Efficiency in the Gold Market – A Note. 1980.
This paper offers the first examination of whether the gold market can be thought of as efficient. It begins by testing for weak form efficiency through tests of serial correlation and finds some evidence against the idea that markets reflect all available information. Modelling the changes in price as a Markov process shows that the change from AM to PM fixing is independent of the overnight change but the authors argue that there may be dependence between the PM to PM changes. Employing a trading strategy based on this does not however prove profitable once trading cost of factored in.
The market model is also applied to test whether investing in gold could offer investors positive alpha – returns greater than can be justified by the level of risk. The alphas calculated are positive but not statistically significantly different from zero. Overall the gold market was found to be generally efficient.
Citation: Tschoegl, Adrian E. “Efficiency in the gold market—a note.” Journal of Banking & Finance 4.4 (1980): 371-379.
Data: London Am and PM Fixings 2/1/1975 – 0/6/1977
Methodology: Tests for Serial Correlation, Markov Transition Probabilities,
Abstract: This paper investigates the efficiency of the gold market with respect to the information contained in sequences of successive price changes. Tests for serial correlation and modelling the changes as first-order Markov processes indicate some short-term dependence. While there is no reason to believe outsiders can profit from knowledge of these relationships, insiders might, though this is not certain. In addition, the application of a market model to monthly returns for the period 1974-1977 results in the finding that gold’s ‘alpha’ and ‘beta’ were positive, but not significantly different from zero.