The New Commodity Play: Short Gold, Long Gold-Mining

Until quite recently, just about every broker/manager and his little brother was making a killing riding the commodity boom. But with the recent collapse in prices, that ride has ended in tears. But don’t despair. The WSJ has unearthed a new pair-trade: short gold, long gold-mining companies:

Shares of miners move broadly in line with gold prices over the long term. Lehman Brothers has analysed the relationship between the Amex Gold Miners index and the metal’s spot price since 1994. Since the start of July, the miners have performed much worse than would have been expected, having fallen 40% while gold is down just 18%.

Given this volatile history, the miners’ recent underperformance against gold perhaps spells opportunity. Those banking on this divergence’s closing again can adopt a simple strategy: Buy stocks and short gold.

So what exactly are we betting on here? That gold prices are overvalued, but that the market is underestimating miners’ ability to access reserves and distribute them at low cost. Beats mortgage-backed securities.

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