There are plenty of reasons why Gold is the wrong place to invest at this particular moment in investment history. For starters, the largest holder of gold, the metal, is not the various countries in their formidable reserves. Instead, Exchange Traded Funds (ETF) are the largest owners of gold. This means that countries were able to offload this precious metal at an equally precious profit because retail investors were happy to pay the premiums they wanted. In return, large gold-holding countries like China were able to reinvest their new wealth in US Treasuries at rates that make even the most uninvolved taxpayer nervous.
Aside from the fact that retail investors, through exchange traded funds, hold so much gold, there is a point in the overall equity market where investors see the premium charged and limited upside potential in gold and realize that even after some form of recovery, equities are still cheaper. This has slowly been making itself apparent as gold as edged a little lower from its all-time highs and more money has started flowing into the equity markets – which are a lot more liquid and cheaper.
However, there are some options for people who want to play the gold game. Unfortunately, however, those options involve taking a longer-term, bearish stance on gold. Just as oil hit its high of nearly $150 in 2007 and remains more than 40% below that high today, it seems evident that when gold starts to pull back, it too might take some time to return to the recent highs (in fact, in the 1990’s, it seemed gold would never tough the $400 level again, yet here we are).
One way to capitalize on the long-term negative returns that gold is expected to deliver in the future, investors can invest in inverse exchange traded funds. By investing in inverse exchange traded funds, investors are essentially playing the odds that gold will depreciate in value. Understanding of course that gold will not drop overnight, some investors might become anxious with the little movement that such funds deliver, but just as surely as gold reached beyond $1,100 per ounce, it will also dip below that same $1,000 level again in the future. The question, of course, is when.
With the right amount of patience and a long-term strategy, investors could incorporate a bearish gold investment with other securities that are currently poised to rebound in the long-term, such as some equities that are currently out of favor. After all, contrarian investing has a history of making certain investors very rich.
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