Time For An Inverse Gold ETF?

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June 19, 2007 | ETFs | | Author Asif

A reader recently asked me if I was aware of an ETF or fund that was the inverse of Gold. Inverse ETFs such as the ProShares Short Dow 30 (DOG) that I mentioned in a blog post titled One DOG Of An ETF, allow investors to short an index such as the Dow Jones, a sector such as real estate or a specific category of stocks such as small-cap growth. You can check out the entire list of ProShares short and ultrashort (twice the bang due to the use of leverage) ETFs here.

So why would someone want an inverse ETF such as DOG when you could just as easily short traditional ETFs? These ETFs allow investors to take a bearish or short position in retirement accounts such as IRAs or Roth IRAs that do not allow short selling. These ETFs can also be used in brokerage accounts that are not approved for margin. In the case of the ultrashort ETFs, they allow investors to use more leverage than the 50% margin possible in retail brokerage accounts, maginfying both the risk and the reward.

With this short explanation out of the way, I can now get back to the question at hand. While I am not aware of an ETF or fund that is the inverse of Gold, there may be a couple of indirect ways to achieve some of the effects of an inverse Gold ETF. One could invest in an asset class that is uncorrelated to Gold, such as stocks, which have traditionally gone up when Gold goes down. Unfortunately these traditional relationships between asset classes seem out of sync over the last few years and it is quite possible to see the price of stocks and commodities go up or down at the same time.

As you can see from this Merrill Lynch research report (pdf) by Richard Bernstein  and Kari Pinkernell, the 5 year correlation of the S&P 500 and gold went from a negative 24% in early 2000 to a positive 8% by 2007. The global economy we live in has created a global market where all boats appear to rise together or sink together, providing precious little protection in case of a downturn unless you happen to be in cash or bonds.

The other indirect alternative to an inverse gold ETF would be to invest in the ProShares Ultra Short Basic Materials (SMN) ETF that is based on the Dow Jones Basic Materials Index. As you can see from the components of this index (excel), it has at least four gold mining companies and some of the other components may be correlated to the price of gold. I am personally long Gold but with central banks dumping gold and keeping a lid on prices, the benefits of an inverse Gold ETF are evident and I would not be surprised if one is already in the pipeline awaiting approval. If not, I certainly hope one of the major ETF providers PowerShares (a unit of Invesco) (IVZ), WisdomTree (WSDT.PK), State Street (STT) or Barclays (BCS) is listening.




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Comments

  1. howard adler
    June 27th, 2007

    Since gold tends to be inversely correlated with the U.S $ , a comparable trade would be to use a long dollar (U.S.) ETF to gain when Gold is declining. Power shares offers both long and short $ ETF’s. Symbol UUP Bullish $ and UDN Bearish $

  2. Asif
    June 27th, 2007

    That is an interesting thought Howard. Looking at a 6 month comparison chart of streetTracks Gold Shares ETF (GLD) and PowerShares DB Dollar Index Bullish (UUP) does show an inverse correlation but not too a great extent. I guess looking at a longer period of time would provide a better picture.

    Gold has appreciated 50% over the last two years but the dollar has dropped almost 10% against the Euro in the same time period. So you are right that going long the dollar would be an alternative strategy to shorting gold.

  3. Anis Haroon
    June 28th, 2007

    The two Indian gold ETFs have not lived up to the fanfare with which they were introduced earlier this year. The charts of GOLDBEES and GOLDSHARE tell the story.

    While there was some apprehension whether the ETF way of investing in Gold would work in India (which by the way is the world’s largest Gold market) because of the traditional link to buying Gold as an asset (this point is well articulated here), the number of investors has increased to 25,000. I wonder if its time for an Inverse Gold ETF in India. 

  4. howard adler
    June 30th, 2007

    "Market analysts have long understood the impact of rising commodity prices and its impact on rising inflation, which in turn puts upward pressure on interest rates.  Commodity prices and interest rates are influenced by the direction of a country’s currency.  Because global commodities are quoted in U.S. dollars, the direction of the dollar has an influence on the direction of global commodity prices like gold.  A falling currency usually gives a boost to commodity prices quoted in that currency.   This is basic intermarket analysis, however the correlation relationship is not 1:1, and certainly won’t be for an isolated 6month test period.  However the longer term trends do bear this relationship out.  How much of the actual inverse move you capture is subject. It gives traders another choice.

  5. Asif
    July 8th, 2007

    As mentioned in a comment on ETFtrends.com in response to this post, the ProFunds Short Precious Metals (SPPIX) would be another excellent alternative to an inverse Gold ETF and would probably capture the effect much better than ProShares Ultra Short Basic Materials (SMN).

    It should be noted that SPPIX is not an ETF, has an expense ratio of 1.81% and requires a minimum investment of $15,000.

  6. Roger
    January 25th, 2008

    Asif above is correct, except that if you buy it thru a discount trader such as Ameritrade there is no minimum purchase value requirement. You do pay transactions fees.

  7. mumbaikar
    March 1st, 2008

    What do you think about the new ETF from WisdomTree EPI?

    I would love to learn your thoughts about its almost 20% exposure to energy sector.

  8. Asif
    March 5th, 2008

    I think that the India ETF by WisdomTree (EPI) is an excellent product with greater diversification through 150 stocks when compared to the Powershares India Portfolio ETF (PIN) despite a slightly higher expense ratio of 0.88%. It gives me a chance to hedge any long positions I may have in individual stocks but with the Indian market declining more than 4,000 points since early January, I think the opportunity to short may be over in short-term. As I mentioned in the March newsletter, a potential trade I am considering is long Tata Motors (TTM) and Sterlite Industries (SLT) with a short position in either EPI or PIN.

  9. wayne
    April 5th, 2008

    I’m looking to short commodites "aig" in my ira account, but I have to use inverse etf’s. Do you know of any? I can’t find any in the us.

  10. tskreddy
    April 11th, 2008

    Hello Asif,

    I really liked ur TWM (ultrashort rus2k) trade, nice way to hedge against recession.Is there any way to buy puts on indian index as well?
    Also, I have been following your blog for over an year now and I noticed that you hit the bulls eye on all of your  put options.
    I think you should consider more of these ….

  11. Asif
    April 11th, 2008

    Thanks for your kind words tskreddy. It looks like puts for the two India ETFs WisdomTree India Earnings (EPI) and PowerShares India (PIN) exist as you can see from the links below.

    http://finance.yahoo.com/q/op?s=EPI&m=2008-05

    http://finance.yahoo.com/q/op?s=PIN&m=2008-05

    Let me expand upon this response with a full blog entry that I will hopefully post tomorrow.

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