Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19
Boris Johnson's "Do or Die, Dead in a Ditch" Brexit Strategy - 11th Sep 19
Precious Metals, US Dollar: How It All Relates – Part I - 11th Sep 19
Bank of England’s Carney Delivers Dollar Shocker at Jackson Hole meeting - 11th Sep 19
Gold and Silver Wounded Animals, Indeed - 11th Sep 19
Boris Johnson a Crippled Prime Minister - 11th Sep 19
Gold Significant Correction Has Started - 11th Sep 19
Reasons To Follow Experienced Traders In Automated Trading - 11th Sep 19
Silver's Sharp Reaction Back - 11th Sep 19
2020 Will Be the Most Volatile Market Year in History - 11th Sep 19
Westminister BrExit Extreme Chaos Puts Britain into a Pre-Civil War State - 10th Sep 19
Gold to Correct as Stocks Rally - 10th Sep 19
Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - 10th Sep 19
Stock Market Sector Rotation Giving Mixed Signals About The Future - 10th Sep 19
The Online Gaming Industry is Going Up - 10th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold, Silver and the Validity of Technical Analysis Part 2

Commodities / Gold and Silver 2011 Feb 15, 2011 - 09:16 AM GMT

By: Julian_DW_Phillips

Commodities

Best Financial Markets Analysis ArticleRecently the economics site: www.FinanceandEconomics.org published an article on "Precious Metals and the validity of Technical Analysis." We completely agree with the thoughts expressed there and in this piece would like to expand on their thoughts here. Over the last eight years or so, we have seen the Technical Analysis approach to the gold price give incorrect signals, when seen in isolation. Many times the technical picture pointed down on the gold price in the face of a strong fundamental picture. We know that this has wrong-footed many gold investors who found themselves waiting for a fall only to see it consolidate then rise. Over the last few years it has done this more frequently until we find at the Gold Forecaster we approach technical analysis in a way that allows for this and complements the fundamentals.


Of late, some analysts have identified a 'head and shoulders' top and forecast the end of the 'bull' market in gold and silver, but it has not come, nor do we expect it to come. The reason the charts have failed to correctly forecast the gold and silver prices so often has been due to the change in the nature of the market, the change in the type of investors, the change in the number of investors and the change in the location of investors.

Part 2 - The Change in the nature of Gold Markets and those that are not Gold Markets

The first part of our series on the validity of Technical analysis, covered the changes in types and location of investors. It also detailed those markets called gold markets, but which are not directly of fully involved in the buying and selling of gold. This laid the foundation of why technical analysis has not proved as accurate as some maintain. Many investors may believe that all one needs to be successful in a market is technical analysis. We would disagree with that when we look at the markets in gold and silver.

Conditions needed for Technical Analysis to work

There are two conditions that need to be met for technical analysis to work efficiently:

  1. Investor sentiment must be properly reflected in the market price.

    With a market as diverse as the gold market, [see part 1 of this series] investor sentiment cannot be properly reflected in the gold price because of the nature of the holders of gold. In the developed world, an investor is one who buys intending to take a profit at some time in the future, by selling gold. In the case of the gold market, this is the concept of the developed world investor, but excludes the largest and most important sides of the gold market outside the developed world.

    For instance, central banks are not driven by profit nor is it their intention to sell at a point of time in the future. Emerging nation gold buyers see gold as financial security. In particular Asia, which includes all the lands to the east of Greece, right through all India and China gold is to be held for the family and ongoing generations thereafter. These buyers only sell when they believe that the price has gone too high too fast and then they sell with every intention of buying back that gold once a new 'floor' price is established after the fall.

    In the developed world, portfolio holdings of precious metals are thought to be less than 1%. This includes the holdings of "non-gold and silver" markets such as futures and options and gold and silver mining company shares. So in real terms, developed world investors are a very small part of the global gold market. Most commentary on gold and silver we see is based on the thoughts and emotions of these western investors. This hardly meets the condition that "investor sentiment must properly reflect the market price."

  2. Prices must accurately reflect demand and supply.

    The equity markets of the developed world usually reflect true demand and supply in the prices of those equities. It was for these markets that technical analysis was developed. Usually events surrounding the equity involved moved investors to buy and sell, reflecting the overall prospects for the equity. In the gold and silver markets, this is not so. The factors affecting the gold and silver prices are diverse, complex and have little to do with gold itself. These factors reflect global confidence or lack thereof, the level of globally perceived stability in the developed world, whereas in the emerging world gold is seen as real money to be collected and held for future rainy days. These motives for holding gold and silver hardly constitute the sort of motives that would fit the criteria needed for technical analysis to be accurate.

    A look at global demand shows that the number of buyers of gold is increasing all the time. With India and China leading world growth through the fundamental development of those nations, the newly enriched middle classes are exploding constantly now and set to do so for several decades to come. Each of these middle classes follows the wisdom of their elders and turn to gold as a trusted and reliable means of saving. Even the well-educated follow their elders on this front. Those who may have been skeptical have been convinced by the rise in gold this century from $275 to close to $1,400 with more rises of a substantial nature expected in the future. Mum and Dad have been right so far. This has solidified this type of approach to gold and silver in a part of the world suddenly able to invest usually for the first time for a generation or more. The percentage of their portfolios held in gold is somewhere north of 25% with the balance [in China] usually held in bank deposits. The percentage in gold is growing all the time, despite rising interest rates in China.

The developed world's perspective

It is hard for the developed world to understand this because investors there grew up in a world of a fully developed banking and investment system driven by banks and governments through paper currencies. For the last 25 years, gold has been treated in the West as an out of date simpleton's investment that carries no income. Even after a rise of over five times the gold price is thought of as a strange bubble that will burst at some point. Bearing in mind that the bulk of the world [albeit only newly enriched] has known gold to be serious money for around 6,000 years. Their [and in Europe] experience through last century with the paper money of the different governments has thoroughly convinced them that it is not to be relied on for your pension let alone for your estate. There, government has been changeable and corrupt, and their paper currencies even more so, so who in their right mind would trust them with their old age. In the West, that lesson is still being learned and could prove a painful one indeed.

Gold not in a 'bull' market

So we would suggest that we look at gold not in a 'bull' market, but that the currencies of the developed world have been in a 'bull' market and have now moved into a 'bear' market, as the leading currencies there are being over-printed, so vastly increasing supplies. Gold, if it is to function in its traditional way, should reflect such an expansion of money by rising in price to reflect that expansion, eventually [there are many obstacles put in its way by governments most anxious for gold to not sit in such judgment]. But gold has and will be the measure of a currency's value not the other way round.

Can Technical Analysis be used in the Gold market?

Turning back to technical analysis, it is clear that the factors affecting the gold price are too diverse, too large and too complex to be persistently and accurately reflected in technical analysis. When describing the Asian type of gold buyer, we are loathe to use the term 'hoarder' because that implies a certain narrow attitude to gold a myopic uneducated one. On the contrary, eastern investors have got it right to date. There historic experience pointed out that eventually currencies would fail as they always have. We are also loathe to use the term 'investor' for the developed world where the term, 'long-term trader may be more appropriate.

Gold has retained its value through wars, peace centuries and throughout history. Currencies have lasted only as long as the government that has issued them. Until 1971 currencies needed the support of gold to retain credibility. Since then, this support has been ignored and that credibility has lasted only as long as the boom has. So can technical analysis be useful in the gold market. Yes it can, but not in isolation.

Where technical analysis is extremely useful is when it is used in conjunction with fundamentals analysis. Used in their correct proportions, it is possible to receive guidance from both types of analysis that is effective in gauging short and long-term price directions. But if one has the wrong perspective or proportions then technical analysis will disappoint.

Repeatedly during the years of gold's rise, technical analysis has warned of a change of trend and a downturn. But when tempered with the fundamentals, it has warned, quite rightly of corrections. Most of these have been shorter lived and shallower than indicated, but then adding the fundamental drivers from Asia and central banks and the warnings have led us to expect such shallower falls and quicker rebounds.

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit www.GoldForecaster.com

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2011 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

J Miah
15 Feb 11, 15:40
gold prediction

On the 29th of September 2010 you predicted $2000 gold by christms on "Frisby's Bulls & Bears" podcast. It's there for everyone to see. As happens during christmas price was around $1400, it just shows how much you know about technical analysis or fundamental analysis. Even I could of told you gold will be no where near $2000.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules