You’ve no doubt noticed gold’s recent tumble. Bullion prices have plunged through key support levels to reach five-year lows at the $1,100 level. It shouldn’t have come as a surprise. Money managers have been climbing aboard the short gold train for several weeks, breaking down speculative momentum.
The weekly trader commitments published by the Commodity Futures Trading Commission (CFTC) confirms the collapse. A month ago, the agency disclosed (issued on Fridays, CFTC reports reflect trading activity as of Tuesday that week) 70 funds were long gold while another 49 money managers were short. All told, funds were net long 42,000 gold futures contracts, together with their option equivalents. When the last report was issued, reflecting activity through July 14 – just before Friday’s big break, the net long position had shrunk to just 4,600 future contract equivalents. By then, the Comex spot price was just testing support, but the momentum indicator had already headed south.
The post-breakdown state of the gold market is reflected in the bullion assets held by the SPDR Gold Shares Trust (NYSE Arca: GLD). Gold prices may be at five-year low, but GLD’s gold hoard, now under 700 tonnes, hasn’t been this small since September 2008.
What this Means Going Forward
Look for continuing weakness in gold prices. How much weakness? Well, the breakdown on the charts points to a tentative target for spot metal at the $950 level. That translates to a $90 level for the GLD trust (at last look, shares changed hands around $105).
There are a few ways to capitalize on gold’s stumble without shorting futures or the GLD trust. The most interesting prospect is the DB Gold Double Short ETN (NYSE Arca: DZZ). DZZ offers a double inverse (-200 percent) exposure to an optimized index tracking gold futures. That’s a double negative of the index’s daily performance, mind you. If you hold the note for more than a day, compounding can cause its performance to veer significantly from its -200 percent target.
Nonetheless, the note now trades around $8.40 and looks like it’s headed to a short-term target area about a dollar higher. At gold’s downside objective, DZZ could be worth as much as $15.
Brad Zigler is REP./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.