Protect your gold investments from price declines

Posted on Posted in Gold articles, Investments, IRA

There are many ways to protect your investment if gold declines. You could buy a put option on a gold futures contract or you could buy an ETF Proshares UltraShort gold fund (ticker symbol – GLL). The Proshares UltraShort  Gold seeks a return that is -2x the return of a benchmark (target) for a single day as measured from one NAV calculation to the next. The benchmark is the 15.00 time fixing of the London Bullion Market Association (LBMA) gold price. The LBMA Gold Price is set twice a day, at 10.30 and 15.00 London time.

Some common uses for inverse funds are:

  • To hedge against declines
  • To profit from declines
  • Underweighting exposure to a market segment

On September 8, 2017 the gold price hit a high of $1,358.50 per oz. and then declined to a low of $1,277 per oz on September 28, 2017. During the same time period Proshares UltraShort Gold increase from a low of $90.990 to US$93.495.  If you had purchased GLL you could have made $2.50 per share, while gold declined $8.15 per oz over the same period. Obviously you would have to balance the number of GLL shares purchased to cover the amount of gold hedged. By doing this hedge, there would be no need to liquidate your physical gold holdings. The correlation between gold and GLL is -0.994. This means that as gold declines, GLL will increase and as gold rises, GLL will decline.

Proshares Ultrashort Gold should lose value when the market benchmark rises. This is opposite from traditional ETFs. The fund invests in financial instruments linked to the performance of commodities such as swap agreements, forward contracts, futures and options contracts. Futures trading involves a substantial risk of loss. Some of the financial instruments will also have counterparty risk and credit risk which could result in significant losses to the fund.

In general if you are a long-term investor, you should consider diversifying your investments globally into several asset classes, one of which should be physical gold.

The information provided in this blog is for educational purposes only. No advice is given to buy or sell any security.

Below is a price chart of cash gold.

Gold declined from a high of $1,358.50 on Sept. 8, 2017  to a low of $1,277 on Sept. 28, 2017.

Below is a price chart of Proshares UltraShort Gold  (Ticker symbol: GLL):

GLL rose from a low of $90.99 on Sept 8, 2017 to a high of $93.495 on Sept 28, 2017.

Gold and GLL are negatively correlated. The correlation is -.994.