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After wrapping up its best annual performance in a decade, gold lost its luster this year, falling more than 6% on increased investors’ risk appetite. In fact, the bullion logged in its worst performance in January since 2011 and extended its decline so far this month. Gold dropped to the lowest level in more than two months with many analysts expecting the price to decline further in the near term.
This is especially true against the backdrop of surging yields and strong dollar. Investors are betting on speedy economic recovery with the wider rollout of vaccines and the likelihood for more stimulus. This has resulted in an appreciation of the dollar and in inflationary pressures. A strong dollar has made dollar-denominated assets attractive for foreign investors, thereby dampening the demand for the yellow metal (read: U.S. Dollar Rising: ETF Winners & Losers).
Notably, 10-year yields jumped to the level not seen since February 2020 at 1.29% while the dollar index rebounded from a three-week low. Though the gold bullion often acts as a hedge against inflation, rising inflationary expectations indicate investors’ confidence in the economy, which has diminished the appeal of the yellow metal. Additionally, U.S. retail sales surged the highest in January in seven months while U.S. producer prices increased the most since 2009, suggesting rise in inflation.
Further, gold demand plunged to the lowest level in 11 years in 2020, according to the World Gold Council. Moreover, the ultra-popular SPDR Gold Trust ETF (GLD - Free Report) , with an asset base of around $66.4 billion and an average daily volume of around 8.4 million shares, pulled out $1.9 billion in its asset base so far this year. With this, the ETF declined 6.7% in the year-to-date timeframe.
Given the massive outflow and the bearish outlook, the appeal of gold ETFs has dulled. As a result, investors who are bearish on gold right now may want to consider a near-term short. Fortunately, with ETFs, this is quite easy as there are many options to accomplish this task. Below, we highlight them and some of their key differences:
This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Bloomberg Gold Subindex, which reflects the performance of gold as measured by the price of COMEX gold futures contracts. The product charges 95 basis points (bps) in fees a year and has amassed $28.4 million in its asset base. Volume is light at moderate 70,000 shares per day. The ETF has gained 13.7% so far this year.
This ETN provides investors with a cost-effective & convenient way to take a short leveraged view on the performance of gold. It is based on a total return version of the Deutsche Bank Liquid Commodity Index Optimum Yield Gold. It trades in average volume of roughly 9,000 shares per day and charges 75 bps in fees per year from investors. The product is up 11.2% so far this year (read: Beyond Coronavirus, What's Driving Gold ETFs?).
This ETF offers two times inverse exposure to the daily performance of the MVIS Global Junior Gold Miners Index. It has been able to manage assets worth $81.1 million and sees average daily volume of 4.7 million shares. The fund has 0.95% in expense ratio and has gained 16.6% this year.
DUST seeks to deliver two times the inverse daily performance of the NYSE Arca Gold Miners Index. The fund has AUM of $107.8 million and trades in heavy average volume of around 3.2 million shares. It charges investors 95 bps in annual fees and expenses. DUST has gained 11.3% so far this year.
GDXD seeks to offer three times inverse leveraged exposure to the S-Network MicroSectors Gold Miners Index. The ETN has accumulated $3.6 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of about 17,000 shares. The product is up 15.1% so far this year.
Bottom Line
It is clear that selling pressure has been intense for gold lately and that the recent trend is unfavorable for the commodity, given the positive market sentiments and a strong dollar. Additional selling could be in the cards if the stock market continues to rise, curtailing demand for gold even further (read: 5 Global ETFs Riding on Best Winning Streak in 17 Years).
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.
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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How to Profit From Plunging Gold Price With ETFs
After wrapping up its best annual performance in a decade, gold lost its luster this year, falling more than 6% on increased investors’ risk appetite. In fact, the bullion logged in its worst performance in January since 2011 and extended its decline so far this month. Gold dropped to the lowest level in more than two months with many analysts expecting the price to decline further in the near term.
This is especially true against the backdrop of surging yields and strong dollar. Investors are betting on speedy economic recovery with the wider rollout of vaccines and the likelihood for more stimulus. This has resulted in an appreciation of the dollar and in inflationary pressures. A strong dollar has made dollar-denominated assets attractive for foreign investors, thereby dampening the demand for the yellow metal (read: U.S. Dollar Rising: ETF Winners & Losers).
Notably, 10-year yields jumped to the level not seen since February 2020 at 1.29% while the dollar index rebounded from a three-week low. Though the gold bullion often acts as a hedge against inflation, rising inflationary expectations indicate investors’ confidence in the economy, which has diminished the appeal of the yellow metal. Additionally, U.S. retail sales surged the highest in January in seven months while U.S. producer prices increased the most since 2009, suggesting rise in inflation.
Further, gold demand plunged to the lowest level in 11 years in 2020, according to the World Gold Council. Moreover, the ultra-popular SPDR Gold Trust ETF (GLD - Free Report) , with an asset base of around $66.4 billion and an average daily volume of around 8.4 million shares, pulled out $1.9 billion in its asset base so far this year. With this, the ETF declined 6.7% in the year-to-date timeframe.
Given the massive outflow and the bearish outlook, the appeal of gold ETFs has dulled. As a result, investors who are bearish on gold right now may want to consider a near-term short. Fortunately, with ETFs, this is quite easy as there are many options to accomplish this task. Below, we highlight them and some of their key differences:
ProShares UltraShort Gold ETF (GLL - Free Report)
This fund seeks to deliver twice (2x or 200%) the inverse return of the daily performance of the Bloomberg Gold Subindex, which reflects the performance of gold as measured by the price of COMEX gold futures contracts. The product charges 95 basis points (bps) in fees a year and has amassed $28.4 million in its asset base. Volume is light at moderate 70,000 shares per day. The ETF has gained 13.7% so far this year.
DB Gold Double Short ETN (DZZ - Free Report)
This ETN provides investors with a cost-effective & convenient way to take a short leveraged view on the performance of gold. It is based on a total return version of the Deutsche Bank Liquid Commodity Index Optimum Yield Gold. It trades in average volume of roughly 9,000 shares per day and charges 75 bps in fees per year from investors. The product is up 11.2% so far this year (read: Beyond Coronavirus, What's Driving Gold ETFs?).
Direxion Daily Junior Gold Miners Index Bear 3X Shares (JDST - Free Report)
This ETF offers two times inverse exposure to the daily performance of the MVIS Global Junior Gold Miners Index. It has been able to manage assets worth $81.1 million and sees average daily volume of 4.7 million shares. The fund has 0.95% in expense ratio and has gained 16.6% this year.
Direxion Daily Gold Miners Index Bear 2x Shares (DUST - Free Report)
DUST seeks to deliver two times the inverse daily performance of the NYSE Arca Gold Miners Index. The fund has AUM of $107.8 million and trades in heavy average volume of around 3.2 million shares. It charges investors 95 bps in annual fees and expenses. DUST has gained 11.3% so far this year.
MicroSectors Gold Miners -3X Inverse Leveraged ETN (GDXD - Free Report)
GDXD seeks to offer three times inverse leveraged exposure to the S-Network MicroSectors Gold Miners Index. The ETN has accumulated $3.6 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of about 17,000 shares. The product is up 15.1% so far this year.
Bottom Line
It is clear that selling pressure has been intense for gold lately and that the recent trend is unfavorable for the commodity, given the positive market sentiments and a strong dollar. Additional selling could be in the cards if the stock market continues to rise, curtailing demand for gold even further (read: 5 Global ETFs Riding on Best Winning Streak in 17 Years).
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.
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 >>