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.