Gold Stock Performance Analysis: Monetary Policy, Geopolitical Tensions Drive Demand

Introduction

Gold is a popular investment commodity that has historically been a safe haven during times of economic uncertainty and geopolitical tensions. In recent years, the gold market has been experiencing a surge in demand, driven by a combination of monetary policy expectations, geopolitical tensions, and global economic outlook. In this article, we will analyze the performance of gold stocks and compare two moving average trading strategies, the Adaptive Moving Average (AMA) and the Simple Moving Average (SMA).

Gold Stock Performance

Gold futures rose to their highest level ever this week, supported by monetary policy expectations, geopolitical tensions, and global economic outlook. The gold price rose as Bitcoin also rose to a new record high. Today, the gold price reached the resistance level of $2142 per ounce, the highest ever for the gold market. Gold prices have erased their losses since the beginning of 2024 and are now up more than 3%. Over the past twelve months, the price of the yellow metal has risen by 16%.

Silver prices, the sister commodity of gold, reduced their gains and turned negative. Silver futures fell to $23.92 per ounce. The price of the white metal is close to eliminating its decline in 2024, as it has declined by 0.5% since the beginning of the year until now. Over the past 12 months, silver prices have jumped by 13%.

The US Dollar Index (DXY), a measure of the performance of the US dollar against a basket of other major currencies, fell to 103.80. The index has risen by 2.45% since the beginning of 2024. A weaker US dollar is good for dollar-denominated commodities because it makes them cheaper to buy for foreign investors.

US Treasury yields fell across the board, with the 10-year yield down 8.2 basis points to 4.137%. The yield on two-year and 30-year notes fell to 4.552% and 4.276%, respectively. Gold is sensitive to fluctuations in interest rates because it affects the opportunity cost of holding bullion that does not generate a return.

Gold price continued its gains, reaching its highest level ever. Recent gains have been enough to push all technical indicators towards strong overbought levels. If the US dollar improves again, there may be opportunities for profit-taking sales of gold. The gold price has added nearly $100 in the past five sessions, supported by a combination of geopolitical tensions, monetary easing expectations, and risks of a decline in stock markets. The nearest resistance levels for gold are currently $2138 and $2155 per ounce, respectively. In contrast, based on the performance on the daily chart, breaking the current upward trend will depend on returning to the $2000 level. Signs indicating the US Federal Reserve’s pivot have supported the gold market since mid-February. Recently, swaps markets showed a roughly 60% chance of a rate cut in June, a higher probability than early last month. Low borrowing costs are usually positive for the yellow metal, which does not offer any interest.

Moving Average Trading Strategies

The study compares two moving average trading strategies, the Adaptive Moving Average (AMA) and the Simple Moving Average (SMA), and finds that the AMA strategy consistently outperforms the SMA strategy in terms of total return and Sharpe ratio. However, the AMA strategy also experiences higher drawdowns than the SMA in certain instances, suggesting a potentially higher risk during market downturns. The authors conclude that the effectiveness of adaptive versus simple moving average trading strategies is nuanced in varying market conditions, with no one-size-fits-all answer. Investors should weigh the potential benefits of adaptability against the increased costs and risks associated with such strategies.

Conclusion

Gold stocks have been experiencing a surge in demand in recent years, driven by a combination of monetary policy expectations, geopolitical tensions, and global economic outlook. The gold price has reached its highest level ever, and recent gains have pushed all technical indicators towards strong overbought levels. The AMA strategy consistently outperforms the SMA strategy in terms of total return and Sharpe ratio, but experiences higher drawdowns during market downturns. Investors should weigh the potential benefits of adaptability against the increased costs and risks associated with such strategies.