Why gold and why is forecasting its price important?

• One of the world’s most frequently traded commodities
• Differs from other commodities so comes with its own set of problems:
  • Not an essential good
  • Quantity not increasing
• Strong link to currency values
• Accurate and reliable forecasts can increase trading profits
  
• I plan to forecast one month, two months and twelve months into the future

Price of gold since 1968

What affects the price of gold?

• Running a regression of the gold price lagged 1 month on itself gives an R-squared of 0.992.
  • Lagged 12 months on itself gives an R-squared of 0.908

AR-X model

• Price of silver
• The value of the dollar
• Recession or other economic factors that cause consumers to lose faith in banks
• Gold reserves
• Demand for jewellery

Gold Price with start and end of US recessions

Examining the data for structural breaks

Time Series Decomposition

Indicator Saturation

Forecasting over a training period

Testing for accuracy - Mean Absolute Percentage Error (MAPE)

##              Auto ARIMA Manual ARIMA      STL      ETS
## Training Set   6.132583     4.978184 5.266885 3.348390
## All Data       4.428418     4.027074 4.043233 4.054349