Inverse ETF will help you profit from gold's fall
With prices of the yellow metal at a two-week low, this gold fund will deliver big profits if the slide continues
Back in February, gold took a big hit when the Federal
Reserve announced it was lifting the discount rate. After pushing briefly above
$1,200 an ounce at the beginning of December 2009, the safe-haven metal slumped
over 12% in two months to a low of around $1,050.
Here we are about three months removed from that low, and we're right back where we started price-wise -- or at least, we were until gold spiraled downward this week to mark a two-week low.
So everyone is asking the question, "Is gold going lower, or is it going higher?" Well the real question investors should ask isn't about the long-term fate of the commodity but rather how they can play the volatility in the short-term. And the answer to that is bank on a brief correction via the ProShares UltraShort Gold (GLL) ETF. Here's why:
Gold is now cruising under $1,200 again -- indicating that the safe-haven metal may have hit a ceiling once more. Even after Thursday's brutal day in the stock market, gold still lost ground slightly to finish at around $1,180, showing investors aren't as nuts over the commodity as they were at the height of the euro zone crisis. That means a further slide could be in the works for the next few weeks -- barring any disasters.
Yes, there are no shortage of gold bugs out there who think gold is going to
double by year's end. If you're in this camp you probably don't even bother
with the best upside gold investments and instead are just hoarding the stuff
under your mattress in preparation for the apocalypse. But for more moderate
investors who don't plan on moving into a bomb shelter any time soon, the idea
of a brief but sharp downturn in gold seems to make sense.
When gold went haywire in February this year, the GLL ETF hit an intraday high of almost $56 a share (adjusted to reflect an April 5 to 1 split). But as gold prices increased, this inverse ETF lost ground. Now, the fund is in the $42 range. Because this UltraShort ETF is a leveraged inverse fund, it plays the decline twice over -- meaning the 25% drop-off for GLL prices happened amid only about a 12% drop in gold prices.
If gold makes a move back down 12% to the range of $1,050 in the coming months, we can expect the GLL inverse ETF to behave just like it did in February -- surging upwards twice as fast to deliver investors a 25% profit in a matter of weeks.
Again, if you're a permabear gold bug who is expecting gold to hit $2,000 an ounce, obviously this strategy isn't for you. But if you're looking for a short-term way to play gold's volatility without worrying about the long-term trends, this leveraged inverse ETF may be for you. Forget about how gold is affected by currencies and the dollar index and just look to make a quick 25% profit in a short window of opportunity.
Even if you want to focus on the negatives and look for reasons that gold is the only investment worth buying, you had to admit that if traders aren't buying more gold now after about a 10% drop in the broader market in May, they likely will have even fewer reasons to buy in later this year. The elephant in the room, as in February, is that the Federal Reserve has to address rock-bottom rates eventually. That could cause investors to flee gold and pursue other low-risk investments that now offer attractive returns. And if you're more inclined to focus on positive developments such as momentum behind new hires or on the retail sector resurgence, there's even more evidence that gold is set for a tumble.
Anyone who says they have their finger on the long-term fate of gold is full of it. Gold can rise very quickly and it can fall very quickly, making predictions difficult. So rather than base your gold strategy on the fuzzy future forecast, bank on the short term by shorting gold with the GLL ETF. It's not a sure thing, but most signs point to a continued slide in gold for the short term – and that means profits for this leveraged inverse ETF.
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The offering could become the second-biggest this year if underwriters exercise an option to buy more shares.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.