Tuesday, April 16, 2013
Ways to Profit from Shorting Gold and Silver
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4 Ways to Short Gold with ETFs by Zack Investment Research
Gold has been performing appallingly this year as investors are shifting to more risky asset classes like equities. This is especially true in the backdrop of the strengthening dollar and continued bullishness in the stock market, two conditions that are tempering safe haven appeal across the board.
In fact, gold bullion has plunged double digits in the year-to-date time frame and is easily under performing the broad markets when compared to the 10% gain for Dow, 8% gain for the S&P 500, 6% for Nasdaq, 5% for FTSE and 25% for the Nikkei. Currently, gold is trading below $1,400 per ounce with some forecasting a bigger drop in the days ahead as well.
This is especially true given some of the fundamental factors surrounding global markets.The U.S. economy is improving, we are seeing weak consumption demand from economies like India and China, and an increasing appetite for equities over commodities.
Investors are also concerned about the longevity of the Fed's quantitative easing measures given the growing signals about a slowdown in the pace of $85 billion asset purchases in the second half of the year or the early end of the program. If this program slows down and the markets are able to hold steady, it could add to the appeal of equities and dull demand for gold (see more ETFs in the Zacks ETF Center).
Further, the ultra-popular SPDR Gold Trust ETF ( GLD ) , with an asset base of around $58.3 billion and an average daily volume of around 10 million shares, has seen more than $8.6 billion in outflows so far this year. While this might not seem like a huge number, investors should note that this is nearly two times greater than the second biggest outflow (SPY) in the same time frame (read: A Technical Perspective on Gold ETFs).
Given these outflows and the optimism over economic growth in the medium run, the appeal of the gold ETFs seems to be dulling. This could be especially true if European woes make investors flee to the dollar, curtailing the demand for gold even further.
As a result, investors who are bearish on gold right now, may want to consider anear term short on the precious metal. Fortunately with the advent of ETFs, this is quite easy as there are many options for accomplishing this task. Below, we highlight a few of our favorites and some of the key differences between each:
ProShares Ultra Short Gold ETF (GLL)
This fund seeks to deliver twice (2X or 200%) the inverse return of the daily performance of gold bullion in U.S. dollars; the gold price is fixed for delivery in London. Launched in Dec 2008, GLL makes a profit when the gold market declines and is suitable for hedging purposes against the fall of gold prices.
The product is expensive when compared to other geared options in the space though, charging 95 bps in fees a year. However, it is rich in AUM and average daily volumes with $109.2 million and roughly 200,000 shares, respectively. The ETF has gained over 26% so far in the year.
DB Gold Short ETN ( DGZ )
Launched in Feb 2008, ETN tracks the performance of the DBIQ Optimum Yield Gold Index Excess Return plus the interest income from U.S. Treasury bills, net of fees and expenses.
The product has an inverse (opposite) relation to the movement of gold prices and thus creates a short position in the underlying index. It has managed assets of $33.4 million so far in the year and trades in average daily volume of more than 100,000 shares. This suggest a relatively wide bid/ask spread increasing the total cost for the product beyond the annual fees of 75 bps.
DGZ has added about 12.7% year-to-date (read: 3 ETF Strategies For Long Term Success).
DB Gold Double Short ETN ( DZZ )
This ETN seeks to deliver twice (2X or 200%) the inverse return of the daily performance of the DBIQ Optimum Yield Gold Index Excess Return, before fees and expenses.
DZZ initiates a short position in the gold futures market and has a relatively tight bid/ask spread with an average volume of roughly 424,000 shares per day. The note charges 75 bps in fees per year from investors.
The product has amassed over $80 million in AUM since its inception in Feb 2008. The ETN generated impressive returns of over 26% in the year-to-date time frame, and its solid volume makes it a good choice for many traders.
VelocityShares 3x Inverse Gold ETN ( DGLD )
This product provides three times (300%) short exposure to the daily performance of the S&P GSCI Gold Index Excess Return plus returns from U.S. T-bills net of fees and expenses (read: Have We Seen the Bottom in Gold ETFs?).
The ETN was launched in Oct 2011 and since then has been able to amass an asset base of only $5.5 million. The product is the high cost choice in the gold bullion space, charging 135 bps in fees per year from investors. Additionally, it has a wide bid/ask spread given its small average daily volume of 20,000 shares that increases the total cost of the product.
Not surprisingly, the note returned an excellent 41% so far in the year buoyed by negative sentiments for gold across the globe.
Investors should note that since these products are extremely volatile, these are suitable only for traders and those with a high risk tolerance. Additionally, the daily rebalancing—when combined with leverage—may make these products deviate significantly from expected long term performance figures.
Still, for ETF investors who are bearish on gold in the near term, any of the above products could make for interesting choices. Clearly, many are abandoning the precious metal, so a near term short could be intriguing for those with a high risk tolerance, and a belief that the trend is your friend in this corner of the investing world.
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