GDX-GLD Pairs Trading Using the US Industry Aggregates Database

Pairs trading is a market-neutral strategy that matches a long position in one security with a short position in a second highly correlated security. The strategy’s profit is derived from the difference in price change between the two instruments, rather than from the direction in which each position moves. It is possible for pair traders to profit during a variety of market conditions, including periods when the market goes up, down or sideways, and during periods of either low or high volatility.

Pair trading the VanEck Vectors Gold Miners ETF (Symbol: GDX) against the SPDR Gold Shares ETF (Symbol: GLD) presents an interesting challenge as the volatility of the two ETFs can be radically different at times and gold can trend for long periods of time, making reversion to mean strategies difficult to implement.

The Equity Analytx US Industry Aggregates database provides the best set of indicators for deciding when to go long GDX/short GLD or vice versa. This is accomplished by associating the gold sector aggregate indicators with the equities held by the Gold Miners ETF. When the aggregate indicators suggest that the gold stock value fundamentals are good, GDX should be held long/GLD short. When the fundamentals do not appear to be so good, GDX should be shorted/GLD held long.

The following two sections illustrate how the US Industry Aggregate indicators can be used. Scatter plots are provided which show profit (%) 1 year out versus indicator assuming equal $ amount of GLD (long) and GDX (short). The first section uses aggregate fundamentals from within the gold sector itself. The second section provides inter-sector (or intermarket) indicators that also demonstrate future profit potential. It is left to the reader to decide whether these relationships are causal or coincidental.

GOLD SECTOR FUNDAMENTALS

Aggregate Sales to EV Ratio

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus the gold sector aggregate Sales to EV Ratio. A high Sales/EV Ratio signifies that equities have a higher probability of profit than for a low Sales/EV Ratio

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus the gold sector aggregate Sales to EV Ratio. A high Sales/EV Ratio signifies that equities have a higher probability of profit than for a low Sales/EV Ratio

Aggregate Earnings Yield

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus the gold sector aggregate Earnings Yield. This scatter plot demonstrates that a positive Earnings Yield is necessary for GDX to outperform GLD.

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus the gold sector aggregate Earnings Yield. This scatter plot demonstrates that a positive Earnings Yield is necessary for GDX to outperform GLD.

Aggregate Earnings Yield Momentum

 [May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus 52-week momentum of the gold sector aggregate Earnings Yield. A strong positive Earnings Yield momentum significantly increases the odds of GDX outperforming GLD.

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus 52-week momentum of the gold sector aggregate Earnings Yield. A strong positive Earnings Yield momentum significantly increases the odds of GDX outperforming GLD.

INTER-SECTOR (INTERMARKET) FUNDAMENTALS

This section demonstrates how aggregate indicators from other industries can be used to predict future direction of the GDX-GLD pair trade.

Restaurant and Leisure Industry

Aggregate Return On Equity 52 Week Momentum

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus 52-week momentum of the Restaurant & Leisure Industry Aggregate Return On Equity. A strong positive ROE momentum in the Restaurant & Leisure industry appears to increase the odds of GDX outperforming GLD.

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus 52-week momentum of the Restaurant & Leisure Industry Aggregate Return On Equity. A strong positive ROE momentum in the Restaurant & Leisure industry appears to increase the odds of GDX outperforming GLD.

Bank Industry

Aggregate Debt to Equity Ratio 52 Week Momentum

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus 52-week momentum of the Bank Industry Aggregate Debt to Equity ratio. A strong negative D/E Ratio momentum in the Bank industry increases the odds of GDX outperforming GLD.

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus 52-week momentum of the Bank Industry Aggregate Debt to Equity ratio. A strong negative D/E Ratio momentum in the Bank industry increases the odds of GDX outperforming GLD.

Hydrocarbon (Oil & Gas) Industry

Aggregate Book to Market 52 Week Momentum

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus 52-week momentum of the Hydrocarbon Aggregate Book to Market ratio. A strong positive B/M Ratio momentum in the Oil & Gas industry increases the odds of GDX outperforming GLD.

[May-2007 to Dec 2015] One Year forward profit (GLD-GDX) versus 52-week momentum of the Hydrocarbon Aggregate Book to Market ratio. A strong positive B/M Ratio momentum in the Oil & Gas industry increases the odds of GDX outperforming GLD.

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