Tuesday, July 13, 2010

PQ7: two tubulent years, +107,60%

Fig. PQ7 net results (after transaction fees and taxes) for 2 years between mid July 2008 and mid July 2010
Final result after 2 years: +107,60% (approx. 37% annulized)

It has been two years since I've started a proprietary trading experiment called PQ7.

Its goal was to test some hypotheses regarding financial markets and... survive :)

It so happened that the PQ7 experiment coincided with one of the most volatile periods in the history of modern financial markets, what is reflected in performance of the strategy.

I have learned a lot during this period. I know now what I more of less do not know :)

The experiment will continue for the next 12-18 months with modified - hopefully less volatile - trading strategy.

More updates to come.

Saturday, July 10, 2010

Cyclical analysis of gold prices

Some investors believe that it is a good time for buying more gold now, for Q4 is usually positive for gold.

This believe is based, among other, on the assumption jewelery demand increases at the end of the year.

Indeed, if you take a look at the average monthly returns over the last 41 years (1969-2010), price of gold was increasing in September, November and December:

Fig. Average monthly changes
Both Q3 and Q4 were on average positive for gold, and stronger then Q1 and Q2:

Fig. Average daily changes in particular quarters

However if you take a closer look at the distribution of monthly changes, the pictures gets less clearer. September was historically a very volatile month, and while average returns for 3 out of 4 months in Q4 were usually positive, the probability of loss was still substantial:

Fig. Distribution of monthly changes
The randomness of changes is even more visible, when you combine two consecutive months - now average bi-monthly returns are very close to zero.

Fig. Distribution of bi-monthly changes
And still more when you analyze daily data - here you can see that daily changes oscillate around zero each month, without a clear tendency:

Fig. Distribution of daily changes in particular months
You can also take a closer look at the distribution of changes in potentially the most beneficial months, such as September and November - in the former positive average return was generated by infrequent high results, and in the later the distribution is rather symmetrical with some outliers on the negative side:

Fig. Histogram of changes in September

Fig. Histogram of changes in November
Hence, based on the available historic data I cannot agree that the probability of gain from investing in gold now and holding it till the end of the year is significantly higher then making a loss on such an investment.

I just can't see a visible cyclical / seasonal pattern in gold prices. But maybe somebody else can and would correct me?

To see daily chart of gold futures prices go to: http://www.wolframalpha.com/input/?i=gold&a=*C.gold-_*Commodity-

You can also find my bookmarks for articles about gold at: http://delicious.com/reakkt/gold