Gold (or bullion) has been the cornerstone of an older generation of investors, for its "safety", for the "next Depression". By holding gold, these investors retain a feeling of security and comfort - who could argue with that? To say that emotion plays a big role in the roller coaster of the gold market would only begin to tell the real story of excitement of gold speculators, miners, geologists and the others inside the mining world when word leaks out of a new major find somewhere in Canada, the United States, Australia or Africa. The quest for this shiny commodity has made millionaires of paupers and, on the flip side, has been the ruin of many wealthy families.

Here we take a look at some of the tools used to analyze gold stocks. The gold players make it look easier than analyzing other sectors, but for those who are not confident in their ability to conduct this type of analysis, we will also analyze the gold price, have a look at the CBOE Gold Index and the AMEX Gold Bugs Index. There has long been a relationship between bullion itself and gold shares of companies that mine the precious commodity.

Tools for Analyzing Gold

In his book "Technical Analysis Explained" (third edition, 1991), Martin Pring explained that an investor can analyze the price of gold itself by using "trend-determining" techniques such as price-pattern behavior, moving averages (MA) and rates of change. For longer term movements, decisive crossovers of the 12-month MA have been reliable. Buy and sell signals using a monthly "know sure thing" (KST) (explained in Chapter 10) have also proved reasonably accurate.

Most investors prefer to own gold by way of buying into a mining company of which some of the larger well-established companies have delivered handsome returns to their shareholders over the years. However, a chartist, before using a mining company, would examine the relationship of gold to gold shares by way of an index like the two mentioned above as the mining group may have silver mines in its portfolio or another facet of business that would skew the bottom line in determining its relationship to gold.

Nature of the Market

Investors tend to lead the market when buying shares in a mining company. Tension rising in politically hot regions of the world will have gold bugs rushing to any one of the top gold producers of the world and buying up shares as quickly as they can - and turning around and selling their positions as tempers cool off and those at CNN and MSNBC tell us that there is nothing to worry about.

Also, As the price of gold rises or falls it may have a dramatic effect on whether a mine is a viable investment. If the cost of mining exceeds the current world price for the metal, the mine will be forced to slow its production or suspend it indefinitely until the price of gold climbs high enough to allow a profit to be made at that particular dig.

Pring writes, "the general rule is that the prevailing trend is assumed to be intact unless a new high or low in either the stocks or bullion is not jointly confirmed. This represents a disagreement and warns that the prevailing trend is likely to reverse. Usually bullion lags behind the shares, but occasionally it is the shares that are slow to turn. In either case a trend reversal should be expected". This rule is can be said to be set in stone; virtually all technical analysts recognize this to be true and follow it to the letter.

Below you can see the mirror image of the three charts selected to demonstrate the relationship between the CBOE Gold Index, the AMEX Gold Bugs Index, and the mining company Anglogold Ltd. Ads. Investors looking to invest in this arena will do well to run their analysis over the index charts at the same time they are breaking down Newmont Mining, Anglogold and Barrick Gold.

Figure 1: CBOE Gold IndexSource: Tradestation
Figure 2: AMEX Gold Bugs IndexChart Created with Tradestation
Figure 3: Anglogold Ltd.Source: Tradestation

The Bottom Line

The quest for this shiny commodity has made millionaires of paupers and, on the flip side, has been the ruin of many wealthy families. No matter how you choose to invest in the gold market, keep an eye on the prevailing trends in the market and in gold bullion.

It's your money, invest it wisely – learn, understand and execute.

Related Articles
  1. Technical Indicators

    Explaining Autocorrelation

    Autocorrelation is the measure of an internal correlation with a given time series.
  2. Chart Advisor

    ChartAdvisor for October 9 2015

    Weekly technical summary of the major U.S. indexes.
  3. Investing Basics

    Learn How To Trade Gold In 4 Steps

    Trading spot gold or gold futures, equities and options isn’t hard to learn, but the activity requires skill sets unique to these markets.
  4. Economics

    The Effect of Fed Fund Rate Hikes on Gold

    Explore the historical relationship between interest rate increases and the price of gold, and consider what effect a fed funds rate hike might have on gold.
  5. Chart Advisor

    These Oil & Gas Stocks Have Reversed

    It's been a long downtrend for oil stock owners, but there's hope. These four oil and gas stocks have reversed and may keep trending to the upside.
  6. Mutual Funds & ETFs

    Top 3 Commodities Mutual Funds

    Get information about some of the most popular and best-performing mutual funds that are focused on commodity-related investments.
  7. Chart Advisor

    Agriculture Commodities Are In The Bear's Sights

    Agriculture stocks have experienced strong moves higher over recent weeks, but chart patterns on sugar, corn and wheat are suggesting the moves could be short lived.
  8. Chart Advisor

    4 European Stocks to Consider Buying

    European companies, listed on US exchanges, that are providing buying opportunities right now.
  9. Investing News

    Glencore Shares Surge in Hong Kong

    Shares of Glencore International, a leading multinational commodities and mining company, jumped by around 15% on London Stock Exchange, after the shares had gained about 71% earlier on the Hong ...
  10. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  1. What are some of the most common technical indicators that back up Doji patterns?

    The doji candlestick is important enough that Steve Nison devotes an entire chapter to it in his definitive work on candlestick ... Read Full Answer >>
  2. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  3. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  4. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  5. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  6. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!