The commodities rose as Israeli Prime Minister Benjamin Netanyahu said his nation will "respond forcefully to Iranian terror." This statement comes in the aftermath of an attack in Burgas where five Israeli tourists were killed.
With Netanyahu already pinning Iran as the culprit, commodities traders are speculating that a war may be in the works. However, I believe the near-term potential for war is extremely low, and the real impact on both commodities will be muted if a war does in fact break out.
Why a Near-Term War Is Unlikely
Israel will not attack Iran unless it has the United States' consent, which is essentially our implicit military involvement. With the presidential election only a few short months away, there is no chance Barack Obama drags the U.S. into a major world war. In 2013? Potentially. For now, however, this is simple politics.
A Look at Oil
Iran produces about 3.5 million barrels of oil per day. The IEA estimates that oil importers bought 1 million barrels/per day less crude in April in May then they did in late 2011 as a result of the sanctions. Since then, the sanctions have tightened, likely further reducing the market supply of Iranian oil.
The market doesn't seem to have noticed the supply change, as WTIC broke under $80 just a few short weeks ago. The oil market didn't notice the supply reduction because oil demand is significantly down from year's past, thanks to a greater reliance on natural gas, and economic weakness in importing countries. The U.S., for example, is importing 1.5 mbd less than in 2011.
The $10 premium is mere emotional speculation. The world's economy has already been dealing with war-time (Iran vs. Israel) oil supply conditions for several months. Additionally, with aggregate demand still falling in major importing countries and the dollar gaining strength, crude prices are not accurately reflecting fundamentals.
A Look at Gold
Though I was bullish on gold at the end of June, I recently argued that with the lack of a monetary catalyst (i.e., QE), gold had no other option but to consolidate. While gold is up a percentage point today in response to the Iranian tensions, the medium-term trend is decidedly downward, and the dollar and U.S. treasuries are far more likely to serve as safe havens than gold is.
All of the easy money, coordinated central bank action, and so-called safe haven shortage is staring the gold market right in the face, but it's simply not moving. Gold historically should be vigorously advancing in these tumultuous, ZIRP economic circumstances, but the price action tells us that without the catalyst of QE, gold is going to continue its consolidation. Additionally, with the dollar likely to serve as a safe haven in a potential war, gold will have yet another price pressure.
Both oil and gold could see some increased bullish trading activity over the next few sessions, but the U.S. wants to keep tensions quiet until after the elections. Oil is dramatically overvalued at current prices. The commodity has been pricing in a projected supply decrease that was already priced in at $80, and each new risk premium over the past couple of years has collapsed within a couple of months.
With gold unable to respond aggressively to all the recent coordinated central bank action -- and the dollar/treasury dynamic to strengthen (rather than gold) in the event of a war -- gold should be sold on Iranian-related price spikes.
Disclosure: I am short GLD. Short via longer-dated puts.