Buying and Selling Gold with Technical Analysis

Choosing the right time to buy and sell is the biggest challenge for investors. Many use technical analysis to guide them in their decision making process. Here are some explanations to help you understand and master the issues involved in technical analysis of the gold price.

Technical analysis: adopting traders' strategies

One of the reasons for the adoption of technical (or chart) analysis of the gold price is that many investment firms use this method. These trading giants program softwares which will automatically buy or sell based on the price analysis. When an event occurs, then all the softwares do the same thing: it sells or buys. It is therefore quite easy, if you know technical analysis, to sell and buy at the same time as them and to benefit from the large movements. The price goes down when everyone sells, the price goes up when there are more buyers.

Warning: technical analysis is not an exact science

Remember that any investment can result in a loss of capital. It is really necessary to go through a financial adviser before choosing to invest in an asset. And then, in the case of technical analysis, it is only an aid to decision-making. It would be too easy otherwise. Indeed, for many investments, other elements can influence a price. This is the case with the price of gold, which is influenced by many factors: inflation, interest rates, geopolitical tensions, crisis… even the wedding season in India can have an effect on the price of this precious metal. We can assure you that love is stronger than any trading software! On a more serious note, jewellery accounts for about 50% of Indian gold purchases, so if there are a lot of weddings, the demand is higher and the gold price goes up.

Technical analysis of the gold price

Gold is a low volatility asset. Obviously, as we can see from this gold price tracker, it is not completely stagnant either. Yes, there are movements in the price for an ounce of gold, but there are no significant changes in a few hours. The monitoring of the gold price does not therefore require watching its evolution every minute. A daily price analysis is already relevant, and some people are happy with a weekly or even monthly closings.

Les grands investisseurs et l'analyse technique

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Identify supports and resistances

In technical analysis, these are the simplest elements to use.

Horizontal supports and resistances

The idea: the gold price corrects to a support. When trading softwares smell a good deal, they buy. The price begins to rise. Then it will be blocked by a resistance (which resists), this indicates the computers sell, and gold price falls again. Without any external event, the gold price can navigate between support and resistance for days. It is then said to be lateralising. If a support is broken, it becomes a resistance. If a resistance is broken, it is a change of polarity, and it becomes support.

Oblique supports and resistances

This variant comes into play when the trend is bullish or bearish. The horizontal limits have “cracked” but by joining two peaks, a descending or ascending line is obtained. It is often said that the price is “capped” or “captured” by the oblique resistance.

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Un support horizontal, comment peut-il vous aider ? #4

Gold prices on record: use the balance sheet

It is a well-known stock market saying: prices do not rise to the sky! So, when you are on record highs, as was the case with the gold price in 2020 and 2021, there is no resistance above. There is a method used by analysts: the balance sheet method. The difference between the two previous limits (support/resistance) is taken from the highest support: this gives a new… fictitious resistance.

Short and long term trends

Another indication that is widely used by investors is trends. Moving averages are used, which are calculated over different periods. If you look at the daily price trend of gold, you will look at the 200-day, 50-day, 20-day and 7-day moving averages. This will then give bullish, neutral or bearish trends. An average of more than 50 days is referred to as a long-term or underlying trend, while an average of less than 50 days is referred to as a short-term or medium-term trend. Sometimes an average acts as a resistance. This means that the price does not manage to move above this limit.

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Gold performance in major currencies, 2000-2021

2000 1,2% -5,3% 2,4% -4,2%
2001 8,4% 2,4% 5,3% 5,5%
2002 5,5% 24,4% 12,3% 3,5%
2003 -0,2% 19,6% 8,0% 7,4%
2004 -2,0% 5,6% -1,7% -3,1%
2005 35,2% 18,1% 31,6% 36,3%
2006 10,4% 23,0% 8,1% 14,1%
2007 18,4% 30,9% 29,2% 21,8%
2008 10,0% 5,4% 43,0% -0,8%
2009 21,8% 24,8% 13,0% 21,1%
2010 38,6% 29,5% 34,2% 16,8%
2011 13,8% 10,2% 10,6% 10,7%
2012 5,0% 7,1% 2,4% 4,5%
2013 -30,9% -28,0% -29,4% -29,8%
2014 11,6% -1,8% 4,4% 9,4%
2015 -0,2% -10,4% -5,3% -9,7%
2016 12,1% 8,5% 29,7% 10,3%
2017 -0,9% 13,1% 3,3% 8,3%
2018 3,0% -1,5% 4,3% -0,8%
2019 21,0% 18,3% 13,8% 16,6%
2020 14,7% 25,0% 21,2% 14,3%
2021 3,6% -3,6% -2,6% -0,6%

Source : Reuters Eikon, Incrementum AG

When to buy or sell gold with these technical analysis elements?

Again, it is your financial advisor who should be accompanying you in this. We are only providing educational and informational elements here, not investment advice. Technical analysis should enable you to keep your cool and not invest on the spur of the moment.

Rational accumulation zones

This expression is used by an expert in the technical analysis of precious metal prices, Tradosaure. He considers that one should never buy or sell an asset, and therefore gold, when the price is between two limits: support and resistance. Indeed, according to him, in this position, a fall or a rise in the price of gold can occur, and it is therefore an important risk (to lose or to gain). For this specialist, the right time to buy (accumulate) is when the price touches a support. As we have seen, the buying positions of the trading software will multiply and the price can therefore rise again.

Investing small amounts: Dollar Cost Averaging (DCA)

To reduce the dangers of price effects, investors prefer to invest small amounts regularly rather than all at once with the risk of a big drop right afterwards. The DCA will smooth out this risk. With technical analysis, some investors, rather than relying on the randomness of a date (every first Monday of each month for example), will adapt the Dollar Cost-Average by choosing to invest only on the supports. Small amounts invested right after a correction.