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Timing Your Gold & Silver Purchases, Part 2
by Daniel R., Homemade Investors
Wednesday, June 4th, 2008
Wednesday, June 4th, 2008
| Using Charts To Time Your Purchases So far we've concluded that investors should buy good investments when sentiment is low and should generally avoid buying when the masses are excitedly piling in and driving prices higher. Next, let's take a look at some basic charting tools that can be used to quantify investor sentiment and help us identify appropriate buy points. Free price charts are available at www.StockCharts.com. Although this site is used primarily for looking at stock charts, gold and silver charts are available by typing in the following symbols: $GOLD and $SILVER. (In fact, why not go there right now and pull up gold or silver's chart by typing in the symbol?) Chart Indicators are tools that investors use in connection with charts to help them analyze and understand what the charts are saying. Each chart generated at www.StockCharts.com automatically provides useful indicators above and below each chart. These indicators can help you decide when it's a good time to buy a stock or commodity. Two particularly useful indicators are the RSI and the MACD. Here's an explanation of each, as well as a sample chart to help you visualize things: RSI (above the chart): Shows when a stock, commodity, or index is overbought or oversold. Traders usually buy when the RSI is oversold (at or below the 30 line) and hold or sell when the RSI is overbought (at or above the 70 line). Notice on the chart below that if you had bought silver only when the RSI touched or dipped below 30, your average buy price would have been much better than if you had averaged your purchases over time. [Click here to learn more about the RSI.] MACD (below the chart): Shows when the chart's trend is changing direction. Traders usually buy when the black line crosses above the red line (looks gray below), and sell when the black crosses below the red. Ideally, if the RSI says oversold or overbought, you may want to seek confirmation by a MACD crossover since a price can drop further or rise higher in spite of the RSI's oversold/overbought condition. In other words, a reversal to the upside is confirmed when we see the black line cross above the red and they both start moving up. The MACD also confirms if a stock, commodity, or index is oversold or overbought. The lower the black and red lines are compared to where they've been previously, the more oversold the chart is. The higher the lines are compared to where they've been previously, the more overbought the chart is. Since it's common for the price to make a significant move before the MACD crossover occurs, investors will often buy an oversold stock or commodity when the MACD is about to cross over. [Click here to learn more about MACD.] The Ultimate Buy Signal for Gold and Silver I'd like to introduce you to one additional charting tool: the 300 day moving average. This indicator has helped more gold and silver investors buy "at the bottom" during this bull market than perhaps any other charting tool. A moving average is the plotted average of a charts price over a certain period of time. Moving averages are thin lines that can be seen snaking across most stock charts. The 50 and 200 day moving averages are most common. [Click here for more information on moving averages.] Specifically, the 300 day moving average shows the average price of the last 300 days. So far this may seem relatively unexciting. But here's the good part: The price of gold and silver almost always bounce off the 300 day moving average on significant declines! This phenomenon has been relatively consistent for the past 7 years. So, unless things change going forward, the 300 day moving average appears to be the most suitable buying point for gold and silver. Take a look at the following gold chart: The 300 dma provides a good support for both gold and silver, although silver has been known to dip below it on very rare occasions. This just provides investors with an unusually good buying opportunity. The big question you'll want to ask yourself, of course, is if you want to wait until the metal's price meets the 300 dma before you buy. After all, there are several instances on the chart where you would have been better off buying earlier rather than waiting for the price to meet the 300 dma. After all, the moving average is a rising one! Plotting the 300 dma on a chart is relatively easy. First, go to www.StockCharts.com. Next, type in a symbol ($GOLD or $SILVER) and press Enter. Then scroll down to "Chart Overlays", which should be underneath the chart. You should see the 50 and 200 day moving averages already inputted. Change the "50" or "200" parameters to "300" and then press "Update". This should give update the chart with the 300 day moving average. UPDATE (October 19th, 2009) - Gold has since crashed its 300 day moving average, and it is no longer considered the ultimate buy indicator. Currently there exists a dual pricing system in precious metals, meaning that physical metals are selling for significantly higher prices than the spot and futures markets. This makes the gold and silver market very hard to predict at this point from a technical (charting) perspective, although I find the whole situation massively bullish for owners of the physical stuff. Stay tuned for additional updates and articles on the situation. - Editor A Practical Buying Strategy The idea here in timing our purchases is not to get in at a precise bottom. The point is to buy your investments at a relative discount. While exact bottoms do happen from time to time, you'll be a very frustrated investor if you try to get in at a precise bottom every time. A smart strategy for long-term investors might be to accumulate on the dips. When a chart shows that your metal of choice is oversold (on the RSI or MACD), then consider buying some. If the metal rallies and then becomes oversold again a few months later, then consider buying some more. And if you're fortunate to have some cash on hand when gold or silver's price dips down to the 300 day moving average, then consider adding even more to your holdings. You may not get in at the precise bottom on these buys, but if you average in over time by buying the dips then you'll likely find that your average buying price was well below the average price over the same period. If you'd like to receive occasional email notifications when gold and silver are oversold, then click here to sign up for our free email newsletter. Happy investing! ******************************************* To sign up for our FREE EMAIL NEWSLETTER, visit our main page at http://www.HomemadeInvestors.com. Disclaimer: Homemade Investors is published by Homemade Investors LLC. The information contained in this article does not constitute personal investment advice and is not designed to meet the personal financial needs of any individual. Investors should seek advice from a qualified investment advisor before entering into any transaction. The information contained in this article is deemed reliable but is not guaranteed. The information and opinions contained in this article are subject to change without notice, and there is no obligation to update such. To republish this article, visit http://www.HomemadeInvestors.com/reprint for guidelines. © 2008 Homemade Investors LLC. All rights reserved. |
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| In Part 1 of this article, we discussed how investor sentiment can be used to help you time your gold and silver purchases more effectively. Since the first part establishes the groundwork for what you are about to read, I recommend reviewing it first if you have not already done so. Click here to read Part 1. |
| An Uncommon Scenario Have you ever bought an investment only to watch its value shoot up almost immediately afterwards? It's a great feeling to watch your hard-earned money increase as you stand by, wondering if you should take profits now or hold for future gains. I hope that you experience the above scenario more as you apply the principles and tools that I am about to share with you in the second part of this article. |
