Gold Miners Vs Bullion: David Einhorn Bets On The Miners

By All Star Charts November 02, 2011: 12:59 PM ET

News is out that David Einhorn is placing bets on Gold Mining companies outperforming bullion going forward. On yesterday's conference call regarding Greenlight Capital's returns, Einhorn said that, "A substantial disconnect has developed between the price of gold and the mining companies. With gold at today’s price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further,” Einhorn said. “Since we believe gold will continue to rise, we expect gold stocks to do even better.

Let's take a look:

Here we are using $GDX to represent the Gold Miners and $GLD to represent Bullion. I think this ratio really tells the story. The chart takes us back to the lows 3 years ago up to the highs 2 years ago. Recently, this ratio successfully tested support around the 61.8% Fibonacci retracement of that original move off the Fall 2008 lows.

If Einhorn is right, support holds and the lows in the ratio are already in place. I happen to agree with his thesis here for the simple fact that this is an easy risk/reward opportunity. Long $GDX and Short $GLD gives you the exposure to this trade. If new lows are made and that retracement level is broken, then all bets are off.

If you don't want to short $GLD, you can probably own $GDX or pick a few of it's components. If you want to add some higher beta names to your portfolio, take a look at the $GDXJ holdings.

Look at Newmont Mining ($NEM) making new highs in price and breaking out of a downtrend relative to $GLD:

Barrick Gold ($ABX) is seeing some similar action in price, but isn't doing anything too exciting vs Gold itself. I'll be keeping an eye on that particular ratio and see what comes out of this:

 

Einhorn Bets Gold Mining Companies Beat Bullion (Bloomberg)

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