Use These Inverse ETFs To Short Gold

Includes: DUST, GDX, GLD, JDST
by: Raging Bull


Gold has seen a bullish year so far.

However, I think its bull runway is nearing its end.

Two inverse ETFs can help active investors take advantage of the situation.

Gold has seen a bullish year in 2017, but for a number of reasons, I think that's not going to last in the immediate future. Now, there are a couple ETFs I want to discuss here. These are the Direxion Shares Exchange Traded Fund Trust (NYSEARCA:JDST) and the Direxion Daily Gold Miners Bear 3X ETF (NYSEARCA:DUST). These ETFs are interesting because they are what's known as an inverse ETF. They attempt to track the inverse of the performance of gold benchmark indices- so when gold goes down, they (are supposed to) go up. Based on my view that gold will see a downward shift in the coming months based on a number of factors that I am going to discuss shortly, I believe these two ETFs are very good places to park my money and ride up as gold falls.

Gold's Bull Run

Gold has maintained its bullish trend in 2017 so far, and continues rising. There have been several reasons such as strong dollar, fed actions and geo-political instability behind such increase in prices. However, despite consistent increase in gold prices for an extended period of time, year 2017 may eventually see some pullback in the price trend, taking some luster off the metal.

The previous year of 2016 was one of the most eventful periods in the history of gold. During the year, various market experts made extremely bullish calls on gold. One of the most upbeat gold expert s out there, Robert McEwen, even claimed that the gold may trade in $1700-$1900 per ounce range by the end of the year. However, gold closed the year at an average price of $1150 per ounce, down by a little over a percent. While gold saw growth during the year, its year-end slump indicated that the metal's decade long bull run may show some signs of lull.

Why I think the party won't last

While 2017 has been kind to gold investors so far, there are several reasons for taking a pause and deliberate about the likely trend for gold prices in 2017. One of the most compelling reason is the recent interest rate hike announced by the Fed.

Prices slumped on the anticipation of interest rate increase and indeed the interest rates were increased by the Fed. Interest rate is one of the biggest catalysts for the amount of money available in the market. With the increase in interest rate, investors are likely to take money away from gold investment, which is generally considered a sterile investment, and park their funds in other more attractive avenues.

After the Fed announcement, gold opened $1225.60 per ounce on the London Bullion Market. The gold prices increased instead of decreasing. However, the rise was mainly due to the fact that the gold had already priced in interest hike and had slumped considerably before the announcement. The Fed also expects to announce a series of interest rate hikes throughout the year and it is not too difficult to anticipate their negative impact on the gold prices.

The increase in gold prices during the previous year was also fueled by political uncertainty. When politicians go haywire, people run for the cover - of gold. Now that the elections are over and the new government seems to be finding its groove, despite some hiccups, it is highly likely that investors would be willing to take their funds away from safe haven investments such as gold. Any such mass action may lead to lower demand and consequently lower price for gold.

However, it is not just U.S. policies which impact international gold prices. Several other international events are also likely to have an impact. Now that the U.K. has formally started its Brexit process, the uncertainty related to the process is expected to dissipate in the coming months. This may further dampen investment in gold, driving down the prices again.

Other factors, albeit not so potent, include the march of the Chinese economy and the actions taken by the Bank of Japan. The Japanese central bank is expected to tweak its interest policy this year, which may impact gold prices. The coming months are likely to provide more clues about the actions expected to be taken by the bank. China, one of the most prominent buyers of gold, is seeing some pullback in its demand for the precious metal. Unsurprisingly, any decrease in Chinese demand for the metal is expected to dampen the international price trend for gold.

Coming back to the U.S., which is arguably the biggest catalyst for international gold prices, the Trump administration is likely to take policy decisions regarding the oil and mining industry. These decisions are expected to provide a boost to these industrial sectors, offering a boost to their production levels. This may further lead to softer gold prices this year.

The Mining sector had been under tremendous pressure in the past couple of years under Obama. Mainly owing to environmental concerns, mining activities were severely curtailed, leading to artificial scarcity of the metal in the market. Once such restrictions are relaxed under the new administration, the market may see higher inflow of the precious metal, easing prices.

Overall, most of the signs are now pointing to more relaxed price trend for gold in the upcoming period. Astute investors are expected to take decisions before the pattern becomes too obvious. Under the current set of circumstances, it is safe to presume that gold prices will see some pullback.

The ETF Option

With this relatively bearish sentiments in view, we would recommend looking at Gold ETFs to take full advantage of coming movements in gold prices. You may look at taking short positions in some prominent ETFs such as the SPDR Gold Trust (NYSEARCA:GLD) and the Market Vectors Gold Miners ETF (NYSEARCA:GDX). GLD is a prime candidate for taking short position in as the ETF is currently trading close to its 52 weeks high of $131.15. This fund tracks the performance of gold bullion price as it holds gold bars, which form near-permanent part of the portfolio, offering a security cushion to the investments.

Similarly, GDX has shown over 16 percent growth this year and is trading mid-way between its 52 weeks high and low of $31.79 and $18.58 respectively. This fund closely mimics the price and yield performance of the AMEX Gold Miners Index, while following passive investment approach. Both the ETFs have shown considerable growth this year so far which coupled with our bearish predictions for the gold prices, depict robust potential for lucrative short position play.

These positions are ideally suited for investors with moderate risk profile. As said before, GDX is follows index approach to investing, which entails lower risk and also offers more economical avenue for investment as such funds do not incur massive transactional costs associated with constant churning of actively managed funds. Additionally, these are vanilla ETFs and thus are easy to understand, making them suitable to even novice investors. Moreover, investors can keep their exposure to gold under check by investing in these funds.

While this strategy is a little risky, I think the eventual fall in gold prices will boost the performance of these short positions. I plan to short both these ETFs and ride the fall in gold.

Disclosure: I/we 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.