The GDX, an alternative leveraged gold play

By Ben Turney.

The GDX (or Market Vectors Gold Miners ETF as it is rather long-windedly known!) has been causing a bit of a stir, here at Spreadbet HQ, over the last few months. This ETF bundles a collection of gold and silver associated stocks together in an effort to track the NYSE Arca Gold Miners Index (GDM). It offers investors and spreadbetters a leveraged play on the price of gold and is tradeable on the larger spreadbetting websites.

Now I know I’m about to bang on again about yet another gold related story, but bear with me. This really is an exciting time for the precious metal and if our house line is right (buy, buy, buy!) then this could prove to be an exceptionally profitable trade. As with all these things, timing is everything and now looks like the time to be buying. Even if we are wrong, downside can be managed with fairly tight guaranteed stops, so the risk/reward is definitely on our side.

Anyway, back to the GDX.

A few months ago, I came across this piece on Seeking Alpha. If you’d like to learn more about the mechanics of the GDX, then this is an excellent place to start. The GDX isn’t without its limitations and as the authors suggest, there could be better returns to be had through thorough research and selection of some of its constituents. Of course, the drawback to this approach is having the time to do this research (isn’t that always the case?!). Buying the GDX, skips this effort.

This is the latest 6 month candlestick chart for the GDX:

Since the 2011 peak (not shown), the GDX has lost nearly 65% of its value. In the context of this decline, the chart above suggests modest recovery. Most people probably wouldn’t get that excited about this and if you do a Google News Search, you’ll see very few commentators are picking up on the GDX as a long trade at the moment. In fact, the majority of them seem to be saying to avoid it.

However, there is something we believe they have missed: the substantial change in volume. Below is the MIDAS chart for the GDX:

The light blue line on the right of the chart is JUN2013 support. This launched at the end of June, when this market hit its most recent bottom. As of writing this post, the GDX is down today at $24.83. This is well below JUN2013 support, but it is still early days and there are some early encouraging signs.

First I’ve annotated the chart to show how the GDX conformed to the MIDAS method in its last bull and bear markets. Historical conformance, in previous major moves, is usually an excellent indicator as to how responsive a financial instrument is to MIDAS support and resistance. Since 2009, applying the MIDAS method to the GDX gave traders at least 6 clear trading opportunities.

But this isn’t what caught my eye about this chart.

On the bottom right, you will notice I’ve indicated a “major OBV increase”. A great strength of MIDAS charts is they plot price against On Balance Volume (OBV) NOT price against time. If you think about it, what use is “time” on the X axis of a chart?! It doesn’t really tell you anything about the state of a market. It just tells you that that market was open on that particular day. Great!  

I plan to return to this in future posts, but for now it suffices to say that the increased widths of each month on the chart reveal a substantial increase, first in selling, then in buying. The selling occurred in April, May and for most of June. However from the end of June onwards, even though there are still likely to have been capitulation sellers in the market, there were enough buyers to arrest the precipitous decline in price. In August things got really exciting, as there was a sudden explosion in OBV. That this was combined with a rise in price, strongly suggests there are major buyers in the background of the GDX.

This hasn’t yet resulted in a significant leap in the value of the GDX, but in recovery situations like these, a large jump in OBV at the start of a move, is a good indicator that a major move is around the corner. 

Declaration: I opened a long position in the GDX, immediately before writing this post.