In the past week, I have seen commentary from various technical analysts indicating that gold stocks appeared to have bottomed and poised to rally. I took a look and concurred with the assessment. However, I feel slightly uneasy about going long gold stocks at this stage despite the positive technical backdrop because this group tends to be slightly negatively correlated to the stock market and the major averages have fallen very fast and very quickly in a very short time.
Further analysis of gold stocks also suggest that they may have rallied too far and have become overbought. So let me suggest a more risk-controlled way of playing the metal and hard asset rebound theme: Buy metal and mining and short gold miners:
The above chart of this pair (XME vs. GDX) shows that metal and mining stocks relative to gold stocks. With the exception of a brief period last August, XME has been in a steady relative uptrend since late 2012. Now that GDX has staged a relative rally, this relationship has settled back to the bottom of the range, this may be a fairly low-risk entry point for the long XME/short GDX trade.
Needless to say, if you were to put on such a trade, keep a tight stop in case gold stocks continue their relative rally.
Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. (“Qwest”). The opinions and any recommendations expressed in the blog are those of the author and do not reflect the opinions and recommendations of Qwest. Qwest reviews Mr. Hui’s blog to ensure it is connected with Mr. Hui’s obligation to deal fairly, honestly and in good faith with the blog’s readers.”
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