Why I'm Starting to Build Gold Now

There are two ways to play the U.S. Banana Republic - short the dollar or long the gold. Since the world is still awash in fear, they are running into dollars (how perverse). So that will be the long-term way to play this; in the short run I am going to finally start building a gold position - I am using the double long ETN (for gold) to get some pop - but it's basically just a straight gold play instead of messing with miners.

GLD is the underlying ETF; I am using [[DGP]] - starting a 3% stake in the low $20s. I'd go bigger but I have to see what the reaction is tomorrow after people have a night to think about things. My belief is sometime in the next week market participants are going to wake up and look over at who they just brought into bed..... and scream "we did what??". But first the drunken revelry (now).

Since DGP is a double ETF, it's like having a 6% stake, effectively.

These are kick-the-can policies that define the US for past 30 years at its best; address the fire in front of you but create a larger one for someone else to clean up later. Another day of feeling sad about the long term future. While everyone else is cheering, to me this smacks of urgent desperation by the central bank.

Disclosure: Long DGP in fund and personal account

Comments

[robert99:]

I tried using SDS as a hedge against my longs when this thing first began in October 2007. My logic was the same as yours - 'Since SDS is a double short ETF, I'll use a 30% position in SDS to hedge against a 60% long position.' Due to slippage, it didn't quite work out like that, and my portfolio took a beating. The traders are right - double and triple ETFs are trading vehicles, not investment vehicles. I don't know if the double gold ETF suffers from the same issues, but you might want to look into it.

Mar 19 01:16 AM

[Conan the B...:]

Please consider UGL also as a sub for GLD.

This mornings trade shows no signs of follow through on Gold or Silver.

The general Basic Metals group won't be left behind forever either.

Mar 19 01:19 AM

[Alan Young:]

To Robert99: Your concern is fundamentally valid; however, ETNs do not have the tracking issues that ETFs have. Instead, there's the counterparty risk. I wouldn't want to hold them. UGL might be a better alternative, although I haven't investigated it.

The gold bugs love to point out that in a really serious crisis, no Wall Street paper is going to be of much use. This kind of trade is to come out ahead in a medium-serious crisis, one that undermines the value of most investments without completely destroying the banking system. It's about as much risk as I'm willing to hedge against.

Mar 19 02:25 AM

[Steven Hansen:]

double gold suffers from the same issues. these are derivative based investments.

Mar 19 02:25 AM

[DONE_SONZ:]

I would mainly stick with the miners for the biggest gains to come.AUY,AEM,KGC to name a few.

Mar 19 05:12 AM

[Gedankonomist:]

"Since the world is still awash in fear, they are running into dollars (how perverse)."

What is really perverse is when they finally realize the mistake they made, all those foreign-held dollars (chickens) will return to the US (coming home to roost). Then inflation may turn into hyperinflation.

Mar 19 06:19 PM

[tb1975:]

I have owned DGP for many months now (Up 30+%). I calculated it the other day, and it had exactly doubled GLD percentage gain. I love my DGP and can see no 'slippage' thus far.

Mar 20 10:20 PM

[Dr. O:]

I like to check out who issued the ETN. ETNs are essentially debt obligations, not equities. For example, when Lehman went bust, a few million dollars worth of their ETNs went bust too. Counterparty risk.

That said, there are some very interesting ETNs around, and I am long platinum via PTM issued by UBS. Of course, I'll be monitoring the financial health of UBS fairly carefully, lol.

Generally, a little comparative charting reveals whether or not the ultra-securities do what they are supposed to do. But intra-day, things can get pretty wild.

Mar 21 07:40 AM

[opinionated:]

Beware of Volatility decay with these 2x- and 3x- ETFs. IMHO they should only be used for as a hedge for a couple of days at most.
If held long enough, they will all eventually be worth $0!

Apr 29 01:37 PM