The Peruvian Nightmare Scenario: Market Vectors Gold Miners ETF (GDX) VS SPDR Gold Shares (GLD)

It was all good just a week ago.

On Monday, Peru voted in a leftist leader Ollanta Humala.  The uncertainty over how aggressively this new government would tax miners sent $BVN, $GFI, $SCCO and other companies with operations in Peru into freefall — effectively weighing down the entire Gold Miners ETF $GDX.  Today, Humala assured all of the mining companies that he would not impose a unilateral tax all companies, but rather go after each one on an individual basis.  There are also stories that the new government will honor existing tax agreements.  Several companies caught a bid into the close on this news.

This is by far my most troubling position, having adjusted and re-levered it several times.  I’m trying to manage the risk first while keeping one eye on the fact that there is monster mean reversion to be had in this spread.  I always prefer not to be a liquidity provider in these large moves.  It’s always much better to play the spread back to the mean, rather than add to it on the way out.

The question remains: is all the bad news baked into the prices here, or are there more surprises to come.  The spread took more than a day to stretch out, and it will take more than a day to revert.  There’s time.  At this point the spread between $GDX and $GLD is simply ludicrous.


Humala Will Respect Peru Mining Contracts, Boosting Southern Copper Shares (Bloomberg)

Humala says will not impose new tax unilaterally (Reuters)

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