For most of this year, precious metals exchange traded funds, the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEArca: IAU) and ETFS Physical Swiss Gold Shares (NYSEArca: SGOL) have been soaring, but gold and the related ETFs have recently come under pressure, prompting some market observers to speculate the yellow metal could see more near-term downside.
Gold has enjoyed greater demand in a low interest-rate environment as the hard asset becomes more attractive to investors compared to yield-bearing assets. However, traders lose interest in gold when rates rise since the bullion does not produce a yield.
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However, there is some momentum for a Fed rate hike before the end of this year, which could weigh on gold and other commodities. Gold and other commodities are denominated in dollars, meaning that when the greenback strengthens, commodities are vulnerable.
“A stronger U.S. dollar, hitting its highest level in nearly two months, weighed on gold, coming as rising expectations of a Fed interest rates rise. The dollar index closed slightly higher Tuesday for its third positive session in four,” reports CNBC.
Risk-tolerant traders can profit from a gold retreat with inverse ETFs.
For instance, the ProShares UltraShort Gold (NYSEArca: GLL) provides a two times inverse or -200% daily performance of gold bullion. Alternatively, ETN options include the DB Gold Double Short ETN (NYSEArca: DZZ), which tries to generate the twice inverse or -200% return of the daily performance of gold; 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.