Forums - Long gold miners short gold bullion

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Posted by dptrading on 01-04-12 05:41 AM:

Long gold miners short gold bullion

Gold's recent volatility has seen the correlation between gold stocks and the underlying metal fall out of whack, with gold stocks now pricing in a gold price closer to $1000, despite the metal's higher price.

The Australian miners of NCM and KCN have fallen considerably in 2011, and US listed NEM was flat for the year, despite gold's rise. The ratios of stock price to gold have reached new lows, and therefore the long stock short bullion trade is proposed.

My graph wouldn't seem to load, and I have written a more detailed trade note on this, which can be viewed here:

http://www.pimmtrading.blogspot.com...gold-price.html

I'm guessing the fundamentals behind this move is the increased volatility of gold (and sudden realisation the price may not always rise) increasing the risk priced into gold miners, reducing their previously high PEs.

Anyone else support the trade or suggest why stock:gold ratios have fallen so low?

Posted by dptrading on 01-04-12 11:14 PM:

I got the graph in, seems I needed to save it as a smaller file.

Posted by billyjoerob on 01-04-12 11:54 PM:

http://stockcharts.com/h-sc/ui?s=GD...id=p00484120643

I don't know what your chart shows, but GDX vs. GLD is certainly at a three year extreme of GDX undervaluation.

Posted by billyjoerob on 01-04-12 11:58 PM:

My uninformed view is that gold will probably go sideways for a long time, unlike the old peak in 80. In that scenario, miners probably do well.

Posted by dptrading on 01-05-12 02:47 AM:

Quote from billyjoerob:

http://stockcharts.com/h-sc/ui?s=GD...id=p00484120643

I don't know what your chart shows, but GDX vs. GLD is certainly at a three year extreme of GDX undervaluation.

My chart is essentially the same as yours, just made in excel. The data represents the stock price / bullion price to get a % value (ratio). I chose Newcrest (NCM.AX) and Kingsgate (KCN.AX) simply because a. I trade more Australian than US equities, and these two are Australia's two biggest gold miners and b. because whilst Newmont is experiencing the same effect, it is more pronounced this side of the Pacific.

The chart is suggesting a mean reversion trade supports going long gold stocks (ETF or individual) and shorting bullion against it. I agree that the gold price is likely to move sideways, as the break above the 3 year channel has been reigned in and there is significant support around the lower 1500s. The gold price shouldn't affect the profitability of this pairs trade though, as an increase in the stock price / bullion ratio will cause it to be profitable.

I haven't experimented with what an appropriate standard deviation from the moving average in order to generate a buy / sell signal would be, but the current ratios are likely to be sharp and low enough to generate the signal. All that's needed is gold stocks to price in gold closer to 1500, rather than 1000, a move that doesn't appear to be too unreasonable.

Posted by dptrading on 01-30-12 02:26 PM:

I never like dragging up old threads....but had to point out the success in this trade so far (touch wood).

Spot gold up around 8%, NCM.AX up around 12%, KCN.AX up around 30% and NEM (Newmont) up

The initial trade (see first post) had been to short gold bullion and go long gold mining stocks against it.

Winning

Posted by achilles28 on 01-30-12 02:59 PM:

^Is the gold stock: gold price ratio historically valid? For example, if spot increases by 30% and the average miner by 10%, prices of the two trend towards equilibrium?

Logically, the assumption is yes. But perhaps industrial variables account for the discrepancy (operating expenses, declining yields...)? I don't know much about it.

If that's true, then does it hold for other commodities, as well? Oil/oil drillers, silver/silver miners, copper/copper miners?

Posted by zdreg on 01-30-12 03:23 PM:

Re: Long gold miners short gold bullion

Quote from dptrading:

Gold's recent volatility has seen the correlation between gold stocks and the underlying metal fall out of whack, with gold stocks now pricing in a gold price closer to $1000, despite the metal's higher price.

The Australian miners of NCM and KCN have fallen considerably in 2011, and US listed NEM was flat for the year, despite gold's rise. The ratios of stock price to gold have reached new lows, and therefore the long stock short bullion trade is proposed.

My graph wouldn't seem to load, and I have written a more detailed trade note on this, which can be viewed here:

http://www.pimmtrading.blogspot.com...gold-price.html

I'm guessing the fundamentals behind this move is the increased volatility of gold (and sudden realisation the price may not always rise) increasing the risk priced into gold miners, reducing their previously high PEs.

Anyone else support the trade or suggest why stock:gold ratios have fallen so low?

governments may institute an excess profits tax.

Posted by dptrading on 01-31-12 12:47 PM:

Quote from achilles28:

^Is the gold stock: gold price ratio historically valid? For example, if spot increases by 30% and the average miner by 10%, prices of the two trend towards equilibrium?

Logically, the assumption is yes. But perhaps industrial variables account for the discrepancy (operating expenses, declining yields...)? I don't know much about it.

If that's true, then does it hold for other commodities, as well? Oil/oil drillers, silver/silver miners, copper/copper miners?

Naturally there are many variables and no mean reversion trend is perfect, but as a general rule this trend has been witnessed in the majority of commodities over the last five years or so. It's not something I'd trade religiously, but is definitely worth a musing in volatile markets where things are likely to fall a little more out of whack.

The MRRT has a minimal impact on Newcrest (NCM.AX) due to the scale of its existing operations (targeting expansion rather than new mines), and Kingsgate (KCN.AX, rallied 33%) is in a similar, though slightly more junior position. Besides that there have been no fundamental changes, other than the strength of the Australian dollar. Maybe that would be something to look into...

Posted by murray t turtle on 02-01-12 10:19 PM:

Re: Long gold miners short gold bullion

Quote from dptrading:

Gold's recent volatility has seen the correlation between gold stocks and the underlying metal fall out of whack, with gold stocks now pricing in a gold price closer to $1000, despite the metal's higher price.

The Australian miners of NCM and KCN have fallen considerably in 2011, and US listed NEM was flat for the year, despite gold's rise. The ratios of stock price to gold have reached new lows, and therefore the long stock short bullion trade is proposed.

My graph wouldn't seem to load, and I have written a more detailed trade note on this, which can be viewed here:

http://www.pimmtrading.blogspot.com...gold-price.html

I'm guessing the fundamentals behind this move is the increased volatility of gold (and sudden realisation the price may not always rise) increasing the risk priced into gold miners, reducing their previously high PEs.

Anyone else support the trade or suggest why stock:gold ratios have fallen so low?

==============
DP-trade;
Strange but true;
NEM still looks like sideways trend , & 50 day moving average is sideways to down a bit

Gold mining stocks are still a strong sector,2012.

You are surely better informed than me on those Ausie gold stocks.

Gold &GLD are stronger on a 52 week measure[closer to 52week high, but below 52 week hi].GLD , gold looks stronger on longer charts/1 year+;
bearish on 6 month candlecharts.

GLD & gold looks lke a sell on 6 month charts

__________________
murray t turtle,nickname,not an alias

Posted by billyjoerob on 05-14-12 03:47 AM:

http://stockcharts.com/h-sc/ui?s=GD...id=p00484120643

TIme to go long the miners? And short gold?

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