The focus in virulent economic times often turns to gold, so our focus will be on the review and market analysis of gold (XAU), how it’s trading, and what we can glean from the market charts.
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For thousands of years, gold has been used as a currency and it’s been popular among savvy investors as an asset to hedge against impending economic collapse or uncertainty. Central Banks maintains gold reserves because it is a highly valuable metal that can be used globally as a means of exchange across cultures and borders.
Many individuals and corporate entities invest in gold because it’s not tied to any one government, and being a rare and finite commodity, gold is often not severely impacted by inflation or economic collapse in any one currency.
Certainly, if currency loses value, the relative value of gold, as expressed in that currency, will increase, allowing investors in gold to profit even further though, to profit from an investment in gold, one has to be able to time the market accordingly.
This brings us back to the question: Should we invest in gold today? Let’s review the top-down analysis of the XAUUSD pair and identify the significant technical drivers of the price of gold so far.
The price of Spot Gold started a bearish decline after closing above the MA-50 in February 2002 and increasing about 474.4%.
Ever since the XAUUSD traded below the MA-50, traders have sought opportunities to enter a long position in the market.
A long early entry was the first regular bullish divergence in January 2015, followed by the second entry in January 2016. The third entry level to purchase gold is the hidden bullish divergence in November 2018. The fourth and most recent entry-level is the breakout of bearish accumulation on June 03, 2019, which forced the price of gold into the overbought area.
From a monthly chart perspective, the most recent and significant entry signal to buy gold was the June 03 ’19 breakout pattern. We should already be in a buy position, looking for opportunities to scale in and out of the trade.
Let’s take a step down to the weekly time frame to see if we can get signals that are more recent while the price trades in the overbought area.
An excellent opportunity to buy gold was long after the breakout of bearish accumulation on October 08 ’18 and May 27 ’19.
Entering a buy order on the XAUUSD this week for the long term will not be a good idea as the pair is just exiting the overbought area, a sign of weak momentum to the upside.
On the other hand, if the price close back towards the upside, we may expect further price rally as that may confirm a hidden bullish divergence. For now, it’s best to stay on the sideline as we are sort of late to the party.
A collapse of the bullish accumulation on September 09 ’19 at $1,492.63 shows bearish sentiment and perhaps a lower point to buy the XAUUSD from a weekly chart perspective.
Formation of regular bearish divergence on August 29 ’19 and September 06 are signals to scale out of existing buy orders in the XAUUSD. Hence we may have to wait for the pair to trade above the MA-50 from a daily time frame for confirmation to scale back into a buy position.
Finally, buying gold as an investment will require timing a 2x or 3x risk-to-reward ratio, like the breakout of bearish accumulation on October 22, 05:00 ’19 on the 4-hour chart.
While it’s not a terrible time to buy gold today for the long game, profit opportunities will present themselves for short term holding if the investor is vigilant enough to catch those moments.
Conclusion and Projection
If you’re worried about an economic downturn, it may make sense to have a small portion of your portfolio in gold, but it certainly shouldn’t be your primary investment strategy.
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