The international business cycle and gold-price fluctuations

Drawing on recent empirical research, we study whether the international business cycle, as measured in terms of the output gaps of the G7 countries, has out-of-sample predictive power for gold-price fluctuations. To this end, we use a real-time forecasting approach that accounts for model uncertainty and model instability. We find some evidence that the international business cycle has predictive power for gold-price fluctuations. After accounting for transaction costs, a simple trading rule that builds on real-time out-of-sample forecasts does not lead to a superior performance relative to a buy-and-hold strategy. We also suggest a behavioral-finance approach to study the quality of out-of-sample forecasts from the perspective of forecasters with potentially asymmetric loss functions.