FLASH: Expert traders use a combination of technical analysis, sentiment analysis and fundamental analysis to determine the future price of gold.
The experts gold traders use several technical, fundamental and sentiment indicators to determine the future direction of the yellow metal. Gold is viewed as both a commodity and a currency.
Gold is generally quoted in USDs, and trades both as an exchange traded instrument as well as over the counter.
How Experts Trade Gold
Gold is considered a safe-haven asset that gains in value when markets are looking for an alternative to other currencies that are losing value. When interest rates are declining around the globe, the demand for a currency that will sustain its value provides a backdrop for rising gold prices. Gold has a forward interest rate, like USD rates or Euribor rates.
This interest rate called the Gofo rate, increases relative to the US dollar when gold demand rises. Expert traders will evaluate three dimensions that provide them with a view of the gold market.
These include the technicals, the fundamental backdrop and sentiment, as follows:
Experts attempt to analyze the long-term trend in gold prices by evaluating a weekly chart. Gold prices trend and trade sideways like other capital market instruments. By using different tools you can determine if the price is likely to trend or remain in a range.
Gold prices in June of Y 2019 are bucking up against the upper end of a 6-year range, and are poised to test the upper boundary. Momentum has turned positive as the MACD index generated a crossover buy signal.
The MACD is a very useful momentum index that uses moving average to generate a crossover signal that describes when positive as well as negative momentum is accelerating.
A weekly MACD crossover on gold prices tells expert traders that gold price momentum is accelerating upward.
Another momentum indicator is the relative strength index (RSI). This momentum oscillator describes whether prices are accelerating relative to the last 14-periods. The RSI surged in June of Y 2019 and has broken out, which shows accelerating positive momentum. The only caveat is the current reading on the RSI is 77, which is above the overbought trigger level of 70 and could foreshadow a correction.
The Key to using the RSI is to look at prior highs to determine how far momentum has accelerated in the past. The weekly RSI has hit levels near 84 in the past, which means that positive momentum can still accelerate as gold prices break out.
The uptrend is also moving higher. The 10-Wk MA crossed above the 50-Wk MA in early Y 2019, and the 10-Day MA continues to rise which shows that a medium-term up trend is currently in place.
There are several ways to determine market sentiment within the gold market.
A Key indicators is using the Commitment of Trader’s report released by the Commodity Futures Trading Commission (CFTC). This reports to helps traders understand market dynamics.
The COT reports show position data that is reported by category. This information is reported to the CFTC by brokers and clearing members. While the actual reason that a trader has a position is not reported, experts make certain assumptions that provide information about those positions.
Positions are reported by category. For gold futures and options, the categories include swap dealers, managed money and other reportables. Swap dealers include banks and investment banks as well as industry specific merchandisers. Managed money includes hedge funds, pensions funds and mutual funds. Other reportables is retail trade.
The CFTC staff does not know specific reasons for specific positions and hence this information does not factor in determining trader classifications. For example, the CFTC does not know if a swap dealer is taking a speculative position or hedging risk. What experts need to evaluate is why positions are increasing or decreasing.
Expert traders generally assume that all the swap dealer positions reflect hedges from deals transacted with gold producers and refiners. Those positions are offset with speculative positions taken by managed money. Managed money takes positions that provide information about sentiment.
There are 2 concepts to evaluate.
1st, is a trend in place. If the COT information shows that managed money or large specs are increasing their long positions, sentiment toward gold is increasing. If they are increasing their short positions, then negative sentiment is increasing.
2nd, is whether the open long or short positions in managed money is overextended. If managed money is overextended, sentiment is too high and prices could snap back quickly.
The most important gold fundamental is whether the US dollar is likely to rise or fall. Since gold is priced in US dollars, when the dollar rises, it makes gold more expensive in other currencies. This means gold prices need to fall to accommodate the higher cost of purchasing it in dollars. The reverse is true when the dollar declines. Traders generally follow how the dollar is performing against the Euro and the yen as these make up the bulk of the transactions that occur around the globe on a daily basis. Gold is also viewed as hedge against higher inflation. When inflation is on the rise, gold prices will offset increases in a basket of goods or services.
Gold prices fluctuate daily, and over the long term either trade within a trend or consolidate. There are several technical indicators, such as the MACD, RSI and Moving averages that can help determine the future direction of gold prices.
Expert traders use a combination of technical analysis, sentiment analysis and fundamental analysis to determine the future price of gold. Sentiment analysis can include the Commitment of Traders report released weekly by the CFTC. Additional, expert traders will track the value of the USD, which is a driving force behind the value of gold
Have a terrific Holiday week.