Gold bears cheer Fed tapering as ETF short bets pay off

gold bars

Investors shorting ETFs on expectations of further weakness in bullion prices were feeling confident Thursday in the wake of the Federal Reserve’s decision to reduce economic stimulus.

Gold prices fell under $1,200 an ounce to test the 2013 low set in June.

February gold futures were down more than 3% one day after the Federal Reserve said it will taper its monthly bond purchases by $10 billion to $75 billion. In a corresponding dovish move, the central bank indicated it would likely keep rates extremely low even after the unemployment rate falls below its previously-stated target of 6.5%.

Eric Steiman has been shorting SPDR Gold Shares (GLD) in the Undervalued Opportunities portfolio on the Covestor platform in 2013 to profit from lower bullion prices.

GLD Chart

GLD data by YCharts

The portfolio manager is positioning for more downside in the gold ETF in 2014.

“If the Fed continues to taper, that signals the endgame to quantitative easing and the dollar should strengthen,” Steiman said in an interview Thursday morning.

SPDR Gold Shares, the largest gold ETF backed by physical bullion, was down about 27% for the year as of Dec. 18. ETFs are exchange-listed securities that trade like individual stocks. Investors can short ETFs to profit from price declines in the market the fund is tracking.

Gold rose to an all-time nominal high in 2011, and is on track to end its 12-year winning streak in 2013.

“Longer-term, I don’t see how gold can reestablish itself,” Steiman said. “If things get worse in the economy and job market, the Fed could step up its bond buying and gold would see a short-term bounce. But if the Fed continues to taper, then gold has nowhere to go but down.”

Another portfolio manager on the Covestor platform, Michael Arold at Technical Swing, is also shorting SPDR Gold Shares.

“Gold was on my watchlist for some time for a potential bearish position,” says Arold, who shorted GLD after Wednesday’s Fed announcement.

“I see the long-term trend as being down for gold,” Arold said Thursday.

The portfolio manager said gold and the U.S. dollar have been falling together in recent weeks, which is unusual since they usually show an inverse correlation. With the Fed tapering announcement, Arold expects the dollar to strengthen and gold to fall.

“The Fed demonstrated it is serious about taking away stimulus with modest tapering,” Arold said. “There has been a lot of talk about tapering the past month but it seems the gold market hadn’t fully anticipated that move.”

Another reason he’s shorting the gold ETF is that so-called real interest rates, which factor in inflation, are moving higher.

“Real interest rates are slowing creeping up, which is poison for gold. As long as we don’t have inflation and interest rise, that should put pressure on gold,” Arold noted. “Also, gold always competes with other assets and doesn’t produce a yield. Bond rates are climbing and investors are also buying equities as stocks rise.”

DISCLAIMER: The investments discussed are held in client accounts as of November 30, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.