Want to know more about gold technical analysis? Here’s a breakdown of what it is and how it could help your portfolio.
While gold is not seen as a volatile asset, it is also not immune to gains and losses within the market, which makes understanding how strong these trends are important for investors with gold in their portfolio.
By understanding and utilizing gold technical analysis, market participants will have the tools they need to make more informed decisions related to trading the yellow metal.
Here we examine what gold technical analysis means, the tools that are used to unlock its value and why it can be an important asset for investors to gain prosperity in the gold space.
What is gold technical analysis?
In order to understand why gold technical analysis is important, let’s first break down what it is. Technical analysis forecasts the direction of prices through the study of past market data, which is primarily done through exploring price and volume.
“I think (technical analysis) provides an objective viewpoint, removes the emotion and it gives us an opportunity to really see,” John Roque, managing director of Wolfe Research, told the Investing News Network (INN). “Especially if we take a longer-term look at the history of the particular item and ask — has it acted like this before, and what has it done when it has acted like this before?”
Roque also told INN that technical analysis revolves around determining trends. So, since gold moves three ways — up, down and sideways — technical analysis is done through an either upward trend, downward trend or sideways trend perspective.
An uptrend deals with the analysis of past price increases that may give evidence for future gains, while a downtrend speaks to declines that the yellow metal faced in the past and how they could indicate further slumps. As for sideways trends, this generally means that gold prices gravitate around a certain level for a certain amount of time and this trend then suggests whether a rally or decline should be expected in the future.
It is important to keep in mind that due to different market perspectives — long term and short term — the yellow metal can actually be viewed as experiencing more than one trend.
“From a long term perspective you might observe an upward trend, while if you zero in on a particular part of this trend (therefore switching to a short term perspective) it is possible that you will notice a downward trend,” Sunshine Profits noted.
Three important components of gold technical analysis
Technical analysts attempt to identify gold price patterns and trends within the market and then make an effort to utilize the patterns detected to make future price predictions, which can ultimately bolster an investor’s portfolio. Although price is undoubtedly the most crucial aspect of technical analysis, momentum and sentiment are also important components in understanding gold’s movements.
Most technical analysts will agree that price is the most important factor in what they do and how they track gold trends. In a recent presentation, John Roque, managing director of Wolfe Research, stated, “It’s no secret that price is one of the three most important inputs for technical analysis.”
“There are, of course, other important inputs for technical analysis — like indicators, but they are, for the most part, derivatives of price — but any indicator viewed in isolation without considering price is sort of like saying that the crime fighting duo of Batman and Robin was better as just Robin,” he added.
The method of tracking the price of gold is known as price action. Investopedia states, “Price action is the movement of a security’s price plotted over time. Price action forms the basis for all technical analysis of a stock, commodity or other asset chart. … Many short-term traders rely exclusively on price action and the formations and trends extrapolated from it to make trading decisions.”
Price action is interpreted through the use of charts that plot prices over time. Analysts then use these charts as a way to help them determine trends, breakouts and reversals of the yellow metal within the market.
Roque believes that, when tracking the price of gold, it is important to research what it has done in the past.
“I think (looking at historical gold prices) is wholly appropriate for investors to consider. We can look at gold’s price today and we don’t have any idea of gold’s price historically. So, I think it is important to consider the current price relative to its history,” he said.
While Roque is the first to admit that understanding gold’s price history will not 100 percent determine where it is going, it does act as an informative base for which direction investors should expect it to move.
“What has gold done in prior advances? It’s very easy to determine that,” he said. “And then we come to some average or median advance, and we say, could gold do that? Maybe it can, maybe it can’t. But at least we have a basis for some future observation for gold.”
While momentum still deals with price, it functions in the form of measuring the speed or velocity of changes in the price of gold.
Tracking momentum is beneficial for analysts when they are trying to determine the strength or weakness of gold’s spot price. It is worth noting that momentum is generally more useful during rising markets than during falling markets. This is because markets rise more often than they fall.
Essentially, momentum or the momentum indicator compares where the current price of gold sits in relation to where the price was in the past. The calculation of momentum is done by taking the current price of the yellow metal and subtracting it by a historical price.
By following this method, it is safe to say that, if the current price is higher than the price in the past, then the momentum indicator is positive. However, when the current price is lower than the price in the past, then the momentum indicator is negative. This indicator can alert market participants to whether they should buy or sell the precious metal.
This aspect of technical analysis puts the spotlight on investors, because it is how they feel about a particular commodity that helps shape and shift its value.
Sentiment refers to the feeling or tone of a market, which is evident through the activity and price movement of gold as it is traded within that market. Technical analysts often rely on market sentiment due to the fact that it influences the technical indicators.
As an example, market sentiment can be either high or low when the US Federal Reserve heights or drops interest rates. Since the yellow metal is also affected by the movements of the US dollar, things such as geopolitical tensions or a thriving economy are some of the factors that can influence sentiment.
As Investopedia points out, analysts then use those technical indicators to “measure and profit from short-term price movements often caused by investor attitudes toward a security.”
Not all investors follow the sentiment. In fact, contrarian investors prefer to trade against the current sentiment, selling when others are buying and vice versa.
What is the value of gold technical analysis for investors?
Since technical analysis is a way to glean a better understanding on where gold could be headed in the market, it can be an important component for investors who currently own gold or who want to add it to their portfolio.
For Roque, he says that understanding where gold prices could go is helpful to investors when they can compare where prices have been to where they currently are to get a sense of gold’s “base” as well as the moment it completes its time resting on that base.
As an example, Roque used gold’s latest rally above the US$1,400 and US$1,500 per ounce levels.
“When gold got above US$1400, gold had completed, in our parlance, a Brobdingnagian base. So, that’s a word that we use, nobody else uses it. Of course, Brobdingnagian comes from Gulliver’s Travels, right? Gulliver visited the island of Brobdingnag, which is where everybody was huge or everything was huge and of course he visited the island of the Lilliputians where it was the opposite,” he noted. “So, we like to use the word Brobdingnagian, the adjective, to describe the base. So, gold went sideways, albeit in an aggravating fashion for six and a quarter years. By getting above US$1,400, it completed this big base.”
The managing director added that, when gold completed its Brobdingnagian base, gold’s fundamental story was manifested on the move above US$1,400 (or whichever price is being used as a financial instrument in the particular moment of analysis).
All of that is to say that technical analysis aids investors who carefully watch the price of gold for indicators of bullish or bearish markets; if they should buy, hold or sell the yellow metal; or what the perfect time may be to get in or out of the gold market.
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Securities Disclosure: I, Nicole Rashotte, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.