Stop Searching For The Holy Grail

In a recent post, I came to the following conclusion:

“the notion that simply ‘following the trend’ in Gold will lead to vast riches is a false one.”

I made this statement after analyzing a simple trend following system (going back to 1975), using the 200-day moving average as a signal of when to get in (closes above it) and when to get out (closes below it).

The most common response to the post:

“You’re using the wrong moving average. You need to use the x-day moving average for Gold. That is the one that works.”

Translation: I should have used the Holy Grail. The only problem: it doesn’t exist.

In testing other popular moving averages such as the 100-day, 50-day, and 20-day, we find that they actually fared worse than the 200-day.

These shorter-term moving averages also traded in higher frequency, meaning the net returns after commissions/slippage would be even lower.

That’s not to say there isn’t some variation that would have worked better than the 200-day moving average in the past. Given the nearly infinite number of permutations, I’m quite sure that there is. Whether it’s a change in time period, indicator, or some combination thereof – if you look long and hard enough you’ll find something that works better.

But that’s not the question. The question is whether there’s enough evidence to show that trend following in Gold has been superior strategy to buy-and-hold.

There doesn’t seem to be, and mining the data to prove otherwise would serve no purpose other than confirming some bias. What would be the point of optimizing for the perfect past return unless there was some fundamental reason why a certain time period/indicator should continue its outperformance in the future?

Lacking such a reason, you are merely chasing optimization, trying to find the combination that would have given you the best past result.