Gold’s drop is accelerating on Tuesday morning, with gold futures slicing below key support. Traders have been eyeing the $1,300 level in hopes that gold bugs would show up en mass to defend their turf. Sadly (for bulls at least), said gold bugs have been found wanting in their support defense. On the heels of the breakdown, the Direxion Shares Exchange Traded Fund Trust (NYSEARCA:DUST) is flying high.
DUST is a triple-leveraged inverse gold ETF designed to move 3x in the opposite direction of the daily price change of gold. That means things are about to get uppity if this support breach in the SPDR Gold Trust (ETF) (NYSEARCA:GLD) holds.
Blame for today’s weakness lies in part with strength out of the U.S. dollar. The greenback is staging a breakout bid of its own, topside. The inverse relationship between gold prices and the buck has been relatively firm all year long. Dollar strength has virtually always been a headwind for the yellow metal, and today is no exception. Expect further upside from the U.S. dollar to hamper recovery attempts from the shiny stuff in the days ahead.
The recent range-bound action in gold prices has delivered similar behavior in DUST. Over the past four months, this ETF’s descent has slowly morphed into a trading range. And with today’s surge, a new uptrend seems to be emerging.
The recent turn has also carried the inverse leveraged ETF back above its 50-day moving average for the first time since January.
Bottom line: if you’ve been waiting for signs that DUST was finally bottoming, wait no longer.
The DUST Trade
Unfortunately, DUST derivatives are extremely illiquid. So any and all option ideas are out of the question. Instead, go with a straight purchase. If you think today is just the beginning of gold’s pain, grab shares of DUST.
You might consider waiting for a pullback, however. DUST is already up some 15% here so a one- or two-day dip will certainly provide a lower-risk entry.
As of this writing, Tyler Craig held positions in GLD.