Using Technical Analysis In The Gold Markets

Gold (or bullion) has been the cornerstone of an older generation of investors, for its "safety", for the "next Depression". Having gold inside their investment portfolios has given these investors a feeling of security and comfort, and who would 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, ruined many of the wealthy and their families.

Here we take a look at some of the tools used to analyze gold stocks, and show you how the gold players make it look easier than analyzing other sectors. We will also analyze the gold price and 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 who mine the precious commodity. Told is used as a form of currency, and it is used in the fashioning of jewelry throughout the world and therefore has industrial purpose.

Tools for Analyzing Gold
Martin Pring has written in his "Technical Analysis Explained" (3rd Edition) 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 been 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. An investment in Newmont Mining Corporation Inc. (NEM-NYSE) in mid-November of 2000 had returned over 150%  by Jul 2002. Likewise, an investment in Anglogold Limited Ads (AU-NYSE) over the same period of time would have doubled in value.

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 anyone 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 or not a mine is a viable investment or not. If the cost of mining exceeds the current world price for the metal, the mine will be forced to slow its production or suspend 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 somewhat set in stone and 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 indices' charts at the same time they are breaking down Newmont Mining, Anglogold, and Barrick Gold (ABX-NYSE) et al.

Chart Created with Tradestation

Chart Created with Tradestation

Chart Created with Tradestation

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