The Definitive Guide To Inverse Gold ETF Investing

by on December 15, 2009 | Updated November 1, 2012 | ETFs Mentioned:

Gold is often referred to as a “safe haven” investment, reflecting its tendency to rise in times of economic uncertainty. While there is no shortage of “gold bugs” that buy and hold the metal for extended periods of time, there are countless investors who trade gold quite actively. Just as signs of weakness in the global equity markets or unexpected negative developments can send gold prices climbing, good news or bullish sentiment on Wall Street can send gold prices plummeting. Fortunately for investors, just as there are a number of ETFs offering the ability to establish a long position in gold, there are several funds that offer short exposure as well. [Free Report: Everything You Need To Know About Commodity ETFs]

Gold Price Drivers

The World's Largest Gold BarValuing gold is a difficult task that is perhaps more art than science. Because gold is a commodity, it doesn’t make interest or dividend payments to investors, making any sort of cash flow analysis impractical. And unlike most natural resources, gold has very few industrial uses, meaning that demand related to manufacturing activity (or another sector of the economy) isn’t a price driver either.

Pinning down the exact reasons for major movements in gold prices is difficult, but the price of the yellow metal can generally be attributed to two general factors: equity market performance and strength of the U.S. dollar.

  1. Equity Market Performance: In uncertain or unstable economic environments, investors tend to pull their money from risky assets, such as domestic and international equities (particularly emerging market equities) and move them into safe haven investments like gold.
  2. Strength of U.S. Dollar: The U.S. currency and gold bullion are effectively substitutes, often moving in opposite directions. Weakness in the U.S. dollar was a major reason for the significant run-up in gold prices in the second half of 2009. As foreign central banks looked to diversify their holdings, they began selling dollars and buying gold, sending the prices for these assets moving in different directions.
  3. Inflation: Gold is often referred to as the “ultimate inflation hedge,” referring to its tendency to rise in value during periods of significant inflation. ETFdb Pro members can see how we use gold ETFs in our Black Swan Hyperinflation All-ETF Model Portfolio.
  4. Supply: Gold mining is big business, with dozens of publicly-traded companies mining for the metal in hundreds of locations around the world. To the extent that significant discoveries of gold are made in the future, gold prices could be sent lower. [For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro]

Inverse Gold ETFs

For investors looking to gain inverse exposure to gold (or to hedge against existing exposure to the yellow metal), there are a number of ETF options for doing so:

PowerShares DB Gold Short ETN (DGZ)

This ETF is based on a total return version of the Deutsche Bank Liquid Commodity Index-Optimum Yield Gold, a benchmark designed to reflect the performance of certain gold futures contracts plus the returns from investing in 3-month U.S. Treasury Bills. Since its inception in February 2008, DGZ has exhibited a nearly perfect negative correlation with GLD, proving itself as an efficient way to bet against gold prices. DGZ charges an expense ratio of 0.75%.

PowerShares DB Gold Double Short ETN (DZZ)

This ETF is based off of the same index underlying DGZ, but offers 200% leveraged exposure (as opposed to the 100% exposure offered by DGZ). As a result of this leverage, DZZ can exhibit significant volatility in certain environments, but offers a way to generate amplified returns in a bull market that sees declining gold prices. DZZ charges an expense ratio of 0.75%.

ProShares UltraShort Gold (GLL)

Similar to DZZ, this ETF offers 200% inverse exposure to gold prices, seeking to deliver daily results that are equal to 200% of the inverse of the daily performance of gold bullion as measured by the U.S. dollar fixing price for delivery in London. It is important to note that GLL maintains a focus on daily results, meaning that returns over multiple trading sessions may deviate from a straight multiple of the change in gold prices over that time.

Other Inverse Gold ETF Options

For investors with the stomach to expose themselves to unlimited downside risk, there are a number of ETFs that can be shorted to establish an inverse position in gold. In addition to ETFs that invest in physical gold or gold futures (see this Guide To Gold ETFs for a complete breakdown), there are a number of funds that focus on equities of gold mining companies. Because the profitability of gold miners is generally linked to the price of gold, these stocks tend to do well when bullion prices surge. Taking a short position in either of the following ETFs provides investors with inverse exposure to precious metals as well:

  • Market Vectors Gold Miners ETF (GDX): This ETF invests in gold mining companies throughout the world, offering exposure to large cap companies in all corners of the world. This ETF’s largest country weightings are in Canada, South Africa, and the U.S., with additional allocations to Australia, Peru, and the UK.
  • Market Vectors Junior Gold Miners ETF (GDXJ): Whereas GDX invests in primarily large cap gold miners, this ETF focuses on small cap firms. Many of the companies owned by this ETF do not have substantial revenues and are more speculative in nature.

Disclosure: No positions at time of writing.