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Gold in Longest 4-Year Losing Streak: Go Short with ETFs

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After a blockbuster start to the year, gold fell out of investors’ favor, thanks to surging stock market, rising interest rates and strong dollar. The yellow metal recorded the fourth consecutive monthly decline, representing the longest stretch of losses since 2013.

Inside The Decline

The slew of upbeat data has been raising confidence in the U.S. economy, bolstering the case for interest rates hike. The Fed has raised interest rates twice this year in quarter-point increments and is expected to implement two more lift-offs by the end of the year. Higher rates have diminished the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. Additionally, it has also provided boost to the U.S. dollar (read: 5 ETFs to Buy as Q2 GDP Growth Hits 4-Year High of 4.1%).

In its latest testimony, Powell painted an optimistic view of the economy, citing that America is expanding at a faster pace. Robust job gains, rise in income and optimism among households have lifted consumer spending in recent months and will likely continue to do so. Unemployment rate is below 4% and inflation is running above the Fed’s 2% target for the first time in several years.

Gold is generally viewed as a safe haven in times of economic or political turmoil. But the bullion is currently struggling to garner safe-haven demand despite the ongoing trade war as investors are looking at the dollar as a new safety investment in a strong economy. Additionally, rising equities tend to indicate investor appetite for riskier assets as opposed to traditional safe havens like gold.

Further, waning demand from the top two consumers, India and China, are also dampening the appeal for metal. Fresh buying of gold has reduced, resulting in lower physical demand. While demand will likely remain subdued in China, given the trade dispute between the world’s two largest economies, India could see a pickup in consumption of the metal going into the wedding season and festive months ahead. According to the World Gold Council (WGC), demand will likely be healthy in the second half of the year on positive but uneven global economic growth, trade war and its impact on currency, rising inflation and an inverted yield curve

Moreover, investors have been building bearish bets on the bullion. Per the latest Commodity Futures Trading Commission data, hedge funds and money managers held the biggest net-short position in futures and options in records going back to 2006 for the week ending Jul 24 (read: Gold Slips Into Correction Territory: How to Trade with ETFs).

Given the strong economic outlook and rates hike, the appeal for gold ETFs has diminished. Per Reuters, holdings at SPDR Gold Trust ETF GLD, the world’s largest gold-backed ETF, fell to their lowest since March 2009.

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. All these products make profit when the gold market moves downward and is suitable for hedging purposes against falling gold prices:

DB Gold Short ETN DGZ

This ETN creates a short position in the Deutsche Bank Liquid Commodity Index Optimum Yield Gold, which is intended to track the short performance of a single unfunded gold futures contract. It has accumulated $12.9 million in its asset base and is the illiquid option, trading in volume of 8,000 shares a day on average. DGZ charges 75 bps in fees per year and has added 2.9% last month.

ProShares UltraShort 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 product has amassed $27.5 million in its asset base and charges 95 bps in fees a year. Volume is light at about 25,000 shares per day. The ETF gained 4.9% in July.

PowerShares DB Gold Double Short ETN (DZZ - Free Report)

This ETN seeks to deliver twice the inverse return of the daily performance of the Deutsche Bank Liquid Commodity Index Optimum Yield Gold. It has a relatively tight bid/ask spread with an average volume of roughly 36,000 shares per day and has been overlooked by investors as depicted by AUM of $26.3 million. The note charges 75 bps in fees per year from investors. It was up 5.6% in the same time frame.

VelocityShares 3x Inverse Gold ETN DGLD

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 $17.6 million while charging investors a higher fee of 1.35% annually. The note trades in moderate volume of around 93,000 shares a day on average and returned 7.8% in the same time frame (read: Inside the Cheapest Gold Bullion ETF).

ProShares UltraShort Gold Miners GDXS

The fund targets the gold mining segment and offers two times the inverse exposure to the daily performance of the NYSE Arca Gold Miners Index. It has accumulated $2.6 million in its asset base while trading in paltry volume of 6,000 shares a day on average. The ETF charges 95 bps and has gained 10.5% in July.

Direxion Daily Gold Miners Index Bear 3X Shares DUST

This product provides three times inverse exposure to the daily performance of the same index that of GDXS. It has AUM of $141.4 million and trades in heavy volume of more than 4 million shares a day on average. DUST charges 94 bps in annual fees and was up 16.6% last month.

Direxion Daily Junior Gold Miners Index Bear 3X Shares JDST

This ETF offers three times exposure to the daily performance of the MVIS Global Junior Gold Miners Index. It has been able to manage assets worth $65.5 million and sees average daily volume of 1 million shares. The fund charges 0.95% in expense ratio and gained 11.3% 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 continues to rise or Fed turns more hawkish, 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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