A Profitable Pairs Trade: Gold Versus Gold Miners ETF

| About: VanEck Vectors (GDX)
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Pairs trading GLD and GDX can be difficult due to different levels of volatility for the two ETFs, and long periods of price trend which make mean reversion strategies difficult.

Aggregate fundamentals for the gold mining industry favor GLD over GDX based on historical results.

In the event that the price of gold rises, GLD has room to move upward before meeting technical resistance, whereas GDX is already at a key resistance level.

With rising interest rates, both GDX and GLD may fall to their technical support levels, but the percentage price drop is greater for GDX.

Background: Pairs trading is a market-neutral strategy that matches a long position in one security with a short position in a second security. Profit (or loss) occurs from the difference in price change between the two instruments, not from the direction in which each position moves. Pairs trades can be profitable during a variety of market conditions, including periods when the market goes up, down or sideways, and during periods of either low or high volatility.

This article describes a strategy wherein the SPDR Gold Trust ETF (SYMBOL: GLD) and the VanEck Vectors Gold Miners ETF (SYMBOL: GDX) are traded as pairs with one held long, the other short in equal dollar amounts. This trade presents an interesting challenge as the volatility of the two ETFs can be radically different at times, and gold can trend for long periods of time, making reversion to mean strategies difficult to implement.

This pairs trade is difficult to analyze from a purely technical perspective. However, with the Equity Analytx US Industry Aggregates database, it is possible to analyze the equities portion of the trade, and by using historical statistics, potentially improve the probability of implementing a successful pairs strategy. This is accomplished by making the assumption that the aggregate fundamentals for the GICS Gold industry are similar to the aggregate of the companies held within GDX. Then observations can be made regarding the pairs trade versus specific aggregate fundamental values.

The chart below provides eight years of scatter plot data (weekly samples) of the pair (GLD minus GDX) percent profit after one year versus the gold industry Aggregate Dividend Coverage (ADC). The ADC is defined by Equity Analytx as:

Aggregate of (100 x Net Income Available to Common / Total Dividends Paid) for stocks within an industry


GLD-GDX forward profit versus the goldminers aggregate dividend coverage

As can be seen from the above chart, GLD tends to outperform GDX when the gold industry aggregate earnings are negative, as is the case presently.

Likewise, when the aggregate value is within the lower half of its 52-week range, GLD outperforms GDX. This is illustrated by the scatter plot below. The ADC is currently near the bottom of the range, suggesting that GLD will perform better than GDX.

GLD-GDX 1 Year % profit versus aggregate dividend coverage percent of 52 week range

Another telling fundamental for this pairs trade is the Gold Aggregate Sales to Enterprise Value (ASE).

GLD-GDX 1 year % profit versus Goldminers aggregate Sales to Enterprise Value %

The current ASE value of 28% suggests that GLD-GDX will likely be profitable long term.

The Equity Analytx database also provides fundamentals from other industries that provide clues regarding the future direction of the GLD-GDX pairs trade. The strongest pattern was found in the Restaurant and Leisure industry, by examining its Aggregate Return on Equity (AROE). The chart below illustrates that a high level of AROE within the Restaurant and Leisure industry historically corresponds to GDX outperforming GLD. The current AROE reading of 18% is good, but nowhere near the 25+% AROE seen when large gains in GDX versus GLD occurred historically.

GLD-GDX 1 year % profit versus Restaurant and Leisure Industry aggregrate Return on Equity %

My favorite chart is the one provided below. Large gains in GDX versus GLD occurred historically when the Restaurant and Leisure industry AROE is near a 52-week high. However, the AROE is near the lower end of the 52-week range, again suggesting long GLD/short GDX is more likely to be profitable.

GLD-GDX 1 year % profit versus Restaurant and Leisure Industry aggregate ROE % of 52 week range

I mentioned earlier that providing technical arguments is difficult with this pairs trade, but there are clues in the individual price charts that may shed some light.

Starting with GDX, the price chart below identifies the longer term support and resistance levels. The recent price of $22.39 is near a resistance level. The price will likely fall from here and ultimately form a double bottom at the support level of $19 before making another run at a breakout. If the price does pierce the resistance level, then GDX will again face resistance at $25.

GDX 1 year price chart showing support and resistance levels

GLD, on the other hand, is not butting up against resistance and has room to run higher, from a recent price of $111.75 up to approximately $115.50. If GLD breaks out, then the next resistance level is at $119.30. The support level below the current price is $107.30.

GLD 1 year price chart showing technical support and resistance levels

Support / Resistance Summary

Movement GLD GDX
to resistance level 3.4% 0.0%
to support level -4.0% -15.2%

Based on the identified support/resistance levels, it appears that GLD will lose less than GDX in a down market (perhaps caused by rising interest rates) and also has room to rise in an up market.


While there are no smoking guns in the analysis provided above, the data gathered provides evidence that long GLD/short GDX may be a profitable trade in the short-to-intermediate term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Author is the founder of Equity Analytx