Yesterday’s dollar drubbing had commodity owners cheering for the first time in quite a while. Investors long oil, gold, and the like have traveled a tough road lately, making the rare up day a coveted event. This week’s sharp currency moves provide us with just the excuse to take a renewed look at gold stocks.
As usual we’ll be using our old friend, the Market Vectors Gold Miners ETF (GDX). Remember, GDX is the top dog among gold stocks, counting such companies as Goldcorp (GG), Newmont Mining (NEM), Barrick Gold (ABX) among its top holdings.
I’ve found the comparison of GDX stock to gold prices offers up some interesting insights from time to time. This month is no exception, as we’ve seen a divergence crop up between gold stocks and the price of gold.
As shown in the chart below, GDX and gold — as represented by the SPDR Gold Trust (ETF) (GLD) — are typically birds of a like feather. The correlation is usually pinned near 1.00. And yet, over the past few weeks, gold mining stocks have held fast (brown arrow) while GLD has been plumbing new depths (blue arrow).
That’s called relative strength, kids, and GDX stock has it in spades right now. The decoupling of GLD and GDX has driven the correlation of both securities to zero. While such a move is not unprecedented, it is typically transitory.
Pick Your Spot and Dig for Gold
The ultimate question is how the divergence will resolve itself. Will gold shed its weak ways and join gold stocks in their bottoming bid? Or, will the incessant selling in the yellow metal upend the recovery efforts in GDX stock? Your opinion on such a query leads to one of two logical trade ideas.
If you think the weakness in gold prices fails to sabotage the potential bottom in GDX, sell GDX puts to profit from its continued neutral behavior. You can short the Jan $13 put for 42 cents. The reward is limited to the initial 42 cents and will be captured provided GDX stock remains above $13 for the next month. By selling the put, you obligate yourself to buy 100 shares of GDX if it’s below $13 at expiration.
If you think GDX ultimately fails to hold the $13 support level, then fade this week’s rally by selling calls. You can short the Jan $15 call for 47 cents. Consider it a bet that GDX stock remains below $15 for the month ahead. If so, your max reward stands at 47 cents. Consider exiting if GDX rips above resistance at $17 to limit your loss.
As of this writing Tyler Craig, did not hold a position in any of the aforementioned securities.
