Can You Time Gold Investing? An Empirical Analysis

Gold is often seen as a long-term investment because, unlike equities, it rarely experiences dramatic up or down movement over the short term. Therefore, few investors consider the timing when buying gold. But should they? This was a question researchers wanted to explore.

To do so, they tested over 4,000 seasonal, technical, and fundamental timing strategies for gold using eighteen different market timing signals. For example, one signal, called the “seasonal market timing signal,” is based on research showing that September and November are the only months in which gold generates a positive and statistically significant return based on data from 1980 to 2010.

Another signal is based on the long-term corporate bond return minus the long-term government bond return. Yet another signal is based on the interest rate on a three-month Treasury bill. They even examined what they called the “kitchen sink” forecast which “incorporates all available predictor variables simultaneously in a multivariate regression model.” The analysis evaluated how these different market timing signals performed from January 1990 to December 2017.

The researchers concluded that “the best fundamental and technical market timing strategy outperformed a buy-and-hold strategy by about 2.3 percentage points per year. The best seasonal trading strategy outperformed a passive strategy by at least 2.7 percentage points per year.”

While it might be difficult for ordinary investors to implement the exact trading strategies used here, the research does show that there are times that are better than others to invest in gold. Everyday investors can time their purchases using much simpler signals like:

1. Economic Uncertainty: Gold is often seen as a safe-haven asset, and its demand tends to rise during times of economic uncertainty or market volatility. In situations like economic downturns, financial crises, or recessions, investors may turn to gold as a store of value, which can drive its price higher.
2. Inflationary Periods: Gold has been considered a hedge against inflation, as its value may rise during periods of high inflation when the purchasing power of fiat currencies decreases. Investors may use gold to preserve wealth when they expect inflation to erode the value of other assets.
3. Geopolitical Tensions: Political instability, conflicts, or geopolitical tensions can increase demand for safe-haven assets, including gold. During times of geopolitical uncertainty, investors may seek the relative stability and perceived safety of gold
4. Currency Depreciation: A weakening currency can boost the demand for gold, particularly in countries where local currencies are losing value against major international currencies like the U.S. dollar

It’s always a good time to own a safe haven investment. But for those who have the opportunity to plan their next purchase, it might be wise to consider the economic environment first.

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