Long gold miners, short gold

http://seekingalpha.com/article/109814-is-it-time-to-buy-what-history-shows?source=headline1 Buy 1 GLL and 2 GDX? (GLL is 2x short gold, so buy GDX 2:1) Any gold bugs here want to discuss?

It is an interested strategy…Basically you have to hope that if gold goes up that the equities significnatly outperform the commodity. Historically that has happened but it may not be enough on the upside to offset double the performance of the commodity.

I don’t see where buy 1 GLL (gold short fund) and buy 2 GDX (mining sector) makes much sense. I also didn’t see where in the article they suggested that trade. The basic idea of a trade like that would be to capitalize on gold mining companies’ ability to become efficient and profitable while neutralizing the effect of gold price changes. So it pays off if gold companies become better businesses, even if their revenues decline. However, to do that correctly, you’d want to regress GDX on GLL and find the alpha and beta of that regression. You’d use the beta to come up with the appropriate proportions of GDX and GLL. I suppose that the beta of GDX vs GLL could be 2, but I’d be surprised if it were. (I may have gotten numerators and denominators mixed up here, but you use the beta to get the right proportions). Also, if alpha is significant negative on that regression, you need to ask yourself some extra questions. Also, my guess is that gold company revenues aren’t linear with the price of gold, because of how they treat their inventories and such. It’s rare that revenues or earnings are completely linear with the prices of products, but I suspect that it’s more noticeably nonlinear in this case.

You need to be careful of slippage with a leveraged ETF.

i thought about going long tulip bulbs and shorting tulips.