Inverse Gold ETFs: How To Bet On A Precious Metals Bubble

Gold ETFs have become some of the most popular options for investors to make a speculative play on their favorite precious metal. With unparalleled transparency, rock bottom fees, and superior liquidity, the exchange-traded structure has emerged in recent years as the vehicle of choice for all types of investors–from novices up to sophisticated hedge fund managers–to establish exposure to precious metals.

While gold has been boosted by bullish sentiment for much of the last few years, recent developments have heightened concerns about a bubble in the space. Gold prices have skyrocketed over the last few years, going from the $600 to $700 per ounce range in 2006, now to its current levels well above the $1,500 per ounce level. Just as investors looking to bet on continued price appreciation have several options for traditional long exposure to gold, those concerned about a collapse to pre-2007 levels have plenty of tools as their disposal as well. Specifically, there are a number of inverse gold options to allow investors to bet against the performance of the yellow commodity [see also Soros Sells Gold ETFs, Bad News For Precious Metal Investors?].

Inverse gold products have been become increasingly popular in recent months as weakness in commodity markets and a resurgent dollar has taken some of the wind out of gold’s sails. For investors looking to profit from an anticipated dip in precious metals prices, there are plenty of options out there. Below, we outline five ETPs to help investors put their assets against the performance of gold.

PowerShares DB Gold Short (DGZ)

This product tracks an index which is designed to reflect the performance of certain gold futures contracts plus the returns from investing in 3 month United States Treasury Bills. DGZ is an inverse ETN which has seen a spike in popularity this year, as gold has struggled to match its 2010 performance. DGZ resets exposure to the underlying index on a monthly basis, distinguishing the short strategy employed from some exchange-traded funds that reset on a daily basis.

It should be noted that DGZ is structured as an ETN; that nuance exposes investors to the credit risk of the issuing institution, but has some potentially significant tax advantages (and also allows investors to avoid tracking error and brokerage fees).

PowerShares DB Gold Double Short (DZZ)

This product is the 2x leveraged counterpart to DGZ, as it tracks the same index, but simply applies a -200% strategy to the underlying benchmark, also with a monthly reset. With its explicit leverage, DZZ may not be appropriate for all investors; this fund is more of a trading tool than it is a “buy-and-hold” investment. For savvy, knowledgeable investors who feel confident that gold is due for a slide, DZZ could be a great way to provide a strong return.

It should be noted that DZZ, like DGZ, does not offer inverse exposure to spot gold prices. Rather, this fund is designed to deliver inverse exposure to an index comprised of gold futures contracts, meaning that the slope of the futures curve will have an impact on bottom line returns.

ProShares Gold UltraShort (GLL)

While the previous two options offer inverse exposure with a monthly reset, GLL resets on a daily basis. In other words, this product is delivered to deliver daily returns that correspond to 200% of the inverse movement in gold prices that day. DZZ, on the other hand, seeks to achieve its target multiple over the course of a month; the effective leverage realized can change depending on the performance of gold. There is another important difference between the two: GLL is an ETF, whereas DZZ is an exchange-traded note that exposes investors to the credit risk of the issuer [see also Seven Factors To Consider When Evaluating Gold ETFs].

Daily Gold Miners Bear 2x Shares (DUST)

DUST is a different kind of gold ETF, as it offers exposure to companies that are involved primarily in mining for gold. In recent years many investors have embraced stocks of commodity intensive equities as a means of achieving exposure to natural resources. Because the profitability of these companies depends on the market price for their products (i.e., commodities), stock prices tend to move in unison with spot prices of the related natural resources. When gold prices are soaring, the outlook for the companies that extract and sell gold improves–and vice versa.

Investors should note that these stocks generally exhibit high volatility to being with, so adding leverage on top of that can lead to some big price swings. DUST currently seeks to deliver daily returns that correspond to -200% of the NYSE Arca Gold Miners Index, a benchmark that includes several of the largest gold miners in the world. Direxion has announced that DUST will convert to a -3x leveraged ETF during the fourth quarter of 2011.

Gold Trendpilot ETN (TBAR)

This product is a bit unique from the others profiled in this list; TBAR actually offers long exposure to gold by seeking to replicate the RBS Gold Trendpilot Index. But this product could be intriguing to investors interested in gold exposure but concerned about a potential bubble. The index to which TBAR is linked oscillates exposure between gold and cash depending on the price of the metal relative to the moving average. So there is essentially a built-in safety mechanism that will limit downside loss potential while still allowing investors to participate in a significant portion of any upside appreciation.

Disclosure: No positions at time of writing.

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