A short gold ETF is an exchange traded fund that bets on the inverse price of gold in the sense that falling gold prices result in inverse gold ETFs profiting and vice-versa.
Why Would Investors Choose Short Gold ETFs?
Investing in a short gold ETF naturally acts as a defense against deflation. In times of poor credit market conditions and general economic crisis, deflation, meaning falling prices becomes a very real worry.
Inflation tends to lead to higher gold prices since amongst others, central banks will increase holding to combat said inflation, thus demand for gold increase. The flip side of course is devaluation leading to falling gold prices.
Credit Crisis Providing Vivid Example
It is no secret that the US, and most of the world’s, economy has been in serious trouble the last couple of years. In October 2008, worries of credit crunch, depression, and deflation, positively overwhelmed the New York Stock Exchange. The result provides a vivid example of why investors would choose to invest in a short gold ETF. US gold ETFs dramatically fell, in just two weeks one leading gold ETF saw its value diminished by a whopping 20 percent. Those two weeks, holding shares in
a standard gold ETF was no fun at all, while short gold ETF holdings were, indeed, golden.
The Outlook for 2010
Will investing in a short gold ETF be sensible this year? It all depends on your predictions. To combat the falling growth of gross domestic products, governments around the world has implemented significant fiscal expansions. These measures trying to revive the economy, traditionally drives up inflation. However, due to credit markets still in trouble, deflation or at least a falling inflation rate is still a possibility.
Whether you want to invest in a inverse gold ETF depends on which effect you think will dominate.
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