September typically is a volatile month for stocks, and historically, one of the beneficiaries has been gold prices. In fact, during the past 20 years, gold has climbed more in September than during any other month.

However, this year the seasonal effects of September could face some serious headwinds — specifically, from strength in the U.S. dollar.

Gold Prices – A September to Forget?

Click to Enlarge Gold prices usually climb in September because, among other reasons, investors are looking for a safe haven for volatility. Gold prices have increased in value 75% of the time in September over the past 20 years, rising by an average of 2.9%. The largest improvement during that time was a whopping 17% climb in 1999 during the month.

Despite the strong seasonal tendency for gold prices to rise in September, this year could prove to be different especially if the dollar continues to gain traction.

Gold is priced in U.S. dollars and traded throughout the globe like a currency versus the U.S. dollar. If you were interested in purchasing gold prices by using another currency  — say, the euro — you would need to convert your euros into dollars to transact gold at the most liquid prices. Thus, if the dollar moves higher, gold prices will naturally move lower.

And a number of recent events should give you an idea about where the dollar might be heading from here.

On Thursday, the European Central Bank cut its refinance interest rates on the levels that banks can lend to one another, and also cut the deposit rate. The refinance rate is now 5 basis points, while the deposit rate was dropped to -20 basis points. This means that if European banks actually want to deposit money at the ECB, they will need to pay 20 basis points on every euro they deposit at the central bank.

Besides surprising market participants with a rate cut, the ECB described non-conventional monetary policy easing measures they plan to initiate in October. The bank will begin to purchase asset-backed securities and covered bonds in an effort to increase credit, and generate enough liquidity to spur on growth and stimulate inflation.

The combination of all of these measures erodes the value of the Euro and increases the relative value of the dollar.

Meanwhile, the dollar declined nearly 12% from the start of the Federal Reserve’s announcement of an open-ended bond purchase in September 2012 to the announcement of the unwinding of the program in March 2014 — and thus could see a similar appreciation on the back of that.

The dollar also has been buoyed by stronger-than-expected U.S. economic data. Over the past week, the ISM non-manufacturing survey rose to 59.6 compared to the median 57.5 expected by economists. Business activity rose to 65 from 62.4, while new orders rose to 63.8 from 64.9. The employment subcomponent rose to 57.1 from 56. The August ISM manufacturing report jumped to 59 from 57.1 in July, which is the highest seen since July 2004.

So … if the dollar is likely to rise, and if gold prices will in turn fall, how can you take advantage?

The most direct way to speculate on declining gold prices on the open markets is to purchase an ETF that rises in value as gold prices fall.  Alternatively, you could short a gold ETF that holds gold futures and bullion. (I like to focus on ETF’s that focus solely on gold prices as opposed to gold miners, as the value of mining stocks are a function of the price of gold as well as their own business operations.)

Two ETFs that move higher in value if gold prices decline are the ProShares UltraShort Gold ETF (GLL) and VelocityShares 3x Inverse Gold ETN (DGLD). The GLL looks to deliver returns that are two times the inverse return of the daily performance of spot gold prices. The DGLD attempts to replicate the returns that are three times short exposure to the daily performance of the S&P GSCI Gold Index Excess Return, an index tracking Comex gold futures.

Click to Enlarge GLL recently has recaptured the 200-day moving average, and its next level of target resistance is seen near $95.

If these ETFs are not up your alley, you can short the SPDR Gold Shares (GLD), which reflects the performance of gold bullion. Just remember: To short stocks or ETFs, you must have access to a margin account and a broker that allows short selling.

As of this writing, David Becker did not hold a position in any of the aforementioned securities.