Hedgers got busy on Monday as commodity ETFs scored some of the day’s biggest gains. Not long-only commodity funds, mind you, but leveraged short takes on crude oil, natural gas, silver and gold.
The pundits also got busy trying to explain the sell-offs, with many pointing to a resurgent Yankee dollar. Sure, there’s a bid under the greenback now, but there are other considerations. Exhaustion, for example. Sometimes, the starch just gets taken out of a market. That certainly seems to be the case for gold.
Monday, as spot bullion tumbled more than $33 to $1,466 an ounce, the value of SPDR Gold Shares (NYSE Arca: GLD) slid 1.5%, reaching its lowest level in two months. And, true to its mandate, the ProShares UltraShort Gold (NYSE Arca: GLL) portfolio spiked 3% higher. GLL offers twice the daily inverse change in bullion’s price.
GLL can be used in lieu of a short position in gold futures, so you can see why hedgers would be interested in the product. A cash purchase of GLL instantly bestows a 200% short gold stance; but if shares are bought through a margin account, even more leverage can be obtained.
Speculators willing to absorb the compounding risk and resultant tracking error of a leveraged product also use GLL.
On Monday, specs were cheered and hedgers relieved by the buoyancy in GLL’s price. Many chart-savvy traders had been eyeing a technical pattern, looking for a breakdown from a recent high in gold—and by extension, GLD. Monday’s close at the $138 level pierced the neckline of a head-and-shoulders top (seen in the GLD chart below), setting up a potential dive to levels last seen in July.
GLD investors will want to keep their eyes on the $133 level as support for the ETF’s now-year-long bull run.
GLL holders would be well served to monitor GLD’s support as well. Monday’s action put gears in motion for a 13% run-up in the inverse portfolio’s price. If GLD rebounds off support, though, the likelihood of GLL achieving its objective diminishes.
Brad Zigler is WealthManagement's alternative investments editor. Previously, he was the head of marketing, research and education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.