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The Future of Gold Miners: Bright or Lackluster?

Dec 22, 2021

By:James Blakeway

Gold investors saw back-to-back double digit returns for 2019 and 2020, at 18% and 25% respectively. Perhaps more impressive were the returns of the gold miner ETFs which outpaced both the Gold ETF (GLD) and S&P 500 (SPY) for the 2019, 2020 stretch. Whether utilizing the larger gold miners (GDX) or the small-cap, “junior” miners (GDXJ), investor had an impressive two-year run as miners were seemingly propelled by general stock index euphoria, coupled with a rising price of gold.

Gold Miner ETF Yearly Returns

Fast-forward to 2021, and the picture is less rosy for the gold miners with GDX down 15% YTD and GDXJ down 25%, while GLD sits only down 6%. The S&P on the other hand is looking to closed out the year with another strong return, up over 25%. It’s clear then that the miners have been more heavily influenced by the price of gold this year than the rise in stocks.

Gold Miner Percentage Change Chart

Gold Outlook for 2022

With 2021 almost behind us, it’s time to look forward into 2022 and search for opportunities for the January and February expiration cycles. Traders with many existing positions already set up for January may favor February at this point to spread out risk across the next few months.

Gold Miner ETF Correlations and Implied Volatility

While both gold miner ETFs are comprised of stock portfolios, neither one has a high correlation with the S&P 500. This means that positions in these ETFs should move with relative independence from the broad market index. Keep in mind that correlations are not static values and will constantly change with changes in the market.

Both GDX and GDXJ demonstrate higher implied volatility (IV) and IV Rank relative to GLD and SPY. Traders hunting for in trades for the gold miners may be looking to see GDX and GDXJ rally over the next few months or at least stabilize from the recent selloff.

How to Set Up Ratio Spreads in Gold

One interesting trade is the short put ratio spread in GDXJ that was featured in the Alpha Boost email this morning, sent by Quiet Foundation.

The trade combines one long 39 put option with two short 38 put options. The trade collects $96 in premium, which is the max profit if GDXJ is above 39 at February expiration. It’s possible for the trade to make more than $96 should GDXJ fall to around 38 as time passes.

Put Ratio Spread Setup in GDXJ Gold Miner ETF

How to Set Up a Skewed Strangle in Gold

Those less optimistic about the future of gold miners, though willing to own the ETF at lower prices than now, maybe curious about a bearish skewed strangle. This GDX trade combines the short 32 call option and short 27 put option for a total premium collection of $140. A trader looking to manage this position for a 50% of max profit would see an approximate 13.5% return on capital (based on initial buying power reduction. Keep in mind this trade is not for the faint of heart as it combines two naked options positions and does carry risk to both sides should GDX fall or rally beyond the breakeven prices.

GDX Strangle Setup

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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