We decided to unwind our short $GLD-$GDX spread this week. We first went short on the spread in April and have averaged down a couple of times since as the spread continued to climb. The spread seemed to finally turn around at the end of May before turning sharply higher again the past week. What do you do in a situation like this? Add more? Unwind all or part? Buy more $GDX?

We’re not sure there is one right answer, but we can tell you why we chose to unwind. We felt that something has obviously changed in the market sentiment regarding the mining stocks since we put on the spread. Gold has held its own the past two months as other commodities sold off, but the gold mining stocks haven’t performed well. This doesn’t feel like a short-term liquidity gap. Also, overall stock market sentiment seems bearish, something that won’t help the mining stocks. Lastly, although $GLD-$GDX is trading at the highest level since the financial crisis, there is no reason why it won’t continue to grow higher to crisis levels. And that would mean additional losses. So we unwind now, lick our wounds, and perhaps return later in a stronger position.

Written by Norm Winer. Follow me on Twitter and StockTwits.