Gold ETFs Rocked By U.S. Dollar Strength

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Includes: DUST, GDX, GDXJ, GGGG, GLD, GLL, GOEX, IAU
by: Christian Magoon

Physical gold ETFs continued to suffer as the EU crisis deepens, sending the U.S. dollar higher in value and gold lower for a fifth straight day. Because gold is denominated in U.S. dollars, gold is worth less as the dollar strengthens.

Last week had been a breather for gold as the U.S. dollar fell in value and physical gold ETFs gained in price. However, this week looks like a continuation of a longer term trend of dollar strength which began in early December. The strength of the dollar, coupled with concern about the demand for gold from key nations like the U.S., China and India, has disintegrated about half of gold's returns for the year thus far.

Here's a performance chart courtesy of stockcharts.com comparing the U.S. dollar to the largest U.S. gold ETF, GLD, over the last 60 plus days.

The U.S. dollar has been outperforming gold of late.

Physical gold ETFs have suffered this week. Wednesday was particularly harsh with physical gold ETFs losing around 2.5% for the day, as the U.S. dollar hit an 11 month high versus the euro.

Gold stock ETFs have predictably fared worse in the last few days as well. The largest gold stock ETF, GDX, lost about 3.5% of its value during trading on Wednesday alone. Here's a chart showing all gold stock ETFs and their performance.

Going forward, it appears there will be more weakness in gold due to negative Euro news, continued demand concerns and investors liquidating gold positions to raise cash going into 2012.

For investors looking to hedge gold positions or even profit from moves downward, the inverse gold ETFs DUST and GLL are tools to consider for a one day position in the market. Both inverse ETFs have different levels of magnification and produced positive returns of 10.4% and 4.9%, respectively on Wednesday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.