Wednesday, June 11, 2008

NEM versus GLD

Any benefit in trading the GLD ETF versus NEM, the 800 lb gold gorilla?
Let's take a look.
NEM, of course is a large cap company with a long and illustrious past.
And, while most ETFs are a composite of related industry companies (spread the risk, share the gains), GLD is a pure commodity play as its sole holding is gold bullion.
Both NEM and GLD have seen substantial upward momentum since last September, when the smart money started to plan for the November market tops.
Above is the NEM:GLD ratio, showing the relative weakness of NEM Jan to May and the current mean reversion underway with NEM leading the way.
GLD just recently started trading options, so an apples to apples comparison isn't really possible, but the contrast is certainly dramatic when looking at the NEM. The current problem with GLD options is that they trade in .10 - .20 spreads and although daily volume is currently on parity between NEM and GLD, exchange participation is greater on the NEM, thereby providing a marginal trading advantage to NEM. NEM options also trade with .02-.03 spreads, a distinct attraction for active (short term) traders.
Finally, a comparison of short interest in GLD and NEM shows a stark contrast, suggesting positive momentum still favors NEM as both a short term and swing trade candidate.
There may be a short term pairs trade here: short GLD and long NEM, but I'd favor a July butterfly on each ( or just NEM) to manage risk.

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