Gold investors were dealt a muck hand last week as the Fed announced that they are eyeing an end to quantitative easing (QE) programs sometime in 2013. The precious metal has had an impressive run of 13 straight years of gains, but that may change this year. If the Fed were to abandon its QE policy and the massive money printing and dilution that goes along with that, gold prices could tank. The suggestion to end this program also points to a confidence in the economy from the Fed, another bad sign for gold as many have been using the commodity as a hedge against rocky markets [for more gold news and analysis subscribe to our free newsletter].
What to Do Now
QE has been one of the biggest propellants for gold in recent years and taking it away from markets could have a big impact in the short term. Gold bugs may be concerned about the value of their holdings or how to navigate this uncharted territory. If you are in gold for the long haul, 2013 may be nothing more than a bump in the road. Sure, an end to QE will wreak havoc on price in the short term, but gold will remain a strong option for keeping pace with inflation and will always be the go-to safe haven for when the dollar is in peril, but the story is different for active traders.
If you are an investor who measures their gold position in days and weeks rather than months and years, this might be a cause for concern. At any point in time, the Fed could abruptly announce the end of QE and gold would immediately tank. After simply announcing that they were toying with the idea of ending the easing program, gold sank nearly 3% in two days as investors rushed to sell out of the precious metal [see also Investing In Gold: The Definitive Guide].
Those who are looking to profit off of a short-term gold trade have a number of options to help prepare for the end of QE. Below, we outline three ways to help protect yourself against a sudden drop in everyone’s favorite precious metal.
- SPDR Gold Trust (GLD): Though this physically-backed fund is often used for long-term holds, GLD is one of the most liquid ETFs in the world and has an active options market. If you are worried about a sudden dip in gold, using options on GLD may be a great way to turn a profit.
- 3x Inverse Gold ETN (DGLD): This ETN features a -300% leverage on gold, making it the perfect fund for a bear play. Note that DGLD will be extremely volatile and is only meant for active traders who fully appreciate the risks that come along with investing in a leveraged fund [see also GLD vs. SLV: 2012 In Review].
- Physical White Metal Basket Shares (WITE): If you still wish to maintain exposure to gold but are looking for a bit more diversity in the precious metals space, WITE may be a good buy. This fund offers exposure to physical silver, platinum and palladium; the latter two metals are expected to perform well in 2013 due to a number of culminating issues.
Disclosure: No positions at time of writing.