Gold has been one of those things that many have thrown in their portfolio as a ‘set it and forget it’ type of asset. It’s been in an uptrend for years and with the thesis that as long as the government keeps printing dollars then gold should keep on marching higher. I won’t get into the economic arguments about how Fed action and gold price movements are correlated, but I will look at the opportunities that have presented themselves in the shiny metal based on past historical price action.
A LITTLE BACKGROUND
Gold has been rising steadily since 2001, but has been in a solid uptrend since 2009. During the last four years there has been just a hand few of dips for gold bulls to jump onto. When using technical analysis we have three resources at our disposal, time, volume and price and we are going to look at two of those in the chart below of gold.
CCI ANALYSIS
In the top panel we have a momentum indicator called the Commodity Channel Index (CCI), which looks at the current price compared to the average price over a set period of time, in our case – 70 days. I’ve put a blue line to mark the -200 level of the CCI indicator, which has only been touched a few times since 2008, each time being near a trough in price. Most recently we hit -200 on the CCI indicator in late-December which tells us that based on price momentum we might be nearing a low point.
TREND STRENGTH
One of the other tools we use in technical analysis is time. The Aroon Oscillator measures trend strength of a security. It takes into account the number of days price has recorded a new high or low over a set period of time. For gold we are looking at the -100 area as a down trend exhaustion point. We’ve seen this level met 4 prior times, each at or very close to a low in price.
BOTTOM LINE
So based on price and time we have an interesting setup taking place in gold that could be signaling an opportunity for buyers to step in and take us higher. While the above mentioned analysis is based on a theory of mean-reversion, other concepts and mythologies should be considered before making a decision to buy or sell a security. What is described here is fairly aggressive and it should be noted that the price of gold can have large swings in both directions.
Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned or purchase or sell positions in securities mentioned in this article in the near future.
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Read more gold analysis here:
What Washington Isn’t Saying About Our Debt (and what it could mean for gold)
Physical Gold Offers the Safe Haven
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