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Technical vs Fundamental Analysis


The value of technical vs fundamental analysis is often hotly debated. In truth, both have their place, but there is a reason I’m partial to technical analysis.

Terry Kinder precious metals analysisBullion.Directory precious metals analysis 6 January, 2015
By Terry Kinder

Investor, Technical Analyst

I recently wrote about the failure of fundamental analysis to correctly forecast precious metals prices, inflation and other fundamentals since 2011. Fundamental analysis largely missed the current oil price plunge as well. Human beings are story tellers.

It’s part of our culture, perhaps even our DNA. But sometimes the stories we tell ourselves are just that – stories. That’s why, in the technical vs fundamental analysis debate, I come down on the side of technical analysis.

Technical vs Fundamental Analysis: While technical and fundamental analysis are both necessary, and act as checks on each other, I lean toward technical analysis

Technical vs Fundamental Analysis: While technical and fundamental analysis are both necessary, and act as checks on each other, I lean toward technical analysis. Image: pixabay

One of the most pervasive stories passed down from generation to generation is the story of scarcity. The Malthusian idea that there isn’t enough food, water, oil, minerals, or whatever, has persisted in spite of mankind’s spirit of innovation and penchant for invention.

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Despite the huge advances in technology from agriculture to mining, you can always find someone who will tell you the not so comforting story that we’re running out of everything. It’s probably not a bad thing that human beings are self-aware enough to be concerned about scarcity. It insures that we’re always trying to see around corners and prevent starvation or some other disaster from wiping humanity out.

One of my favorite stories that we tell ourselves is the story of Peak Oil.

Peak Oil is an interesting story. It’s an almost perfect story through which to examine technical vs fundamental analysis.

Fundamental analysis has been warning us about Peak Oil for a long time. Some of my first memories of Peak Oil were during the Carter presidency when the nation was told that we were going to have to turn down our thermostats and learn to live with less because, essentially, oil was running out. Peak Oil has morphed over the years from the idea that oil was running out to the more nuanced idea that the easy to drill, more economical oil is disappearing.

In other words, some oil, given the technology available today, costs more to get out of the ground than it is worth on the open market. We’re not necessarily running completely out of oil, but we have less oil that is economically feasible to extract.

Which brings us back around to technical vs fundamental analysis. While all of this talk about Peak Oil was going on and I heard, more than a few times, that oil would likely never dip back below $100.00 a barrell, Peter L Brandt was using technical analysis to forecast some prices that were just a bit under $100.00 per barrell:

1. There was his June 23rd 2013 analysis of $59.50 oil (he rounded it up to $65.00;

2. Before that, on October 23, 2012, Brandt mentioned that the monthly crude oil chart targeted $50.00;

3. Then on November 23, 2014, just for emphasis, Brandt again pointed to a $50.00 target for oil.

So, over the course of more than two years, Brandt pointed to the possibility that something was amiss with the fundamental analysis of the oil market. Of course, you can argue that, for multiple years, those who argued for elevated oil prices were correct and it would be hard to disagree. They were right, until they weren’t anymore.

I like a good story as much as anyone else. Peak Oil and the idea of scarcity – the Malthusian nightmare – have been around for a while. I’m not arguing that we shouldn’t be good stewards or conserve our natural resources. I do believe, however, that necessity is the mother of invention.

When faced with a crisis, mankind has found ways to survive, thrive and prosper. I believe that will be the case with oil in the future. In the debate over technical vs fundamental analysis, I lean toward technical analysis, but believe that both kinds of analysis serve a valid purpose. They both act as checks on the other. In the case of oil, there was evidence that the story told about scarcity and price had some holes in it.

It’s something Brandt was talking about two years ago, but few were paying attention to. We’re certainly paying attention to low oil prices now.

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