Posted on January 06, 2023
I like to look at the charts in financial markets quite often, probably even every day. They are helpful in giving a very thorough snapshot of what a market is doing at any given time. Charting provides a quick view into immense amounts of data, all in a single place. After all, they say a picture is worth a thousand words.
Technical analysis can be a wonderful thing, but it can also be a boondoggle for the very same reason. By that, I mean that technical analysis isn’t always right. Or perhaps put more clearly, the effectiveness of a good technical analysis depends on several factors which include the amount and quality of data available, the time frame, which is being analyzed, and finally the ability of the analyst to incorporate outside data to interpret the information they are processing.
Further, it is very easy to perform a good technical analysis and yet have the results come out ‘wrong’. Typically, this means the market shifted due to some unforeseen market narrative, such as a big economic or political news event. Russia’s invasion of Ukraine, for example, had an understandable and noticeable effect on the financial markets.
Because the event was not foreseeable, even a good technical analysis of the gold market, for example, prior to that event probably fell flat on its face in the end. Technical analysis is often backward-looking; we look at things that have already occurred to predict what could happen next. Without a crystal ball, however, there will always be failures in technical analysis. Despite this, even a failed analysis can be immensely informative if only for educating us exactly how those types of unforeseen events affect the markets.
Here we have a simple chart on gold with some analysis by me. This is a ten-year chart, and I have added a few technical indicators to help us in our analysis. I’ll explain what each one is and give you my take on where gold is now, and where it could go this year based on what the current chart shows us.
I have put two types of indicators on the chart. The first is called a moving average (MA), and what that means is we average out the price of gold over a specified period (last 50 and last 200 days) to get an idea of whether the price will ‘break out’ from the moving average ranges. In other words, the moving average tells us if gold is either falling below a periodic average price or surging above it. Both indicate potential breakouts in gold either up or down, depending on the direction of the surge.
The second indicator is a Fibonacci, named after an Italian mathematician who developed it. All you need to know about Fibonacci numbers is that they are naturally occurring in many areas and appear to be a natural indicator of natural number sequences. They are very helpful in trading because they are psychological trading events for markets.
I mean in this case that traders use these numbers to trade to or away from, and as either support or resistance. Support indicates the price will not fall below that number, and resistance indicates traders do not want to go above it. So, we have plotted a couple of Fibonacci sequences on the chart for the purposes of determining where traders are setting their gold price targets.
And now that we have the basics down, let’s perform a quick analysis of gold.
Let’s see what we have on the chart. The first thing to know is that Fibonacci sequences can be drawn on a chart for any time frame or price range. And what they give are traders targets for their prices. In each place the Fibonacci line crosses a price, it is a potential target for gold, whether up or down from its current position. Gold traders on COMEX will use these to manage both their options and futures trades on the market, for which the spot price emerges that we use to buy and sell physical bullion on an everyday basis.
The left Fibonacci, light purple, was drawn to show the support line for gold that was held for the last quarter of 2022. Traders were obviously setting their rock bottom price stops at about $1625 per ounce, as you can see on the chart (shown in bright orange). That price is the 50% Fibonacci sequence number between the high price of $2069 and the 2016 to 2019 market lows. Why would they do this?
Well, gold has been rising since 2016 in a steady pattern until the pandemic in 2020, for which gold exploded upward. So, traders simply decided that gold should not retrace (to reverse direction) farther than that level. A simple way to look at it is that the 2020 pandemic created a new floor price on gold that traders would not go under, due to the perceived increased risk in the economy.
And that level was the 50% Fibonacci value of the 2016 to 2019 price range. Traders don’t know what is going to happen in the future, so they use tactics like this to guide them in finding what the new prices should be. Remember that potentially millions of traders could get involved in setting the gold prices, and this technique is simply a way to ‘capture’ (or to determine) the consensus of the market on what the gold price should be.
Because the pandemic set a new psychological support price under gold, it is then helpful to perform a second Fibonacci analysis on gold for the previous two years. Simply, the circumstances around the economy, the supply chain, and geopolitical events caused traders to evaluate the potential for higher gold prices going forward.
This Fibonacci is in an arc form, which is simply a representation of the price levels using a more visual indicator. Where the price intersects one of the Fibonacci lines (plotted as an arc or half-circle), that becomes the potential new support (higher prices) or resistance (lower prices) line for gold. With that basic understanding, let’s look at what is going on with gold.
Because we reached a new ALL-TIME high of gold in 2020 due to the pandemic, traders immediately use this high as a starting point for a new technical analysis of gold. So, the dark red Fibonacci arc has been plotted here to show us where gold prices will meet resistance (stop rising) or support (stop falling). In each case the gold price intersected the Fibonacci sequence number, I circled it in green.
Now, traders are using this Fibonacci sequence to place their stops to the upside. Or in other words, they are resistance lines. In each case, gold retreated from the Fibonacci resistance line, only to come back and retest it again in the future. And this is a perfect time to talk about unexpected events.
In early 2022 when news broke that Russia invaded Ukraine, an immediate response was felt in the financial markets. I have attached a picture of the US30, an index that tracks the 30 largest US companies, and we can see how the stock markets react to major world events.
Specific to the Russia-Ukraine invasion, gold popped up over $260 per ounce in a VERY short period of time. And since then, the market has been trading exactly to the Fibonacci arc sequence I have graphed out on the gold chart. I pulled out the selected timeframe for you on the following excerpt from the original gold chart I included at the beginning of the article.
It is clear to see how the traders are looking at gold to the end of 2022. They believe it should be range bound between the new ‘rock bottom price’ set during the pandemic period in 2020, with the upper bound being the new all-time high in gold set because of the war in Ukraine.
The red highlight on the chart is the next target Fibonacci number in this period’s sequence, and that number is around $1846. That is exactly where I expect gold to gravitate towards next, at least until some new information on the world economic situation emerges.
That could all change when the next big news event comes out. When it does, we can chart a new Fibonacci sequence to give us the best guestimate as to where traders are going next in the gold futures market. Since those trades create our physical gold spot price, that’s really what we want to know in the end! At least, it is as good of a target as any in my book.
Now for the question, you are really asking me by now. Where is gold price headed to next? Surely it will not hover around $1846 forever, will it? Not likely. With all this talk around Fibonacci number sequences, we haven’t incorporated our first indicator yet, the moving average!
The good news for gold fans is that gold has broken resistance by vaulting past the 50 and 200-day moving averages. Put simply, gold is frothy dating back to the last 200 days’ trading patterns. This is an indicator of a solid breakout in gold, and in that case, we may be looking to the next Fibonacci number in the gold sequence.
I highlighted in yellow, on both gold charts, what that next Fib number is for gold, which is right at $1900, the last all-time high in gold in 2011. It seems traders like to use important gold prices from the past in their trading, which makes it quite a bit easier for us.
Well, how about that!
Since we are in the New Year, let’s do the 2023 Year of the Rabbit coin. Short, sweet, and perfect for the occasion. May you all have many blessings in 2023.
Rob Kientz is a precious metals industry expert with over twenty years of investment experience in bond, stock, real estate, commodities, Forex, and precious metals markets.