There are many factors for precious metals price movements. Investors mostly use technical and fundamental analysis to make a decision when to buy gold and/or when to sell their investments. Before we go any further lets make clear what technical –and fundamental analysis is.
Technical analysis – Technical analysis is a trading tool employed to evaluate securities and attempt to forecast their future movement by analyzing statistics gathered from trading activity, such as price movement and volume. Unlike fundamental analysts who attempt to evaluate a security’s intrinsic value, technical analysts focus on charts of price movement and various analytical tools to evaluate a security’s strength or weakness and forecast future price changes.
Fundamental analysis – Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security’s value, including macroeconomic factors such as the overall economy and industry conditions, and microeconomic factors such as financial conditions and company management. The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security’s current price, thus indicating whether the security is undervalued or overvalued.
What to keep in mind when evaluating gold price for the charts?
First of all, you should keep it simple, especially when making a long-term investment. Key factors to check when making technical analysis is support and resistance levels where prices potentially reverse. Secondly in which direction the trend is going – uptrend or downtrend.
Here is an example from weekly gold chart and as you can see very strong resistance zone is between 11941 and 11756 SEK. Price has tested these levels three times but is not strong enough to push through it – in other words investors all over the world do not believe that gold price can move past this zone just yet.
Currently, there is a quite strong uptrend going on, as we can see the price has made lower lows and higher highs. To support the trend we have put 200MA ( Moving average of the past 200 weeks – the blue line ) and the price is higher from the line which also shows an uptrend. The third basis for the uptrend is support zone (green area) which gold has not even touched yet . Three technical indicators all in that zone in the same time signify that this area is a great support in weekly basis and there is a strong potential that it will not break this line. It is a perfect zone to buy gold.
In following months we are expecting gold price to go back in the resistance zone of 11941-11756 SEK per 1-ounce. See picture below.
What to keep in mind with Fundamental analysis?
Gold price is strongly affected by FOMC news (Federal Open Market Committee). For example when Fed rises interest rates that means economy is rather strong and people are more likely to put their money in other investment opportunities which makes the gold price go lower.
Additional to FOMC news it is important to check unemployment rates which also shows quite clearly if the economy is rather strong or weak.
Gold supply in the entire world is about 165000 metric tons and only about 2500 metric tons of gold gets produced each year. When production costs rise, miners sell gold for more money to preserve their profits, and those higher costs also get reflected when it comes time to sell coins if they were minted from gold that was originally mined yesterday or thousands of years ago.
With global crises, gold price usually tends to rise when people lack confidence in governments or financial markets. Gold is often called crisis commodity. For example, the price of gold spiked right after when Russians moved into Ukraine as people became uncertain about geopolitical stability in the region. Gold is not just valuable as a hedge fund and a safe haven investment; gold is also used in jewelry and industry. Over half of gold demand is from jewelry, and China, India, and the United States are three countries with the biggest demands. In some parts of India, gold is still regarded as a type of currency, a display of wealth, an important gift, and a hedge against bad times. This demand drives the price of gold in India up. Gold, both the color and the precious metal, is a symbol of opulence in China, and a booming Chinese economy means that more people have money to spend on China gold. Read another article how India can affect Gold prices on Tavex blog.
In conclusion, if you plan to buy gold, you need to understand that the price is impacted by production costs, money supply, comfort or discomfort with financial or geopolitical stability, the demand generated by jewelry and industry, and actions taken by central banks. In other words, gold is a finite resource and when global economic conditions make gold more attractive, gold demand increases, making the price of gold rise. But the actual value of gold remains fairly stable in the long run.