Dull Gold Helps Inverse ETFs Shine

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 |  Includes: DGLD, DGZ, DZZ, GLD, GLL
by: Tom Lydon

Gold is crashing with prices dipping below $1,400 an ounce Monday. Inverse ETFs are capitalizing on gold's misfortunes.

The ProShares UltraShort Gold (NYSEARCA:GLL), which tries to reflect two times the inverse, or -200%, daily performance of gold bullion, surged 15.8% Monday as gold futures plunged 7.7% to $1,370 per ounce. The fund is up 24.3% year-to-date.

Meanwhile, the SPDR Gold Shares (NYSEARCA:GLD) dropped 8.2% Monday. The ETF is down 11.2% year-to-date.

Inverse ETFs also use derivatives in an attempt to achieve a negative, or inverse, multiplier to the direction of the underlying asset or index, and they would typically rebalance on a daily basis. The ETF strategies help get in on tactical short-term opportunities. Additionally, these products are more suitable for those with a high risk tolerance.

Traders should also know that inverse and leveraged products are not suitable for long-term buy-and-hold investors as the compounding affects from the daily rebalances would create divergences from the ETF's performance to that of the underlying index, especially over periods of high volatility.

Gold bullion has declined over 10% year-to-date, and it is off 28% from its all-time high. Consequently, gold is currently deep in bear market territory, writes Adam Shell and Kim Hjelmgaard for USAToday.

"Gold was a very over-owned and a very big bull market and when it broke support, the masses got out," Gary Kaltbaum, president of Kaltbaum Capital Management, said in the article. "When the big money guys own a boatload of stuff, and are all watching the same number, when support breaks, I call it the 'give up, we are done' response."

Along with the inverse gold ETF, there are a number of inverse gold-related exchange traded note products. However, traders should be aware that an ETN is essentially an uncollateralized loan to an investment bank and leaves investors open to potential credit risks of the issuing bank - if the bank goes under, there is no guarantee that the ETN investor will receive all of his or her principle back.

Inverse ETN options include:

  • PowerShares DB Gold Double Short ETN (NYSEARCA:DZZ). DZZ tries to generate the twice inverse, or -200%, return of the daily performance of the DBIQ Optimum Yield Gold Index. The ETN is up 24.6% year-to-date.
  • PowerShares DB Gold Short ETN (NYSEARCA:DGZ). DGZ tries to reflect the inverse of gold price movements by taking a short position in the underlying DBIZ Optimum Yield Gold Index. The ETN is up 11.9% year-to-date.
  • VelocityShares 3x Inverse Gold ETN (NASDAQ:DGLD). DGLD tries to reflect the performance of three times the inverse, or -300%, daily performance of the S&P GSCI Gold Index. The ETN is up 38.2% year-to-date.

ProShares UltraShort Gold

Click to enlarge

For more information on gold, visit our gold category.

Max Chen contributed to this article.

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. I have no business relationship with any company whose stock is mentioned in this article.