Interesting Divergence

Just because gold rallies, it does not mean the mining stocks will advance. The chart below shows the relationship between the Spyder Gold Trust (GLD) and S&P Metals & Mining ETF (XME). The darker shaded candles represent the XME which is close to unchanged since it first started trading in June of 2006, while Gold is up over 60% in the same time. Which one is wrong? Neither! Markets don’t always do what they are “supposed to do” and fighting a trend based on a relationship which is supposed to exist is a good way to lose a lot of money. Only price pays! If you trade GLD, trade it based on the chart of GLD. If you trade XME, trade it based on the chart of the XME. Let the media and academics debate why markets do what they do, our job is to manage risk.

Here are the components of the XME.