How to Spot Signals in Gold

This article written by Andrew Hecht was originally published in the October 2012 issue of Traders' Magazine.

  • Andrew Hecht is a commodity trader and expert with over 30 years of trading experience. He has traded a wide range of physical commodities and commodity derivatives over the course of his career. Andrew currently writes weekly for the Sovereign Investor as well as for a number of trading services including Trader Hunter and Commodity Trend Alert.

Stochastics can be used as a centrepiece for buying and selling gold futures whether you are a short or long term trader. Stochastics will signal changes in the momentum of the price of gold. Used in combination with fundamental analysis and other technical tools stochastics will add an additional dimension to your trading.

The author began trading gold in 1983. At that time he worked for one of the biggest commodity trading companies in the world. In his early days as a trader he went to his boss to point out an interesting chart pattern developing in the gold market. The pattern showed that the price of gold was about to move higher. Not only was there a bullish price pattern on the chart but the gold price was closing each day at or near the highs of the trading session. His boss looked at the chart, listened to the rationale. He then poured a cup of cold coffee over that chart. “Only fundamental supply and demand analysis will tell you when the price of a commodity is going to move. Fundamentals are telling me lower – charts don’t mean a thing”. Needless to say he did not buy gold at that time. However he did learn a valuable lesson. You see, as the price of gold moved higher during the following days, he knew that chart patterns sometimes will signal a coming price move in any market.



The Role of Fundamental and Technical Signals

The ultimate guide to the long-term price direction of any commodity is its supply compared to its demand. The boss was not wrong about that. When it comes to the gold market, supply and demand data is readily available. A curious investor can quickly find data on annual production, annual consumption and total above ground stockpiles on the internet. Look at whether production or consumption is rising or falling compared to past years. Is the cost of producing an ounce of gold rising or falling? The answer to this question will shed light on the fundamental state of the gold market. You should use fundamental knowledge to determine a basic price bias – will the price of gold rise or fall in the future? However, fundamental knowledge alone is not enough to make money buying and selling a commodity like gold. This is particularly true when it comes to shorter-term trading.






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