Shorting Gold In The Short Term, Buying For The Long Term

 |  Includes: DUST, GDX, GLD
by: Jayson Derrick

By: Jayson Derrick

Gold (NYSEARCA:GLD) seems to be sharing a lot of attention these days with Apple (NASDAQ:AAPL) as investors and traders are left wondering where each is heading, and if each has reached a bottom. Personally, I believe that gold still has some room to continue dropping in the short term, but fundamentally and technically gold is a great buy at any price for the long term.

Going back in time a few months it appeared obvious and a 'no brainer' that a correction in gold was to occur as the commodity ran out of steam after more than a decade of consistent growth. Speculation in gold was abnormally high as many investors were using as much leverage or borrowed funds as possible to go "all in" creating a bit of a bubble. The macro economic news didn't help either, as a recovering US economy is not typically a good friend of gold owners. The Fed indicated a slowing down or termination of their QE program which is a negative for gold as well.

Gold is not that far off the May 2012 lows of $1,536/oz and if this level is hit, shorts can cash in big time as the next resistance level would be around the $1400 range. It is not unusual for gold to have corrections of this size and magnitude during bear markets, as we have seen not too long ago in 2008 when gold corrected 29% during the year. March has historically been the worst performing month for gold, and with little positive news to drive up gold, and March-June being the weak seasonal demand period for gold I see the commodity dropping even further in the short term.

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The easiest way to profit from a decline in gold would be to short the gold ETF. The ETF tracks the price of gold quite accurately, so any decline in physical gold will bring translate to a decline in the ETF. One of the most profitable ETFs for 2013 so far has been the gold miners bear 3x ETF (NYSEARCA:DUST), which delivers daily performance equal to 3 times the inverse of the gold miners ETF (NYSEARCA:GDX). The ETF has more than doubled in 2013 as gold mining companies are continuously under pressure. Naturally, any inverse leveraged ETF is not intended for long term investing and I would encourage you to read this article prior to taking a position.

In a previous article I explained how I believe that the commodity weakness is not demand related, and driven by the QE fiasco and irresponsible fiscal/monetary policy. While short term bears have a better argument than bulls, I believe this is the opposite in the long term. Gold still remains at least in theory the best (and possibly only) hedge against currency wars, actual wars, inflation, uncertainty, bear markets, slowing economy, and many other factors we have been told over the years. There is no doubt that gold will reach a new all time high, probably not in 2013. Meanwhile, central banks will continue buying gold in large quantities, and these are buyers not looking to sell any time soon. Gold will continue playing a more important role in the monetary system as central banks continue to diversify and hedge against inflation. Central banks are expected to buy another 280 tons in the first half of 2013 alone. Leading the way is China (the world's largest importer and consumers of gold) who is trying to position their currency as an alternative global reserve, and large quantities of gold is essential for this to be achieved. If China ever announces their true intentions to continue hoarding gold, and to be the largest gold holder in the world, expect the commodity to shoot up.

To conclude, I'm sure many would agree with my short term negative outlook and my long term positive outlook. Investors should utilize caution especially if it involves shorting gold which presents tremendous risk. Gold can change directions in a heartbeat and this is what worries me for the short term and why I will personally chose not to participate in the continued gold bear market. Finding the bottom in gold does not match my investor risk profile, but by all means any investor that has a high risk tolerance should attempt to profit from the continued short term decline.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.