The decade-long bull market in gold began to crumble two years ago and now the metal appears to be in the early stages of a long-term bear market.
Friday, the price of the yellow metal is falling another two percent as it hits a three-month low. There are rumors the sudden drop this morning was caused by one large trade of 5k gold futures contracts.
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Whether the rumor proves to be true is not relevant. What is important is that the long-term and short-term trends are bearish and that investors must prepare for lower prices.
The Gold ETFs
The two most popular gold ETFs are the SPDR Gold Trust ETF (NYSE:GLD) and the iShares Gold Trust ETF (NYSE:IAU). The ETFs are designed to track the day-to-day movement of the price of gold bullion; the shares are backed by physical gold. Each ETF is down 11 percent in the last six weeks and are also hitting a three-month lows.
If the ETFs continue the downtrend and retest the multi-year low set in late June they will have to fall another six percent. This may sound like a big move lower, but it may only be the start of a much deeper drop for the gold ETFs.
Looking at the charts and the amount of money coming out of gold, it would not be a stretch to see the precious metal fall another 20 percent if the June low is breached. This would not happen overnight and it would not be a straight line down, however it is very possible.
Inverse Gold ETNs
Investors that agree with the synopsis above regarding the likelihood of a further drop in the price of gold could consider profiting from the move. There are a number of ETFs that will gain in value as the price of gold decreases and vice versa. The PowerShares DB Gold Short ETN (NYSE:DGZ) is designed to provide investors with 100 percent of the inverse of a gold futures contract.
For example, since August 27, DGZ is up 11.4 percent and GLD is down 10.6 percent. The returns are not always exactly the inverse, but typically they are close.
The aggressive trader that likes to push the envelope could consider the PowerShares DB Double Short ETN (NYSE:DZZ) that will seek to return 2x the movement of a gold futures contract. From 8/27/13 the ETN is up 24 percent. The leveraged ETN is only for the experienced trader that knows how to properly use the vehicle. If not used in the correct manner it could lead to major losses.
Keep in mind that a long-term trend has many peaks and troughs throughout the time the trend plays out. The current downtrend in gold will have rallies in the future, but as long as the overall trend remains lower the best strategy is to not own the metal or have a short position.
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