Short Gold ETF

What Is a Short Gold ETF?

A short gold ETF is an exchange-traded fund (ETF) that seeks to profit from a decline in the price of gold. Short gold ETFs are also known as inverse gold ETFs, or gold bear ETFs.

In some cases, short gold ETFs will offer additional leverage to investors, such that a given decline in the price of gold would translate to an even greater increase in the value of the ETF—and vice versa. These are known as leveraged short gold ETFs.

Key Takeaways

  • Short gold ETFs provide a convenient way to bet against the price of gold.
  • Gold often rises in times of economic uncertainty, such as in the midst of financial crises. Therefore, short gold ETFs can be useful for contrarian investors who believe that other investors may be overestimating the risks faced in those periods.
  • Some short gold ETFs also offer additional leverage, which would maximize the potential gains or losses incurred on the position.

Understanding Short Gold ETFs

As with all ETFs, short gold ETFs are investment products that are traded on the public stock exchange. By investing in a short gold ETF, the investor gains exposure to a security whose market price is engineered to follow the opposite pattern as the market price of gold itself. For example, if gold increases by 10% in a given trading day, the short gold ETF would theoretically decline by 10%. Likewise, if gold decreases by 10%, the short gold ETF would increase by the same amount.

Although ETFs are generally highly accurate at tracking their underlying assets or indexes, there is no guarantee that they will necessarily be successful in doing so. In fact, it is common for ETFs to have some small amount of inaccuracy, which is commonly referred to as the ETF's tracking error. In addition to looking for ETFs with low fees, investors should also consider how low their historical tracking errors have been.

Depending on the provider of the short gold ETF, the exact methodology used to produce the product could vary substantially. For instance, some providers might link the short gold ETF to an ETF that is long gold, such as the popular SPDR Gold Trust (GLD). Others might link the short gold ETF to gold mining stocks or to a specific subset of gold futures contracts. Here again, it is important for investors to understand the methodology used to calculate the product's daily market prices.

Real-World Example of a Short Gold ETF

Historically, investors have tended to invest in gold at times of heightened financial anxiety, such as during the midst of a credit crunch or financial crisis. In other times, demand for gold can be spurred by concerns over inflation. In the years following the 2007–2008 financial crisis, for instance, the price of gold increased substantially in part due to fears that the government's expansionary monetary policy might cause the value of the U.S. dollar (USD) to decline.

Of course, there will always be investors who wish to bet against the tide. Products such as the short gold ETFs provide a convenient way to take a contrarian position without needing to incur the transaction, financing, or holding costs associated with directly short selling the assets in question. 

For such investors, there are many potential options available. By way of example, the DB Gold Short ETF (DGZ) seeks to provide returns that are inversely related to the average monthly performance of gold.

Other securities, such as the VelocityShares 3x Inverse Gold ETN (DGLD), have the same objective but also provide leverage to maximize the potential return. Of course, if the price of gold increases during the holding period, then the losses incurred from holding a leveraged ETF would also be maximized.

Article Sources
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  1. U.S. Bureau of Labor Statistics. "Gold prices during and after the Great Recession," Page 2. Accessed Jan. 18, 2021.

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