Large Bounce: GLD Update

Mojo-Wang

Back in the beginning of July I highlighted $GLD as an opportunity for a big inflection point:

Take a look at the long-term ratio chart of $GDX / $GLD. Not only does it highlight this brutal underperformance of the miners, but it also indicates a breach of the former historical lows in the spread. This is the lowest point in the ratio since the inception of the products, and also a two standard deviation move based on the relationship over the last two years.

gdx-gld-weekly-july-2-2013

When historic price discovery like this takes place it usually means a significant inflection point is at hand. This could work out in a couple ways: either prices in the entire gold complex resolve higher or the bottom completely falls out. The higher probability option, given the tone towards owning gold at the moment, is that the inflection point resolves in higher prices. This might look like a large bounce in an emerging down trend or a long-term bottom in the overall uptrend. On the other hand, if the bottom does come out of the gold complex, look for many mining company bankruptcies and months and months more selling pressure. This is a far lower probability outcome in my opinion. Remember, inflection points can be synonymous with knife catching. If that is your game, stick with the underlying $GLD because $GDX has proven it can fall faster and further if things do go south.

We were looking for a large bounce and we found it. The easy part of the trade is over and if you plan on sticking with $GLD from here consider reducing size or preparing for a grind. If you were in $GLD for a swing trade, then congratulations the trade as I see it is done.

gld-august-29-2013

 

Read also: Historical Moves In Gold Complex (DynamicHedge)


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