Gold Purchases: Time Them with Technical Analysis

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(September 2012)

Technical Analysis is mathematical analysis of the market based on price action, but not the fundamentals of supply, demand, costs of production, and hundreds of other important factors (fundamental analysis). Many people will tell you Technical Analysis does not work. I disagree. If you understand its limits, it works quite well.

Do I completely trust technical analysis? Certainly not! I want to know as much as I can about any market I trade, whether it is gold, wheat, an oil stock, or the S&P 500 index, and that includes as many fundamentals and as much relevant technical analysis as possible. How many times have you heard commentators examining the same data, and yet producing different interpretations – one saying buy, and one saying sell? The same can be true in technical analysis. One analyst sees one facet of the market and values it more highly than others and consequently may disagree with the next analyst. It is a bit like art – in the eye of the beholder. Find what works for you.

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My View of Technical Analysis

  • Keep it simple. More variables and more analysis are not necessarily better. I need it simple, or I get lost in the complexity.
  • Filter out the “chart noise.” All markets jump up and down on a 5 minute, 15 minute, daily, and weekly basis. Most of the movement probably means nothing. Look at the big picture.
  • Technical analysis provides the timing on when to buy or sell. It is not (in my experience) very good at picking what to buy or sell. Look at the big picture fundamentals for what, and use technical analysis for when to buy or sell.
  • If you want to buy, based on daily data, make certain the weekly data is supportive; and, if not, keep a close stop. It is easy to buy on a short–term up move just before the long-term downtrend resumes.
  • Trust buy signals in bull markets and sell signals in bear markets. Be skeptical of buy signals in bear markets and sell signals in bull markets. (Easy to say, difficult to do.)
  • There are many highly competent technical analysts. Read their analysis to self-educate.
  • There is not one right answer, one analysis technique, or one indicator that is always correct or best for everyone. Find what works for you.
  • If you don’t like it, don’t use it, and find another method. Your attitude and your discipline at sticking to a proven investing and trading plan are more important than what analysis process you actually use.
  • Don’t trust your emotions. Trust your charts.
  • Don’t give up! Surprises happen. Corrections always happen. Trust the big picture.

Gold Analysis

  • Thanks to massive government budget deficits and excessive money supply increases, gold has been in a bull market since 2001 that will last several more years. Trust it. Gold is what to buy.
  • Pick your buy points based on technical analysis. Look at the following chart for weekly gold prices, and look at the turning points for my favorite oscillator. An oscillator moves from low (over-sold market) to high (over-bought market) in parallel with prices. Buy low and sell high! The chart and oscillator tell you when to buy.

Seven years of gold prices are shown in the above chart – note that the vertical scale is logarithmic. You can see that the oscillator turned up from low levels (very over-sold) in 2005, 2006, 2007, 2008, December 2011, and June 2012. These points are marked with a circle and an *, and they were excellent buy points. Note that five other minor turns in the oscillator are marked with an “M,” and these were buy points of lesser strength. Now look at the price of gold at each of those turning points. Clearly, the price of gold was temporarily bottoming at each of those turning points. Every time, except at the minor turn in 2008, gold went much higher in the next several months. Based on the above timing data from this oscillator, do you think technical analysis can be beneficial?

What Does This Technical Analysis Show Now?

(This is my opinion; do your own analysis or check with your investment advisor.)

  • You should have bought gold in early June of 2012 at about $1550.
  • Gold has rallied about $240 (about 15%) from its lows in May 2012. It is now (September 22) clearly over-bought and vulnerable to a decline, but fears of war and Quantitative Easing to Infinity may hold it up.
  • A reasonable time for an intermediate term peak is 2013 – second quarter. This is based on a gold price cycle from high to high of about 21 months. I don’t fully trust cycles, but I don’t ignore them either.
  • Early 2013 may not a good time to buy gold if the gold market shows an over-bought condition. It is likely that, if the oscillator is strongly overbought, gold will be in the news regularly, and many articles will be telling you it can only go up further. A CNBC commentator might even turn bullish on gold if it is near a top.
  • After every big rally, there is always a correction – prices fall to some level of support below the peak rally price. Don’t buy or sell based on your emotions – greed and fear usually create poor decisions. Instead, use technical analysis and your charts.
  • Remember the big picture. Look at a 12 year chart of gold: Exponential Gold Rally! What it Means and Will it Continue?.
  • The Intermediate term Gold Price Projection for 2013: Gold Price Projection – for 2013.

I wish you good investing!

GE Christenson
aka Deviant Investor

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2 thoughts on “Gold Purchases: Time Them with Technical Analysis

  1. In this article (Gold Purchases: Time Them with Technical Analysis), you refer to the oscillator. However, you don’t name the oscillator. Which one, may I ask, is it?

    Thanks


    • The oscillator is a weighted average of the RSI – Relative Strength Index plus the percentage difference between a short and long moving average. The purpose of constructing such an oscillator was to include the timing function of the RSI plus the over-bought or over-sold influence of the deviation of a short term moving average from a long term average.

      GE Christenson
      aka Deviant Investor


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