After a series of weak U.S. economic data points, gold bullion and related exchange traded funds look more polished and are trading back above their short-term trend lines. However, a slowly strengthening economy could mean an eventual downfall in the safe-haven asset.
Paul Christopher, head of international strategy at the Wells Fargo Investment Institute, points out that the recent gains in bullion have been supported by weak economic data mostly related to the frigid winter conditions, along with recent lackluster payroll numbers, reports Chris Dieterich for Barron’s.
Moreover, geopolitical concerns and the ongoing Greek financial drama have also helped lift the precious metal.
However, looking ahead, Wells Fargo warned investors of excess optimism as the fundamental picture for gold remains gloomy and recent gains may be “transitory.” Additionally, Christopher argues that the continued strength in the U.S. economy and U.S. dollar will weigh on bullion’s outlook.
“Low inflation, a stronger dollar, and an interest rate hike or two by the Federal Reserve later this year, all imply negative and sustained impacts on the price of gold,” Christopher said in the article. “The U.S. economy is substantially outperforming the economies of Europe and Japan, which should support a stronger dollar and generate persistent downward pressure on gold and silver prices into the end of the year. Low oil prices and slow global economic growth diminished inflation expectations, creating yet another headwind for gold prices.”
Consequently, commodity traders who would like to hedge against a potential dip in gold prices could utilize inverse gold ETFs. For example, the ProShares UltraShort Gold (NYSEArca: GLL) provides a two times inverse, or -200%, daily performance of gold bullion. The Direxion Daily Gold Bear 3X Shares (NYSEArca: BARS) reflects the daily -300% daily performance of gold.
Alternatively, ETN options include the PowerShares DB Gold Double Short ETN (NYSEArca: DZZ), which tries to generate the twice inverse, or -200%, return of the daily performance of gold, PowerShares DB Gold Short ETN (NYSEArca: DGZ), which tries to reflect the inverse of gold price movements, and VelocityShares 3x Inverse Gold ETN (NYSEArca: DGLD), which tries to reflect the performance of three times the inverse, or -300%, daily performance.