Short gold ETPs surge as gold price tumbles amid heavy Monday trading

Jul 21st, 2015 | By | Category: Commodities

The spot price of gold sunk to $1,084 per ounce during Asian trading on Monday, its lowest price since November 2009. The futures market recorded excessively large trading volumes in a short period of time, about 20% of daily volume within a few minutes, causing the price of the yellow metal to sharply drop by 4%. Experts surmise that the timing of the trades indicate a direct desire to influence pricing in the market and likely reflective of a trader attempting to profit from a short position. Investors holding short leveraged ETPs tracking gold were well positioned to profit from the move: the Boost Gold 3x Short Daily ETP (3GOS LN) opened up 6.9%.

Long-gold ETFs tumble amid heavy Monday trading

Gold prices show increased volatility after heavy selling pressures on Monday

Boost ETP, a specialist provider of short and leveraged ETPs, offer a suite of inverse leveraged gold products. These include the Boost Gold 1x Short Daily (1GOS LN), the Boost Gold 2x Short Daily (2GOS LN), and the aforementioned the 3x short gold ETP. The total expense ratios are 0.44%, 0.70% and 0.99% respectively.

Gold prices have only partly corrected since their abrupt fall, and increased volatility appears to be entering the market. “Gold has struggled against a backdrop of global economic recovery and a strengthening dollar, and the recent sell-off appears to have come on the back of the Chinese central bank reporting its gold holdings, which disappointed analyst’s expectations.” reported Laith Khalaf, senior analyst at Hargreaves Lansdown, the FTSE 100-listed financial services firm.

The Greek situation is now relatively stable, at least for the short term; Greece is no longer in arrears and banks reopened this week after a third cash-for-austerity bailout was agreed. Gold, a safe-haven asset, has consequently seen its attractiveness wane.

Expectation of an interest rate hike is also dampening the price levels of gold-linked ETFs. Gold does not pay any income, making its value relatively weaker when yields are pushed higher. Further to this, the US dollar has continued to appreciate against other major currencies due to a divergence in monetary policy between the US and other major developed economies, most notably the EU and Japan. An appreciating greenback makes dollar-denominated gold relatively more expensive for foreign buyers, thereby decreasing demand for the precious metal (equally, the supply and demand dynamics of the global commodity market and its interaction with currencies means the gold price adjusts down accordingly).

On Friday the People’s Bank of China revealed its current gold reserves, its first disclosure since 2009. Although the announcement of 1,658 tonnes represented a 60% increase from 2009 levels, the revelation was far below consensus analyst estimates of 3,500 tonnes, indicating both a higher external supply available as well as lower forecast demand from the national bank. Gold ETFs traded down on the news.

Not all analysts are defeatist regarding a future gold recovery, however. Louis James of Casey Research points to the fact that the sharp decrease “belies the rosy picture of economic recovery driving the markets. And that makes a sharp reversal [in gold] a distinct possibility. I see the current meltdown as a buying opportunity.”

Investors who are optimistic about a gold recovery may consider the ETFS Physical Gold ETF (PHAU LN). The fund is backed by physical allocated gold and has AUM of over $3.8bn. The total expense ratio is 0.39%. Among the leveraged products available are the Boost Gold 2x Leverage Daily (2GOL LN) and Boost Gold 3x Leverage Daily (3GOL LN).

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