Hoarding Gold Beats Charts Over 25 Years: Technical Analysis

A buy-and-hold strategy for gold made investors more money during the past quarter century than any technical analysis tool.

While ichimoku chart, moving average oscillator, directional movement indicator and variable moving average techniques as much as doubled profits since August 1986, holding onto bullion would have boosted investors’ money more than fourfold, according to data compiled by Bloomberg. The returns from buying the metal and using 22 other individual strategies that use chart patterns don’t account for trading costs.

Gold rose to a record $1,681.65 an ounce yesterday and is set for an 11th straight annual gain, the longest winning streak since at least 1920. Central banks are expanding their gold reserves for the first time in a generation, joining billionaire investors including John Paulson in accumulating the metal. While a buy-and-hold technique does well in bull markets, technical traders can make money when prices rise and fall.

“Increasingly investors are buying gold as a buy-and-hold rather than a buy-and-trade,” said Jeffrey Nichols, New York- based senior economic adviser to Rosland Capital LLC. “Gold has been in a long-term bull market for many years and I think it will remain in a long-term bull market for at least several more years. There are technical tools that traders will use for trading and sometimes they work and sometimes they don’t.”

Chart Patterns

While holding bullion would have made money in all of the past 11 quarters, more and more people may be turning to charts to help them trade. The Society of Technical Analysts said its membership jumped 60 percent since June 2002. In technical analysis, investors and analysts study charts of trading patterns and prices to predict changes in an asset or security.

Using ichimoku charts, developed by Goichi Hosoda in the late 1930s before he released the findings in the 1960s, returned the most for copper and platinum in the past 25 years, the data show. Wheat gave the biggest profits using a moving average oscillator, while crude oil and silver fared best when using a buy-and-hold strategy.

Gold surged more than sixfold since the end of 2000, beating the 9.3 percent gain in the MSCI All-Country World Index of equities and a 78 percent return on Treasuries, according to a Bank of America Merrill Lynch index. Debt woes in Europe and the U.S. and concern over slower growth helped push the metal to all-time highs in euros and pounds this week. Bullion traded at $1,679.80 an ounce by 3:18 p.m. in London yesterday.

‘Peculiar’ Gold

Paulson & Co. is the largest shareholder in the SPDR Gold Trust, the biggest exchange-traded product backed by gold, with a stake now valued at $5 billion. Warren Buffett, with a net worth of $50 billion, says the metal has no utility.

“They take it out of the ground in South Africa, ship it to the Federal Reserve, where they put it back in the ground,” Buffett said in answer to a question about commodities on April 30 at Berkshire Hathaway’s annual meeting in Omaha, Nebraska. “If you were watching from Mars you might think it’s a little peculiar.”

The buy-and-hold strategy hasn’t always been the best for gold. The ichimoku method, which uses a cloud and lines based on median prices to provide what some investors refer to as a “chart at a glance,” returned the most profit since August 2007, the data show. The Williams %R momentum indicator was the best tool in the five years through 1992.

Investors holding gold make money when prices are rising. Still, using technical analysis allows traders to profit from dips in a bull market or when an asset fluctuates, said Axel Rudolph, a technical strategist at Commerzbank AG in London. Those studying charts tend to use a combination of indicators and levels to form both short- and long-term forecasts, increasing the chance of making a more informed trade, he said.

Technical Charts

“The advantage of technical charts compared to buy-and- hold is that you can get out in periods when the market underperforms, and even for gold there is seasonality, so with technical analysis you can fine tune it all,” Rudolph said. “The more different technical tools you use which all give you the same picture, then the higher the probability is that you’re going to be right.”

While nearly all techniques have default settings designed for a range of assets, users can make adjustments to suit different markets and trends and potentially make more money. A relative strength index typically uses key high and low levels of 70 and 30 derived from averaging gains or losses over 14 days, though traders can widen or narrow the gap depending on the strength of the market, for example.

Gold will reach $1,938 in 2012, according to the median in a survey last month of the four most-accurate precious-metals forecasters tracked by Bloomberg over the past two years.

“There are more retail investors coming into the market” for a protection of wealth, said Nichols, who is also managing director of American Precious Metals Advisors. “Retail investors tend to hold onto these investments for a longer period of time.”

To contact the reporter for this story: Nicholas Larkin in London at nlarkin1@bloomberg.net

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net

Source: http://www.bloomberg.com/news/2011-08-04/hoarding-gold-beats-charts-over-25-years-technical-analysis.html