The algorithm identifies waves in the price of gold to forecast its trajectory. Every day the algorithm analyzes raw data to generate various gold predictabilities and signals. The predictability is the “strength” of the prediction and the signal is the movement direction (increase/decrease). The predictability is the historical correlation between the algorithmic prediction of gold and its actual movement.The signal is the strength of the current gold prediction. Each cell represents a different commodity and gold is part of the commodities table. The commodities table is organized by signal strength. The strongest up signals are at the top of the table, down signals at the bottom.
We include both the ETF version of gold (GLD) and the physical version of gold (XAU) even though their stock prices are identical, because the algorithm analyzes each one independently; therefore, when the algorithm predicts that both will move in the same direction, there is greater confidence in the predictions.
However, when the algorithm predicts that each will move in a different direction, it means that the algorithm is uncertain about the movement of gold and we advise investors to sit out and wait for a more confident prediction. If one insists on investing he should follow the prediction with the stronger signal/predictability combination.
More about the predictability:
Predictability (P) is obtained by calculating the correlation between the current prediction and the actual gold movement for each discrete time period. The algorithm then averages the results of all the prediction points, while giving more weight to recent performance. As the machine keeps learning, the values of P generally increase.
Predictability ranges from negative 1 to positive 1; this metric is an adaptation of the Pearson correlation coefficient.
P=-1 means the actual price of gold moved in the opposite direction than the algorithm predicted.
P=0 means that there is no correlation between the prediction and the actual gold movement.
P=1 means that there is perfect correlation between the actual gold movement and its predicted movement.
Any value of P above zero indicates a positive predictability, the higher the better. We give the most importance to predictabilities ranging between P=0.2 and P=0.7.
Reading the Prediction
It is recommended that investors consider both the signal strength and predictability, as a highly predictable asset that barely moves and an unpredictable asset that is projected to move drastically both make unattractive investments. It is important to note that longer-term forecasts (1-month and 3-month) tend to have higher predictabilities as the algorithm can more easily spot long-term trends.
Every day the algorithm generates a heat map demonstrating the overall direction of the gold market. For example, a bull market would be indicated when green “buy” predictions at the top of the table dominate the red “sell” predictions at the bottom.