Gold Continues to Sink, Makes New Low For the Year
While some observers have been recommending going long gold recently, the play was really dependent on its not breaking support. It has, and is now at a crossroads.
Gold tends to do pretty well when the economy is slowing down, and this has prompted some analysts to recommend taking long positions in gold, to look to take advantage of an expected upward movement.
We can’t forget what the charts tell us though, and this is the real indicator as far as how an asset is doing. We can look at things like the economy or the bond market but it is only to the extent that people are actually trading on these circumstances that this even matters.
Even though this seems intuitive and even obvious, a lot of people, including just about all fundamental analysts, are confused about what really drives price movement, and even think that these fundamentals drive price by themselves. They certainly do influence them, but are always only part of the story, especially since we only really look at a portion of the fundamental picture with our preferred indicators.
There is a set of data that does influence the price of gold, which we could term the objective criteria, and this includes things like macroeconomic forces, intra-asset movement of funds, and longer-term speculation. On top of this we have the subjective data, which is actually the real filter, and included the general mood of the market along with interpretations of the objective data and the forces of momentum that have people trading in the direction of the current trend.
The forces at work here are therefore quite complicated and not that easy to predict from just looking at data, and it’s not even so much that interpreting the data is so complicated, it’s more that we’re not the ones that matter as far its these interpretations go, it is the market that does it.
The market takes all this data, interprets it subjectivity, and then adds in whatever subjective influences it has on top of this. An example would be with how gold has performed over the last 6 months, where slowing economic data pushed it up back last September, and it rallied until this February, and has been going down since then.
If the Data Says Yes, and the Market Says No, Listen to the Market
The economic data continues to make gold look bullish, but at some point, the market decided that other assets looked better and migrated out of gold. This makes sense given that a lot of investors were skeptical about the stock market when the current move with stocks started, but as time went on, they gained more confidence and moved back into stocks more.
If we just hung onto our view that as long as the economy is slowing, this is bullish for gold, even though that might be the case generally, we need to try to avoid over-generalizing as well. We also can’t miss an important step here, the critical one actually, which is the economy slowing down being acted upon by the market to continue to drive the price of gold up.
If we look at the weekly chart for gold, and a weekly chart is generally preferable to a daily one for investors since they show you a higher-level view than daily bars do, one more suitable to the time frame that people who are looking to hold stocks for 6 months or longer, we do see a distinct move up from September to February, and then a reversal which is still going on.
It doesn’t even matter why this happened, because whatever is going on with a market, all its influences will be shown to us on charts in their entirety, with no doubt or room for argument. We can try to explain things away that do not correspond to our view by saying that the market is wrong, but the market is never wrong, it just is, and if our predictions deviate, it is our predictions that are always wrong.
Suggesting that we buy something during a downward trend is a bad idea, even though people may wish to try to outwit the market and predict reversals ahead of time. This is not only a risky venture but if the price is running against you, the probabilities of your success are against you as well, at least prior to any real confirmation from the market that your guess may be correct.
If we’re still thinking that gold may be going up soon, we can afford to wait until the journey begins. Prior to that, in the interim period, we need to avoid exposing ourselves to too much risk and as well as a reduced chance of success with these trades. This is actually what separates good traders from most investors, and investors can learn a lot from looking at the techniques of traders since they cannot afford to be too far wrong as the consequences are more severe, and therefore look to trade in a way that is sustainable over time.
We Need to Confine Our Strategies to Ones That Work Over Time
Investors usually don’t trade enough to even have much of an idea of how strategies pan out in a statistically significant sense, and the idea of jumping on a declining asset such as gold may not seem that odd or wrong to them. Perhaps they did this once or twice before and got lucky, but it’s what happens over hundreds of attempts that matters, because we need enough trials to make the results meaningful from a probability standpoint.
When these gold recommendations come out, as they have recently, the first thing we need to do is look at the weekly chart to see how this view jives with the current view of the market, and we would have seen that things are actually going the other way with gold right now. The fact that it was declining in price and looking like it might test the low of the year is not something we should get excited about or ignore.
It has since moved down further and broken through its support level, and this is really not a good sign at all if you are long or looking to be long this asset.
Those who were paying particular attention to this may have even been short gold at this point in time, based upon the February price reversal, and going short gold shouldn’t really scare us as long as we don’t just short it and close our eyes or cling to false hopes that we may be right in the end when things go against us too much.
The real reason why we need to use the weekly chart if we’re not trading gold shorter-term is that the dailies encompass a lot of up and down trends on that time frame that aren’t meaningful enough for those who are looking to stick around for a few months at least, as you could be in and out of the asset many times over a period like this if you are looking to ride the ups and downs of daily charts.
We could set our indicators long enough out to compensate for this, and plenty of people do this, but one of the main features of a chart is to give us a visual perspective and we need one that corresponds with our time frame, one that we can easily see these recent trends on.
Longer-term investors need to go with monthly charts, which provides a better perspective of the time frame we desire. We need to select the right chart to match up with our time frame, where significant moves are seen clearly and the noise that we don’t want to act on is filtered out enough.
Even the monthly chart for gold is starting to turn downward though, and while this doesn’t necessarily mean that investors on this time frame should be exiting, as they may be looking for more confirmation, when this is happening, this is not really a time you want to be entering.
Even those with a time frame of several years still need to time their entries and exits. If you are just going with what amounts to a general feeling among some people such as the demand for gold rising as people move out of other assets, even if this view is correct, you still need to jump in when such a thing is actually happening rather when the reverse is happening, as is the case presently.
Perhaps gold will start looking bullish again soon, but it isn’t now, and if we aren’t up for being short gold now, by buying inverse gold ETF shares for instance, we at least need to muster up the patience to wait for a better time to buy it. The fact that many people don’t do this is no reason why we need to become careless as well.
We see all sorts of what we could call loose recommendations all the time, and we cannot just assume that these people have done their due diligence or even know how to. Someone needs to though and this is often left to us.
Gold is well worth keeping an eye on from here, and while we may want to pay attention to things that may influence its price, the end result. How it is being influenced is the only thing that matters actually. We neglect this at our own peril.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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