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The Gold Fix

During 2011, when Gold was right at the peak of its amazing multi-year bullish trend that saw it rise in value from $300 to almost $2000 per ounce, I was having a drink with a couple of fund managers. One of them raised the subject of Gold and said what a shame it was that so many of the people you talked to with a keen interest in and knowledge of Gold were so irrational in their opinions. He gave as an example a Gold specialist he had been speaking with only that morning, who had been trying to persuade him that Gold was on its way to $5,000 per ounce. I pointed out that Gold had already risen by much more, but he just smiled at me, and as it turned out he was right. Then he went on to say something that did stick in my mind: “If you had simply bought Gold every evening, and sold it the next morning, you’d have made a ton of money. This guy proved it to me.”
Was he right?

Gold & Time of Day

We can test out this theory by performing a little experiment. Let’s calculate the average price gains or losses we would have enjoyed if we had bought Gold at different times of the day from 2001 until the end of 2016. The fund manager was using London time in his example, and we will use Universal Time (Greenwich Mean Time) which is basically the same thing.

The first test is holding Gold for a period of 4 hours. On average, Gold fell by 0.01% from Midnight to 4am. Buying at 4am, 8am, and Noon would all have produced an average price rise of 0.01%. Buying at 4pm would have produced an average price rise double that, at 0.02%. Buying at 8pm would have produced an average of no change.

So far, it would seem as if the fund manager’s statement was right at least in the sense that Gold has tended to rise towards the end of the day. Let’s take it a stage further and calculate the average of a 16 hour holding period. This would allow for Gold to be purchased at 4pm and sold at 8am, so we can really test our hypothesis with some averaged results.

Buying at Midnight and selling at 4pm produced a gain of 0.02%. Buying at 4am and selling at 8pm produced a gain of 0.05%. Buying at 8am and selling at Midnight produced a gain of 0.04%. Buying at Noon and selling at 4am produced a gain of 0.03%. Buying at 4pm and selling at 8am produced a gain of 0.2%. Finally, buying at 8pm and selling at Noon produced a gain of 0.01%.

So in this analysis, the fund manager’s belief is wrong. It might have been right for the period represented by the few years leading up to 2011, but we can actually see that buying at 4am and selling at 8pm would have produced the best results, at least on average. However, he was right in that buying towards the end of the day would seem to produce the best short-term results.

As it happens, you would not be able to make any money with this strategy of buying and selling every day, because the retail spread in Gold is equal on average to about 0.05%, which was the maximum profit obtained.

Does this investigation teach us anything about how time of day can be used as a factor in trading Gold?

The Gold Fix

The spot Gold market is quite unusual as there is a process called the Gold Fix that happens twice each weekday, at 10:30am and 3:30pm London time. The 11 major banks dealing on Gold bullion are joined by conference call, and they undergo a process which ends with their agreement of a
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representative rate for the price of spot Gold. Essentially, what happens with the Gold Fix is that each bank matches all their buy and sell orders
and derives a price from that, and then the process is repeated between the banks, giving an overall representative price which reflects an equilibrium of all trading orders.

Conclusion

The first turn of an hour after the final Gold Fix is at 4pm London time. You cannot get further away from a Gold Fix than 4pm. Could it be that the market, knowing the fix is cleared and the price is out of danger of any possible manipulation, rushes to buy at 4pm, accounting for our finding that the largest short-term move begins at 4pm?

The truth cannot be settled easily, but it may be far more prosaic. 4pm London time is usually 9am New York time, when the world’s great financial center opens for business. This time window, when both New York and London are open, sees the greatest volumes statistically in almost all global assets. Therefore the 4pm rush might just be a case of having the most crowded room which would turn to produce the strongest price moves. Since 2001 the general direction of the price of Gold has been upwards, so it may be a tendency of directionality in general tending to begin at about 4pm.

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