Technical analysis does work for gold

Alasdair Macleod also wrote an article the day prior entitled Precious metals and the validity of technical analysis.

They are both well worth the read.

I just want to refute their arguments that technical analysis doesn’t work in gold. I read and enjoy both men’s work as often as I can.

Mr. Kim suggests technical and fundamental analysis is mute in manipulated markets in the short-term.
As for fundamentals, I say demand is increasing for gold, while supply is not keeping pace with demand growth. That equates to higher prices over the mid to longer term.

I’ll show just how wrong he is in a minute on the technical analysis front, though.
While there is no doubt gold is being manipulated, or held lower every chance possible, the fact is also true that large sovereign buyers and fund buyers are waiting in the wings to scoop up cheaper gold.

More recently they have had less patience and have not waited for large pullbacks, rather they’ve stepped back in at relatively minor support areas in an attempt to front run the growing list of others who are looking to do the same.

It’s been a hot topic lately that the best way to buy gold is to acquire shares of GLD. What’s termed a “basket” of GLD shares consists of 100,000 shares, and in theory can be redeemed for 10,000 ounces of pure gold.
Whether this is true, practical or only available to the big well connected boys is a topic for another day so let’s leave it at that. But for today let’s assume this to be correct, that GLD is the best way to acquire physical delivery of gold.

This is in no way a knock on Mr. Kim as I’ve enjoyed his writing for years now and agree with many of his thoughts.

First, let’s take a look at the six month chart of gold since it’s relatively short term.

This is the basic chart I’ve been showing in my free weekly letters and it was quite easy to spot the rounded top as it was completing and I did mention that and I know many readers took advantage of it.

The recent bottom occurred just below mild horizontal support then broke the very simple basic downtrend line.  That would constitute a bottom having been put in.  In my opinion.

I mentioned these both in the free and clear to everyone in my weekly letters every weekend.

The fact that the recent bottom was on only mild horizontal support is further evidence of the strong willingness and eagerness of buyers to step in at the first opportune time.

Now this is all well and good and very basic, but not enough for me to discount J.S. Kim!

So let’s take a look at another indicator I use and mention every week for free in the weekly letter, the GLD chart.

The GLD chart could have the exact same technical lines drawn in as the gold chart above, but what I want to focus on is the volume.  This may not even be classified as “pure” technical analysis, but for me, I like to see a few things line up in order to give me confidence to lay my money on the line.  And admittedly I did not catch every top or bottom.

It’s clear, to me at least, that any large volume days above roughly 25 million shares traded in GLD have marked high or low points within a day or two.  In my book, a very accurate indicator.

As long as it works, it works.

Initiating and closing positions once the volume metrics line up, using very short stops would have netted you very nice profits, especially if leverage with options or futures.

One last note, you should read Mr. Kim’s article linked above.  He does bring up many great points and I agree with him everywhere except the fact that you can call bottoms and tops quite easily and accurately even in the manipulated gold market.

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