Gold Pairs Trade Still has Room to Go

by Jay Pestrichelli on May 24th, 2012

Back on May 10th, I posted a trade idea to this blog that advocated a pairs trade on the gold miners ETF (GDX) vs. the gold ETF (GLD). See Gold Miners Only if its Hedged. At the time the GLD opened at 154.76 and GDX opened at 43.07. Today GLD is at 152.76, a drop of .2% and GDX is at 46.1, a gain of 7%.

This trade is gaining momentum and our analysis has it with more room to run. We outline in our ETF Newsletter on Minyanvillea way to trade this in a hedged way with options, but if you’re just short GLD and long GDX, it’s feeling good right now.
Buy why is it working when in the past this was a sucker’s trade. The answer falls in the current environment. The commodity itself is under pressure due to the rising strength in the dollar. However sales in other currencies won’t go through this so they can get top Euro or rupee, but have their stock quoted in dollars

All commodities are going through this, but lower costs may also a factor. As fuel prices drop the expenses the miners have to endure to pull the metal out of the ground follow.

If these two factors continue for the next month or so, expect this gap closing trade to continue to work. As the world starts to digest the current shake-up, this may all level out and Gold once again may gain favor, but for now, it’s the unusual lagger against those that mine it.

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