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A technical analysis of gold is a breakdown of the history of the gold market as compared to present and future events. Like all forms of technical analysis, this process is about prediction. The underlying theory simply states that any situation will repeat itself should it happen again. If the price of gold changed when a particular event happened, if that event were to happen again, the price would change in the same fashion. The validity of much of technical analysis theory is in dispute in modern economics.
The basics of the technical analysis of gold appear very simple, but it is actually very complex. In order to understand the reason for a change in market value, the analyzer must understand everything there is to know about the situation at that time. This means that he must study the context of the areas of demand and the areas of supply to understand the overall chain of events that led to the eventual change. This often ends up needing additional study to understand the underpinning of actions taken in foreign lands.
Performing a technical analysis of gold is even more complex than with other materials. In the past, gold was used as a measurement of wealth. This means that changes in the buying and selling of gold were filtered through the basic understanding that it was a non-essential luxury good. In modern technology, gold and gold plating is used in a wide number technologies as a ductile conductor. This means that gold is not only rare and valued as a luxury material, it also has a strong technological demand.
The technical analysis of gold needs to look at the historical data for the metal to see how social changes lead to value changes, but it also needs to anticipate the effect of the technological demands. This modern usage has relatively small amounts of data when compared to the more historical uses. As a result, the reasoning behind the fluctuation in gold values is often difficult to pin down.
While the concept behind the technical analysis of gold seems solid, in practice, it isn’t as effective as an investor might think. The biggest hindrance to the technique is a lack of understanding as to why something happened. For example, a South American gold mine loses most of its production during a period of drought; this change then causes the price of gold in the United States to spike. While this may seem very simple, it may not be. The drought may have been unimportant; the instability could have been caused by a neighbor country, a bad year of fishing or any number of other factors.