How on Earth Can Gold Decline During the U.S. - Iran Crisis? / Commodities / Gold & Silver 2019

So,did U.S. and Iran just become best friends?

Gold’shuge reversal and a decline of about $50 in 24 hours might certainly suggest soto those, who choose to follow the news instead of estimating market’s movesusing more reliable tools.

Ofcourse, the two countries are not on friendly terms at this time. So, whathappened that gold declined so much, so fast? Let’s start with going over whatwe explained yesterday as gold’s price action confirmed it so well.

Gold,News and Market Expectations

Whensomething happens that shocks the market – a missile strike, a drone airstrike,a new military threat or a sudden shift in trade relations between superpowerssuch as U.S. and China – the markets have to react. Why? Because markets areessentially people that adjust their views on the world based on new facts.Their reactions to new information is based not only on the information itself,but also on how people really view it (important or not? permanent or not?),what they were expecting previously (even a rate cut could be bearish forstocks if people were previously expecting a bigger rate cut that they got),and what’s their emotional status at the moment they received the news. Ever triedasking for a raise when the boss was angry? The risk to reward ratio for thisrequest would go against the one asking…

The gold-relatednews that hits the market is one thing and it doesn’t depend oninvestors’ approach, views, emotions etc. That’s an important factor thatinvestors will need to discount in the price (by buying or selling) in someway. And they will.

Shouldgold move up if an Iranian missile hits a U.S. target? Of course.

Butshould gold move up by $0.10, $1, $10, $50, $100, or $1000? And how long shouldthe reaction last? A minute, an hour, a day, a week, a month, or maybe a year?

Thesetwo questions are really the key to determining what action to take. And noneof them is answered or explained by the news itself. One could try to estimatehow long are the threats going to take place or if they escalate into afull-blown conflict. We received numerous messages after Russia took overCrimea years ago, and we received messages as the U.S. – North Korea tensionshit its peak. The messages were from people, who were absolutely convinced thatthis is just the beginning of war. This didn’t turn out to be correct, and goldmoved lower in the following months as the uncertainty eased.

Rememberhow sudden the U.S. – NorthKorea’s conflict’s end was? Remember how gold performed at thebeginning of the Gulf War 1, the 9/11 attack and last year’s attack on SaudiAramco’s Abqaiq facility? Gold rallied initially, but the rally soon reversedand turned into a decline. Predicting how the events will unfold is difficultenough on its own, but in case of goldforecasts, it gets extra complicated.

Yousee, gold doesn’t simply rally the less peaceful the situation gets. Itgenerally moves up depending on how uncertain the situation is and how badlypeople want to insure themselves. The markets are said to buy the rumor andsell the fact, and this is also the case – in a way – with gold. Remember whenthe SLV ETF was launched and everyone and their brother were expecting silverto shoot for the moon based on that? Silver collapsed immediately after thelaunch as people who wanted to buy, had already bought based on the expectation(!) that the ETF will be launched.

So,instead of estimating the outcome of the U.S. – Iran tensions, one would needto forecast what path will the uncertainty itself take with regard to theconflict. We already saw the first military moves on both sides of theconflict.

Missileswere launched from both sides. In yesterday’s analysis we emphasized that thismight not be the end of the conflict, but… It could be the case that it’s thepeak of the uncertainty.

Afterthe U.S. killed the Iranian general Qasem Soleimani, Iran was practicallyforced to react in a visible way as otherwise the regime would be viewed asextremely weak by the Iranian people. It did, but perhaps it did so in a waythat would not lead to the escalation of conflict. We will never know thedetails of the missile attack, but we can’t rule out the possibility that outof the ways that it could have been carried out, it was done in a way thatwould make it clearly visible to everyone, but with as little damage aspossible. This way – along with the “we do not seek escalation or war” tweet –Iran might be aiming to really end the conflict and the tensions. Of course, itcould have just not carried out the attack, but that would have probably been apolitical suicide for its leaders.

Asit turned out, the retaliatory Iranian missile attack on two U.S. bases in Iraqcaused no casualties and it was an opportunity for the U.S. President to becomeless hostile toward Iran. Trump took this opportunity. “We must also make adeal that allows Iran to thrive and prosper, and take advantage of its enormousuntapped potential.” See how quickly and unpredictably the news can change?

Ifthere only was a way to focus on something that’s more stable, more comparableto other cases, and at the same time based on proven methodology… That’s what gold’stechnical analysis is all about.

Mostimportantly, the technical analysis does reply to the two questions: how long agiven move could take, and how big a given rally or decline is likely to be. Ofcourse, nobody in the world has an all-knowing crystal ball, which means thatnot all signals will work exactly as one thinks, but overall the technicalsignals proved to be useful over and over again. Looking at just the newsthemselves might explain why something just happened (which might be a trueexplanation or not), but it doesn’t imply that much for the future. Rememberthat we have to estimate the trends in tensions and uncertainty, not theescalation of conflict per se. If the conflict gets worse, but the news is lessand less surprising while at the same time they normalize in a way, this couldresult in lower uncertainty.

Focusingon technicals gives us the chance to estimate the next moves, the direction,and time the likely moments of reversals. Looking at news is still useful, butthe biggest usefulness comes from checking whether the market is reacting theway it should.

Ifit’s clearly underperforming compared with what it “should” be doing given acertain piece of news, it’s a useful sign showing that something from theemotional state of market or something about market’s perception andexpectations, is likely to make the market either move up or down. This,combined with nearby support and resistance levels, turning points, and signalsfrom indicators that proved to be useful in case of a given market can give oneinsights that are simply unavailable to those, who focus on just the news.

Yesterday’smissile launch was definitely an escalation of conflict, at least at firstsight. Consequently, gold should have rallied substantially on this piece ofnews.

Andhow did gold market react just several hours after the missile strike?

Itdid rally, but only for a few hours. Then it declined and at the moment ofwriting these words, it is trading exactly where it had been trading 24 hoursearlier. In other words, gold completely shrugged off the news that wassupposed to make it soar. In yesterday’s Gold Trading Alert, we wrote that it was a crystal-clear sign that gold doesn’t want to movehigher here, and that it’s most likely topping right now.

Thereversal itself is a profound sell sign, but “it doesn’t count” yet as thesession is not over. Still, given that it’s a reaction to the news that “shouldhave caused” gold to launch a sustainable rally, it’s already a major show ofweakness.

Goldreally topped on Monday when it erased most of the overnight gains and formed areversal. Today’s pre-market action is a repetition of the same signal but withan even bigger strength and importance.

There’salso one additional factor that it’s still worth mentioning. Gold just gotCramerized. “Gold, gold, gold, gold” is what CNBC’s Mad Money host featuredrecently. Gold received all the publicity it could get from multiple angles,and people had the chance to react to a missile strike. And what did gold to?It reversed. Twice. Each time failing to break above the key 61.8% Fibonacciretracement level based on the 2011 – 2015 decline.

Perhapsthe gold –Iran link is not that simple…

Andwhat did gold do after we posted yesterday’s analysis?

Itdeclined even more. At the moment of writing these words, gold is verifying thebreakdown below the very short-term support line. However, the key thing thatgold just did was to invalidate the breakout above the 2019 high. This is amajor technical development. One of the tradingtips specific for gold is that in case of the gold market, it takesthree consecutive closes above a certain level to confirm a breakout. On the thirdday, gold invalidated it and it’s declining in today’s pre-market session.

Andspeaking of invalidations…

ThosePMs Reversals

Goldstocks plunged almost 5% yesterday and then closed well below its 2019 high.The HUI Index seems to have formed an island top and is now likely to slide even fasterthan it had rallied.

Silvershowed strength at the very end of the decline, just like it tends to do at thetops. We have many factors in place arguing for a decline in the preciousmetals market and for the targets and key long-term points made in this week’sflagship Gold & Silver Trading Alert (Monday’s  issue) : they remain up-to-date.

Toreply to the question that we started this analysis with - gold declined somuch so fast yesterday as that was in tune with the emotional / technicalcondition of the market. It didn’t really want to move higher – essentially, itwas forced to based on the news that kept emerging. It only took a decrease inthe uncertainty for gold to plunge and for both: gold and gold stocks to invalidatetheir breakouts above the 2019 high.

Inour view, if there ever was an excellent time to enter or add to one’s shortpositions in the precious metals sector – this is it. Mining stocks and silverare likely to decline more than gold, but diversification might be a goodway to go for most investors.

Wehope you enjoyed this analysis and we hope your profits continue to increase asgold moves lower. If you would like us to help you with that (you will probablyagree that receiving analyses such as the above one yesterday, would have beenvery valuable indeed…), we invite you to subscribe to our Gold & SilverTrading Alerts. They include the price targets as well as profit-take levelsfor the positions that we have opened (we closed both of our previous positions– one long and one short – profitably), and the subscription includes bigflagship analyses that we usually post on Monday as well as all the daily (andintraday, when required) follow-ups, such as the one that you just read. Subscribetoday.

Thank you.
PrzemyslawRadomski, CFA
Editor-in-chief,Gold & Silver Fund Manager
Sunshine Profits - Effective Investments through Diligence and Care

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All essays, research and information found above represent analyses andopinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. Assuch, it may prove wrong and be a subject to change without notice. Opinionsand analyses were based on data available to authors of respective essays atthe time of writing. Although the information provided above is based oncareful research and sources that are believed to be accurate, PrzemyslawRadomski, CFA and his associates do not guarantee the accuracy or thoroughnessof the data or information reported. The opinions published above are neitheran offer nor a recommendation to purchase or sell any securities. Mr. Radomskiis not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFAreports you fully agree that he will not be held responsible or liable for anydecisions you make regarding any information provided in these reports.Investing, trading and speculation in any financial markets may involve highrisk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees andaffiliates as well as members of their families may have a short or longposition in any securities, including those mentioned in any of the reports oressays, and may make additional purchases and/or sales of those securitieswithout notice.

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