When an investor buys or sells gold, they are part of a global market driven by numerous and varied objectives, such as making a profit, achieving liquidity, seeking a safe haven, or commercial use. Traders rely on one of two techniques to decide when to buy gold: fundamental or technical analysis. Fundamental analysis has supported investing in gold for some time, but now technical analysis is also favoring the yellow metal.
Fundamental vs. Technical Analysis
Markets will always move up and down, presenting opportunities to buy and sell. The goal of investors is to correctly anticipate the direction of asset prices and take advantage of the most favorable positions. Forecasting those price movements and market cycles involves one of two basic techniques: fundamental analysis or technical analysis.
When one is focused on the intrinsic value of a commodity like gold, the fundamental market analysis approach is in play. This is basically an effort to evaluate the value of gold based on factors that affect that perception. Note this includes both objective and subjective indicators that affect supply and demand. For example, annual mine output is a closely monitored objective factor that influences gold prices, as is the demand for gold for use in jewelry.
On the other hand, the overall sentiment about world economic stability, concerns over a particular political situation, or the possibility of war are all subjective ways that markets are influenced and prices affected.
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In the other camp, that of the technical analysts, the gold price evaluation strategy focuses on the market itself. Historical and current information about trading and external factors are used to predict how markets will move. Underlying the graphs and charts produced by the technical side of the market is a massive amount of data and analysis that seeks to find patterns and predict market activity.
Of course, the fact that there are sellers and buyers every day means that there is no perfect time to be on one side of the market or the other. In addition to these different approaches and a multitude of variables is the issue of whether one is in the market as a speculator for short-term gain or an investor concerned with long-term objectives.
Technical Analysis Supports Gold Investing
Many of the short-term reasons to buy or sell gold have very little to do with the long-term factors. For example, the market will react strongly to the threat of an economic crisis over a few days or weeks, and then that event will be priced out.
However, there are trends that have proven reliable over many years. It is these market indicators that are getting the attention of a number of technical traders in gold and precious metals. 1 Their analysis suggests that the market is turning bullish for gold prices. 2 Among the strongest signs favoring investing in gold is a stock market that is swiftly retreating from its post-election rally and facing a market crash.
Savvy, long-term investors in gold take the time to understand as much as possible about the major market trends, fundamental and technical, in these prices. They use times of downward pressure to average down the total cost of their holdings, and enjoy the upswings that add to their overall value.