Short-Seller’s Guide To GLD

May 23, 2012

Gold, despite its recent rebound, has gotten clobbered over the past three months.

Many people are calling for the end of the secular gold bull market that started at the beginning of the last decade.

But even if you don’t think gold’s impressive run is over—up more than 600 percent since the bear market bottom in 2000—you may believe it’s due for a further correction.

Either way, if you don’t have the guts or the capacity to short GLD outright, you have options.

Luckily, there are three products on the market that give you inverse exposure to the yellow metal.

The PowerShares DB Gold Short ETN (NYSEArca: DGZ), the PowerShares DB Gold Double Short ETN (NYSEArca: DZZ) and the ProShares UltraShort Gold ETF (NYSEArca: GLL) all provide inverse exposure to GLD, albeit in different ways.

DGZ is the only one of the three that gives you unlevered inverse exposure to GLD.

DZZ and GLL, on the other hand, provide two times the inverse exposure to GLD. Further, DZZ and DGZ are ETNs, while GLL is an ETF.

That means DGZ and DZZ, which are backed by Deutsche Bank, are exposed to the credit risk of the issuer. In addition, DGZ and DZZ are reset on a monthly basis as opposed to GLL, which is reset on a daily basis.

In other words, GLL only promises its double leverage every day, whereas DGZ and DZZ promise to provide their inverse exposures on a monthly basis.

So which approach is better?

Well, as always, it depends —on the market, the trend and to some extent, the volatility of GLD.

Let’s take a look at how well these funds have delivered on their promises recently.

Here we have a chart of all three funds and GLD since Feb. 28, when gold began its most recent decline.

3-mo Performance of GLD & Inverse Funds

As you can see, GLD has lost more than 12 percent over the past three months, and the three inverse funds have actually provided better returns than you would expect.

In the case of DZZ, this outperformance has been the most pronounced. Why? First and foremost, the decline in gold has been orderly and efficient. It has fallen steadily and without significant volatility.

That type of trending market is the exact recipe for success in leveraged and inverse funds, even those that rebalance monthly.



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