Those who are regular readers will be aware that we have long been of the opinion that gold stocks are a poor way to access the gold market, as shown by their underperformance year after year over the last 5 years. This underperformance being the case, we decided to take a position that would simply be short the mining part of gold mining stocks.
To execute a trade that would be short the mining part of the gold mining sector, and not gold itself, we signalled to our subscribers to “sell GDJX shares and buy an equal dollar amount of GLD shares at $141.32”. This pair trade meant that we were long gold, but short the junior gold mining stocks; the resultant was that the position was effectively a short on the mining part of these junior stocks.
The graph above shows the performance of being long each of the parts of the pair trade against the performance of the pair trade overall. During the time that we held the position GLD dropped 4.27% and GDXJ lost 12.11%. The net change in our pair trade was a gain of 7.85%; meaning that the mining part of GDXJ lost 7.85% in that time. This fall, almost twice the fall in gold over the same time period, is in line with our long standing view that the mining stocks are a barbarous relic and should be avoided on mass.
After just 24 days our position was up 7.85% as the mining stocks continued on their downward trend. The current turmoil in the gold market combined with profits already shown made it clear that the risk-reward dynamics of this trade were no longer in our favour. This being the case we signalled to our subscribers “to close out our Long GLD/Short GDX pair trade”.
Our core view that gold stocks are poor performers at best and that the gold bull market may be over still stands, however we may be able to re-enter this position at a more favourable price level, thus generating more profits for our subscribers. For the mean time we are happy to take the 7.85% profit. If you want to find out when we may be re-entering this position, or entering any other position all you have to do is purchase a subscription from the buttons below.
This is the fifth consecutive profitable trade that we have closed so far this year; with those trades alone our portfolio is up 17.27% in 2013. We have an annualized return of 63.72%, and on average a trade returns 30.83% in 52.38 days. In the three and a half years since we began trading we have closed 117 trades, 86.44% of which have been winners. Our model portfolio is up a grand total of 489.13% in that time period.
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