Q. Dear Sandy, should I buy gold at current price levels?
A. Gold prices have certainly been in the headlines over the last few weeks. It’s no surprise that investors are interested in this commodity as its rise has been spectacular over the past year.
In fact since 28 July the metal has gained 17.8 per cent and since the start of this year we have seen a 21 per cent gain. The one thing that investors should consider if buying at current levels is the time frame they are looking at.
In other words, are you a short-term speculator or a long-term investor? For both short-term traders and longer-term investors, the key point is that the gold market is definitely in a bull trend but seems to be overextended at current levels. Typically when we reach new highs we may see some profit taking and an increase in volatility.
Buying at gold’s current record levels may seem scary because we always think that the price may drop. But trend traders will buy breakouts at new highs and have historically made substantial gains using this simple method.
Q. Dear Sandy, what should I look for as an indicator to buy gold?
A. A very simple and effective technique is to use a 10-period moving average indicator. For example, if the market is in a bullish uptrend, then wait until the commodity drops below the 10-period moving average and then reverses by closing above the 10-period moving average.
So basically you buy each time the price closes above the 10-period moving average and exit when it closes below. Historically, this method has worked quite well in bull markets and the method can easily be reversed for bear markets.
Q. Can the same be applied to other markets?
A. Yes absolutely. Take a look at the recent move in crude oil, which also saw a clear move to the upside last week. The West Texas Intermediate front month futures contract rose to as high as $81.75.
In fact, even the moves in the stock market indices and currencies have seen excellent results by using this simple technique. You can also apply this method to different time frames such as weekly charts for longer-term traders and hourly charts for short-term day traders.
Learn more about technical analysis with Sandy at his free City Index seminars.