The modicum of money that departed stocks Monday found itself running into the welcoming arms of precious metals. While silver saw inflows, it was gold, the magical yellow metal, that received the most love. Wall Street’s favorite gold ETF — the SPDR Gold Shares (NYSEARCA:GLD) — ripped 1.13% while the Market Vectors Gold Miners ETF (NYSEARCA:GDX) soared 4.66%.
After a long bout of dithering, GDX is finally starting to look interesting again.
The gold market has long provided equity traders with two avenues for speculation. The first and most direct way to speculate is through GLD. It’s as good as gold — literally. And these days it’s relatively tame. Monday was a big up day and the fund still only popped 1%.
The second, and definitely the more aggressive approach, is to venture into the gold miners space. GDX and GLD are tied at the hip. But with the gold miners ETF, you get a lot more volatility.
One of the best ways to measure the relationship between the pair is with a chart overlay. Check out this beauty:
There is a bit of variance between the two, but by and large, they are birds of a like feather. Currently, the 20-day correlation is 0.67. And most of the time it reads much higher. So, again, rest assured if gold continues its bullish ways, GDX is sure to follow.
And by the way, if GDX doesn’t get your motor running there’s always the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). Consider it GDX’s high-octane twin. One who delivers monster moves in both directions. For reference, GDXJ was up 6.11% yesterday.
Click to Enlarge
On the technical front, Monday’s pop in the Gold Miners ETF was significant for a few reasons:
- First, the fund was able to vault above a minor trendline, which had been keeping a lid on it in recent weeks.
- Second, GDX reclaimed the high ground north of the 200-day moving average. Its last two attempts at breaching this oft-watched average (early-Feb & mid-April) failed miserably, but I suspect this one could go the distance. Unlike the previous breakout bids, the current rally is just getting started.
- Third, Monday’s moonshot was accompanied by substantial volume verifying the legitimacy of the move.
A GDX Options Play with Golden Upside
Implied volatility has been circling the drain for months now. Given GDX’s low price tag, I’m normally a fan of selling puts, but the cheap premiums are making it difficult to recommend that strategy. Instead, consider buying the Jul $23/$26 bull call spread for $1.15. The position consists of buying to open the Jul $23 calls while selling to open the Jul $26 calls.
The best-case scenario occurs if GDX can rise above $26 by expiration. In that case, you will capture the maximum reward of $1.85. On the flip side, the maximum risk is $1.15 and will be forfeited if the fund falls below $23.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.
