Gold, the precious metal, reached an all-time high of almost $2070 in August, 2020 before a bout of profit taking took the yellow metal down 10% to around $1857. It now trades at around $1925, almost 7% lower compared to its all-time high. But, will gold continue to lose its luster, or is a recovery imminent?
According to the Trefis Machine Learning Engine, which identifies trends in Gold’s price data since 1999, returns for Gold average around 5% in the next one-month (21 trading days) period after experiencing a 10% drop over the previous month (21 trading days). Notably, though, the commodity is very likely to outperform the S&P500 over the next month (21 trading days), with an expected excess return of 2% compared to the S&P500.
Now, it you extend the time frame to 1 year, the AI Engine says that Gold can return around 11% in the next 1 year, after experiencing a -7% drop in two months (42 trading days)
But how would these numbers change if you are interested in holding Gold for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Gold chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just 1 day!
MACHINE LEARNING ENGINE – try it yourself:
IF Gold moved by -5% over 5 trading days, THEN over the next 21 trading days, Gold moves an average of 1.6 percent, which implies an excess return of -0.6 percent compared to the S&P500.
More importantly, there is 54.9% probability of a positive return over the next 21 trading days and 45.7% probability of a positive excess return after a -5% change over 5 trading days.
Some Fun Scenarios, FAQs & Making Sense of Gold Movements:
Question 1: Is the average return for Gold higher after a drop?
Consider two situations,
Case 1: Gold drops by -5% or more in a week
Case 2: Gold rises by 5% or more in a week
Is the average return for Gold higher over the subsequent month after Case 1 or Case 2?
Gold fares better after Case 1, with an average return of 1.6% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of -1.3% for Case 2.
In comparison, the S&P 500 has an average return of 3.1% over the next 21 trading days under Case 1, and an average return of just 0.5% for Case 2 as shown in our dashboard that details the average return for the S&P 500 after a fall or rise.
Try the Trefis machine learning engine above to see for yourself how Gold is likely to behave after any specific gain or loss over a period.
Question 2: Does patience pay?
If you buy and hold Gold, the expectation is over time the near term fluctuations will cancel out, and the long-term positive trend will favor you.
Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays!
For Gold, the returns over the next N days after a -5% change over the last 5 trading days is detailed in the table below, along with the returns for the S&P500 after a +5% change over the last 5 trading days (since Gold and S&P500 are inversely related):
You can try the engine to see what this table looks like for Gold after a larger loss over the last week, month, or quarter.
Question 3: What about the average return after a rise if you wait for a while?
The average return after a rise is understandably lower than a fall as detailed in the previous question. Interestingly, though, if Gold has gained over the last few days, you would do better to avoid short-term bets on it.
Gold’s returns over the next N days after a 5% change over the last 5 trading days is detailed in the table below, along with the returns for the S&P500 after a -5% change over the last 5 trading days (since Gold and S&P500 are inversely related):
It’s pretty powerful to test the trend for yourself by changing the inputs in the charts above.
What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
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