Gold Moving Average Strategy – Best Trend Following System for Gold Trading (Backtest and Statistic)

Last Updated on May 8, 2023

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:

Gold moving average strategy backtest
Gold price from 1971 until July 2020. Source:

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:

Gold Moving Average Strategy

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 simple moving average strategy.

The results from the backtest are pretty good:

Gold Moving Average Strategy - backtest chart
The simple 200-day moving average trend following system beats buy and hold by a wide margin.

When the gold price is above the 12-month (250-day) moving average, we are long. When the gold price is below the average, we stay on the sidelines in cash. Such a simple system beats buy and hold by a wide margin. 100 000 invested in 1971 grew to 10 million by using the 12-month moving average system while buy and hold ended at only 4 million.

There are 26 trades in this period and the system is long as of today (May 2021). Slippage and commissions are not included.

Which moving averages are best for trend following gold?

We tested several moving averages and we get the best results around the 12-month moving average plus/minus a few months. On a daily time frame, this equals a 200 – 250-day moving average.

Why does trend following work?

The main reason why it works is that it takes you out of big drawdowns. This is extremely important to compound efficiently. You got out early after the tops in 1980 and 2012 and preserved your capital.

Thus, you start the next trade on a higher “plateau”.

How to buy and sell gold: ETF or gold futures

Gold is a physical asset that is not easily transferred and it involves huge transfer costs. In practice, you only have two options: ETF (ticker GLD) or futures. In our tests, we only tested by using the spot price. If you tested on futures there is always the possibility that the result is somewhat different.

Gold futures exist in two contracts: the “normal” contract that has a value of 100 per point (177 500 USD in May 2021) and a mini contract at a much less value of 17 750 USD (a multiplier of 10).

Conclusion: trend following in gold works

Commodities often have huge moves up and down, thus trend-following tends to work reasonably well. The very simple trend following system in gold we provided in this article, has captured all the major moves. It has worked well in the past and we suspect it will continue to do so in the future, but there are no guarantees, of course.

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  • The strategy works even better if an envelope is used on the simple moving average. A offset of only 1% is sufficient to avoid some “whipsaws”.

    In particular, the profit factor and the percentage of trades won are improved.

    The envelope around the SMA also works for the S&P 500, even on a daily basis… Perhaps you try a 4-6% offset for a simple backtest.

    Regards and THX for your excellent work!

  • Hi Matt,
    Thanks for your input and feedback. I have never thought of this. I’ll give it some thoughts and test and I’ll most likely sum it up in an article.


  • Hello Oddmund,
    with envelopes around an SMA, very attractive results can be achieved with high-yield funds (well managed mutual funds, not ETFs).

    These funds show slow, evenly and very steady trends that are easy to follow. Short SMA (20-50 days) and a low offset (0.2%-0.5%) work here.

    Some of these funds can be tested back to 1995.
    Noteworthy is the high rate of winning trades, between 66% and 75%.
    The winning trades are significantly larger than the losers, which averaged just -1,5%.

    A basic rotation strategy is also conceivable.
    From a list with funds that harmonize well with the strategy (Europe, Emerging Markets, USA …) you buy the fund that has had the best performance in the last 3 months.

    Exceptionally high returns are of course not feasible with this simple approach. In return, you achieve a very balanced equitycurve with very low drawdowns. In particular, after sharp price drops, such as the subprime or corona-crisis, returns similar to those of equity funds were realizable, only with a significantly lower risk.

    This “poor-man’s-trendfollowing-strategy” works for me since years…

    • Matt,
      Thanks a lot for your feedback, very appreciated that you go into details. I’ll do more research on the “poor man’s trendfollowing strategy” 🙂