Chart courtesy of Stockcharts

The Relative Strength Indicator or RSI as it is more commonly known is one of many indicators used by analysts, researchers and investors in an attempt to time their market entry and exit points. Timing is paramount to a good investment decision and there are many combinations of indicators and factors that must be considered before making that final decision to buy or sell. Fear and greed are generally regarded as the biggest movers in the market place and they can push a stock or a commodity into the oversold or overbought territory. This aberration can be detected by the RSI as gold swings in either direction. In general terms if you can buy when the indicator touches or goes below ‘30′ you should be reasonably comfortable that you have bought at a low for gold. At the other end of the scale if you can sell when the RSI touches or goes above the ‘70′ mark then you can be reasonably comfortable that you are getting out pretty close to the top.

Now if we examine the chart for gold covering the last twelve months we can see that there have been three buying opportunities as the RSI hit the ‘30′ level. Each of these trigger points were followed by rallies albeit of differing magnitudes. A fourth opportunity appeared to be on the cards earlier this month however this did not materialize as gold bounced off its 200 day moving average and headed back towards the $900/oz area. However there does appear to be a downward channel forming over the short term consisting of lower lows and lower highs so gold could once again test the lower channel line with a move down to the $850/oz level.

Some would argue that the bottom is already in and its up, up and away from here and they might well be correct. No-one knows for certain and our humble opinion is that we will see gold move lower and hit or break through the ‘30′ level on the RSI. Should this happen then we will become buyers once again of quality gold producing stocks. Being patient and sitting on your hands is not always easy and picking the bottom of a cycle is almost impossible, however, we believe that the RSI could guide us to an advantageous entry point. The next few weeks could present us with such a buying opportunity or gold could go her own way regardless of any chart analysis.

For the moment we are keeping our ‘opportunity cash’ under wraps in the hope that our trigger point is met.

Trading decisions belong entirely to you as your circumstances are different from ours and we trade to suit our investment criteria and cash position.

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