Where is the gold price going?

What path for gold from here? The range of possibilities is immense. However there are some things we can say with great confidence, if not absolute certainty.

For example: " The probability of the gold price rising by 5%+, is greater then the probasbility of it rising by 30%"

However there are some questions which are harder to answer. Here's one.

"What's the probability of the gold price rising by more than 10%, compared to the probability of it falling more than 10%?"

Mont Carlo Simulation

This is where a Monte Carlo Simulation can help. The simulation assumes that the size of daily movements, up or down, as seen in the past is representative of what we may see in the future. For example, bitcoin has big daily movements and Treasury Bills have small daily movements.

Unlike many charts, the simulation does not assume that price movements follow a well-trodden path, so that past patterns will be repeated. Instead it assumes that every daily percentage movement could occur again, but randomly without reference to the previous days' pattern.

In this simulation, which takes into account over 13'000 days of daily price movements since 1971 and involves over 250 thousand calculations we can see the various probabilities of where the gold price might be one year from now. In each of the 1000 simulations a randomizer picked 250 random historical dates since 1971 and added or subtracted that day's percentage change to the gold price, building up a possible price chart or path for the next year.

Higher Gold Prices Coming (Probably)

Using the data since 1971 tells us that there is a 67% chance of a higher gold price and a 33% chance of a lower gold price in one year's time. That's to be expected. Gold has an upwards "drift" as the currency is devalued by more printing and government borrowing.

You can see that there is a 30% probability that the gold price will rise by more than 20% over the next year.. On the other hand, there is only a 7% chance that it will fall by more than 20%. That seems like good odds to me.

In one of the thousand simulations, gold rose to $5235. (I hoping for that outcome). In another 1 in a thousand chances, gold fell to $1462 (That wouldn't worry me). Both results are outliers and very unlikely to happen.

The above results were based on a random selection of 250 random daily movements (i.e. making one year - allowing for weekends) over 53 years, (i.e. 250 daily percentage movements taken at random from over 13'000 daily changes).

Gold is moving faster than before - accelerating to the upside.

Gold has been more volatile in recent years. It has also started moving to the upside faster than before, especially since the major QE's of 2008 and 2021. I think we should shorten our time frame to take account of the current world, not the way it was 50 years ago.

Post-Covid data

Lets see what happens if we shorten the data period to just the post-Covid, higher-infaltion, and higher-interest-rate period, say from 1st January 2022. Now we only have around 700 price changes instead of 13'000.

Here's the result:

If the last three years are representative of gold's future volatility, then we are looking at an 80% chance of a rise and only 20% probability of a fall. The chance of a 20% rise is 30%, whilst the chance of a 20% fall drops from 7% to just 1%. These are even better odds that I like.

Not a Price Prediction - but here's what it's thinking

The Monte Carlo simulation does not predict the future price. It rather plots 1000 paths that the gold price might take from here, and assigns them probabilities. However, for those interested in what all the paths have to say about the future price, you can see it on the left hand side of the above picture. The median path finishes up with an 11.9% gain over one year.

So if you want a price prediction, take the average ($2833), or the median ($2804). But remember, in the simulation there are 998 other paths that the gold price could follow.

I can't fit all 1000 paths into an excel chart, but here is a chart of the first 100 gold price paths. The yellow line is the median.

The above chart is based on the daily data since 1971.

Monte Carlo Sandwich

Lastly, for those of you who have heard of the "Monte Carlo Sandwich", here's the one I attempted to make. If you would like to know how to make one of these culinary delights, stay tuned. I'll be publishing full instructions soon.