The Peruvian Nightmare Scenario: Market Vectors Gold Miners ETF (GDX) VS SPDR Gold Shares (GLD)
- Posted by DynamicHedge
- on June 8th, 2011
It was all good just a week ago.
On Monday, Peru voted in a leftist leader Ollanta Humala. The uncertainty over how aggressively this new government would tax miners sent $BVN, $GFI, $SCCO and other companies with operations in Peru into freefall — effectively weighing down the entire Gold Miners ETF $GDX. Today, Humala assured all of the mining companies that he would not impose a unilateral tax all companies, but rather go after each one on an individual basis. There are also stories that the new government will honor existing tax agreements. Several companies caught a bid into the close on this news.
This is by far my most troubling position, having adjusted and re-levered it several times. I’m trying to manage the risk first while keeping one eye on the fact that there is monster mean reversion to be had in this spread. I always prefer not to be a liquidity provider in these large moves. It’s always much better to play the spread back to the mean, rather than add to it on the way out.
The question remains: is all the bad news baked into the prices here, or are there more surprises to come. The spread took more than a day to stretch out, and it will take more than a day to revert. There’s time. At this point the spread between $GDX and $GLD is simply ludicrous.
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DynamicHedge is an equities, futures and derivatives trader based on the West Coast. He runs a long/short opportunistic relative-value strategy within a proprietary trading group. More
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