Gold attracts investors during economic uncertainty because its value is not influenced like other commodities. However, there are instances when investors may believe that the gold and oil price forecast is ready to drop, and they can profit from this guesswork. This is where Short Gold ETFs come into play.
What is a Short Gold ETF?
A Short Gold ETF is focused on providing returns inversely interrelated with gold performance. In simpler terms –
- When the price of gold falls, the value of a Short Gold ETF rises
- When the price of gold rises, the value of the ETF declines
The ETF issuer achieves this inverse correlation through the use of financial derivatives and other strategies.
How Do Short Gold ETFs Work?
Short Gold ETFs use various financial instruments to achieve their inverse coverage to gold prices. Here is how short gold ETFs work:
- Derivative Contracts: Derivative contracts like futures or swap agreements are designed to move in the opposite direction of the existing gold price. For instance, if gold is expected to decline, the ETF issuer might use a futures contract to profit from this drop.
- Daily Rebalancing: Short Gold ETFs are designed to deliver daily returns. To achieve this, the ETF undergoes daily rebalancing. This means that the ETF’s exposure to gold and the related derivatives is adjusted daily to maintain the desired inverse correlation.
- Leveraged and Inverse ETFs: Some Short Gold ETFs are leveraged or inverse leveraged, aiming to provide multiple times the inverse daily returns of gold. For example, a 2x leveraged Short Gold ETF seeks to provide double the inverse return of gold for the day.
Advantages of Short Gold ETFs
- Hedging: Investors can use Short Gold ETFs to hedge their portfolios against potential decays in the gold price. It is a valuable strategy for investors during economic downturns or when they have significant exposure to gold-related assets.
- Diversification: Short Gold ETFs offer an opportunity for portfolio diversification. They help to offset traditional gold investment, such as owning physical gold or gold mining stocks, which often move in synch with gold prices.
- Intraday Liquidity: Short Gold ETFs are transacted on stock exchanges all through the trading day. It offers liquidity and flexibility for investors to enter or exit their positions based on market conditions changes.
- Cost-Efficiency: ETFs typically have lower expense ratios and do not require investors to post margin. Therefore, shorting gold through ETFs is often more cost-efficient than other methods like futures.
One of the best gold trading tips is to pay close attention to the factors that drive the price of the yellow metal. You can learn more about the factors influencing gold prices on VSTAR, a brokerage platform that even offers exclusive educational resources.
Disadvantages of Short Gold ETFs
- Compounding effects can lead to deviations from expectations, especially in volatile markets
- Not Suitable for Long-Term Holdings because it can result in losses due to the compounding effects and daily rebalancing
Wrap up
Short Gold ETFs are a powerful tool for investors. They can profit from or hedge against potential declines in the gold price. There are risks which some investors may be uncomfortable with. So, do your due diligence. If needed, consult with a financial advisor before incorporating short gold ETFs into your investment strategy.
