-safety move as are safe-haven currencies like the Swiss Franc and Japanese Yen which both jumped initially before paring back gains. The Volatility Index (VIX) is up almost 3%. Speaking of gold, look at the following chart courtesy of DB:

For as long as we had a gold standard, inflation remained under control. That’s not to say we never had inflation – it just didn’t result in long-run inflation. A country’s reserves were matched in gold holdings. As soon as that link broke, inflation had a free run via (geopolitics of the Middle East war and soaring oil prices in the late- 1960s and up to the mid-1970s). Then, for some 20 years (1980 to 2000) when inflation fell and came under control for a variety of factors (fiscal discipline, the emergence of China as a major exporter, energy-efficient production, etc.), the gold price went sideways. Since then, we are back to the instability of the late-1960s to mid-1970s – just in a different form (“history doesn’t repeat itself but it does rhyme”). Throw into the mix high debt and the constant temptation to create (print) more money – and inflation results. On Tuesday this week, Fed Chair Jerome Powell said recent inflation data has NOT given the Fed greater confidence to begin cutting rates. In fact he indicated rates will have to remain higher for longer.
That’s a strong argument for hanging on to gold!

MARKET UPDATE