What is a Short Gold ETF

A short gold ETF is an exchange-traded fund which seeks to profit from adverse changes in the price of gold. A short gold ETF may also be called an inverse gold ETF or a gold bear ETF. 

In contrast, a Gold bull refers to an investor who believes the prices of gold bullion and gold futures will fare well, and invests accordingly. 

BREAKING DOWN Short Gold ETF

Short gold ETFs use futures contracts to gain exposure and provide a synthetic short position in gold bullion. Each day, the price of a short gold ETF is adjusted by -100% of the daily-percentage change in the cost of gold. Also, the gold price of a short gold ETF may have a basis on the value of a gold index, physical gold, gold futures contracts, or gold mining stocks. Investors would buy a short gold ETF if they expect the price of gold to decline. 

Some investors recalibrate their investments in the face of uncertain or volatile markets, favoring gold in lieu of stocks or bonds. Historically, gold has a low-positive or low-negative correlation to traditional asset classes. Gold tends to maintain its value in the midst of market volatility and is used by some investors as a hedge against influences like inflation or a fluctuating economy.

For these reasons, gold has frequently been considered a safe investment. Some investors, though, may take a contrarian approach and wager against gold by going short. 

Strategies for Trading in Gold ETFs

When optimism and strong economic growth predominate market environments, and when investors have a robust appetite for equities, may be an excellent time to consider a short gold ETF. Conversely, if investor sentiment turns pessimistic, increasing the demand for safe-haven trades like gold and other commodities, it is unwise to invest in a short gold ETF.

The ETF strategies allow investors to trade short-term tactical opportunities. However, these products are more suitable for those with a high-risk tolerance.

  • Short gold ETFs can have significant variations in the amount of leverage, also known as magnification, which they carry. This magnification amount is included in their descriptions and appears as -1x, -2x, or -3x. 
  • Inverse ETFs use derivatives as they seek to profit from a decline in the underlying asset. These inverse ETFs typically rebalance on a daily basis. 

Traders should understand that inverse and leveraged products are not suitable for long-term buy-and-hold investors. The compounding effects of the daily rebalancing create divergences from the ETF’s performance to that of the underlying index. This deviation is unusually wide during periods of high volatility.