Technical Analysis

Whether it's behaving like a bull or a bear, the gold market offers high liquidity and excellent opportunities to profit in nearly all environments due to its unique position within the world’s economic and political systems. While many folks choose to own the metal outright, speculating through the futures, equity and options markets offer incredible leverage with measured risk.

Market participants often fail to take full advantage of gold price fluctuations because they haven’t learned the unique characteristics of world gold markets or the hidden pitfalls that can rob profits. In addition, not all investment vehicles are created equally: Some gold instruments are more likely to produce consistent bottom-line results than others. Trading gold isn’t hard to learn, but the activity requires skill sets unique to this commodity. Novices should tread lightly, but seasoned investors will benefit by incorporating these four strategic steps into their daily trading routines. Meanwhile, experimenting until the intricacies of these complex markets become second-hand.

1. What makes gold move?
As one of the oldest currencies on the planet, gold has embedded itself deeply into the psyche of the financial world. Nearly everyone has an opinion about this metal, but gold itself reacts only to a limited number of prices catalysts. Each of these forces splits down the middle in a polarity that impacts sentiment, volume, and trend intensity:

Inflation- When a currency experiences greater than normal inflation, traders may prefer to store their value in gold since it is relatively stable and has historically held its value well.

Supply- Like other commodities, supply has the power to lower Gold’s price if a market becomes saturated or raise the price if scarce. New Gold discoveries increase availability where there may have been a shortage.

Unlike some consumable commodities such as Oil and Corn, Gold is still tradeable even after being used. If the price goes higher, it is more advantageous for miners to mine for new Gold. If the price drops, they may not mine as much resulting in less su

pply in the market.

Demand- Demand for Gold can be triggered by the demand for the metal in jewelry, industrial uses, and trading. If demand is greater than the supply, the price may go up. On the other hand, if demand is low and the market has a surplus, the price may drop to attract buyers, or it may rise depending on buyer demand.

The US Dollar- Gold is priced in dollars making the US currency a player in how attractive the commodity is to foreign inventors. If someone trades in Euros, Pounds, or another currency, a devalued USD may make the commodity more attractive while a stronger dollar may have the adverse effect.

Geopolitical events- As a global metal, geopolitical events can influence the supply of this precious metal. Events can also affect the movement of currencies, changing the relative value of Gold and potentially sending large amounts of traders to or from this commodity.

2. Understand the Crowd
Gold attracts numerous crowds with diverse and often opposing interests. Gold bugs stand at the top of the heap, collecting physical bullion and allocating an outsized portion of family assets to gold equities, options, and futures. These are long-term players, rarely dissuaded by downtrends, who eventually shake out less ideological players. In addition, retail participants comprise nearly the entire population of gold bugs, with few funds devoted entirely to the long side of the precious metal. Gold bugs add enormous liquidity while keeping a floor under futures and gold stocks because they provide a continuous supply of buying interest at lower prices. They also serve the contrary purpose of providing efficient entry for short sellers, especially in emotional markets when one of the three primary forces polarizes in favor of strong buying pressure.

In addition, gold attracts enormous hedging activity by institutional investors who buy and sell in combination with currencies and bonds in bilateral strategies known as “risk-on” and risk-off.” Funds create baskets of instruments matching growth (risk-on) and safety (risk-off), trading these combinations through lightning-fast algorithms. They are especially popular in highly conflicted markets in which public participation is lower than normal.  

  3. Read the long and short-term gold charts
Take time to learn the gold chart inside and out, starting with a long-term history that goes back at least 100 years. In addition to carving out trends that persisted for decades, the metal has also trickled lower for incredibly long periods, denying profits to gold bugs. From a strategic standpoint, this analysis identifies price levels that need to be watched if and when gold returns to test them.

Gold’s recent history shows little movement until the 1970s, when following the removal of the gold standard for the dollar, it took off in a long uptrend, underpinned by rising inflation due to skyrocketing crude oil prices. After topping out at $2,076 an ounce in February 1980, it turned lower near $700 in the mid-1980s, in reaction to restrictive Federal Reserve monetary policy.

The subsequent downtrend lasted into the late 1990s when gold entered the historic uptrend that culminated in the February 2012 top of $1,916 an ounce. A steady decline since that time has relinquished around 700 points in four years; although in the first quarter of 2016 it surged 17% for its biggest quarterly gain in three decades, as of March 2020, it's trading at $1,635 per ounce.