The RSI is a technical indicator that gold traders can use to compare gold's recent gains to gold's recent losses, thereby determining if gold is overbought or oversold.
Typically, gold traders consider gold overbought or overvalued when its RSI approaches the 70 level; they thus consider it a good candidate for a sale.
In contrast, most gold traders consider gold oversold or undervalued when its RSI approaches 30 level; they thus consider it a good candidate for purchase.
RSI is also very useful in showing gold traders' divergence with price.
Before explaining why, let's make sure you understand divergence, which occurs when the price of gold and the price of a related asset (such as an index, or an indicator such as RSI) move in opposite directions.
To gold traders, divergence can be either a positive or a negative: When the price of gold reaches a new low, but the indicator starts to rise, positive divergence occurs; when the price of gold reaches a new high, but the indicator starts to fall, negative divergence occurs.
In gold trading, divergence simply reveals significant shifts in the direction of gold prices. As an example of how the gold RSI chart can be used with divergence, when the price of gold reaches a new low, but RSI starts to rise, gold traders can see that buying power is building and a rally often follows.
So, if you are interested in trading gold, consider learning more about and using RSI.