A Short Gold ETF For the Bears
For some gold bugs it’s hard to imagine buying a short gold ETF, especially with such a strong gold market these past few years. Though it’s difficult right now to see a need for an inverse gold ETF, remember not that long ago gold was not a strong performer to say the least.
Now I’m not saying that gold is about to take a nose dive into bear market territory but it has been on a tear lately and could be due for a correction of some kind. You know the saying, “what goes up must come down”. Well that’s not always true in the investing world but like all common sayings there is “some” truth to it. No investment goes up all the time and though it seems the gold price is trending up long term, it still can come down a number of times as it corrects in price from over exuberance in the gold market. It is at these times where short gold ETF funds can be become a profitable tool so long as they’re utilized correctly, which comes with experience and technical analysis skills.
Gold is money and because the fiat currencies are being devalued, in particular the USD, gold continues to gain value as a hedge against the risk of government mismanagement and over spending. Gold has and always will have value and during times of uncertainty, investors and people in general, snatch up what they consider to have value, especially gold. This is one of the reasons why gold has been doing so well lately. All the turmoil, uncertainty and fear throughout the global markets has served as the primary catalyst for gold’s rapid rise in value.
Having said all this, eventually after all this turmoil is behind us, gold will begin to level off over the long term and may even decline just as rapidly as it had gained. Gold will always hold value but it’s a commodity like anything else and at the end of the day its value is determined by supply and demand. So if gold starts its decline, you’ll want to take advantage of this, just as you hopefully did on its way up. The best way to profit from a decline in gold is to buy an inverse gold ETF or ETN. Since they are exchange traded funds they can easily be bought and sold freely on the stock market making them ideal for short term trades.
The following is a list of the most commonly traded short gold ETFs on the major stock markets:
Short Gold ETF (GB: SBUL) – Traded on the (LSE) London Stock Exchange the SBUL short gold ETF trades inversely to the current gold price.
DB Gold Short ETN (DGZ) – The DGZ is an ETN traded on the NYSE that is also priced inversely to the gold price so if gold goes down 1%, DGZ will go up 1%.
DB Gold Double Short ETN (DZZ) – Similar to the DGZ, except that it is leveraged 100%, and thus trades at double the inverse of gold. This gold short ETN can be thus be very profitable if you’re on the right side of the trade.
ProShares UltraShort Gold ETF (GLL) - This double short gold ETF also trades at twice the inverse of current gold prices, only it is an ETF (vs. ETN).
Leveraging With a Double Gold ETF
A double gold ETF is a leveraged ETF that moves up and down with the price of gold, only doubly so. In other words, if the price of gold goes up 10%, a double gold ETF will go up 20%. Conversely if the price of gold drops 10%, a 2x gold ETF will drop 20% in value.
The attraction for these types of leveraged gold ETFs especially the double long gold ETF has been increasing over the past few years as investors have watched the gold price skyrocket. If you are convinced that the price of gold’s general direction is going to be upward, why not be doubly rewarded as it climbs? Well unfortunately, like most things it’s not really all that cut and dry. Yes, you can drastically increase your yield by investing in a double gold ETF but if you are wrong, even in the short-term, do you have the fortitude to watch the price of gold tumble along with your invested funds? The gold price may come back again and even surpass your projected price, but if you do not have enough conviction of this, you may end up selling for a big loss.
Thus, due to the already extremely volatile nature of the price of gold, gold double ETFs should only be reserved for the most seasoned investor who is not averse to risk and is only risking a small portion of their overall investment portfolio.
Having said that, a lot of investors have been handsomely rewarded for being invested in a double gold fund these past few years and many gold bugs would argue that gold still has a ways to go before it begins to cool off.
If you are one of those investors whose willing to take on the extra risk, you can either invest in a gold ETF or gold ETN. A gold ETN (exchange traded note) is similar to an ETF except that investors hold the debt security until it matures, at which point the issuer will give you the principal amount. Essentially ETN’s have the properties of both an ETF and a bond.
Here are the four main double gold ETF & ETNs to buy:
PowerShares DB Gold Double Long ETN (DGP) will move at the double the gold price and is meant for long gold investments.
PowerShares DB Gold Double Short ETN (DZZ) is the exact opposite of DGP in that it will move at double the price of gold yet in the opposite direction. So if you think gold is going to drop, it’s a perfect investment vehicle for short gold plays.
ProShares Ultra Gold (UGL) ETF will move at double the price of gold and is meant for investors who are long on the gold price.
ProShares Ultra Short Gold (GLL) ETF moves at double the price of gold in the opposite direction, thus ideal for those short on gold.
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