Time to Buy Market Vectors Gold Miners ETF?

Food for thought: I was reading an article by John Hussman from 2007 detailing the Gold/XAU ratio. Since 1974, when the ratio is above 5, the XAU has followed with annualized gains of 89.6%. When the ratio is above 5 and the economy is weak as signaled by an ISM Purchasing Managers Index below 50 (indicating a contracting manufacturing sector), gold miner shares have appreciated 125.6%. The XAU index can be followed somewhat using an ETF - GDX. Otherwise, one could purchase each individual security in the XAU index.

Currently, the Gold/XAU ratio is well above 5, according to Kitco.com. The ISM Purchasing Managers Index was 36.2 in November. GDX is currently the closest ETF to tracking the XAU that I am aware of; however, the holdings do not mirror the XAU exactly. GDX has already seen significant appreciation since October; however, if history is any indicator and the Gold/XAU ratio holds up, we could see more appreciation in GDX or declines in the spot price of gold before reaching a ratio of 5 or less. One potential strategy would be to go long GDX and/or short GLD. Or, trusting John Hussman's research, simply purchase the individual securities in the XAU without hedging by shorting GLD.

For more information on tracking the gold markets, Hussman has written another article on the topic, "Going for the Gold".

Comments

[Cam Hui:]

See my comment here on why the Gold/XAU ratio might not be relevant: humblestudentofthemark...

SA article here: seekingalpha.com/artic...

The article is a little dated but the principles are still relevant.

Jan 12 11:35 AM

[Conan the B...:]

DZZ.

Dead Cat Bounce around $800.

Someone else had a chart depicting an 8 week cycle on GLD. With its Failure, I made the case for a minimum down move to $700.

If the dollar makes a run to 92, $700 is probable. At USD 95 or higher, low $600's.

IMO

Jan 12 12:07 PM

[bricki:]

Gold is in a downward trading channel. Next bounce off the bottom trendline is 720.

Jan 12 01:31 PM

[Jeroen:]

Looking at the ratio gold/platinum, it also shows a relative departure from historical values, which implies the relative underperformance of gold. If you'd choose an unhedged position, it's important to be sure which factor in the ratio will be the driving force: the numerator declining, or the denominator increasing.

See stockcharts.com and fill in $gold:$plat for the ratio chart.

Jan 12 01:55 PM

[Conan the B...:]

bricki: what are you working with?

Weekly or daily chart...

Jan 12 04:03 PM

[Scott's Inv...:]

Jeroen: I think the best play would be to short gold and go long GDX to hedge your bets rather then gamble on one side or the other.

bricki and paultat: I agree, gold looks to be in a downward trend in the short and intermediate term, so I think any purchase of GDX should be a hedged one.

Jan 13 11:20 PM