Gold New High Trading Strategy – (Rules, Backtest, Performance, and Setup)

Gold has a rich history dating back thousands of years, admired for its beauty and rarity. It has been used for currency, jewelry, and ornamental purposes across civilizations. But more recently, it has been widely used for speculating in the commodities market and as a hedge for inflation (store of value). Let’s look at a gold new high trading strategy.

Gold has risen spectacularly since the 1970s, but it has occasionally gone through some tough times. So we thought, can we develop a trading strategy that only takes advantage of gold when it’s near its all-time high?

In this article, we will see what drives the price of gold, how often it is at an all-time high, and develop a gold trading strategy to take advantage of it when it’s near its maximum price (new high).

Related reading:- A library of algo trading systems

What drives the price of gold?

Gold prices are influenced by a blend of factors, including supply and demand dynamics, fluctuations in the value of the US Dollar, and the behavior and risk appetite of investors. Apart from investors, gold finds significant demand from Central Banks, which use it to bolster their reserves, and from the jewelry industry.

The value of the US Dollar also plays a crucial role in determining gold prices. A stronger US Dollar typically exerts downward pressure on gold prices, ensuring greater stability and control. Conversely, a weaker US Dollar tends to stimulate demand for gold, resulting in higher prices, as more gold can be acquired with a weaker dollar.

As a consequence, gold is often regarded as a hedge against inflation. Inflation occurs when prices rise, and in turn, prices increase when the value of the dollar declines. Therefore, as inflation intensifies, the price of gold also tends to rise.

How often does gold set an all-time high?

From 1955 to 2022, gold has achieved 80 monthly all-time highs, demonstrating its consistent growth despite having no intrinsic value and little industrial use. This averages about 1.25 record-setting moments per year, equivalent to approximately 10% of the months.

How often does gold set an All-Time High?

However, gold went more than 14 years between 1981 and 2005 without a new high, and gold goes in cycles. The 14-year long streak without having any significant gains is tough to bear for bulls.

Because of this, we decided to develop and backtest a gold trading strategy for when prices are at all-time highs.

Gold new high trading strategy – trading rules

The trading rules of the strategy we are going to backtest are simple, but to get the trading rules, you need to be a Silver member. Please have a look at our four memberships (clickable link):

For an overview of the strategies you get access to, please click on this link:

Gold new high trading strategy – backtest

We backtest the strategy using the monthly closing price of gold from the World Bank’s Commodities Markets Database. Here is the equity curve of the gold new high trading strategy:

Gold New High Trading Strategy - (Rules, Backtest, Performance, and Setup)

The equity curve looks decent without any major drawdowns.

Here are some performance metrics and statistics about the strategy:

  • CAGR is 4.3% (buy and hold 6.57%)
  • Time spent in the market is 31.01%
  • Risk-adjusted return is 13.86% (CAGR divided by time spent in the market)
  • Maximum drawdown is 35.5% (62.08%)

Although the return is lower, the time spent in the market is only a third, and the maximum drawdown gets reduced to almost half. This strategy performs similarly to the one we developed when inflation was high.

Gold new high trading strategy – conclusion

To sum up, today we show you how often gold is at an all-time high and develop a trading strategy to take advantage of this. Because it’s invested only around a third of the time, it can be helpful to identify bull regimes in gold.

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