The decade-long bull market in gold began to crumble two years
ago and now the metal appears to be in the early stages of a
long-term bear market.
Friday, the price of the yellow metal is falling another two
percent as it hits a three-month low. There are rumors the sudden
drop this morning was caused by one large trade of 5k gold
Whether the rumor proves to be true is not relevant. What is
important is that the long-term and short-term trends are bearish
and that investors must prepare for lower prices.
The Gold ETFs
The two most popular gold ETFs are the SPDR Gold Trust ETF
) and the iShares Gold Trust ETF (NYSE:
). The ETFs are designed to track the day-to-day movement of the
price of gold bullion; the shares are backed by physical gold.
Each ETF is down 11 percent in the last six weeks and are also
hitting a three-month lows.
If the ETFs continue the downtrend and retest the multi-year
low set in late June they will have to fall another six percent.
This may sound like a big move lower, but it may only be the
start of a much deeper drop for the gold ETFs.
Looking at the charts and the amount of money coming out of
gold, it would not be a stretch to see the precious metal fall
another 20 percent if the June low is breached. This would not
happen overnight and it would not be a straight line down,
however it is very possible.
Inverse Gold ETNs
Investors that agree with the synopsis above regarding the
likelihood of a further drop in the price of gold could consider
profiting from the move. There are a number of ETFs that will
gain in value as the price of gold decreases and vice versa. The
PowerShares DB Gold Short ETN (NYSE:
) is designed to provide investors with 100 percent of the
inverse of a gold futures contract.
For example, since August 27, DGZ is up 11.4 percent and GLD
is down 10.6 percent. The returns are not always exactly the
inverse, but typically they are close.
The aggressive trader that likes to push the envelope could
consider the PowerShares DB Double Short ETN (NYSE:
) that will seek to return 2x the movement of a gold futures
contract. From 8/27/13 the ETN is up 24 percent. The leveraged
ETN is only for the experienced trader that knows how to properly
use the vehicle. If not used in the correct manner it could lead
to major losses.
Keep in mind that a long-term trend has many peaks and troughs
throughout the time the trend plays out. The current downtrend in
gold will have rallies in the future, but as long as the overall
trend remains lower the best strategy is to not own the metal or
have a short position.
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
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