Gold & Silver Markets Analyses

Posted on January 16, 2011

Market Analysis Regal Gold Buyers buys and sells hundreds of ounces of gold and silver per month, and we are often asked for our opinion on current market conditions. Whether one wants to buy or sell gold or silver coins and bullion, it's important to be educated in market analysis. Regal Gold Buyers uses a simple approach to analyze and predict markets. First, it's important to define some terms and understand some analysis tools. Resistance - An AREA of price points that a market has difficulty exceeding. Sellers generally step in at this price range and introduce supply to a market sending the price down.

Support - An AREA of price points that a market has difficulty falling below. Buyers generally step in at this price range and introduce demand to a market sending the price up.

Moving Average - A line created by plotting points on a graph calculated by averaging the most recent price points. For example, each point on a 50 week moving average is an average of the closing prices (open, close, high, or low prices can be used) of the previous 50 weeks.

Although there are many market analysis tools available, Regal Gold Buyers employs a simple approach to market analysis. Many market analysis tools are contradictory, and therefore, confusing. Areas of support, resistance, trend lines, moving averages, and volume are sufficient to appropriately evaluate markets. In this analysis, we use a weekly candlestick chart. Although we primarily use technical analysis to evaluate markets, we caution against ignoring fundamental analysis. However, charts will generally precede any pending fundamental announcements.

For our current assessment, we are evaluating a weekly chart of XAU provided by Free Stock Charts. The XAU is a sector index that follows gold AND silver. Upon first glance, we see a healthy market in a long-term uptrend. What makes it a healthy market? We can see two periods of upward movement with each peak exceeding the previous peak and each trough being higher than the previous trough. These two periods are separated by a period of consolidation, at times bordering on congestion.

We have added several trend lines, a resistance line, a 50 week moving average (MA), and a 200 week MA.  This chart provides an excellent opportunity to review recent history, learn from it, and apply it to the present and future.  The uptrend before the consolidation (left side of chart) was ended by a failed attempt to make a new high peak (blue arrow) followed by a break to the downside of trend line 1 (white arrow).  This failed attempt to make a higher peak established an area of resistance ("Proven Resistance").  We label this as "Proven" because during the period of consolidation there were two failed attempts to exceed this price area (yellow arrows).  When we look at the current uptrend (right side of consolidation), we see a similar breakdown of the uptrend.  We see the same failed attempt at a higher peak (blue arrow), followed by a break to the downside of the trend line (white arrow).

Please note that at the end of the consolidation, we finally broke through resistance.  After a definitive break to the upside of resistance, we had numerous weeks of upward movement that initiated a new uptrend.  This is important because previous resistance becomes future support.  This old adage will be important in making our final prediction for future market activity.  Also, please note that the 50 week MA (blue wavy line) has essentially met the line of resistance.  This will likely form a very strong area of support.

SUMMARY & PREDICTION: The XAU chart indicates that we are in a long-term uptrend in gold and silver. However, we have entered a time in which the graph has failed to achieve a new high and has broken through the upward trend line.  We predict a short-term downward price movement, possibly to terminate at previous resistance (now support).  At the current gold/XAU ratio, that would mean a drop to the $1240 mark.  What does this mean for investors?  Considering we are still in an overall uptrend, we would recommend holding current positions and possibly buying more gold.  Although we can make educated guesses, we can not predict with certainty where the downslide will end.  Therefore, it is wise to use this down period to average into a new position.  Averaging in means purchasing in segments to avoid being locked into one purchase price.

Disclaimer: This blog is intended to provide education. Investing is risky, and due diligence should be performed. Regal Gold Buyers' analysis and predictions are not intended as a call to action.