Before getting to the analysis itself, I want to provide a bit of background on the markets in general and how it translates into the current situation. “Market buys the rumor and sells the fact.” is one of the Wall Street sayings.
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This is the case, as the markets are forward-looking, and they keep discounting various versions of the future. As something becomes near-certain (and it’s generally known), it’s already discounted in the price.
Let’s keep in mind that people tend to get too emotional about things – this mechanism also applies to the markets. So, as people keep discounting the possible fact or event, they also exaggerate in their expectations. In consequence, the price might move too far relative to where it should move.
And then, when the fact arrives, or the event finally does materialize, the market gets more realistic, and the price moves back to where it “should” be. It’s then moving in the opposite direction to what “makes sense” based on the event itself.
For example, when the SLV ETF was launched many years ago, everyone and their brother were forecasting that the silver price would shoot to the moon due to the increased investment demand. It made sense. Silver price kept rallying before the ETF was launched. And you know what it did after the launch? Silver price topped shortly, and then it collapsed.
Why am I mentioning this today? Because the key driver behind gold’s recent decline is the fear and expectations of war in the Middle East.
At this point it seems very likely that Israel will launch a military operation shortly. When this became very likely on Friday – after the warning from Israel – gold price truly soared.
Now, given what I wrote above about how prices, expectations, and events work, and knowing what happened to the silver prices after the key event materialized, what’s likely to happen to the prices of gold after the military operation starts?
Source: Fxempire
