One of 2014’s most talked about trades, and rightfully so, has been the resurgence of gold miners equities and exchange traded funds.
At various points last year, seven, eight or more of the 10 worst non-leveraged ETFs had some something to do with gold an silver and several of those funds were mining funds such as the Market Vectors Gold Miners ETF (GDX) and the Global X Silver Miners ETF (SIL) . Things have rapidly changed as six of this year’s top-10 non-leveraged ETFs are gold and silver mining funds. [ETF Laggards Rise in 2014]
With the resurgence in mining ETFs has come out-peformance by those funds of physical gold ETFs such as the SPDR Gold Shares (GLD) . This is not something that happens with great frequency. From 2008 through 2013, GDX outpaced GLD just twice. Some believe this could be the year to be long GDX and short GLD.
“The trade now is essentially long the gold miners and short gold the commodity. The break to new lows in December was only temporary. I believe we have ourselves a false breakdown here in this pair. And as the old saying goes, “from false moves, come fast moves in the opposite direction” — in this case, higher,” says J.C. Parets, president of Eagle Bay Capital.
Parets points out that the number traders will want to keep an eye on is a GDX/GLD ratio of 0.187.
“As long as this ratio remains above 0.187, I think all systems are a go, and miners should continue to outperform the metal. There’s no telling how high it can go. A good initial target would probably be 0.30, which was the fall of 2012 highs. This represents a move of over 50% from current levels, with a risk of just a couple of percentage points. A 25:1 risk/reward ratio is a home run in my book. I’ll take that all day,” said Parets.
That makes for a tempting trade as GDX traded in the low to mid-$50s for much of autumn 2012. The ETF closed at $23.67 last Friday.
There is something to be said for the long miners trade. Until recently, gold miners were easily one of the market’s most disliked groups, but some marquee gold indices and mining equities were hovering near 10 to 15 year support ranges, indicating a bounce could be close. [Rare Opportunity in Gold Miners ETFs]
Plus, there is GDX’s out-performance of the broader market. Friday is just one example, but it paints the picture. GDX lost just 0.21% on the same day when the S&P 500 plunged 2.1%.
One vital anecdote to remember: If GDX and related ETFs rise this year, that should still prove to be a good thing for GLD and rival funds. After all, there has NEVER been a year when gold prices have fallen and mining stocks have risen.
GDX/GLD Ratio Chart
Chart Courtesy: J.C. Parets Eagle Bay Capital
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of GLD.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.