Gold bullion prices are making headlines every day as volatility in the yellow stuff continues. Just three months ago, gold prices bottomed out at around $1,050 in February and now we are once again pushing $1,200 an ounce for the precious metal. Not surprisingly, the investment continues to garner attention as gold bullion investors ask the question, “Is gold going lower, or are gold prices going higher?”
Unfortunately, the investment opportunity around gold in the long-term is still very unclear. So the real question gold investors should ask is how volatility of gold bullion prices in the short-term can create profits — and the answer to that question is to play a leveraged inverse ETF. Specifically, investors can bank on a brief correction in gold via the ProShares UltraShort Gold (GLL) exchange traded fund.
Here’s how: As an inverse ETF, ProShares UltraShort Gold moves up as gold bullion prices move down. Also, as a leveraged ETF, the GLL fund moves twice as much as gold prices. So if the yellow metal goes up 5%, the GLL ETF moves down 10%. If gold prices go down 10%, the GLL ETF goes up 20%. You get the idea.
Back in February, gold took a big hit when the Federal Reserve announced it was lifting the discount rate. After pushing briefly above $1,200 an ounce at the beginning of December 2009, the yellow stuff slumped over 12% in two months to a low of around $1,050. That means this leveraged inverse ETF has lost 25% of its value since February as gold has moved up. But it also means if gold gives that 12% back, investors who buy in now will make 25% profits in a hurry.
Gold is now cruising under $1,200 again — indicating that the yellow stuff may have hit a ceiling once more. Even after Thursday’s brutal day in the stock market gold was still losing ground slightly, showing investors aren’t as nuts over the metal as they were at the height of the euro zone crisis recently. That means a further slide is likely in the works — at least for the next few weeks or so — barring any disasters.
When gold went haywire in February this year, the GLL ETF hit an intraday high of almost $56 a share (adjusted to reflect an April 5 to 1 split). But as gold prices increased, this inverse ETF lost ground. Now, the fund is in the $42 range. Because this UltraShort ETF is a leveraged inverse fund, it plays the decline twice over — meaning the 25% drop-off for GLL prices happened amid only about a 12% drop in gold prices.
If gold makes a move back down 10% or 15% to $1,050 an ounce or even $1,100 in the coming months, we can expect the GLL inverse ETF to behave just like it did in February – surging upwards twice as fast to deliver investors a 20% or 30% profit in a matter of weeks.
If you’re a permabear gold bug who is expecting gold to hit $2,000 an ounce, obviously this strategy isn’t for you. But if you’re looking for a short-term way to play gold’s volatility without worrying about the long-term trends, this leveraged inverse ETF may be for you.
Even if you want to focus on the negatives and look for reasons that gold is the only investment worth buying, you had to admit that if traders aren’t buying more gold now after about a 10% drop in the broader market in May, they likely will have even fewer reasons to buy in later this year. The elephant in the room, as in February, is that the Federal Reserve has to address rock-bottom rates eventually. That could cause investors to flee gold and pursue other low-risk investments that now offer attractive returns.
Anyone who says they have their finger on the long-term fate of gold is full of it. Gold can rise very quickly and it can fall very quickly, making predictions difficult. So rather than base your gold strategy on the fuzzy future forecast, bank on the short term by shorting gold with the GLL ETF. It’s not a sure thing, but most signs point to a continued slide in gold for the short term – and that means profits for this leveraged inverse ETF.
As of this writing, Jeff Reeves did not own positions in any of the stocks or ETFs named here.
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