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1996issue C101

Dual-horizon bands for a precious-metals cash switch

A weekly gold-stock-to-bullion ratio becomes a closed long-or-cash procedure when a slow standard-deviation envelope and a fast standard-deviation envelope are given complementary pierce-and-reclaim rules.

  • The only signal series is a weekly gold-stock-to-bullion ratio formed from a gold-mining stock index and a quoted gold-bullion price.
  • A 46-week moving-average envelope and a four-week moving-average envelope share that ratio but use different band widths and complementary reclaim rules.
  • A long follows a slow oversold reclaim or a fast overbought pullback; cash follows the reverse of those two conditions, with no short sleeve.
  • Friday observations set the indicator, any cash-switch is assumed to take effect the following Monday, and the long sleeve is illustrated with a gold-sector mutual fund.
Entries in this reading3 entries
Current trackMean reversion43 readingsRule-based entry174 readingsMoving average449 readings

One ratio, two horizons

The indicator is a weekly gold-stock-to-bullion ratio: a gold-mining stock index divided by a quoted gold-bullion price. The construction does not trade the mining index itself. It uses that relative-value series as the sole rule input for a cash-switch: hold a gold-sector fund after a long signal, and hold cash after an exit signal, with no short sleeve.

A moving average of the ratio is the centerline of each envelope. One lookback is 46 weeks, with bands placed 2.3 standard deviations above and below the average. The other lookback is four weeks, with bands placed 1.6 standard deviations above and below the average. That pair is the dual-horizon envelope.

Long rules as reclaim or fade

A long signal occurs when the ratio falls below the lower 46-week band and then closes back above that band. A second long signal occurs when the ratio rises above the upper four-week band and then closes back below that band.

Those longs are framed as an extreme slow-horizon oversold reclaim or a short-horizon overbought pullback. Mean reversion is the working assumption: extreme departures of the ratio from a moving-average envelope tend to reverse, so the sleeve follows the slow reclaim or the fast fade.

Cash rules reverse the same tests

The long is replaced with cash when the ratio rises above the upper 46-week band and then closes back below it, or when the ratio falls below the lower four-week band and then closes back above it. Cash rules reverse the two long conditions.

In this rule-based entry, a band pierce followed by a close back through the same band produces the entry, and a matching pierce-and-reclaim on an exit band returns the sleeve to cash. The cash-switch holds the long sleeve after a long signal and holds cash after an exit signal, with no short sleeve.

Friday marks and the illustrated sleeve

Indicator values are taken from Friday observations. Any position change is assumed to take effect the following Monday. Because the mining index itself is not a tradable vehicle, the long sleeve is illustrated with a gold-sector mutual fund.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
5 of 36 in the Mean reversion track
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By fieldEntry and exit rules206 readingsBy year199680 readings
All 43 readings tagged Mean reversion
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