DEFINITION of 'Reverse Gold ETF'
Exchange traded funds that are designed to trade in a direction that is diametrically opposite to gold bullion. Reverse gold ETFs, or inverse gold ETFs as they are better known, are generally used by investors to hedge against a downward move in gold prices, or by speculators to execute a bearish trade in gold. They typically deliver the inverse of the daily return of physical gold; leveraged inverse gold ETFs deliver a multiple (2x or 3x) of the daily inverse return of gold.
BREAKING DOWN 'Reverse Gold ETF'
Inverse gold ETFs enable retail investors to take a bearish view on gold with limited amount of capital. For example, an investor who wishes to hedge $5,000 of gold exposure can buy an inverse gold ETF. Assume the ETF units are trading at $10, so the investor buys 500 ETF units. If the price of gold falls by 4% the next day, the ETF units should trade 4% higher, or around $10.40. The increase in the value of the inverse ETF units thus offsets the decline in the investor's gold stocks portfolio.
Since their performance depends on the daily return of gold, inverse gold ETFs - like all such ETFs - may underperform during periods of heightened volatility in gold prices.