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After a staggering first-half rally in almost four decades, gold started to falter in the second half of 2016. In particular, the bullion witnessed a sharp drop in almost three years on October 4, falling below $1300 per ounce. This is especially true against the backdrop of the renewed fears of s Fed rate hike and European Central Bank’s (ECB) tapering talks – two conditions that are tempering the safe haven appeal across the board.
Rate Hike in the Cards?
The spate of positive economic data has strengthened the prospect of a liftoff in December that has dulled the competitiveness of non interest-bearing asset. In fact, Richmond Federal Reserve President, Jeffrey Lacker, on Tuesday cited a strong case for a rate hike in December. Additionally, the probability of a Fed liftoff in December has increased to above 60% as per the federal-funds’ futures market while CME Group's FedWatch Tool shows a 63% chance.
The U.S. manufacturing activity strongly rebounded in September with the ISM index rising to 51.5 from 49.4 in August. This gave a boost to the U.S. dollar, which hit its highest level in nearly two months (read: ETFs & Stocks to Play as U.S. Manufacturing Grows).
The recent consumer sentiment surveys have also been extremely positive with the monthly Consumer Confidence Index, measured by the Conference Board, climbing for the second consecutive month in September and currently hovering at its highest level since recession. Consumer confidence, as per the University of Michigan, climbed for the first time in four months, with the final index rising to 91.2 in September from the preliminary reading of 89.8. These suggest increased spending and thereby pave the way for better economic growth.
Additionally, the U.S. economy expanded at a faster clip of 1.4% in Q2 from 1.1% from the previous estimate and 0.8% recorded in Q1.
Other Factors
Though investment demand for gold is on the rise, jewelry demand fell nearly 50% in the first half of the year, according to the World Gold Council. Purchases by central banks have also been weak, dropping 23% year over year. In addition, fresh buying of gold has reduced, resulting in lower physical demand (read: Consumer Confidence Hits 9-Year High: ETF Winners).
Furthermore, fresh worries that ECB will gradually curtail its €80 billion bond buying program ahead of the planned conclusion in March 2017 has dulled the shine of the yellow metal.
Bearish Gold Outlook
A number of experts and researchers expect a bigger drop in the near term. An investment banking firm UBS expects the Fed to signal monetary policy tightening in December at its next meeting and thus has a negative view on the bullion. As per the technical analyst at Rich at Evercore ISI, gold could fall another $70 in the near future.
Moreover, the ultra-popular SPDR Gold Trust ETF (GLD - Free Report) , with an asset base of around $38.7 billion and an average daily volume of around 11.2 million shares, suffered one of its biggest one-day drop since 2013 on October 4. With this, the ETF plunged 3.6% over the past couple of days.
Given the decline and the concerns over an increase in interest rates, the appeal for gold ETFs seems diminishing. As a result, investors who are bearish on gold right now may want to consider a near-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 them and some of their key differences:
This ETN creates a short position in the DBIQ Optimum Yield Gold Index Excess Return and charges 75 bps in fees per year. It has accumulated $20.1 million in its asset base and is the most illiquid option, trading in volume of 55,000 shares a day on average. DGZ added 3.2% in the past couple of sessions.
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. The product makes a profit when the gold market moves downward and is suitable for hedging purposes against falling gold prices. The product charges 95 bps in fees a year and has amassed $81 million in its asset base. Volume is light at under 35,000 shares per day. The ETF gained 7.3% in the past couple of days (read: 5 Reasons Why Gold ETFs Can Regain Their Mojo).
PowerShares DB Gold Double Short ETN (DZZ - Free Report)
This ETN seeks to deliver twice the inverse return of the daily performance of the DBIQ Optimum Yield Gold Index Excess Return, before fees and expenses. It has a relatively tight bid/ask spread with an average volume of roughly 167,000 shares per day and has been overlooked by investors as depicted by AUM of $43.1 million. The note charges 75 bps in fees per year from investors. The product was up 6.9% in the same time frame.
VelocityShares 3x Inverse Gold ETN
This product provides three times (3x or 300%) 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. The ETN has been able to manage an asset base of $17.5 million while charging investors a higher fee of 1.35% annually. The note trades in a light volume of around 54,000 shares a day on average and returned 10.8% in the same time frame.
Bottom Line
It is clear that selling pressure has been intense for gold and that the recent trend is unfavorable for the commodity given positive market sentiments and a strong dollar. Additional selling could be in the cards if the stock market rises on another bout of good news, curtailing demand for gold even further.
However, investors should note that since the above-mentioned 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 the expected long-term performance figures (see: all the Inverse Commodity ETFs here).
Still, for ETF investors who are bearish on gold for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.
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If Gold Continues to Drop, Profit from These ETFs
After a staggering first-half rally in almost four decades, gold started to falter in the second half of 2016. In particular, the bullion witnessed a sharp drop in almost three years on October 4, falling below $1300 per ounce. This is especially true against the backdrop of the renewed fears of s Fed rate hike and European Central Bank’s (ECB) tapering talks – two conditions that are tempering the safe haven appeal across the board.
Rate Hike in the Cards?
The spate of positive economic data has strengthened the prospect of a liftoff in December that has dulled the competitiveness of non interest-bearing asset. In fact, Richmond Federal Reserve President, Jeffrey Lacker, on Tuesday cited a strong case for a rate hike in December. Additionally, the probability of a Fed liftoff in December has increased to above 60% as per the federal-funds’ futures market while CME Group's FedWatch Tool shows a 63% chance.
The U.S. manufacturing activity strongly rebounded in September with the ISM index rising to 51.5 from 49.4 in August. This gave a boost to the U.S. dollar, which hit its highest level in nearly two months (read: ETFs & Stocks to Play as U.S. Manufacturing Grows).
The recent consumer sentiment surveys have also been extremely positive with the monthly Consumer Confidence Index, measured by the Conference Board, climbing for the second consecutive month in September and currently hovering at its highest level since recession. Consumer confidence, as per the University of Michigan, climbed for the first time in four months, with the final index rising to 91.2 in September from the preliminary reading of 89.8. These suggest increased spending and thereby pave the way for better economic growth.
Additionally, the U.S. economy expanded at a faster clip of 1.4% in Q2 from 1.1% from the previous estimate and 0.8% recorded in Q1.
Other Factors
Though investment demand for gold is on the rise, jewelry demand fell nearly 50% in the first half of the year, according to the World Gold Council. Purchases by central banks have also been weak, dropping 23% year over year. In addition, fresh buying of gold has reduced, resulting in lower physical demand (read: Consumer Confidence Hits 9-Year High: ETF Winners).
Furthermore, fresh worries that ECB will gradually curtail its €80 billion bond buying program ahead of the planned conclusion in March 2017 has dulled the shine of the yellow metal.
Bearish Gold Outlook
A number of experts and researchers expect a bigger drop in the near term. An investment banking firm UBS expects the Fed to signal monetary policy tightening in December at its next meeting and thus has a negative view on the bullion. As per the technical analyst at Rich at Evercore ISI, gold could fall another $70 in the near future.
Moreover, the ultra-popular SPDR Gold Trust ETF (GLD - Free Report) , with an asset base of around $38.7 billion and an average daily volume of around 11.2 million shares, suffered one of its biggest one-day drop since 2013 on October 4. With this, the ETF plunged 3.6% over the past couple of days.
Given the decline and the concerns over an increase in interest rates, the appeal for gold ETFs seems diminishing. As a result, investors who are bearish on gold right now may want to consider a near-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 them and some of their key differences:
PowerShares DB Gold Short ETN (DGZ - Free Report)
This ETN creates a short position in the DBIQ Optimum Yield Gold Index Excess Return and charges 75 bps in fees per year. It has accumulated $20.1 million in its asset base and is the most illiquid option, trading in volume of 55,000 shares a day on average. DGZ added 3.2% in the past couple of sessions.
ProShares UltraShort Gold ETF (GLL - Free Report)
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. The product makes a profit when the gold market moves downward and is suitable for hedging purposes against falling gold prices. The product charges 95 bps in fees a year and has amassed $81 million in its asset base. Volume is light at under 35,000 shares per day. The ETF gained 7.3% in the past couple of days (read: 5 Reasons Why Gold ETFs Can Regain Their Mojo).
PowerShares DB Gold Double Short ETN (DZZ - Free Report)
This ETN seeks to deliver twice the inverse return of the daily performance of the DBIQ Optimum Yield Gold Index Excess Return, before fees and expenses. It has a relatively tight bid/ask spread with an average volume of roughly 167,000 shares per day and has been overlooked by investors as depicted by AUM of $43.1 million. The note charges 75 bps in fees per year from investors. The product was up 6.9% in the same time frame.
VelocityShares 3x Inverse Gold ETN
This product provides three times (3x or 300%) 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. The ETN has been able to manage an asset base of $17.5 million while charging investors a higher fee of 1.35% annually. The note trades in a light volume of around 54,000 shares a day on average and returned 10.8% in the same time frame.
Bottom Line
It is clear that selling pressure has been intense for gold and that the recent trend is unfavorable for the commodity given positive market sentiments and a strong dollar. Additional selling could be in the cards if the stock market rises on another bout of good news, curtailing demand for gold even further.
However, investors should note that since the above-mentioned 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 the expected long-term performance figures (see: all the Inverse Commodity ETFs here).
Still, for ETF investors who are bearish on gold for the near term, either of the above products could make an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is the friend” in this corner of the investing world.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>