Short gold ETPs in play as gold loses safe-haven appeal

Jul 9th, 2013 | By | Category: Commodities

Gold had been seen as a pretty safe bet for investors during the recent turmoil in the global economy. Yet after a decade-long rally, gold experienced its biggest fall in value for 30 years in April and again last week tumbling to its lowest level in nearly three years.

Short gold ETFs in play as gold loses safe-haven status

Gold appears to have lost its safe-haven status.

The fall was triggered by the Federal Reserve beginning to set out a time frame for the US central bank to exit its stimulus programme as a consequence of strong economic data, as well as the threat of heavily indebted eurozone countries selling their gold reserves.

Continued uncertainty has created significant volatility in the price of gold, with brokers seeing a substantial increase in the amount of gold trades being placed by clients compared to the same period last year.

Ole Hansen, Head of Commodity Strategy at Saxo Capital Markets, a broker, says: “Volatility in gold options has picked up over the past week. Investors are still nervous about the potential for further losses. This is demonstrated by the fact that put volatility is higher and a majority of the top 10 most-traded strikes are puts.”

In the long run, the outlook for gold remains uncertain. Although in theory the decrease in the price of the precious metal shows an improvement in the global economy, it is still heavily affected by the inflationary policies introduced by the Federal Reserve, European Central Bank and Bank of England. The push and pull effect of equity markets against currency trading and general uncertainty over the economic outlook has created a fluid market for gold.

Hansen sees gold “dropping like a stone en route to the next major technical target of $1150” and says that specialist short exchange-traded products (ETPs) such as the ETFS Daily Short Gold ETC (SBUL) from ETF Securities and the Boost Gold 3x Short Daily ETP (SGOS) enable investors to benefit from a falling gold price, either through one or three-times gearing respectively. However, he notes that “investors should be aware of the increased spread between bid and ask which may exist on smaller ETFs. This will produce a greater amount of slippage when buying and selling which negatively impacts the potential return.”

As an alternative, Hansen says “investors could consider selling short a CFD on one of the major long only ETFs tracking gold”, an example being the giant SPDR Gold Shares (GLD) or ETFS Physical Gold ETC (PHAU). But while the dealing spreads might be reduced, against this one has to consider the funding costs, which tend to rise during a period of heavy selling as other investor undoubtedly also wish to borrow the stock in order to sell short, and counterparty risk.

But shorting gold, either through short gold ETPs or shorting long gold ETPs, could prove a risky strategy. Recent forward guidance offered by the European Central Bank and the Bank of England made it clear that they don’t foresee tightening monetary conditions any time soon and many analysts, including Nicholas Brooks of ETF Securities, see the price correction as “excessive”.

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