Short Gold ETFs are an interesting investment strategy that take advantage of gold ETF funds that are held by one investor. The theory is why not utilize an asset that is being held. The players in this investment game are the owner of the ETF, the investor or borrower, and the market.
An ETF is an Exchange Traded Fund. A key concept in these transactions is the word Fungible. An example of what Fungible means is as follows. If I borrow your red sweater, it is expected that I will return the same red sweater. A fungible exchange is if I borrow a cup of sugar, you do not expect that I will give you back the SAME cup of sugar. Instead, I am going to return a cup of sugar. This is the basis of a fungible trade. The exchange is identical in terms of the product but not in a physical sense.
Short Gold ETF: How This Works:
The owner of the gold ETF funds allows an investor to borrow their ETF with the expectation that the ETF will be returned in a specified time (plus fee’s etc.) The Investor then sells the ETF that they have just borrowed. Which seems completely odd, but in reality, it is not. The investor plans to buy a similar ETF back at a later date. The goal would be to buy the ETF at a cost that is less than what it was sold for. This is an inverse way of thinking about investments. The glass, in this case, is half empty. Investors who borrow ETF’s are expecting that the value of the ETF will drop. Sell high and buy low is the strategy, but in this case, the time frame is short. Maybe several days or a week. So a volatile ETF could afford a great amount of profit. These investments have an unlimited risk too.
In short: Borrow, sell, hope to buy when the price falls, return investment. This is the ideal that represents this type of short investment. These investments work because the stock market is never consistently high or low. The peaks and valley that represent the price of stocks and ETF’s make this type of short investment possible.
Short Gold ETF: The Market:
The gold market has been red hot of late, and the opportunities that may be available for a short gold ETF can be seen by tracking the daily spot price of gold over a period of time. Trends in the price of gold can show a great deal of potential for the Short gold ETF. The hope is that the daily spot price of gold will fall within the time frame of the ETF borrowing arrangement. The risk is that the daily spot price of gold will not fall but may rise. This means that it will cost the borrower more to buy equal gold ETF funds then if they received when they sold the short gold ETF.
Short Gold ETF – The Price of Gold:
Short ETF works off of the theory that a rising fund will fall or experience a market correction. It is that concept that opens up the door to short ETF’s. Because the price of gold changes daily, the opportunity to make profits using ETFs can be lucrative, but the risk is higher than average. This is because the borrower is working against the clock to recap their investment. If the borrower sells off a borrowed ETF at $1800 and must return a fungible ETF within the next 7 days, then the borrower expects that the spot price of gold is going to drop below $1800 per ounce. If the daily price of gold drops to $1700 then the borrower can repurchase an equal ETF and make a $100 profit for each ounce of gold that was sold. If there were 1000 shares in this transaction then the borrower profits a very crisp $100,000. If the borrowed gold ETF funds price drops to $1789 and the borrower buys an equal ETF then the borrower has made $11,000. If the borrower sells the 1000 shares at $1800, and the price of gold does not fall, but instead rises to $1810, then the borrower has lost $10,000. He has lost money because he must return an equal ETF to the owner from which he borrowed the ETF. Because the price of the gold ETF fun did not fall, he has lost money on this investment. This is how the price of gold can affect the risk of ETF and short ETF trading.
The short gold ETF can be lucrative, but the risks are potentially high. It is very important to know when to sell a short ETF and when to repurchase the ETF. This means that an investor who is interested in these types of short ETF’s must consider the spot price of gold. Consideration should also be give to the costs associated with selling and buying ETF’s. The associated costs should play into the decision about whether or not it is wise to use this investment strategy. Gold ETF funds can be found through the exchange or brokers. With all investments, risk is a paramount concern, in short ETFs the risk is typically higher and as such, should be carefully considered. The practice of short ETF trading has grown in popularity, but that has not lowered the risk of these investments. The ferocious trends in gold have led to an investment mecca. Investors who are interested in these types of investments should consult a couple of different brokers for details about their programs. The criteria may change from broker to broker.