With the Islamic State of Iraq and Syria, or ISIS, declaring an Islamic Caliphate recently, many Americans weary of war in the Middle East could be forgiven for asking, “How does that affect me? Why should we get involved?” The simple answer is that the world still has a hydrocarbon-based economy; and most of those hydrocarbons are in the Middle East, much of it in Iraq. The rest of the major Middle Eastern oil reserves are in Saudi Arabia, the UAE, and Kuwait. These Sunni Muslim countries had been secretly aiding the ISIS fighters while they were destabilizing Iran’s ally, Syria. Now, the tables are turned; and ISIS fighters are at their doorstep.
If the jihadists are able to capture the Sunni oilfields in the kingdoms, there’s trouble ahead concerning energy prices, as they will control a large percentage of the world’s supply of crude. Add to that the ability to cause geopolitical conflict in the region, and that will only add to the price pressure on energy supplies.
There is no way Israel will be able to defend itself without the employment of her small nuclear arsenal. She can no longer count on the United States to be in her corner. If an Islamic state is stood-up from the Levant to Iran, including the kingdoms, all bets are off for The Jewish State. Causing her destruction will be too much for the Islamists to resist. Obviously, energy prices would skyrocket under that scenario; and that would seriously affect the U.S. economy. The United States could be drawn into another Middle Eastern war–and a nuclear one at that. That is assuming our jihadist-in-chief has left office; otherwise, it is doubtful he would come to Israel’s aid. In fact, I believe he would love it if Israel came under attack; but, that is for another column.
Advertisement - story continues below
There are other neighbors of the new Islamic state that will not be happy as well. The Shia Islamic state of Iran does not want to see Sunni domination of the Middle East. They were saving this hegemony for themselves. Russia can also not be happy about the events unfolding south of her border as Russia has continuously had a terrorist problem. This problem would grow ten fold under an Islamic caliphate scenario. The Crimean War was fought under exactly the same conditions and aided in the destruction of the Tsarist Russian empire, and Russians have long memories.
All of these possible outcomes are not good for your liquid portfolio or your other financial assets. That is with one caveat. Commodities could and would do very well if events continue to heat up in the world’s energy breadbasket. I think it’s a very good time to be adding precious metals to your asset allocation. Gold has formed a nice base after a steep correction and is just begging investors to buy. People often ask me what to buy to prepare for the many cataclysmic scenarios that are on the horizon. I tell them to buy things they can touch. Another facet to this whole scenario is that if oil prices spike, the USD will trade down in opposite fashion due to the inverse relationship that has been in place now for some time. That’s good for the US in order to pay off her skyrocketing dollar denominated debt, but not healthy for the country or your portfolio in the long run. We can see all of these threats gathering on the horizon. Prepare yourself now and make sure you are hedged.
The views expressed in this opinion article are solely those of their author and are not necessarily either shared or endorsed by the owners of this website.