5 Ghosts of War: Impacts on Defense, Gold, Energy

With the recent U.S. downing of a Russian-made Syrian fighter jet and Russia’s suspension of communications with the U.S. command center in the region, the two superpowers are now stumbling into a violent quagmire with a hideous history and potentially fatal future.

They are on a collision course toward a new, hotter cold war.

And each new episode of this expanding conflict has far-reaching consequences for investors.

This quagmire is not a single episode that comes and goes quickly. It’s the culmination of five battles and wars that trace their roots through nearly 14 centuries.

The first was the Battle of Karbala, fought over the succession of Mohammed in the year 680. This is the origin of the millennial religious conflict that today splits the Muslim world into two sects — Shiites and Sunnis.

The second was the Crusades of the Middle Ages. These are widely recognized as the origin of ethnic-religious conflicts between Christians and Muslims.

The third was the decline and fall of the Ottoman Empire in the early 20th Century, the first time a modern Western superpower inserted itself into a major conflict in the Muslim world. The country was Britain, which encouraged an “Arab Revolt” against the Ottomans in 1916.

Fourth was the Soviet invasion of Afghanistan in 1979, starting a heated proxy war between Washington and Moscow in the region.

And fifth was the U.S. invasion of Iraq and the installation of a Shiite leadership.

Today, the ghosts of all five epic events have returned to haunt the modern world.

Ghost #1, the Battle of Karbala, is the backdrop for new, modern-day conflicts between Shiites and Sunnis.

The primary protagonists on the Shiite side are Iran, the government of Syria, and the Hezbollah militias based in Lebanon.

The primary players on the Sunni side are Saudi Arabia, Egypt, and virtually every other Arab nation.

But what makes the conflict especially complex are the minority (and sometimes majority) Shiite populations across the region.

In the accompanying map, the dark and light-brownish areas have majority Shiite populations, while the balance of the countries shown are predominantly Sunni.

Moreover, the map belies the fact that all countries in the region have a mix of both Muslim sects:

Iraq has a majority Shiite population that was traditionally ruled by a long line of minority Sunni leaders, the last of which was Saddam Hussein.

Meanwhile, Kuwait has a Shiite minority of about 27%; Saudi Arabia, 3%; Oman, 12%; the United Arab Emirates, 16%, and Qatar, 10%. (More on Qatar in a moment.)

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Regardless of the percentages, in most of those countries, the hatred and resentment between the two Muslim sects run deeper than those associated with virtually any other ethnic conflict in the world today.

Ghost #2, tracing its origins to the Crusades, is fomenting new hatreds between Muslims and Christians.

Is this a religious war? In this sense, no: Historically, religious wars were led by mainstream religious and political leaders. Today, in contrast, most mainstream leaders on both sides have made strenuous efforts to calm the tensions.

But despite those efforts, the Islamic State, al-Qaeda and wildcat terrorists have been very successful at using terror to transform historic resentments into a kind of stealth religious war.

Ghost #3, taking its cue from the British Empire, is dragging the world’s major powers into the conflict.

This includes not only the United States and Russia, but also most European powers, Iran, Saudi Arabia, and allied nations.

Plus, of most immediate concern …

Ghost #4, tracing its roots to the Cold War, is pitting Washington against Moscow.

The U.S. is aligning itself almost entirely with the Sunni-led countries in the Arab world, Iraq being the sole exception.

Russia is aligning itself almost entirely with the Shiite-led countries.

And therein lies the grave danger: The Cold War and the Shiite-Sunni conflict are now coming into close alignment. They overlap and reinforce each other. They defy resolution. And they are escalating at a frightening pace.

Ghost #5, emanating from the Iraq War, helped create the Islamic State.

Soon after the United States invaded the country in 2003, it helped put the Shiites in charge. And it was widespread Sunni resentment against the new Shiite leadership that fomented Sunni rebellions, Sunni terrorism, and ultimately, the emergence of the Sunni Islamic State.

Lessons from History

For anyone who knows history and who recognizes the ghosts of the past, it’s clear that today’s superpowers are playing a very dangerous game. But to leaders of the United States and Russia, the Sunni-Shiite conflict has been just a sideshow, and they repeatedly choose to ignore it at their own peril.

The Soviets ignored it when they aligned themselves with the Shiite governments of Syria and Iran.

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President George W. Bush ignored it when he invaded Iraq in 2003, putting Shiites in power.

Obama ignored it when he made a pact with Shiite Iran, overruling the vehement protests of America’s Sunni allies.

And now Trump is ignoring it again by siding 100% with Saudi Arabia and other Gulf countries against Qatar, the one country in the region that had tried to maintain a neutral posture in the Shiite-Sunni conflict.

The U.S. and Russia are drawing new lines in the sand along the same fault line that has divided Sunni and Shiite Islam since the death of Muhammad nearly 14 centuries ago.

It’s obviously not a new conflict.

It’s obviously not going away anytime soon.

And now, two major world powers — the U.S. and Russia — have not only taken opposing sides, but they’ve also joined directly in the battle. Today it is a proxy war.

The big question now being asked by military strategists in the Pentagon and the Kremlin: When will it become a direct war? Let’s pray the answer is “never.” But let’s never take that outcome for granted.

For investors, it means three things:

1. Ongoing and immediate: A continuing rise in U.S. defense stocks. For our favorite defense-sector ETFs, be sure to see last week’s “Two Sector ETFs with the Most Firepower,” and for our three defense-stock picks, see “Urgent War Quiz for Investors.”

2. Coming soon: New waves of flight capital flowing into gold and gold-related assets. See “Gold Setting the Stage for a Year-End Rally.”

3. In later phases: Expect big potential threats to oil and gas supplies in the Persian Gulf and beyond. Right now, however, energy prices are getting pounded hard, just as our experts have predicted. See “Looming Tidal Wave of U.S. Oil Supply” and “Don’t Buy the Hype about Higher Oil Prices.”

Good luck and God bless!

Martin