Gold Market - Technical Analysis and Macroeconomic Fundamental Factors - Case Study Example

The Study of Market Research Analysis Report of Gold Market Student’s Name Institutional Affiliation Introduction Some factors visualize the gold prices flow in the global markets and their offer trading insights to potential buyers and sellers. Gold is one of the precious and valuable equity commodities in the global markets. The gold market has become popular for investors specifically those operating in foreign exchange institutions. Unlike currency, gold can diversify market risks for its value is easy to store, and it is the global economic inflation does not affect the value the gold. The influence of the value of gold in the stock market trends on its demand and the supply, and how it responds to numerous emerging trading macroeconomic factors. In relation to other stock exchange commodities, in decades, the prices of gold had retained market prices despite having an economic crisis, where many mining traders are still struggling to recess. In other words, gold trading is relatively different from other precious metals. For instance during the global economic crisis between 2008 and 2009, gold increased its value by over 5 percent when other stock equities dropped market value by over 30 percent (Poshakwale and Mandal, 2016). However, estimation of precious metals like gold in the stock markets remains volatile. The advantageous factor of trading using gold is that the precious metal has long-term market price sustainability. In recent months, the demand for gold in the stock markets had increased dramatically by over 17 percent emerging to be the most well-organized product sold in the foreign exchange. A number of macroeconomic variables play a vital role in determining the prices of gold in the global markets. The significance of this paper is to articulate the fundamental macroeconomic factor of the current gold market. Additionally, the paper analyzes technical techniques, RSI analytical tools, MAs and Charting patterns. Macroeconomic Fundamental Factors of the Current Gold Market Political uncertainty is one of the basic macroeconomic forces that shape and drive the gold market. The unexpected emergence of political policies determines the trend at which the gold prices will follow; it might either favor or inflate the traders. The exit of Britons from the European Union is an example of political uncertainty that had an adverse impact on the gold market. Investors believed that the political exit of Britons would affect the gold prices in the market without warning, of which came to be (Poshakwale and Mandal 2016). During the referendum voting for the exit, the gold prices rose within six hours by over 3 percent because investors reacted quickly in response to the European political wave; by buying gold as a hedge against inflated euro and British pound (Poshakwale and Mandal, 2016). During and after American elections is another political effect of gold trading. Gold markets were very stable during American campaigns, and most of the investors were comfortable that Triumph would lose the election to Clinton. Unfortunately, the election favored Trump. The gold market investors were in the watch, and gold prices hiked forming an upward trend due to hedging effects. This January after the inauguration of President Trump, the gold prices retained its upward trend due to fear of Trump economic policies. Thus, global political arena plays especially Europe and America, plays a vital role in gold market; when there is political instability the prices of gold hikes (are high). The global economy is another macroeconomic factor that determines the position price of gold. The price of gold in the stock market is a reflection of global economy. When the economy is healthy the price of gold is low in the global markets at vice versa. At the same time, economists believe that gold prices dictate the global economy, and therefore, the global economy and prices of gold are inseparable economic elements. Additionally, the gold prices basis on economic law of demand and supply. When the demand for gold is high, the supply is low translating to high market prices. On the other hand, when the supply of gold in the market is high, and demand is low, the market prices for gold are low. Inflation has an immense effect on gold prices. The over the circulation of currency (fiat currency) it lowers its value in the global markets translating to high costs of commodities in the global markets. Gold price is on track with other precious commodities, and hence, the more fiats in currency than normal the more the gold price goes up. As mentioned above, when the gold price is high, which symbolizes economic inflation. Additionally, when lending interests specifically in central banks hikes, the trend price of gold goes up. In this aspect, currency value and the bank interests determine the market prices for gold. Gold Market Technical Analysis RSI (Relative Strength Index) Technical analysis is a trading platform that investors use to find out and scale the price movements of their commodities in the stock markets. Relative Strength Index (RSI) is the popular technical analysis tool that helps investors to measure the price movements of the assets in the global markets. The RSI indicator (oscillator) has numerals with a value that ranges between 0 and 100. According to Sipkova and Sipko (2014) investors interpret RSI using three dimensions: overbought and oversold momentum, centerline crossover and divergence signals. The graph has two graphed options, below 50 and above 50. The area in the chart below 30 is a trading trend that interprets an oversold region while the figure part above 70 is an overbought region; the two areas predict the oversold and overbought signals respectively (Sipkova and Sipko, 2014). Centerline Crossover signal has either upward trend tends, or downward trend tends. When the RSI is above 50 translates to higher average gains than average losses. On the other hand, when RSI is below 50 the average losses are above average gains. Similarly, the downward RSI 50 the investors refer to it as sell signal, and when RSI is below 50, and it crosses upward direction it is a buy signal. Divergent signals failure of swings and centerline crossovers. Investors use the relative strength index to sell and buy stock when it hits upward 70 and downward 30. Therefore, there is psychological magnitude that stock traders use to predict the relative strength index behavior. For traders to use RSI correctly and effectively, they must find and sell stock when there is a price swing. Gold inventors have been using RSI momentum for technical analysis and trading purposes. RSI is broken down into three elements, RS average gain and average loss that cover 14 periods; average gains and losses amount from the sum of gains and losses over the last fourteen trading periods. In the trending market, the price of stock might trend either upward or downward. In an upward trending market the RSI oscillator should trend upward while in a down ward trending market, the RSI oscillator should pull downward. Trading opportunities arise when the upward and downward trends hit 80 and 40 respectively. RSI has proven to be an effective technical analysis tool in the stock market. In situations when the RSI crosses above 50 the investors call it is bearish, and when it crosses below 50 they term it as bullish. In the market, bearish and bullish plays vital role for it gives buyers and sellers the trading signals as well as the forecast of the future downward and upward trends. In the last few months, the gold price has become hot, and it is hard to predict the future upward and downward trends. Early this year there was a prediction of bullish gold prices and the prices could reach the peak of 890 USD (Precious Metals Forecast, 2017). The graph below represents RSI trading trends between 2016 and 2017 (before, during and after United States elections) Adopted from, market realistic by Shawn Meera, 2017. Moving Average Moving Average is another technical, analytical tool used in the stock market for the purpose of the price. In the stock exchange, forecasting is essential to investors for helps them to estimate the future trends of market prices and the demand for precious metals. In other words, moving average is a forecasting tool that requires psychological art to predict future trade events (trends). Forecasting basis on the past and current market data collected in various market segments; the past and current stock market trends (Rickards, 2016). Moving average method is forecasting tool used in stock exchange to predict future trading trends. Moving trends represents the number of overlapping observations in the trading market that generates an average of a fixed number of observations. Unlike RSI technical analytical tool, moving average is a very popular and easy to use. It is possible to predict the future trading trends using the moving average for the device has the capacity to identify and reflect the market direction (KTCO, 2017). The diagram below demonstrates the moving average for gold in the last ten years. Adopted from KTCO, 2017 Charting Patterns in gold market Charting patterns involves graphing prices of stock market commodities and the third popular technical analysis in trading. Graphing market trading data portrays a repetitive pattern of trading trends that frequently occurs (Rickards, 2016). Investors use charting patterns to predict the future market trends of precious commodities in the stock market. Hence, charting graphs demonstrates investors’ illusion future trading magnitude. In the gold trading market, investors use four charting patterns to predict the future price trends of the commodity: gaps, head, and shoulders, triple bottom/top, triangles and saucer. Gap charting pattern happens when the closing price of the gold deal is higher or lower than the opening price deal. Therefore, the trading dynamics that forces the prices to decline of decrease will repeat themselves in future. Hence, the investors have the capacity to predict either future upward fallout or downward shift (Rickards, 2016). Head and shoulders charting graph illuminate the upper trend of the commodity price and the lower end of the price edge. For instance, the opening price target of gold might peak for sometimes, and later return back to its original target trend; the head and shoulder pattern can be either top (upward) of down (downward) pattern. Triple bottom/top charting pattern is an expanded head shoulder pattern; it forms three similar repetitive patterns. Triangles charting pattern illuminates the jump and falls of gold prices within a short trading period. Finally, Saucers charting pattern begins with downward gold price trend followed by stagnated or prolonged sideway trend (Sipkova and Sipko, 2014). Since the beginning of 2017, the gold prices in the global stock market have been performing well, standing at 7.1 percent (Shawn, 2017). The current fundamental development of bullish trends of gold prices results from high demand; the central months have been buying massive tons of gold for economic reservation purposes. The charting paper below illustrates various gold price trends patterns. Adopted from, market realistic by Shawn Meera, 2017 References KTCO, 2017, Accessed on 14th March 14, 2017, from http://www.kitco.com/charts/techcharts_gold.html Poshakwale, S.S., and Mandal, A., 2016. Determinants of asymmetric return co-movements of gold and other financial assets. International Review of Financial Analysis, 47, pp.229-242. Precious Metals Forecast (Gold, Silver, Palladium), 2017. Accessed on 14th March 14, 2017, from http://www.finyear.com/Precious-Metals-Forecast-2017-Gold-Silver-Palladium_a37719.ht Rickards, J., 2016. The New Case of Gold. New York: Amazon. Shawn, M., 2017. Analyzing the Gold-Platinum Ratio in 2017, how does the US economy affect gold prices? Market Realistic, Accessed on 14th March 14, 2017, from http://marketrealist.com/2017/01/analyzing-the-gold-platinum-ratio Sipkova, H. and Sipko, J., 2014. What Are the Real Drivers of Gold Prices?. International Journal of Business and Social Science, 5(8). Read More