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Using Technical Analysis In The Gold Markets

2011-10-28 07:51:30

Gold (or bullion) has been the cornerstone of an older generation of investors,

for its "safety", for the "next Depression". By holding gold, these investors

retain a feeling of security and comfort - who could argue with that? To say

that emotion plays a big role in the roller coaster of the gold market would

only begin to tell the real story of excitement of gold speculators, miners,

geologists and the others inside the mining world when word leaks out of a new

major find somewhere in Canada, the United States, Australia or Africa. The

quest for this shiny commodity has made millionaires of paupers and, on the

flip side, has been the ruin of many wealthy families.

Here we take a look at some of the tools used to analyze gold stocks. The gold

players make it look easier than analyzing other sectors, but for those who are

not confident in their ability to conduct this type of analysis, we will also

analyze the gold price, have a look at the CBOE Gold Index and the AMEX Gold

Bugs Index. There has long been a relationship between bullion itself and gold

shares of companies that mine the precious commodity.

Tools for Analyzing Gold

In his book "Technical Analysis Explained" (third edition, 1991), Martin Pring

explained that an investor can analyze the price of gold itself by using

"trend-determining" techniques such as price-pattern behavior, moving averages

(MA) and rates of change. For longer term movements, decisive crossovers of the

12-month MA have been reliable. Buy and sell signals using a monthly "know sure

thing" (KST) (explained in Chapter 10) have also proved reasonably accurate.

Most investors prefer to own gold by way of buying into a mining company of

which some of the larger well-established companies have delivered handsome

returns to their shareholders over the years. However, a chartist, before using

a mining company, would examine the relationship of gold to gold shares by way

of an index like the two mentioned above as the mining group may have silver

mines in its portfolio or another facet of business that would skew the bottom

line in determining its relationship to gold.

Nature of the Market

Investors tend to lead the market when buying shares in a mining company.

Tension rising in politically hot regions of the world will have gold bugs

rushing to any one of the top gold producers of the world and buying up shares

as quickly as they can - and turning around and selling their positions as

tempers cool off and those at CNN and MSNBC tell us that there is nothing to

worry about.

Also, As the price of gold rises or falls it may have a dramatic effect on

whether a mine is a viable investment. If the cost of mining exceeds the

current world price for the metal, the mine will be forced to slow its

production or suspend it indefinitely until the price of gold climbs high

enough to allow a profit to be made at that particular dig.

Pring writes, "the general rule is that the prevailing trend is assumed to be

intact unless a new high or low in either the stocks or bullion is not jointly

confirmed. This represents a disagreement and warns that the prevailing trend

is likely to reverse. Usually bullion lags behind the shares, but occasionally

it is the shares that are slow to turn. In either case a trend reversal should

be expected". This rule is can be said to be set in stone; virtually all

technical analysts recognize this to be true and follow it to the letter.

Below you can see the mirror image of the three charts selected to demonstrate

the relationship between the CBOE Gold Index, the AMEX Gold Bugs Index, and the

mining company Anglogold Ltd. Ads. Investors looking to invest in this arena

will do well to run their analysis over the index charts at the same time they

are breaking down Newmont Mining, Anglogold and Barrick Gold.

The Bottom Line

The quest for this shiny commodity has made millionaires of paupers and, on the

flip side, has been the ruin of many wealthy families. No matter how you choose

to invest in the gold market, keep an eye on the prevailing trends in the

market and in gold bullion.

It's your money, invest it wisely learn, understand and execute.