Gold: Technical Update Regarding Buy Low


Even though we had published timely warnings, the recent pullback and increased volatility in the precious metals sector have caught many traders and investors off guard. While all central banks keep printing currency like crazy, prices for gold (XAUUSD:CUR), the SPDR Gold Trust ETF (GLD), and the Sprott Physical Gold Trust (PHYS) have all pulled back sharply and have been trading rather sideways to down over the last three weeks. To help navigate through these uncertain times, I decided to publish a somewhat unusual update.

The ultimate success principle: Buy Low and Sell High

If you want to make money in the markets, there is only one very simple yet super powerful principle you have to follow: Buy low and sell high. This is the only way to make money and the most important principle of them all. You can change the order and first sell high and then buy low which means you are shorting the market. But besides that, there is no shortcut or other way to make a gain. This is the most essential thing you need to understand. I am not saying this is easy. But the principle itself is very simple.

However, to figure out if something is high or low, you first need to differentiate in which time frame you are looking at each market. While something might be low on a short-term time frame (for example, an hourly chart or a daily chart), it still could be very high on a long-term chart (weekly or monthly chart) and vice-versa.

You also need to differentiate against what you are comparing the respective market or stock. Today, we want to focus on the gold price against the US dollar, as this is still the main fiat currency in which the gold price is being traded worldwide. Of course, we could also compare gold against other currencies, against stock indices such as the Dow Jones or S&P 500, or equally against other commodities such as oil, copper, etc. And we actually might come to different conclusions than we will draw from today’s analysis.

However, let’s go through the current gold charts in the US dollar together today, by looking at different time frames and finding out whether gold is trading high or low and therefore, whether it is a buying opportunity or not.

Gold in US Dollars, Monthly Chart: Rather high than low

Gold in US dollars, monthly chart as of August 26, 2020. Source: Tradingview

The monthly chart is really the big picture. If you are a long-term investor with a buy and hold approach, that’s basically your main time frame. Obviously, things are moving and changing very slowly here. It takes time for signals to come up or change. You might get a signal once a year or maybe only once every decade. And you certainly will be late because changes are showing up late on the monthly time frame. However, once a trend is established, you can ride it for many years. To your advantage, you also filter out most of the daily and weekly noise and can make life-changing triple-digit gains by simply playing the long wave. A negative could be that your learning curve is rather very slow as you get only a few signals and might, therefore, only realize after many years that your strategy or approach or investment system has been wrong. As we talk about gold, I would like to add that the monthly chart together with the weekly chart should be your main timing tool for your physical purchases.

On the monthly chart, gold is not low

Applying the principle of “buying low and selling high” on the monthly chart for gold, it should be obvious that gold prices are not low anymore. Instead, they have just recently reached a new all-time high. So, gold is likely more high than low. Consequently, it is not the time to chase gold. However, I have to make one exception. Given the dire outlook for all the fiat currency systems on our planet, buying gold at current levels is justified if you don’t have at least 2-5% of your net-worth in physical precious metals already. In that case, the insurance character of gold and silver is more important than having a good and reasonable entry price. Should you own a physical position in precious metals on the other hand, then I believe you should patiently wait for a bit lower prices in the weeks and months to come.

As a simple rule of thumb, I would say that pullbacks into the zone between US$1,600 and US$1,800 would qualify for a medium good “buy low” opportunity.

Gold in US Dollars, Weekly Chart: Rather high than low, too

Gold in US dollars, weekly chart as of August 26, 2020. Source: Tradingview

The weekly chart is not only important for long-term investors but should also be used by swing traders, who want to be in positions for a few weeks to a few months. This is also a great bigger picture tool and lets you spot trends and trend-changes much earlier than the monthly chart.

In the case of gold, the weekly chart is up nearly US$900 since the last really important low which was found on August 26th in 2018. In the meantime, gold had rallied from US$1,160 up to US$2,075. Hence, the weekly chart is also rather high than low. You can see how the rally accelerated in three trend channels of which the light green one is the steepest one. Should this light green trend channel break, gold might test the upper edge of the next lower trend channel between US$1,750 and US$1,800.

Note, as well, that after staying in the overbought zone for more than three months, the stochastic oscillator has finally issued a sell signal. Therefore, the bullish momentum has been lost on the weekly chart. The weekly chart would probably signal a new “buy low” opportunity once the stochastic oscillator reaches its oversold zone or becomes neutral at least. The last time this happened was at the “corona low” in mid of March. A truly oversold opportunity was last seen in December 2019. On this weekly chart, you can also see that gold gave you two good “buy low” entries in 2019 and one medium good “buy low” entry in 2020 so far. Hence, one very good “buy low” opportunity should at least show up in the remaining course of this year. As so often in investing and trading, you need to be patient and let the market come to you!

Gold in US Dollars, Daily Chart: Neither low nor high

Gold in US dollars, daily chart as of August 26, 2020. Source: Tradingview

The daily chart is primarily an important time frame for day-traders and swing traders and also mid- and long-term investors should use it to optimize their entry and exit timing. On the daily chart, a lot of noise and short-term fluctuations can easily prevent market participants from seeing the forest for the trees. The faster the movements and the shorter the frequencies, the stronger the impact emotions can suddenly have on your decision finding process.

Looking at the daily chart for gold, after peaking at US$2,075, now trading nearly US$160 lower, current price levels do not really qualify as being high anymore. However, the most recent low at US$1,861 is also still US$50 away. Hence, the daily chart is neither low nor high at the moment. Instead, gold is more or less trading in a sideways range, probably trying to find a short-term bottom. Therefore, it’s not really a buy on the daily chart and certainly not a sell which means it’s rather neutral.

Gold in US Dollars, 4-hour Chart: Getting low

Gold in US dollars, 4-hour chart as of August 26, 2020. Source: Tradingview

The final stage we want to zoom in is the 4-hour chart. Day-traders, of course, will need to zoom in much further but for our purposes in this analysis, it is more than sufficient. As you can see, gold has been sliding to the south slowly but surely over the last three trading days. So far, no short-term bottom is in place. However, bears are only slowly making progress. The slow stochastic is signaling an oversold setup but could move further into its oversold zone. At the same time, the zone between the all-time high at US$1,920 and the round psychological number of US$1,900 should bring in some form of support.

Hence, a bounce during tomorrow’s Jackson Hole meeting is getting likely as gold is becoming more and more oversold on its short-term technical picture. However, it would take a bounce above the downtrend currently around US$1,970 to neutralize the bearish setup.

Conclusion and Recommendation: Be patient

Going through all the different time frames, you can see that they are all sending different messages. Ideally, they would all sound the same melody which would mean we could stack our odds and act accordingly by building positions that we could hold for quite some time. Unfortunately, that is not the case at the moment as the monthly chart simply argues to be patient while the weekly chart seems to be just starting to roll over.

Therefore, any short-term buying opportunity on the daily and especially on the 4-hour chart should only be treated as such – a short-term trading opportunity with a short-term time horizon. Large physical purchases, for example, are certainly not in that category. Buy and hold mining stock strategies would also not really fit into that category. Option plays with a multi-week time frame, certainly, are not making any sense in the current non-directional environment. Actually, any multi-week directional plays probably will not be successful on the long side.

But you could try playing a bounce in gold and silver prices for a few days (from around US$1,900 to maybe US$1,950/US$1,970). But you might need to risk more than US$40 if you want to use the recent low at US1,961 as your technical stop. At the same time, the upside would be probably limited to US$50-US$80. In total, this will not give you a very good risk-reward ratio. You’d be risking US$40 to maybe gain US$50-US$80…

My humble conclusion would be to avoid this market for some time and simply wait for the next low-risk setup. Between US$1,750 and US$1,820, I think a good longer-term opportunity could present itself for a nice swing-trade as well as for investments into mining stocks and, of course, especially for physical purchases of gold and silver.

Disclosure: I am/we are long PHYSICAL PRECIOUS METALS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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