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Gold investors have hit a home run over the past ten years, picking up an annual return somewhere in the ball park of 16%. Astute speculators that have paid close attention to the stellar run-up in gold may wish to begin preparing for the inevitable price collapse. Deutsche Bank's Exchange Traded Note (NYSEARCA:DZZ) offers one of the best ways to bank profits on this collapse without going directly into the futures market.

It is my belief that a 76% return is possible from DZZ should gold collapse from $2100 to $1300 per ounce. This is the scenario I am now preparing for. There are many indicators that the gold price will soon top. The main one being Europe is now plunging into recession and folks will begin cashing in their gold to buy their basic necessities, such as food, housing and gas. Small businesses will also find themselves in a tight money situation as liquidity dries up after European banks deploy their last reserve euros to backstop the weak links in the EU.

Another interesting indicator that I will call the Gold Ruch Factor is based on a comment that I picked up on the History Channel's wildly popular Gold Rush show that depicts the adventures of a handful of greenhorns who headed north to Alaska a couple of years back to mine for gold. Todd Hoffman who often speaks for his Oregon crew made the comment that for season three he intends to mine 1000 ounces of gold and expects it to be worth around 1.2 to 1.3 million dollars. This translates to 1200 to 1300 dollar gold.

The gold mining season for the small and mid-size mines up in Alaska basically occurs during the summer months, up until about the end of September, so it would seem that Hoffman is counting on prices to come down by then. One would think he might halfway know something about it by now seeing as he's been up there speaking with local miners for the past two years. We'll see if he knows what he is talking about soon enough. I happen to agree with him.

Here is how I get to the 76% return. I reviewed the price action of DZZ, GLD, and Gold at various price points over the past few years (nothing scientific here) to get a feel for how close the DZZ responds to the price action of gold. I will let the table do most of the talking.

Interestingly enough, it is obvious to me that Deutsche Bank who has some fairly talented folks working for it seems to have priced the DZZ with a top gold price of somewhere in the 2100 to 2400 per ounce range in mind. The downward pricing of the DZZ sort of follows a pattern based on the theory of diminishing returns as the price of gold moves up. The incremental moves to the downside actually get smaller and smaller as the price of gold inches upwards. Check out the chart below:

Date

DZZ

GLD

Gold Price

Oct. 27, 2008

39.52

71.34

730.50

Nov. 10, 2008

37.21

73.30

753.00

Nov. 24, 2008

29.21

80.31

822.50

Dec. 1, 2008

33.65

74.52

778.00

Dec. 22, 2008

25.51

85.60

849.00

Jan. 12, 2009

26.89

82.71

827.00

Jan. 26, 2009

22.15

91.31

910.25

Feb. 17, 2009

18.99

97.80

968.00

Mar. 2, 2009

21.53

92.29

937.25

Mar. 23, 2009

22.30

90.69

949.25

Apr. 6, 2009

24.52

86.31

870.25

Apr. 20, 2009

22.85

89.72

877.00

May. 11, 2009

21.79

91.55

913.00

May. 26, 2009

19.30

96.20

945.00

Jun. 8, 2009

20.90

92.17

943.75

Jun. 22, 2009

20.87

92.29

919.25

Jul. 6, 2009

22.08

89.58

924.00

Jul. 20, 2009

20.25

93.41

952.75

Aug. 3, 2009

20.15

93.75

959.75

Aug. 24, 2009

20.16

93.87

951.50

Sep. 8, 2009

18.03

98.78

1,000.75

Oct. 5, 2009

16.52

102.84

1,005.50

Oct. 26, 2009

16.65

102.53

1,054.00

Nov. 16, 2009

13.21

112.94

1,130.00

Nov. 30, 2009

12.70

113.75

1,175.75

Dec. 7, 2009

13.60

109.32

1,142.50

Dec. 7, 2010

8.28

136.50

1,420.00

Jan. 21, 2011

9.03

129.87

1,343.50

Apr. 28, 2011

6.62

149.82

1,535.50

Aug. 22, 2011

3.85

184.79

1,877.50

Oct. 14, 2011

4.90

163.40

1,678.00

Oct. 20, 2011

5.30

157.77

1,620.00

Oct. 27, 2011

4.50

169.55

1,718.00

Nov. 7, 2011

4.22

174.98

1,782.00

Nov. 8, 2011

4.30

173.53

1,795.00

Nov. 21, 2011

4.83

163.50

1,702.00

Dec. 15, 2011

5.43

152.33

1,574.00

Dec. 21, 2011

5.17

157.16

1,608.00

Dec. 29, 2011

5.53

150.34

1,531.00

Jan. 12, 2012

4.84

160.38

1,661.00

Jan. 23, 2012

4.65

163.16

1,675.00

Jan. 24, 2012

4.74

162.01

1,665.00

Jan. 25, 2012

4.43

166.42

1,650.00

Feb. 2, 2012

4.14

171.05

1,751.00

Feb. 6, 2012

4.34

167.18

1,719.00

Feb. 7, 2012

4.22

169.70

1,724.00

Feb. 10, 2012

4.35

167.14

1,711.50

Feb. 17, 2012

4.33

167.35

1,723.00

Feb. 22, 2012

4.05

172.94

1,752.00

Feb. 23, 2012

4.08

172.23

1,777.00

March or late Spring ?

4.00 to $3.50

2,100.00

?

7.04

1,300.00

The DZZ is designed to move up 2% for every 1% decline in the price of gold. Extrapolating from the table above, should gold run to $2100 per ounce, the DZZ should move downward to $4.00 and below range depending on the pattern or number of days it takes gold to hit $2100 per ounce and if any premium bias builds into the downside pricing of the DZZ. Depending upon the time required for the price to collapse to the $1300 range and whether or not a price premium builds into the DZZ, the upside potential ranges from $7 to $9 which can deliver a 76-125% gain.

Caveat: This scenario also depends upon Deutsch bank remaining solvent and not closing out the ETN, and Germany and the EU not restricting short selling of Gold. Bottom line, this trade is not for novice investors but for speculators only that believe the price of gold will collapse to the 1200-1300 range sometime this spring or summer as the European recession heats up. The catalyst for gold moving up to the upper range will be the announcement of the ECB and the IMF to turn on the easy money spigot. The collapse will soon follow.

Caution: The literature on leveraged short ETNs and ETFs cautions that these funds should not be held for long periods of time, basically not longer than a day or a few days. I personally disagree with this, but then again, I'm playing with my money, not yours. My disagreement lies with the fact that as the commodity (in this case, gold) hits its top, the price fluctuation on the lower side of the DZZ price is worth the risk. At four dollars per share, I am risking the loss of 25% of my investment for every dollar the DZZ moves down. I just happen to like the reverse leveraged ETF and ETN markets better than I do going to Vegas, which has a reputation for keeping 90% of 99% of all gamblers' money. Oh, I didn't mean you. Surely you are in the 1%, right?

Source: Setting Up The Big Gold Short