Sunday, October 23, 2011

A New, Simple Way to Play the Dow to Gold Ratio

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Since I haven't noticed anyone else out there commenting on it, I thought I would offer my kudos and thanks to the folks over at Factor Shares for launching a new series of spread ETFs for traders. The product that has my attention and interest is a double leveraged spread of the Gold to S&P 500 ratio. This is a simple way to play the Gold versus paper theme that is near and dear to my blog. Though the Dow to Gold ratio is better known, an S&P 500 to Gold ratio is really no different.

The new ETF I am referring to has ticker FSG and you need to do do your own due diligence if this is something that interests you. Please understand that I had never heard of the Factor Shares company before they released this product, I am not versed in the counterparty risk this product may carry, and I have no relationship with the company behind this new ETF. Like all leveraged ETFs, there is slippage that will plague this product and thus FSG is better used for trading rather than as a "buy and hold" vehicle. However, we are fast approaching a "buy" point for this ETF due to the oversold nature of the Gold to S&P 500 ratio right now.

Here is a 5 year daily log scale chart of the Gold ($GOLD) to S&P 500 ($SPX) ratio (i.e. $GOLD:$SPX) through Friday's close with my thoughts:

The FSG ETF has been trading now for about 8 months and it looks like its volume is starting to pick up, which is a good thing:

Meanwhile, the bearish sentiment on precious metal stocks and precious metals is starting to get to a point where it is time to start thinking about going long. I think we may need one more plunge, but that should just about do it. If we get a "falling knife" in the Gold stock indices and precious metals over the next few weeks, I will be looking to catch it.

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