Gold Moving Average Strategy – Best Trend Following System in Gold Trading (Backtest)
Gold Moving Average Strategy and Trend following systems work. Below we present a very simple trend following system in gold:
In this article, we look at how you can use the 12-month (250-day) moving average to outperform the gold price. Gold spends most of the time going nowhere, and it seems the 12-month moving average does a great job in capturing trends in gold. Trend following strategies in gold has worked well in the past.
Gold is different than stocks: it has no particular use and doesn’t provide any cashflows. If you own stocks, you own something that is producing value. Gold doesn’t produce many tangible values.
Moreover, gold doesn’t provide any services to society (at least very little). Additionally, you need to pay to store and insure gold. Despite all this, presumably gold has served as a good hedge against inflation for thousands of years. However, we believe the stock market is a much better hedge than gold:
We are no fans of owning gold, even though we own a few ounces. The reason for not owning gold is simple: it doesn’t produce any valuable products or services and gold requires cash outlays for storage unless you bury it in your garden. The good thing is that if all goes to hell, you can dig out your gold and use it for barter.
If you’re a gold bug, is it better to buy and sell gold by trend-following the gold price?
Trend following involves riding the trend. But what is a trend? You want to be long when the trend is up, and you want to be out or short when the trend is down. But just like stocks, gold has an upward bias, thus shorting is, of course, very difficult.
Besides, you need to define what a trend is, and in this article, we use the moving average to define the trend.
Prior to 1971, the USD was part of the Bretton Woods system, but in 1971 Richard Nixon “shocked” the markets and took the dollar off. Thus, from that date, the USD and gold were formally independent of each other. Because of this we only test gold from 1971 onwards.
Gold moves by leaps and bounds
Gold tends to move in leaps and bounds:
The monthly chart above shows that gold tends to move in leaps and bounds and being “idle” for long periods of time, something that bodes well for trend-following strategies.
Trend following gold by using moving averages:
Let’s first look at how the 12-month average fits on the gold price:
Some days back we published an article about trend following the S&P 500 by using a 200-day moving average, which is pretty similar to 12-month average:
How does a similar system work in gold?
We only have monthly prices in our database, and we backtested by using a 12-month