DZZ: How To Short Gold by Going Long
The DB Gold Double Short ETN (DZZ) is a relatively new way to take advantage of gold price action. This gold fund provides double the movement that the GLD ETF or the price of gold does, providing bigger opportunities in the gold sector. I have just recently started to use DZZ ETN for trading and have found it to be very useful, which you will see in the charts below.
A Couple of Benefits of DZZ
The fact that it’s a leveraged fund provides more of an opportunity to the small investor, as they can have twice the amount of gold exposure without having to use margin, pay interest, and open a margin account. While trading with leverage is a two sided knife, if done properly, potentially higher annual profits can be obtained.
Another reason gold ETNs are becoming popular is because they allow gold traders and investors to trade both sides of the gold sector within their 401k, IRA or Canadian RRSP accounts. Being able to take advantage of the short side during bear market conditions can double your annual return on investment.
Now let’s look at our current charts and see how this fund can be used.
Gold Bugs Index – Monthly Gold Chart Breakdown
click to enlarge
As you can see on the monthly chart, the gold bugs index is breaking down below our support trend line. We could be entering a much larger consolidation phase or maybe even a bear market. It really does not matter, as we can take advantage of both sides of gold (long and short). The short side actually has more potential in my opinion, but most traders prefer to trade the long side as it’s what everyone learns first and feels comfortable with.
Gold Miner Stocks Index – Weekly Chart Breakdown
The gold miner stocks index has given us a breakdown, as well as showing that a short play is not fighting the current short term trend of gold. It is now testing support, which means short traders should tighten their stops to lock in more profits when gold decides to bounce.
Gold Bugs vs Gold Price – Weekly Gold Chart at Support
Gold stocks are testing a support level, as they have declined in value against the price of gold, showing that a large number of investors have been scared out of their positions and thus forcing gold stocks down more than normal.
DZZ: How to Short Gold by Going Long
Recently we had a buy signal for DZZ, which provided an excellent low risk setup near the end of July. Currently the trade is up over 28% in just 3 weeks. While we look for the same type of setup for going short, there is one important point to note. When trading GLD or any other stock, index or futures contract to the long side it’s important not to enter a setup with a steep vertical support trend line, as it generally will not continue for any length of time. But trading to the short side like this DZZ trade, the trend lines can be steeper, as prices generally drop much faster, thus pushing our Short Gold ETN fund higher.
Disclosure: Long DZZ
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This article has 7 comments:
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CLH
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717 Comments
Aug 19 06:42 AM-
Frankfurt/Hessen
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12 Comments
Aug 19 08:20 AMwhat bull you was on Gold,buying one oz American Eagle coin,or buying futures on Gold?
Or maybe gold/silver penny stocks?Those are down on average 70%.
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Philman
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69 Comments
Aug 19 09:20 AMThey may soar, if what Kenneth Rogoff, former chief economist of the IMF says (that a huge US based bank is about to fail) ends up coming true. But, even if that were not the case, one never knows when gold is going up, or going down.
It is utter foolishness to own any type of leveraged gold investment. Gold should be purchased with cash ONLY, and kept for the long term. If you buy on margin, or using one of these margined instruments, you will surely lose your shirt. Gold and silver are the two most carefully manipulated commodities in the world.
Most of us are not privy to what is said inside the smoke filled rooms. Anyone who is heavily leveraged or margined is going to get creamed. Check out this article, which goes into great detail about the way that manipulators play the precious metals game.
seekingalpha.com/artic...
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User 30121
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342 Comments
Aug 19 11:08 AM-
steve123
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1 Comment
Aug 19 03:32 PMIt would seem to me that the real producers of gold would be aware of this shortage and be reluctant to hedge, selling real gold contracts, at these lower prices. It would seem the banks would have to buy the paper contracts to cover their butts and drive prices up as demand returns to the paper gold arena to the point at which the real gold producers are willing to sell real gold futures. I don't see how they can possibly force gold lower with heavy real demand. It would require real gold producers willing to sell at lower prices than what demand is dictating. I understand how the paper short sellers created the paper gold over load, allowed to occur in the same way that naked shorting has been allowed in stocks. But what I don't undertstand is how they are going to escape the demand situation. The stock situation created a panic sell off allowing the naked short sellers to cover. There was no real demand in that situation. But with gold, there is real demand. I don't understand how they can escape real demand. Won't they have to pay the piper?
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User 245880
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1 Comment
Aug 19 11:07 PM-
Rhett
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89 Comments
Aug 20 09:01 AM