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Gold Loses Its Luster

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After breaking the $1,000-an-ounce barrier during the spring, gold’s seemingly invincible run has hit a brick wall. The price of this storied yellow metal has been steadily sliding over the past few months. Exchange-traded funds (ETFs) tracking the price of gold have fallen around 22.5 percent into bear market territory.

As a result, both the iShares COMEX Gold Trust (IAU) and the more heavily traded SPDR Gold Trust (GLD) have been on a roller-coaster ride. Since the beginning of the year, both ETFs are down around 6 percent, putting them right on par with the Nasdaq-100 index (QQQQ), off by the same amount. The S&P 500 (SPY) has fallen 11 percent, and the Dow Industrials (DIA) was off by 12.1 percent through late August.

Even factoring in recent declines, gold’s price has still managed to double since the start of 2005. And some analysts remain convinced that gold’s multi-year gains aren’t over. They point to gold’s recent weakness as mere consolidation and add that long-term fundamentals remain intact.

One reason for the recent weakness in gold performance has been the rebound in U.S. dollar. Over the past month, the greenback has gained around 8 percent against competing currencies. The better the dollar does, the worse gold is likely to perform.

Still, gold’s decline has been far less dramatic than the energy heavy iShares S&P GSCI Commodity Index Fund (GSG). The fund is up 11.2 percent through late August, but has given back roughly 33 percent of its gains over the past few months because of declining crude oil prices. GSG follows a basket of 24 different commodities including crude oil, gasoline and natural gas futures. Gold is also represented inside GSG, but it has a very small weighting.

Gold is typically used as a hedge against inflation, and lately there’s been plenty of that. July data showed the Consumer Price Index (CPI) was up 5.6 percent year-over-year, mainly because of elevated food and energy costs. The figures exceeded forecasts and were higher compared to June.

Another looming wild card that could boost gold is an unexpected economic or political shock. Such an event would likely translate into gains for gold.

But gold’s recent fall has translated into healthy gains for gold ETFs that provide inverse performance. Since debuting in February, the PowerShares DB Gold Double Short ETN (DZZ) is ahead by a sizzling 49.2 percent, and PowerShares DB Gold Short ETN (DGZ) is up by 21.3 percent through mid-August.

Both ETFs are built to increase in value when gold prices fall. The duos are bank notes issued by Deutsche Bank and charge annual expenses of 0.75 percent.


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