Two Steps Forward, One Step Backtest The gold spot price ($/oz) ( Gold ) has experienced a healthy return year-to-date 2012, increasing 10.56% as of November 21, 2012. Many investors would believe that the gold miners, measured by the NYSE Arca Gold Miners Index ( GDM ), would perform somewhat similarly. However, GDM has decreased by -7.37% over the same period. The diverging Gold and GDM returns have caused the Gold/GDM ratio to increase to 1.306 as of November 21, 2012. Is there an opportunity to gain from trading Gold or GDM by understanding patterns in the Gold/GDM ratio? Gold Spot Price ($/oz) and NYSE Arca Gold Miners Index Ratio, 50- and 200-Day Moving Averages: 1993 2012 Source: Bloomberg, between September 17, 1993 and November 21, 2012. ( Evaluation Period ) 1) First historical high Gold/GDM ratio, November 17, 2000. 2) Second historical high Gold/GDM ratio, October 27, 2008. The Gold/GDM ratio was at its first historical high value of 1.4717 on November 17, 2000, during the Evaluation Period. Subsequently, the Gold/GDM ratio 50-day moving average crossed below the 200-day moving average on March 6, 2001. The Gold/GDM ratio 50-day moving average did not cross back above the 200-day moving average until November 14, 2002. Gold increased by 22.05% and GDM increased 86.55% between March 6, 2001 and November 14, 2002. A similar Gold/GDM ratio peak was observed again on October 27, 2008, during the Evaluation Period, where the Gold/GDM ratio was 1.6228. Afterward, the Gold/GDM ratio 50-day moving average crossed below the 200-day moving average on March 30, 2009. The Gold/GDM ratio 50-day moving average did not cross back above the 200-day moving
average until January 29, 2010. Gold increased by 18.02% and GDM increased by 12.08% between March 30, 2009 and January 29, 2010. Finally, the Gold/GDM ratio reached another high of 1.4177 on May 15, 2012. Did the Gold/GDM ratio reach another peak? The Gold/GDM ratio 50-day moving average crossed below the 200-day moving average on October 17, 2012. Gold Spot Price ($ $/oz) and NYSE Arca Gold Miners Index Values: 1993 2012 Source: Bloomberg, between September 17, 1993 and November 21, 2012. How the Gold/GDM Ratio is Affected Percent Change in the Gold Spot Price ($/oz) More than GDM More than GDM Percent Change in the NYSE Arca Gold Miners Index e e e More than Gold More than Gold Effect on Gold/GDM Ratio Potential Trades If you believe that the Gold/GDM ratio will decrease, you could consider one of the following pair trades: : 200% leveraged inverse exposure to goldd bullion
: 200% leveraged inverse exposure to gold bullion If you believe that the Gold/GDM ratio will increase, you could consider one of the following pair trades: : 200% leveraged inverse exposure to gold bullion S&P/TSX Global Gold Index correlation of daily returns with the NYSE Arca Gold Miners Index was.9291 between September 29, 2000, and November 21, 2012. The inception date of the S&P/TSX Global Gold Index inception date was September 29, 2000. Do you want to try this trade? Use the Horizons Trading Simulator to place hypothetical trades with simulated funds using real market data. The views expressed herein are of a general nature and this Trade Idea is not and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors. ETF Performance as of October 31, 2012 ETF 1 mo 3 mo 6 mo YTD (2012) 1 yr 3 yr Since Inception Inception Date Annual Management Fee 1-5.38 13.39 4.06 14.37-7.61 29.17 17.92 January 22, 2008 1.15% 1 4.92-13.93-10.54-22.80-8.39-34.99-32.98 January 22, 2008 1.15% HGU 1-1.22 43.80 19.14-12.94-30.59-3.42-11.91 June 26, 2007 1.15% HGD 1-1.36-35.28-30.97-14.27-0.19-28.48-51.71 June 26, 2007 1.15% 1 This ETF does not seek to meet its investment objective over any period other than daily Wade Guenther, CFA ETF Research Analyst Horizons Exchange Traded Funds
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