Gold’s recent sell-off has been nothing less than spectacular. Over the last week or so, prices for the precious metal have plunged nearly 12%, and touched lows not seen in the last two years. This certainly has stung many gold-bug portfolios, and it definitely came as a surprise. Since 2001, gold prices have surged more than 600% as sovereign bond risk and rock-bottom interest rates have taken hold.
However, the recent improving financial landscape and macroeconomic picture over the next few years seems to have taken the wind out of gold’s sails. Given the improving environment and investors preference for stocks, the golden play over the next few months could actually be to short the precious metal.
Lowered Price Targets
Gold prices’ bull-run lasted about a decade -from 2001 to 2011- when prices hit a peak of $1,900 per ounce. Since reaching that historic mark, however, gold has fallen about 22%, and there is no sign of an end to the carnage.
Much of gold’s appeal stemmed from all the global macroeconomic problems facing the world. After all, the precious metal is seen as a “port in a storm” and all the debt, austerity and slowing developed market growth can certainly be seen as an approaching hurricane. So it’s no wonder why investors have embraced gold and funds like the SPDR Gold Shares (ARCA:GLD), stocks of mining companies and even gold coins have crept into a variety of retail investors’ portfolios.
However, it seems like a lot of those negatives haven’t come to fruition.
Recent bullish employment numbers, rising consumer confidence and lower inflationary pressures have all been gold’s undoing. Additionally, the strength in the U.S. dollar and treasury bonds as the “best house in the bad neighborhood” have caused gold to see price declines. Since reaching its peak per ounce price, the U.S. dollar index (USDX) has appreciated almost 50% against gold over the past 2 years. Even Europe’s recent debt woes and the issues in Cyprus barely budged gold prices.
Then there is the coming end to the Federal Reserve’s quantitative easing programs. The Fed has basically telegraphed that it plans to slowdown the pace of its $85 billion worth of scheduled asset purchases in the second half of the year. Some analysts have even speculated that the Fed will end the program early. This, plus weak gold demand from nations like India and China, along with increasing appetite for equities over commodities has many now believing that gold’s record bull market has finally ended.
As such, a variety of investment banks have reduced their forecasts for gold prices over the next few years. Goldman Sachs (NYSE:GS) reduced its target to just $1270 per ounce by the end of 2014, while Societe Generale expects it to average $1500. There has even been some class from analysts that gold will break a thousand dollars and settle at $800 per ounce.
Time To Go Short
Given the headwinds facing gold, investors may want to short the precious metal. Shares of the two biggest funds in the sector- The SPDR Gold and iShares Gold Trust (ARCA:IAU) –are available to borrow. However, an easier way could be by using one of the dedicated short gold exchange traded funds (ETFs) now available.
The biggest of which is the ProShares Ultra Short Gold (ARCA:GLL). The ETF is designed to deliver twice the daily inverse return of gold bullion prices. With more than $100 million in assets and with nearly a 330,000 shares trading hands daily, the fund is the most popular choice of investors looking to short gold. So far it’s up about 26% this year as gold has fallen.
For those investors not wanting the leverage that comes with GLL, the PowerShares DB Gold Short ETN (ARCA:DGZ) can provide the same effects. However, the gains- and potential losses- will be muted.
With production costs rising, the miners of the precious metal have been forced to deal with shrinking profit margins. That fact has been exacerbated by the falling gold price. As such shares of gold producers like Barrick (NYSE:ABX) and Newmont (NYSE:NEM) have imploded over the last few weeks. To that end, shorting the various mining stocks could also make sense. The Direxion Daily Gold Miners Bear 3X Shares (ARCA:DUST) provides a leveraged way to short the popular Market Vectors Gold Miners ETF (ARCA:GDX). Like GLL, DUST has surged as the price of gold has dwindled.
With the improving global macroeconomic picture taking some of the luster away from gold, investor enthusiasm for the precious metal has been falling by the wayside. For portfolios, that could mean it’s time to get short the metal. The previous ETFs along with the VelocityShares 3x Inverse Gold(ARCA:DGLD) make it easy for investors to do just that.
At the time of writing, Aaron Levitt did not own shares in any of the companies or funds mentioned in this article.