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.
- Short gold ETFs can be useful for contrarian investors who believe that other investors may be overestimating the risks faced in those periods.
- Short gold ETFs may offer some level of diversification and cost-effectiveness, especially compared to more traditional or even more niche types of investments.
- 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.
As of December 2023, the price of gold is around $2,027 an ounce. This is comparable to the price at the start of 2022.
Advantages and Disadvantages of Short Gold ETFs
Pros of Short Gold ETFs
Investors turn to short gold ETFs for various reasons. Some reasons include but aren't limited to:
- Protection Against Gold Price Declines: With the use of a short gold ETF, investors may safeguard their portfolios against prospective drops in gold prices. Holding a short gold ETF might help an investor offset losses in other gold-related assets if they anticipate a decline in specific precious metal prices.
- Potentially Profitable Investments: A short gold ETF might produce gains if an investor correctly forecasts a decrease in gold prices. The inverse performance of the ETF will improve when the price of gold declines, enabling investors to profit from the downward trend even if the asset class decreases in value.
- Investment Liquidity: Short gold ETFs are traded on significant exchanges and offer similar liquidity compared to other ETFs in terms of accessibility. Shares can be easily purchased or sold by investors at any time during the trading day, giving them flexibility and accessibility in managing their investments.
- Portfolio Diversification: By including a short gold ETF in a diversified investing portfolio, portfolio diversification may be improved. The dynamics of gold prices might differ from those of other asset classes, and having a short position can offer balance and lessen connection with conventional investments.
- Cost-Effective: ETFs are often more cost-effective than other investment vehicles like mutual funds in terms of fee ratios. For investors looking to access short gold positions without paying expensive management fees, this cost effectiveness may be advantageous.
Cons of Short Gold ETFs
Though investors usually have specific intentions when entering into short gold ETF positions, there are several downsides to consider as well. These downsides may include items from the list below.
- Market Volatility: The ability to short gold through an ETF makes gold prices even more erratic. For investors holding short positions, sudden price movements can lead to substantial losses, particularly if the price of gold abruptly surges. Through the use of leverage, investors may incur larger gains but can suffer larger losses.
- Margin Requirements and Costs: In order to borrow shares from a broker in order to short sell, investors often need to pay margin requirements and interest fees. Some brokers may have similar margin or account requirements for entering into an ETF position. If the value of the short position rises and the position needs more money or collateral to be maintained, margin calls may be triggered. In addition, these more specialized types of investments.
- Limited Diversification: Though diversification was also listed as a pro, shorting gold is a niche investing technique that could not offer significant benefits to diversification. It is frequently concentrated on a single asset class (gold) and would not be able to adequately make up for losses in other areas of the investing portfolio.
- Focus on the Short Term: Shorting gold ETFs is often a short-term trading strategy since it seeks to profit from rapid price changes. It might not be as suited as a primary investing strategy for long-term investors.
Pros
Can hedge against gold prices
May profit from the price of an asset decreasing
ETF may provide greater liquidity compared to other securities
May provide diversification, though might be too niche of an investment
Often is a more cost effective method of shorting (via ETF)
Cons
May experience higher volatility compared to other securities
May incur greater losses should position be leveraged
May have special account and cost requirements compared to buying other forms of investments
May be a short-term strategy but may not be viable as a long-term investment
Examples of Short Gold ETFs
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. Alternatively, those looking for a leveraged situation may invest in ETF such as ProShares UltraShort Gold (GLL).
What Are the Tax Implications of Investing in a Short Gold ETF?
Tax implications can vary based on an individual's jurisdiction and tax laws. Generally, short-term capital gains or losses may apply when investors sell the ETF shares, though it may also depend on the investment vehicle and taxpayer-specific financial position. It's recommended to consult a tax advisor for personalized guidance.
Can Short Gold ETFs Be Used for Hedging Purposes?
Yes, short gold ETFs can be used for hedging purposes. They allow investors to offset potential losses in other gold-related investments by profiting from the inverse performance of gold prices.
Can Short Gold ETFs Be Held in Retirement Accounts?
Short gold ETFs can generally be held in retirement accounts, such as individual retirement accounts (IRAs) or 401(k) plans, subject to the specific rules and restrictions of the retirement account provider.
Do Short Gold ETFs Pay Dividends or Interest?
Short gold ETFs do not typically pay dividends or interest to investors. Their objective is to provide inverse returns to gold prices, and any gains or losses are generally reflected in the ETF's share price.
The Bottom Line
Short gold ETFs are investment vehicles designed to provide inverse or opposite returns to the performance of gold prices. They allow investors to profit from declining gold prices by taking short positions. These ETFs are traded on major exchanges and offer potential benefits such as hedging against gold price declines, potential profit opportunities, liquidity, and diversification benefits.
