Rotating to Gold Rather Than Cash
Gold and equities have historically had alomst zero long term correlation, and gold has tend to outperform during major equity draw downs, though this relationship isnt guaranteed and has shown signs of weakening in some crises. Wanted to test if a simple trend-following rotation can exploit this relationship over the long term.
The strategy rules
- Entry
- Buy SPY when
- SMA 5 > SMA 21 AND
- CLOSE > SMA 5
- Exit
- SMA 21 > SMA5 OR
- SMA 5 > CLOSE OR
- SPY dips 20% from buy price
- Rotation
- When SPY exits, move capital to GLD
- When SPY entry triggers again, rotate back
- Timeframe:
- Monthly
- Duration
- Start - 2007 Nov (the original intention is to do from 2006 Jan, but SMA 21 warm up takes 21 Monthly bar to begin the strategy)
- End - 2026 January
Results of SPY -> Gold rotation
| Metric | Value |
|---|---|
| Initial Capital | $100,000 |
| Final Capital | $540,837 |
| Total Return | 440.84% |
| CAGR | 10.13% |
| Max Drawdown | 15.91% |
| Sharpe Ratio | 0.35 |
| Sortino Ratio | 1.69 |
| Win Rate | 54.05% |
| Profit Factor | 4.40 |
| Total Trades | 37 |
P&L Breakdown
- SPY strategy: $267,977 (268%)
- GLD rotation: $172,861 (173%)
Strategy vs Buy & Hold SPY (2007-2025)
| Metric | Strategy | SPY Buy & Hold |
|---|---|---|
| Final Value | $540,838 | $434,933 (without dividends) |
| Max Drawdown | ~16% | ~36% |
Verdict: Strategy beat SPY by $105k with less than half the drawdown.
Visual Stats
Running the strategy on just SPY and moving
to cash when no trade
Results of SPY → Cash Rotation (No Trade = Cash)
| Metric | Value |
|---|---|
| Backtest Period | Oct 2007 – Apr 2025 (~17.5 yrs) |
| Starting Capital | ~$100k |
| Portfolio Final Value | ~$250k |
| SPY Benchmark Final Value | ~$350k |
| Portfolio Max Drawdown | ~10–11% |
| SPY Max Drawdown | ~34–35% (GFC) |
| Portfolio Drawdown (COVID) | ~8–10% |
| SPY Drawdown (COVID) | ~27% |
| Est. Portfolio CAGR | ~5–5.5% |
| Est. SPY CAGR | ~7–7.5% |
Visual Stats
Key Takeaway
The gold rotation is doing the heavy lifting. SPY alone (moving to cash when no trade) returned ~5% CAGR with ~10% max drawdown, safe but underwhelming, lagging buy-and-hold SPY by a wide margin. Adding GLD as the rotation target nearly doubled the CAGR to 10.13% while keeping max draw down at ~16%, beating buy-and-hold SPY by $105k with less than half the draw down.
The backtest supports the thesis: gold and equities tend to move inversely during stress periods, and a simple SMA-based trend-following rotation exploits that relationship effectively. The strategy doesn't just avoid losses during crashes, it actively profits from them through GLD exposure. Of the total $440k return, GLD rotation contributed $173k (39%), meaning the idle capital wasn't idle at all.
Bottom line: Trend-following on SPY works for risk management. Pairing it with gold rotation turns defensive periods into productive ones, not quite alpha, but meaningfully better risk-adjusted returns than buy-and-hold, contingent on the gold-equity inverse relationship holding up.
Posted Feb 21, 2026, 5:30 PM UTC