- The ratio of federal debt to the GDP is expected to rise dramatically due to the covid-19 pandemic fiscal stimulus. This should result in a significant gold price rally.
- The analysis shows that a trading strategy for gold miners is preferable to a buy-and-hold investment strategy of individual mining stocks.
- This momentum strategy selects periodically one gold mining stock from a set of three: AngloGold Ashanti Ltd (AU), Newmont Corp. (NEM) and Sibanye-Stillwater Ltd. (SBSW).
- The selection is based on the momentum of the percentage price change and the up/down volume ratio of the stocks.
- From Jan-2016 to Apr-2019 this strategy would have produced an annualized return (CAGR) of 80.6%, much more than that of the best performing single stock of the three considered.
US Debt/GDP vs Gold Price
The ratio of federal debt to the economic output of the U.S. is expected to rise dramatically by the end of 2020 as a result of the covid-19 pandemic fiscal stimulus. This, and low interest rates should result in a significant rally in gold, similar to the post 2008 gold price increase, as shown in the figure below.
An upward trend of the gold price should benefit gold mining stocks. Instead of a static investment, a trading strategy between three stocks is proposed, all of which have significant upside potential on their own according to various analysts.
The Gold Mining Stocks:
The three gold mining stocks used in the strategy and their performance statistics are listed in the table below and also shown in figures 2, 3 and 4 in the appendix.
|Ticker||Name||MktCap $-million||CAGR from 1/1/2016||Max Draw-down||Sharpe Ratio|
|AU||AngloGold Ashanti Ltd||10,922||34.2%||-68.0%||0.59|
|Trading Strategy (Figure-1)||80.6%||-34.8%||1.20|
Only one stock of the set of three is held at any one time. The stock selection criteria are from a standard Portfolio 123 ranking system. The approach ranks stocks based on percent price change over four separate time periods: 120 trading days, 140 days, 160 days and 180 days. Also the up-down ratio over more recent time intervals, 20, 60 and 120 days is considered to guard against diminishing investor sentiment.
There are two sell criteria. One compares the current drawdown of a stock over a 200 trading day period with the current drawdown of the benchmark over the same period. The other is the current percentage decline from the highest closing price since the position was started.
Performance of the trading strategy from Jan-1-2016 to Apr-23-2020 is shown in figure-1, and includes trading costs of about 0.2% of each trade amount. An initial investment of $100.000 would have grown to $1,278,000 over this period for an annualized return of 80.6%. The calendar year percentage return is listed in table below.
The analysis shows that a momentum driven trading strategy for gold miners is preferable to a buy-and-hold investment strategy of individual mining stocks.
At iMarketSignals one can follow this strategy where it is updated weekly before the first trading day of the week. The current holding since 2/24/2020 is (NEM), all other historic realized trades are listed in the appendix.
All results shown are hypothetical and the result of backtesting over the period 2016 to 2020. The future out-of-sample performance may be significantly less if ranking-, buy-, and sell rules are not as effective as they were during the backtest period, or if the expected uptrend of the gold price does not materialize. Backtesting involves optimizing parameters by looking at past data. Even if parameter values may be optimal going forward, future returns may generally not be as high as past returns. No claim is made about future performance.
Figures 2, 3 and 4 show the buy-and-hold performance of AU, NEM and SBSW, respectively.
List of Realized Trades:
*) Percent return does not include dividends.