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Oct 7, 2016

S3 BLACKLIGHT: Gold ETF Divergence – GLD (gold) Bear vs. GDX (miners) Bull

Spot gold prices have risen 18% this year and while the Spider Gold Shares ETF (GLD US) is also up 18% as expected, the VanEck Vectors Gold Miners ETF (GDX US) is up 65%.

Short interest in the GLD ETF peaked in mid-July at $1.9 billion when gold hit its year to date high of $1,366.80 on July 11th. Since mid-July GLD short interest is down $848 million to $1,079 billion, a 44% drop. Most of this decrease came in September when short sellers closed down $474 million of their positions, locking in some of their profits as the price of gold fell almost $100/oz. from its $1,350 September high.

Short sellers were not the only traders closing out their positions. After adding $13.5 billion of inflows prior to July 11th, long shareholders sold $1.4 billion of their positions after gold hit its year to date high. With both the long and short side trimming their positions, gold may be trading in a range for the short term especially after crossing both its 100 day and 200 day moving averages. After testing $1,250 - $1,260 support levels gold might reverse course or more likely test new lows. ETF outflows and an increase in short interest would be a signal that prices are ready to plunge even lower towards $1,200/oz.

While trading in the GLD ETF looks bearish trading in the GDX ETF is looking bullish.  GDX long shareholders have been building their positions all year long, but especially after gold’s year to date high on July 11th. The GDX ETF had $1.2 billion of inflows from January to July 11th but almost double, $2.3 billion, of inflows from July 11th to the present. On the short side, short interest rose by $1.2 billion to a total of $1.6 billion from January to mid-July, up 288%. Since then, short interest declined by $569 million to $1,014 billion, or down 36%.

With both the long and short side of the GLD trade looking bullish there are other factors which are overriding gold’s recent price weakness, primarily a dovish Fed and the probability of continued low interest rates to combat sluggish economic growth and keep inflation levels low. Also, in the last year gold miners have aggressively brought down costs and increased margins and a stable price of gold is very positive for their revenue flow. And lastly, volatility in the banking sector, in currencies and worldwide equity markets is keeping gold an attractive investment alternative – ensuring that the mining sector has sufficient demand for its product to keep production at optimum levels to exploit their higher margins at higher capacity levels.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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