Using Multiple Time Frames for Gold

The chart below is a weekly chart of gold going back 3 years. I feel that it is essential to look at many different time frames when doing technical analysis, and the weekly chart is one of the most important time frames. The main reason I am posting this chart today is to show that gold is still in a strong uptrend, despite some recent selling.


If you notice in the above chart, the 50 week moving average, which is the dotted yellow line, you will see that for the past 3 years, gold has never dipped below this line. Despite some very heavy selling these past few weeks, gold descended to the 50wma, but never violated it. In fact, the bears took gold right down to this line a couple days ago, but the bulls were able to successfully defend against the bears at this important juncture. I believe that this proves that the bulls are still in control, and that the long term bull market in gold is intact.



In the above chart, we have a daily chart of GLD, the gold ETF. The main thing to focus on in this chart is that gold has bounced off its 200 day moving average. I believe that this is a very rare situation where both the weekly and the daily chart are giving powerful evidence that gold is at major area of support. This is why it is important to look at several time frames. It can help you build a much stronger case.

Aluminum and Gold Stocks

This is another chart that does not give buy or sell signals everyday, but does, nevertheless, make up an important part of my toolbox. The chart below shows that the price of aluminum and gold stocks are correlated. The blue area of the chart represents the price of aluminum, and the solid line represents the price of gold. As you can see, the two tend to move in tandem.

The value of this chart comes from observing when the price of aluminum becomes overbought or oversold on the RSI. When this occures, it triggers a buy or sell signal. I have drawn lines connecting these zones to the chart at the very bottom, which is of XGD.



As you can see from the above chart, when the RSI is overbought, a draw down in XGD can be expected. On the other hand, when the Aluminum RSI becomes oversold, it tends to represent a good buying opportunity for XGD, or GDX for that matter.

One of the reasons I am posting this chart today is because this chart has just recently given a buy signal. If you look at the chart, the RSI is in oversold territory. I took a snapshot of this chart a couple of days ago. The reason it gives a buy signal now is because experience has taught me to wait a couple days after the signal is given. This is why the vertical lines are slanted in the above chart.

So, I'll put this post out there, and when you look back at this post, you will be able to see for yourself if this signal given was valid or not.

Japanese Stocks and Gold Stocks

This next chart shows another interesting intermarket relationship. Japanese stocks and gold stocks would appear to have nothing in common. I mean, what does Japan have to do with gold. Well, if you look at the chart below, it is fairly clear that they are in fact tightly correlated.


In the above chart, the first section is a graph of the Japanese Ishares ETF, ticker symbol EWJ. This exchange traded fund contains a basket of various Japanese companies. The graph on the bottom shows the XAU, which I discussed in a previous post. As you can clearly see, the 2 charts tend to peak and trough at the same time, as shown by the blue lines.

This chart is very useful when a divergence developes between the 2 charts. In other words, one chart begins falling, and the other continues rising. This sort of thing happened near the beginning of November, 2006. The Japanese Ishares started falling, but interestingly, the XAU kept grinding higher. This diveregence was corrected by the XAU falling shortly thereafter. In this way, I feel that EWJ gave a warning signal when it began falling while the XAU was rising.

The reason that there is a relationship between the two has to do with inflation. During the 1990's Japan was couping with a serious bout of deflation. This deflation spread around the global economy, and was a negative influence on commodities. However, ever since the year 2000 or so, the Japanese economy has picked up, and these deflationary forces are beginning to subside, and inflationairy forces are starting to reasert themselves.

In other words, the Japanese market is barometer of the Japanese economy's health, and the health of the Japanese economy is a barometer of inflation, and gold rises when it detects inflation.

The Canadian Dollar and Gold Stocks

I find this next chart really interesting because it shows that it is indeed important to look at the currency market when you are trading gold stocks. Many people hold gold stocks that are traded on both American and Canadian stock exchanges, and some people may wonder if there is any advantage in holding a gold stock on a particular exchange. Would it be better to trade Yamana on Toronto or New York, for example.

With the Canadian Dollar showing so much strength lately, one might expect that holding stocks denominated in Canadian Dollars would be the better choice. However, as the chart below will show, this is not the case.


The top section of the chart above shows XGD divided by GDX. The first symbol, XGD, is a gold stocks ETF that trades in Toronto. The second, GDX, is an American gold stocks ETF, denominated in US Dollars. When the ratio line above is decreasing, it means that GDX is doing better than XGD, and when it is rising XGD is outperforming.

The second section of the chart has nothing really to do with gold stocks, and is a chart of the Canadian Dollar. Even though the 2 charts seem like they would have nothing in common, as you can see, both charts are mirror images of each other.

What is going on here is that when the Canadian Dollar is rising, American gold stocks have to rise faster in order to keep valuations in line with their northern counterparts. For example, if Yamana in Toronto rises by 1%, and the Canadian Dollar rises by 1%, Yamana trading in New York must rise by 2%.

Therefore, whether you hold your gold stock on an American Exchange or Canadian one, I don't think you will have any advantage either way.