The Silver Lining

A couple of weeks ago I wrote about Eric Sprott selling his own silver fund. I did more reading and it seems he sold physical silver and bought silver miners because he noticed a discrepancy between recent advances in physical silver (high) and those in the miners (low). Let’s take a look.

Image

Sure enough, physical silver (the green line in the 6 month chart above) advanced far beyond silver miners (the blue line), especially in the last couple of weeks of April, which is when Sprott made his trade. Nice work Mr. Sprott!

Hmmm. I wonder what gold looks like.

Image

Physical gold (the green line in the 6 month chart above) has lagged the much more volatile gold explorers (the blue line), but caught up at the beginning of May. The discrepancy was greatest in early to mid-February. An investment in physical gold then would have resulted in a return of 15% by the beginning of May when the discrepancy closed.

This could offer a useful (but speculative) trade in the future: pairs trading, or shorting the higher of the pair and going long on the lower of the pair. I’m not sure what timeline to use when assessing which is high and which is low: is six months always an effective period to judge? Today, gold explorers are down and physical gold is up (see 6 month chart above) so the trade would be:

  • Long gold explorers (the GLDX)
  • Short physical gold – using Horizons BetaPro COMEX Gold Bullion Bear Plus ETF (HBD.TO)

Let’s look at this again in a month to see how this trade has performed.

POSTMORTEM

I predicted that a pairs trade of long Gold Explorers (GLDX) and Short Gold (HBD.TO) would be profitable within one month. It’s June 21st 2011 and the results are in: a 6% loss!

Image

Why have gold explorers not advanced? Interestingly, the GLDX has moved up over 2% today (June 22nd). Perhaps my prediction will come true later.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s