Simple Gold-Gold Stock Fund Pair Trading

A reader asked about the gold-gold miner stocks arbitrage-like argument in Jay Kaeppel’s 2/2/10 article “Don’t Give Up On Gold Stocks Just Yet”, for which his 9/21/04 article “Gold Stock and Gold Bullion” is a more robust antecedent. Does the relationship between gold and gold miner stocks support more frequent switching than indicated in these articles? For example, if SPDR Gold Shares (GLD) and Market Vectors Gold Miners GDX) diverge over some recent interval, do they then tend to converge? To check, we construct a simple long-only pair trading strategy and test it with available data. Using weekly dividend-adjusted closes for GLD and GDX since late May 2006 (inception for GDX) through mid-June 2011, we find that: (more…)