Gold: Momentum or Mean Reversion?

GLD 2004-2015

Is gold a good momentum play or is it a mean reversion play?

Stupid question, right? Gold is a commodity, and commodities trend like there’s no tomorrow. Or like tomorrow is just like today. Right?

Maybe not, as it turns out.

I wanted to know if gold was in fact full of momentum-y goodness like everyone says. So I set up a test to see.

I chose the SPDR Gold Trust ETF (GLD) as my stand-in for gold prices. The ETF has been around since late 2004, and has seen a significant rise with a much more recent fall over its existence.

I then screened for all instances where the close moved more than one standard deviation (calculated over the previous 20 close-to-close returns) from the previous day’s close. I then looked at the returns for one day, two days, five days and ten days, to see if the move exhibited momentum or mean reversion. It didn’t matter the direction of the move – I included both short and long. I just wanted to see if the prices kept going in the same direction or not. Here’s what I got:

 

GLD trending results

Under 50% means a tendency toward mean reversion, and over 50% a tendency toward momentum. As you can see, GLD tends to be mean-reverting the day after a >1-standard-deviation move. But after that, it tends to continue in the same direction of the move (momentum). You can see that in the first row of data above.

Since GLD has been under two significantly different regimes, I wondered if there was a difference in the momentum/mean-reversion ratio when looking at long-only vs short-only moves.

First note the average gain/loss % for each holding period. Whether the trend was toward momentum or mean reversion, all holding periods show a positive expectancy with momentum.

But the short side shows a significantly greater tendency toward momentum, whereas the long side shows a tendency toward mean reversion in days one and two, and is ambivalent about the longer time periods. This is true even though GLD has had many more years of growth than it has had decline.

Of course I then had to check to see if there were any differences over the years! And yes, there are.

 

GLD trending by year
Note that 2015 is only through July 24th.

Again, any bar over 50% means a tendency toward momentum after the signal day, whereas under 50% mean a tendency toward mean reversion.

The results for a holding period of one day are all over the map. But the longer holding periods have shown a distinct bias toward momentum in the past, and yet lean toward mean reversion in the past few years. Ignoring that odd spike in the 2-day holding period for 2015, all the bars show a tendency toward mean reversion lately.

As for that spike: no idea why it’s the highest of all the years measured. Could simply be noise and the fact that the sample size is only half a year.

You might not like my definition of momentum, and that’s fine. I’m paying no attention to longer term trends in the prices here, but only using a one day change as a ‘breakout’. Ten days is the maximum holding period, so this is not a long term test. That’s the thing about momentum and mean reversion: one can become the other when the time scale is changed.

Conclusions? Other than that if gold spikes upward you should short on close and sell the next day at close? Wait, no, I’m not recommending that! But that’s not an unreasonable idea for a system based on the data. And then you could turn around and go long and hold for one more day.

Standard disclaimer: You should never trade anything but baseball cards. Trading commodities will give you hives and/or herpes.

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