Time to Buy Market Vectors Gold Miners ETF?

Source:

". . .if history is any indicator and the Gold/XAU ratio holds up, we could see more appreciation in GDX. . ."

An article by John Hussman from 2007 details 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 ETFGDX. 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; but, 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.

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