Gold as an investment is a very particular asset class. The precious metal has some industrial uses, but its value is more related to its historic function as a store of value than functional applications. Unlike stocks or bonds, gold does not generate any cash flows, so it’s practically impossible to tell if the metal is undervalued or overvalued in terms of intrinsic value through discounted cash flows.

The supply of gold is relatively fixed, or at least very stable, and the commodity doesn’t generate any cash flows, so price fluctuations depend considerably on investor sentiment and demand levels.

When investing in gold, you want to make sure to be positioned on the right side of the main price trends for the metal, because it’s practically impossible to analyze a position in gold by looking at valuation levels or projecting industrial needs.

In that spirit, this article takes a look at gold investing through a quantitative approach, focusing on price trends and relative strength to time positions in SPDR Gold Trust ETF (GLD), the most popular ETF to invest in gold.

Trend Following In Gold Markets

Trend following is one of the most simple and effective strategies to make investing decisions based on demand levels and price action. In a nutshell, trend following means that you only invest in a particular asset when the trend in prices for such asset is considered up over a particular period.

In order to evaluate if the trend is up or down, we can compare the current market price versus a moving average of past prices. The 10 month moving average is a widely used long term trend measure, and it works quite well at identifying major trends in gold prices over the years.