Gold as a Safe Investment

In markets, especially Forex, things gain value when both currencies or CFD's are compared in value with other items.

Why Gold is considered a precious yellow metal?

Metals such as Gold were widely used in the monetary system as a unit of money. When the Federal Reserve was created, the American people were using a piece of gold in every paper money printed.

In order to monopolize the market FED decided to print paper money without gold. When there was a significant contraction of Gold in circulation, the USA experienced a grave depression in 1929. Coincidence? We don't think so! But let's try to focuse on how to trade XAU these days.

XAUUSD was traded initially at US$19,39. That is, buyers could be owners of one troy ounce of Gold with the value of US$19,39.

Note that it’s normal to see Gold prices rising in wartime. Coincidence again? Absolutely not! During the War of 1812 the yellow metal was traded at a much higher price.

During World War I, the U.S Government settled on the Gold value of 4,45 per ounce.

In the 1970s, the American monetary system deprived Gold of a money representation status, which made the USD currency weaker.

Today, one ounce is equal to 1 oz = US$1324.00, approximately.

Nothing had so much influence on the metal investment like the USD.

So, if you are a day trader, consider 1D charts.

In 2012, FED applied a series of monetary easing to stimulate the economy.

Due to the increasing money supply in the market, the USD depreciated against Gold.

Certainly, if QE tapering happens, Gold prices will rise making Hedge funds satisfied.

Do you see the segment AB?

Hopefully, you will watch out a rising move.

When you see CCI above 0, be sure that bulls are stepping up. And vice verse.

Before detecting a breakout, check if Stoch or CCI is undervalued. Naturally, when indicators are pointing to the SAME thing, the direction seems solid.

It’s no secret how to detect breakouts. Just look at the 1-2-3 pattern or ABCD harmonic. If the third wave (CD) is larger than (AB) so, a resistance line is broken given uptrend continuation. Keep it in mind.

Look at H1 chart:

MACD demonstrated a slow movement after noticing a big move in the US session.

This ranging is attributed to the fact that traders din't know what direction to follow. In this case, a bull breakout was forced by economic news about not to taper monetary stimulus.

Do you see a Bullish divergence where MACD > 0? The probability of going long increases in the beginning on the US session where blue candles are making a reversal.

The day after a breakout occurred a small ranging followed and again sellers decided to step up. This happened due to the CCI < 0 (bearish divergence) and MACD < 0 (bearish divergence). In other words, the new strength moved down.

On M5 chart, CCI also demonstrates bullish divergence. SMA is telling you green candle crossed the line. The probability that price will continue going up is higher.

Let’s draw some parallels with physics. The first Newton's law says that: "an object either is at rest or moves at a constant velocity, unless acted upon by an external force."

Ok, and what?

Well, in economy when prices drop, the probability to wait a further decrease is higher because the strength is an "inertial reference"!

Looking at M5 chart, before (X) the old trend was bearish. An inertial down wave.

Now, looking (X)-(A)-(B), the wave (XA) is showing you a stronger bullish reversal and the probability of a bull breakout is higher (again).

Furthermore, the gartley (XAB)-(BCD) was bullish.

Summing-up, try to check if CCI and MACD tell the same thing. Look if there is an ABC pattern or even a beautiful gartley before entering a trade. If the ABC pattern follows the same trend, a breakout will happen sooner or later.

The article is written by Igor Titara and is participating in the Forex Article Contest. Good luck!

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  • Oasis

    Nicely analysed and explained. Thank you, I am just curious if candlestick patterns are a part of your analysis.

    • Igor

      Hi Oasis, yes .
      Candlestick patterns are strongly looked.
      Also, To observe how strength a currency are can be useful to detect breakout which happens everyday.

      Thank for your comment!