Big Printin’ – $GDX: Ain’t Messin’ with No GoldDiggers

by Dan May 25, 2016 3:46 pm • Commentary

Gold Mining stocks had been the poster-children for the negative perfect storm that resulted from the implosion of the commodity super-cycle that started in the wake of the global financial crisis.  The GDX, the Vaneck Vectors Gold Miners etf had a peak to trough decline of 82% from its 2011 all time highs to its Jan 2016 lows.  Since the lows, the demand for the GDX and its components has been epic, gaining more than 100% from the lows to the early May 52 week highs.  The relative weakness of the U.S. dollar for the first few months of the years, coupled with expectations of rising inflation and the possibility of increased demand for commodities are the main culprits for the the bounce. But does the GDX’s 12% decline from the recent highs, just as expectations have been rising for the Federal Reserve to raise interest rates for the first time since December, and only the second time since June 2006 suggest that the rally could be over and that a sharp sell off is in the offing?

At least one trader today rolled a near term bearish (or defensive) view lower. When the GDX was $22.70., a trader sold to close 50,000 July 23 puts at 1.76 and bought to open 50,000 of the July 22 puts for $1.27.  These puts now break-even on the downside at $20.63, or down about 10% from current levels.  Again we have no way of knowing if this was outright bearish, or possibly a hedge against a long position, which can often times be the case of rolls up or down in strikes like this one.

Taking a quick look at the one year chart, may help answer why a long may look to put in place some protection after a 100% four month rally.  The sharp decline from $26 to this morning’s nearly 4 week low shows a clear break in the uptrend from the lows, with little technical support below $22 till about $20:

GDX 1yr chart from Bloomberg
GDX 1yr chart from Bloomberg