As the investment sector most closely associated with apocalytic Mad Max scenarios, hyperinflation and other forms of economic mayhem, few markets are more dominated by sentiment than precious metals. It comes as no surprise, then, that technical analysis, which quantifies market sentiment, has proven to be effective at predicting the course of the gold price. Recent price activity in the gold market has supported the two technical trading indicators which suggest further upside ahead for the all-important spot price.
Traders last week were focused on gold's move above the 50-day moving average, an event that has previously signaled a sustained price rise. Through most of 2011, the bullion price remained above the 50-day average as it moved from $1,370 per ounce in February to a peak of $1,880 in September. The price then plunged through the 50-day moving average, which was the start of a period of volatility and general price declines. By May of this year, gold was trading lower, at around $1,550.
Gold's Relative Strength Index (RSI) proved a profitable trading tool during the 2011 to May 2012 period of volatility. An RSI reading of 30 or lower signals oversold conditions; when the RSI went below 30 in December and again in May, traders who bought gold were rewarded with significant higher price moves in the subsequent weeks. An RSI reading of 70 or above is usually a sign the stock is overbought, but it appears far less useful today. When RSI is above this point, the gold price still tends to sustain rallies.
Recent history suggests that as long as the gold price remains above the 50-day moving average, it should continue to move higher. If it ducks below the 50-day, however, current holders of gold and gold-based investments should start paying close attention. And for those investors looking to re-enter the gold market, if the current rally fails, watch the RSI. If it goes below 30, that's a buy signal.
Scott Barlow