Inverse/short gold ETFs surge as precious metal goes into meltdown

Apr 15th, 2013 | By | Category: Commodities

**Please join us at our Income & Yield Strategy Briefing, with presentations from BMO, Fidelity, First Trust, Lyxor and WisdomTree, on Thursday 29th June 2017 @ The Ned, London - REGISTER NOW**

Exchange-traded funds (ETFs) and related exchange-traded products (ETPs) linked to the inverse performance of the price of gold have surged over the past few weeks as the precious metal, a so-called ‘safe haven’, has tumbled following downgrades from a number of prominent research houses.

Inverse/short gold ETFs surge as precious metal goes into meltdown

Inverse/short gold ETFs have surged over the past month as the value of gold, a so-called ‘safe haven’, has fallen sharply.

One of the best performing inverse ETPs in this space is the London-listed Boost Gold 3x Short Daily ETP (3GOS), which provides triple short exposure to the performance of the gold price. It is up 48.5% month-to-date on the back of the dramatic sell-off.

Among the research houses who have recently downgraded their outlook for the yellow metal are investment-banking giants Goldman Sachs and Societe Generale.

In research notes, Goldman Sachs said that “conviction in holding gold is quickly waning” and advised clients to close long positions and initiate short positions, while Societe Generale lowered their price target and said that gold is “in bubble territory”.

The price of gold has fallen about 14.3% during the first half of April to around $1,370 per troy ounce today. The metal is now some 23.5% off its recent high point of $1,792/troy oz in October last year and 28.4% off its all-time record high of $1,913/troy oz set in August 2011.

The underlying reasons underpinning the sell-off are fairly compelling, as Goldman Sachs and Societe Generale outline in their research. Essentially, investors have pushed the gold price sharply higher driven by fears that aggressive central bank quantitative easing (QE), most notably by the US Federal Reserve, would lead to very high inflation. However, inflation has so far remained relatively low (US inflation has been trending lower since late 2011) and we are now beginning to see the economic conditions that would justify an end to the Federal Reserve’s QE programme.

In line with this, a pick-up in the pace of economic growth supports rising US real rates, thereby increasing the opportunity cost of holding gold, and a strengthening of the dollar, which is negative for gold as that is the currency the metal is priced in. Indeed, the dollar has already begun to trend higher, in part owing to weakness in the euro and yen.

In addition, negative sentiment has been exacerbated in the short term by the news that crisis-hit Cyprus will sell off some of its gold reserves as part of its bailout package. Although the amount of gold involved is small relative to the size of the overall bullion market, some analysts have suggested that the move could set a precedent that would lead to other struggling eurozone countries with much larger gold reserves following suit, adding further downward pressure on the gold price. For example, Italy has 2,452 million tonnes of gold reserves, Portugal has 382 million tonnes and Spain has 282 million tonnes.

While all this is negative for conventional long gold ETPs, such as the NYSE Arca-listed SPDR Gold Shares ETF (GLD) and London-listed ETFS Physical Gold ETC (PHAU), which have incurred significant outflows, it comes as a boon to specialist short ETPs, which have surged higher in recent weeks. Short ETPs – also known as inverse ETPs – reflect the inverse performance of their underlying reference index. Some products also combine this with a degree of leverage, further amplifying potential returns.

In addition to the aforementioned Boost ETP, short gold-based ETPs include the ETFS Daily Short Gold ETC (SBUL) listed on the London Stock Exchange, and the ProShares UltraShort Gold ETF (GLL)PowerShares DB Gold Short ETN (DGZ)PowerShares DB Gold Double Short ETN (DZZ)VelocityShares 3x Inverse Gold ETN (DGLD) and Direxion Daily Gold Miners Bear 3x Shares ETF (DUST) listed on the NYSE Arca.

For investors not accustomed to how these products work, consider the Boost Gold 3x Short Daily ETP. It provides a total return linked to three times the inverse daily performance of the Nasdaq Commodity Gold ER Index. This means that if the Nasdaq Commodity Gold ER Index, which is based on the performance of three-month COMEX gold futures prices, falls by 8.6% (as it has today, as of the time of writing), the Boost Gold 3x Short Daily ETP should rise by 25.8% (before fees).

Despite the already impressive performance of these products over the past few weeks, with Goldman Sachs currently forecasting a 2014 year-end gold price of $1,270/troy oz (expect further downgrades) and Societe Generale similarly bearish, short gold ETPs are likely to see a substantial increase in inflows and post continued strong returns. But, of course, should the gold price bounce back (don’t write off the gold bugs just yet), short ETPs would fall in value, so investors need to be aware of all the risks, especially when introducing an element of leverage.

Tags: , , , , , , , , , , , ,

Leave a Comment



More in Commodities
iShares launches roll-optimised commodity ETP
Investors rotate out of gold into cyclically-geared commodities, ETP flows show

As global growth and risk appetite picked up in the first quarter of 2013, commodity investors rotated out of exchange-traded products (ETPs) linked...

Gold market will see a second decade of growth, says ETF Securities founder Graham Tuckwell, creator of the first gold ETF
Gold market will see second decade of growth, says creator of first gold ETF

Contrary to recent forecasts predicting the end of the gold bull market, Graham Tuckwell, Founder and Chairman of ETF Securities, believes untapped demand...

Close