A World War I Reminder: Nobody Knows Where the U.S.-Iran Conflict Will Go

By TradeSmith Research Team

Given recent events in the Middle East, there are two points worth remembering about World War I, which lasted from July 28, 1914 to Nov. 11, 1918.

The first point: World War I was started by an assassination. On June 28, 1914, the Archduke Franz Ferdinand of Austria and his wife were shot after taking a wrong turn into a side street. A month later, the War was on. 

The second point: All parties expected World War I to be short. The general consensus was that the fighting would only last for weeks.

Instead, as you likely know, World War I became “the war to end all wars,” with an estimated 9 million combatants and 7 million civilians dead, as the fighting stretched interminably over a period of four-plus years.

The broader point is that wars are relatively easy to start, but very hard to stop.

And once a war begins, nobody knows how long it will last or the direction it might take.

The World War I comparison is relevant because, on Jan. 2, the Pentagon confirmed the assassination of a top Iranian commander via airstrike on a Baghdad airport. The strike was ordered directly by the President of the United States.

Qassem Soleimani, the Iranian general who was assassinated on U.S. orders, was not just a military leader. He was seen as the second most powerful individual in all of Iran, with the comparable Iranian societal clout of a U.S. senator, a ranking member of the Pentagon Joint Chiefs of Staff, and a member of the presidential cabinet.

By all accounts, Soleimani was a powerful and dangerous enemy of the United States.

But geopolitical intelligence analysts have struggled to communicate the magnitude of this development. In comparative terms, though not quite, “taking him out” was almost as big as killing a head of state.

And the “state” in question here is Iran, a country with 18 million inhabitants, a global network of well-funded militias and shadow forces, and direct leverage over the Strait of Hormuz, a geostrategic “choke point” for 25% of the world’s oil supply.

Relations between the United States and Iran are now at the lowest point since 2003, the height of the Iraq war. This is fitting, in a way, because Iran will almost certainly treat the assassination of Soleimani as an open act of war by the United States.

The three unknowable questions are these:

  • What will Iran do to retaliate?
  • What will the U.S. do in response to that response?
  • Where will things go from that point?

A clash between the United States and Iran has the potential to be truly global — part open conflict, part guerilla warfare, part proxy war, and even part cyberwar. And it certainly has the potential to stretch out not just for months, but years.

While the United States has the strongest conventional military in the history of the world, Iran is one of the best at unconventional warfare. They can hit American interests, or the interests of American allies, at hundreds of vulnerability points on multiple continents.

Wall Street has no idea how to price an event like this. That is in part because wars are like earthquakes — nobody can know in advance how big either is going to be.

The size of an earthquake is determined by the complex interplay of fault lines and tectonic plate shifts deep below the surface. That is why the tremor that peters out and the tremor that unleashes “the big one” can look and feel exactly the same.

It’s the hidden chain reaction that matters, and that is the thing we can’t see. Even if all the variables were laid out before our eyes, the dynamic interaction would be too much to track.

If conflict with Iran gets serious, gold and gold stocks could benefit the most.

Oil prices may continue to spike if tensions in the Middle East heat up, or if, say, the United States gets kicked out of Iraq (an increased likelihood now). But a spiking oil price would be self-defeating to the degree it hurts the global economy and threatens to usher in a recession.

Gold and gold stocks, on the other hand, were already on a rising trajectory prior to the surprise Iran news. Geopolitical uncertainty that benefits precious metals would just be another tailwind for a bullish trend that is already gaining steam — and a global downturn or recession would benefit gold even more, as central bankers panic and pour on emergency stimulus.

TradeSmith Research Team