Posted on 28 June 2012.
While it is difficult to make a long term case for shorting gold, it is possible to profit from the significant temporary downdrafts in the price of gold by buying a short gold ETF, which is a an Exchange Traded Fund (ETF) that goes up in value when the price of gold falls. Gold has been riding high in recent years, and many gold traders and investors expect gold to continue to appreciate in price, as the sovereign debt crisis causes governments to print money and depreciate their currencies, bolstering the demand and price for hard investment assets, such as gold. However, shrewd gold investors cannot ignore the fact that gold does not go straight up in price and profits can be made during pullbacks in the price of gold using short gold ETF strategies.
The following are some short gold ETF ideas. Some these are actually Exchange Traded Notes (ETNs) rather than ETFs, but trade in a similar manner as ETFs. It should be noted that DZZ, DUST, and DGLD are leveraged gold short ETFs that are designed to move in the opposite direction of the price of gold by more than a one to one ratio.
Another way to play the short gold ETF trade is by shorting one of the long gold ETFs. These long gold ETFs fall in price when gold falls in price, and therefore shorting them has the same outcome as buying a short gold ETF when gold falls in price. There is an advantage to shorting gold by shorting long gold ETFs that invest in gold futures contracts, due to the potential for price decay when the long gold ETFs need to buy more expensive longer dated futures contracts to replace expiring futures contracts, which reduces the value of gold futures long ETFs, making them an attractive way to short gold. This strategy does not work with long gold ETFs that buy physical gold and derive their value from their physical gold holdings, since price decay does not occur in long gold ETFs that derive their value from physical gold assets.
The following are some long gold ETFs that can be utilized to implement a short gold ETF strategy. It should be noted that FSG and NUGT are leveraged gold long ETFs that are designed to move in the same direction as the price of gold by more than a one to one ratio.
If a trader is short gold via a short gold ETF or by shorting a long gold ETF, it is a good idea to take advantage of any profits that arise when gold takes a dip in price, because the long term indications are that gold will increase in price over time. Short gold ETF strategies can be a very profitable trade when timed correctly to take advantage of volatility in the price of gold.
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