Trend analysis is a vital part of gold investing. Posted by James Randolph on November 30, 2010
A word about trends.
November 30, 2010 – Trend analysis is a vital part of gold investing, but be wary of hard and fast “rules”. One widely used technique is to pore over the price charts looking for distinct patterns and then make assumptions based on previous occurrences of that pattern. The use of pattern recognition in predicting future movements, however, is of little value.
The reason for that is a simple logical fault – that every occurrence of situation ‘X’ has been immediately preceded by pattern ‘Y’ does not imply that every pattern ‘Y’ will be immediately followed by situation ‘X’. Typically such patterns repeat themselves numerous times throughout every cycle, and while a correlation may exist, it is useful only in explaining historical data.
A far more meaningful analysis is to compare actual performance to mathematically predicted trends. For instance, a straight line trend will predict future prices assuming they follow the current average growth. If prices are consistently above that line then we can safely conclude that returns are improving over the baseline.
The most commonly used trend lines, however, are the 20 and 40 month moving averages, which account for changes in the growth rates. Performance that is consistently above these trends indicate that a market is accelerating.
One pattern that has been detected in gold prices that you may have read about in Business Week is the so-called “head and shoulders” – a sequence of three peaks, the highest (the head) flanked on either side by two lower peaks (the shoulders). With that some have concluded that the gold market is close to topping out. But even a cursory examination of recent gold prices reveals several other occurrences of the same pattern.
On the other hand, gold is consistently outperforming its moving averages. The market is in fact accelerating, the ideal condition for gold investment.
Senior Staff Writer – Certified Gold Exchange