When Equities Struggle, Go Long Gold?


When the equities market is in distress, is taking a long position in gold a profitable strategy?

The conventional thinking among pundits supports taking a long position in this precious metal as a way of mitigating strong losses in the equities market.  Fortunately, many active market participants prefer to run the numbers before acting on this long held assumption about market direction. This study attempts to prove or disprove this form of hedging strategy by performing an analysis on two active funds: the spiders (SPY), which are the best representation of the equities market (averaging 205 million shares per day), and the SPDR Gold Shares fund (GLD) with 15.7 million shares a day serves as our dependent variable.

In this study, our operational definition of a setback – within the previous 300 trading days (Apr 11, 2011 to Jun 19, 2012) – is a daily loss in excess of $1.00 in the spiders. 

When making an assessment of excessive scores, a scatter gram displays more information regarding the past daily combinations of these two instruments.  Below is a comparison of the spiders (X axis) with those 65 days with a loss in excess of $1.00, the performance of this gold fund (Y axis) is given in response to the daily loss in the spiders.

Fig1

On the 11 days with a <-$3.20 loss in the spiders, if you invested in this fund holding gold bullion in a vault in London, there were 7 advances against 4 declines, with $10.01 in profits.   So, if we were to buy gold on these days we would make a nice daily profit, but there is one slight problem with this thinking, that is, we can’t trade the past. Consequently, we have to assess the performance of the spiders from an earlier timeframe in order for us to make decisions about the future direction of this yellow metal.

research question: If the spiders (SPY) drop 60-plus cents when trading from 6:00 to 9:00 in the morning, should we take a long position in GLD?  More specifically, we would take a long position at 9:00, hold it, and offset it at 15:00 hours.

DATES OF STUDY: Jan 31, 2011 to Jun 19, 2012 (350 trading days).

GLD price:

Jan 31, 2011 its 9:00 price = $129.43.

Jun 19, 2012 its 15:00 price = $157.27

In these 350 trading days the frequency of a <- 60¢ drop in the spiders between the hours of 6:00 to 9:00 was not uncommon, there were 34 records found (9.71%). Since this condition occurs roughly once in every 10 trading days, an analysis of this condition is a meaningful endeavor.

1)      How does this $1.13 profit compare to the performance of this GLD fund when trading in this six-hour setting when the spiders do not have a 60-plus cent decline?

2)      When using this strategy, the results disregard the early morning direction of this GLD fund.  If we refrain from taking a long position when this instrument either advances or declines from 6:00 to 9:00, does it enhance our performance results?

In this condition, we have two different categories both playing off the strong early morning loss in the spiders:

– An early morning loss (6:00 to 9:00) in excess of 60 cents in the spiders along with an advance in GLD.

– An early morning loss (6:00 to 9:00) in excess of 60 cents in the spiders along with a decline in GLD.

An examination of both of these conditions shows a performance discrepancy.  When taking a long position from 9:00 until 15:00, an excessive early morning loss in the spiders AND an advancing three-hour session in this fund, was the more profitable category.

Fig 2

conclusion: Before putting your money on the line, always ask more questions about the previous trading conditions. Anyone who craves definitive answers is in the wrong business, as investors the best we can do is trade with the percentages.  Anyone who seeks answers to questions, examines the numbers and is willing to modify his or her views is going to sharpen their analytical skills and increase their knowledge.  And, ultimately it is knowledge that is the gateway to long-term trading mastery over the markets.

Dr Anthony Trogone can be contacted by email at

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