If You’re Not Sold On Gold, This ETF Will Make You Twice As Interested In Shorting It

I am not a gold (XAUUSD) bug at all. It is a necessary evil to me, and the Gold SPDR (GLD) is one of the 10 exchange-traded funds (ETFs) in my ROAR 10 portfolio. But that’s more of a hedge against those occasional monster rallies, like you see below. 

To me, gold spends most of its time as a traditionally assumed inflation-fighting agent, a place to be when Armageddon strikes, and a play on the end of fiat currencies as we know them. I’m just not that interested in it as others are. But that doesn’t mean I can’t try to profit from it using my chart work and ROAR Score analytics.

After a big run and with a daily price chart that looks not to be trusted, despite a bounce last Monday, I’m looking for ways to short this bounce. The ETF that can do a solid job of that is the Ultrashort Gold -2X ETF (GLL). But before I get to that 2x inverse gold ETF, I need to make the technical case to myself. That daily chart is OK, but it could already be washed out. So I want more evidence.

This weekly chart looks too much like the daily for me to count out a sudden dip-buying frenzy. That weekly 20-period moving average (red line) is certainly weak, and the 50-week measure (green line) is just starting to roll over on the bullish case. So that’s good. But I want more.

Fortunately, the monthly chart comes to the rescue. I’ve even highlighted it in “gold” on top and bottom, in celebration of discovering a trend that, due to the monthly chart’s slow-moving nature, might just be a window into a major reversal in GLD.

Up top, I circled and put a question mark around the quickly fading rally, which looks done. The 20-month moving average will need the rest of this month and maybe next month to confirm that. But I’m looking more to establish that GLD is in “short the rallies” mode, rather than an immediate strike in large position size. There’s a lot of gold bugs out there, after all.

The lower part of the chart gives me the most confidence. The PPO has twice peaked like this and crossed down (black line through blue line) since 2011. Both led to significant GLD declines.

How to Play a Gold Crash

If there were ever a use case for leveraged inverse ETFs, it is with gold and other volatile commodities. When they go (down), they go! So GLL, at more than $130 million in AUM, does the job. Of course, it will be crushed in a strong gold rally, so beware of that, given its “ultrashort” nature.

What Does GLD’s ROAR Score Say Right Now?

It is right where I want it to be, tipping over from the yellow (neutral risk) zone to the red (higher risk) zone. At 30, this confirms that while GLD can rally, the path of least resistance is more likely down.

Let’s face it: The consensus crowd loves shiny objects. And with geopolitical fractures widening and service sector inflation acting “sticky” and refusing to budge, the mainstream media has spent months pumping the yellow metal. The ultimate, bulletproof safe haven. 

GLD has enjoyed big inflows from investors looking for an unhedged asset class to shelter them from a top-heavy, over-concentrated stock market. But price rules, and it is not a strong part of a bullish argument anymore. In fact, it looks ready to turn tail and run.

The Double-Edged Sword of Leveraged ETFs

Remember, GLL can be a good way to profit from the unwinding of an overrated gold trade. However, because GLL is a leveraged ETF, it suffers from the same structural trap as single-stock leveraged vehicles: compounding volatility decay.

GLL resets its exposure daily. If the price of gold chops sideways in a wild, manic-depressive pattern over several weeks, the daily mathematical slippage will systematically erode your principal, even if gold ends up slightly lower at the end of the month. Thus, treat GLL like a short-term, tactical, specialized tool, not a long-term holding. But when those inevitable selloffs occur, this ETF gives you a nice choice: Get twice the gain if gold falls, or invest the money to pursue a similar result.

Rob Isbitts created the ROAR Score, based on his 40+ years of technical analysis experience. ROAR helps DIY investors manage risk and create their own portfolios. For Rob's written research, check out ETFYourself.com.